level_I_mock_exam_afternoon_versionb_answers_2014
Question block created by wizard
You have 180 minutes to complete this session.
1. Hui Chen, CFA, develops marketing materials for an investment fund he founded three years
ago. The materials show the three-year, two-year and one-year returns for the fund. He includes
a footnote that states in small print "Past performance does not guarantee future returns." He
does not claim compliance with the GIPS standards in the disclosures or footnotes. He also
includes a separate sheet showing the fund's most recent semiannual and quarterly returns,
which notes that those returns have been neither audited nor verified. Has Chen most likely
violated any Codes and Standards?
A. Yes, because he did not adhere to the Global Investment Performance Standards
B. No
C. Yes, because he included unaudited and unverified results
Answer = B
The Standards require members to make reasonable efforts to make sure performance information is fair, accurate, and complete. The Standards do not require compliance with the (GIPS) standards, auditing, or verification requirements. See Standard III(D).
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
2. Umi Grabbo, CFA, is a highly regarded portfolio manager for Atlantic Advisors, a mid-sized
mutual fund firm investing in domestic securities. She has watched the hedge fund boom and on numerous occasions suggested her firm creates such a fund. Senior management has refused to commit resources to hedge funds. Attracted by potential higher fees associated with hedge funds, Grabbo and several other employees begin development of their own hedge fund to invest in
international securities. Grabbo and her colleagues are careful to work on the fund development only on their own time. Because Atlantic management thinks hedge funds are a fad, she does not inform her supervisor about the hedge fund creation. According to the Standards of Practice
Handbook, Grabbo should most likely address which one of the Codes and Standards
immediately?
A. Priority of Transactions
B. Disclosure of Conflicts
C. Additional Compensation Arrangements
Answer = B
According to Standard VI(A) Disclosure of Conflicts, Grabbo should disclose to her employer her hedge fund development because this activity could possibly interfere with her responsibilities at Atlantic. In setting up a hedge fund, Grabbo was not acting for the benefit of her employer. She
should have informed Atlantic she wanted to organize the hedge fund and come to some mutual agreement on how this process would occur.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard IV(B), Standard VI(A), Standard VI(B)
3. Jiro Sato, CFA, deputy treasurer for May College, manages the Student Scholarship Trust. Sato
issued a request for proposal (RFP) for domestic equity managers. Pamela Peters, CFA, a good friend of Sato, introduces him to representatives from Capital Investments, which submitted a proposal. Sato selected Capital as a manager based on the firm's excellent performance record.
Shortly after the selection, Peters, who had outstanding performance as an equity manager with another firm, accepted a lucrative job with Capital. Which of the CFA charterholders violated the CFA Institute Standards of Professional Conduct?
A. Neither
B. Peters
C. Both
Answer = A
Members should use reasonable care and judgment to maintain independence and objectivity, as stated in Standard I (B). There is no indication of inappropriate behavior in the selection of the equity manager or in the acceptance of employment with that manager; both decisions were based on the excellent performance records of the manager and the member, respectively.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard I(B)
4. Francesca Ndenda, CFA, and Grace Rutabingwa work in the same department for New Age
Managers, with Rutabingwa reporting to Ndenda. Ndenda learns that Rutabingwa received a Notice of Enquiry from the Professional Conduct Program at CFA Institute regarding a potential cheating violation when she sat for the CFA exam in June. As Rutabingwa's supervisor, Ndenda is afraid that Rutabingwa's behavior will be seen as a violation of the Code and Standards. Does Ndenda most likely have cause for concern?
A. No, not until Rutabingwa is found guilty of cheating
B. No, because her responsibilities do not apply
C. Yes
Answer = B
A supervisor's responsibilities relate to detecting and preventing violations by anyone subject to their supervision or authority regarding activities they supervise. Ndenda had no way of detecting and/or preventing Rutabingwa from cheating during the CFA exam, if in fact that is what she did, because it was an event she did not attend.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard IV(C)
5. Ross Nelson, CFA, manages accounts for high-net-worth clients, including his own family's
account. He has no beneficial ownership in his family's account. Because Nelson is concerned about the appearance of improper behavior in managing his family's account, when his firm
purchases a block of securities, Nelson allocates to his family's account only those shares that remain after his other client accounts have their orders filled. The fee for managing his family's account is based on his firm's normal fee structure. According to the Standards of Practice
Handbook, Nelson's best course of action with regard to management of his family's account would be to:
A. remove himself from any direct involvement by transferring responsibility for this account to
another investment professional in the firm.
B. treat the account like other employee accounts of the firm.
C. treat the account like other client accounts.
Answer = C
Nelson has breached his duty to his family by treating them differently from other clients. They are entitled to the same treatment as any other client of the firm. Nelson should treat his family's account like any other client account as stated in Standard III (B) related to Fair Dealing and Standard VI (B) related to Priority of Transactions.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard III(B), Standard VI(B)
6. Norman Bosno, CFA, acts as an outside portfolio manager to a sovereign wealth fund. Raphael
Palmeti, a fund official, approaches Bosno to interest him in investing in Starlite Construction
Company. He tells Bosno that if he approves a $2 million investment in Starlite by the fund,
Bosno will receive a "bonus" that will make him wealthy. Palmeti also adds that if Bosno decides not to invest, he will lose the fund account. After doing a quick and simple analysis, Bosno
determines the investment is too risky for the fund. If Bosno agrees to make the investment,
which of the Standards of Professional Conduct is least likely to be violated?
A. Additional Compensation Arrangements
B. Diligence and Reasonable Basis
C. Loyalty, Prudence, and Care
Answer = B
Despite Bosno undertaking a quick and simple analysis to determine that the investment would be too risky for the sovereign wealth fund, that analysis does not necessarily mean he was not diligent and did not have a reasonable basis for making that determination.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard III(A), Standard IV(B), Standard V(A)
7. What is the theory that best describes the process by which financial analysts combine material
public information and nonmaterial nonpublic information as a basis for investment
recommendations, even if those conclusions would have been material inside information had they been communicated directly to the analyst by the company?
A. Mosaic theory
B. Economic theory
C. Probability theory
Answer = A
The process by which financial analysts combine material public information and nonmaterial nonpublic information as a basis for investment recommendations, even if those conclusions would have been material inside information had the company communicated them directly to the analyst, is known as mosaic theory.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard II(A)
8. A central bank fines a commercial bank it supervises for not following statutory regulations
regarding nonperforming loan provisions on three large loans as a result of the bank's loan
provisioning policy. Louis Marie Buffet, CFA, sits on the board of directors of the commercial bank as a non-executive director, representing minority shareholders. He also chairs the bank's
internal audit committee that determines the loan provisioning policy of the bank. Mercy Gatabaki, CFA, is the bank's external auditor and follows international auditing standards whereby she tests the loan portfolio by randomly selecting loans to check for compliance in all aspects of central bank regulations. Which charterholder is most likely in violation of the Code and Standards?
A. Gatabaki
B. Buffet
C. Both
Answer = B
Buffet sat on the audit committee that determined the bank's provisioning policies that were contrary to the statutory regulations of the central bank. As a result, he most likely violated Standard I–Professionalism by not abiding by regulations of a regulatory body. Gatabaki did not violate Standard I - Professionalism because it is not apparent she knowingly facilitated the incorrect provisioning policy.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard I(A)
9. Atlantic Capital Management has access to a limited number of shares in a popular new issue
expected to be oversubscribed. Atlantic's portfolio managers have determined the issue to be a prudent addition to Atlantic's developing growth equity strategy. A number of the firm's investment professionals have family-member accounts that are managed to the developing growth strategy.
Which of the following allocation options most likely adheres to the Code and Standards? Atlantic should allocate the shares:
A. on a prorated basis across all developing growth accounts, including the family-member
accounts.
B. on a prorated basis across all developing growth accounts, excluding the family-member
accounts.
C. to family-member accounts only after non-family accounts have been allocated their shares. Answer = A
Under Standard III (B), if an investment professional's family- member accounts are being managed similarly to those of other clients of the firm, family members should not be excluded from buying such shares because they are considered clients despite their familial relationships.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard III(B)
10. Jean-Luc Schlumberger, CFA, is an independent research analyst providing equity research on
companies listed on exchanges in emerging markets. He often incorporates statistical data he obtains from the web sites of the World Bank and the central banks of various countries into the body of his research reports. Although not indicated within the reports, whenever his clients ask where he gets his information, he informs them that the information is in the public domain but he does not keep his own records. When the clients ask for the specific web site addresses, he
provides the information. Which Standard has Schlumberger least likely violated?
A. Performance Presentation
B. Record Retention
C. Misrepresentation
Answer = A
Standard III (D)-Performance Presentation pertains to investment performance information and there is no indication any violation has occurred.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard I(C)
11. Madeline Smith, CFA, was recently promoted to senior portfolio manager. In her new position,
Smith is required to supervise three portfolio managers. Smith asks for a copy of her firm's written supervisory policies and procedures but is advised that no such policies are required by
regulatory standards in the country where Smith works. According to the Standards of Practice Handbook, Smith's most appropriate course of action would be to:
A. decline to accept supervisory responsibility until her firm adopts procedures to allow her to
adequately exercise such responsibility.
B. require her firm to adopt the CFA Institute Code of Ethics and Standards of Professional Conduct.
C. require the employees she supervises to adopt the CFA Institute Code of Ethics and Standards of
Professional Conduct.
Answer = A
According to guidance for Standard (IV(C), if a member cannot fulfill supervisory responsibilities because of the absence of a compliance system or because of an inadequate compliance system, the member should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to allow the member to adequately exercise such responsibility.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard IV(C)
12. Lee Chu, a CFA candidate, develops a new quantitative security selection model exclusively
through back-testing on the Chinese equity market. Chu is asked to review marketing materials that include an overview of the conceptual framework for his model, provide back-tested
performance results, and list the top holdings. Chu directs the marketing group to remove the description of his model because of concerns that competitors may attempt to replicate his
investment philosophy. He also instructs the marketing group to remove the list of the top
holdings because it shows that the top holding represents 30% of the back-tested model. Which of the following actions is least likely to result in a violation of the Code and Standards? Chu's:
A. failure to disclose that the top holding represents such a large allocation in the model
B. failure to adequately describe the investment process to prospective clients
C. use of back-tested results in communication with prospective clients
Answer = C
The use of back-tested results is not prohibited, provided it is appropriately disclosed.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard V(B)
13. Amanda Covington, CFA, works for McJan Investment Management. McJan employees must
receive prior clearance of their personal investments in accordance with McJan's compliance procedures. To obtain prior clearance, McJan employees must provide a written request
identifying the security, the quantity of the security to be purchased, and the name of the broker through which the transaction will be made. Precleared transactions are approved only for that trading day. As indicated below, Covington received prior clearance.
Two days after she received prior clearance, the price of Stock B decreased, so Covington decided to purchase 250 shares of Stock B only. In her decision to purchase 250 shares of Stock B only, did Covington violate any CFA Institute Standards of Professional Conduct?
A. No
B. Yes, relating to diligence and reasonable basis
C. Yes, relating to her employer's compliance procedures
Answer = C
Prior-clearance processes guard against potential and actual conflicts of interest; members are required to abide by their employer's compliance procedures (Standard VI (B)).
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard V(A), Standard VI(B)
14. Heidi Katz is a CFA candidate and an analyst at a pension consulting firm. Her father is a major
shareholder and managing director at Saturn Partners, a large hedge fund. When assisting in an alternative manager search for a pension client, Katz plans to recommend Saturn's market-
neutral strategy because she believes it meets all of the pension plan's criteria. Given this
situation, the best course of action for Katz is to:
A. not present this strategy to the client and recommend another strategy.
B. disclose the potential conflict to her employer and follow their guidance regarding disclosure of
her relationship to the client.
C. disclose the potential conflict to the pension client when discussing this recommendation. Answer = C
Standard VI (A) requires disclosure of conflicts but does not prohibit members from making recommendations as long at the potential conflicts are appropriately disclosed.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard IV(A)
15. While waiting in the business class lounge before boarding an airplane, Becca Msafari, CFA, an
equity analyst, overhears a conversation by a group of senior managers, including members of the board, from a large publicly listed bank. The managers discuss staff changes necessary to accommodate their regional expansion plans. Msafari hears several staff names mentioned.
Under what circumstances could Msafari most likely use this information when making an
investment recommendation to her clients? She can use the information:
A. if she does not breach the confidentiality of the names of the staff.
B. if the discussed changes are unlikely to affect investor perception of the bank.
C. under no circumstances.
Answer = B
To comply with the Code and Standards, a member or candidate cannot use material nonpublic information when making investment recommendations. The information overheard would not be considered material only if any public announcement of the staff removal would be unlikely to move the share price of the bank, nor would the regional expansion substantially impact the value of the bank.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard II(A)
16. Rebecca Wong is enrolled to take the Level I CFA exam. Her friend William Leung purchased
Level I study materials from a well-known CFA review program the previous year. Leung made a photocopy of the previous year's copyrighted materials and sold it to Wong to help her study.
Who most likely violated the CFA Institute Code of Ethics or any Standards of Professional
Conduct?
A. Neither violated.
B. Only Leung violated.
C. Both violated.
Answer = C
Photocopying copyrighted material, regardless of the year of publication, is a violation of Standard
I(A) because copyrighted materials are protected by law. Candidates and members must comply with all applicable laws, rules, and regulations and must not knowingly participate or assist in a violation of laws.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard I(A)
17. Claire Jones, CFA, is an analyst following natural gas companies in the United States. At an
industry energy conference, the chief financial officer of Alpine Energy states that the company is interested in making strategic acquisitions. At a separate event, Alpine's head of exploration
commented that he is bullish on natural gas production prospects within northeastern
Pennsylvania. Jones is aware that Alpine currently has very little exposure to this region. She also knows another company in her universe, Pure Energy, Inc. is based in northeastern
Pennsylvania and controls significant assets in the area. Pure Energy is highly leveraged, and Jones believes it will need to raise additional capital or partner with another firm to move to the production phase with their assets. Jones attempts to contact Alpine's chief executive officer with an unrelated question and is told he is unavailable because he is on a business trip to
northeastern Pennsylvania. Jones updates her research on Pure Energy and then recommends the stock to Lisa Wong, CFA, a portfolio manager, who purchases significant positions in client accounts. The following week, Pure Energy announces it has entered into an agreement to be purchased by Alpine for a significant premium. Has either Jones or Wong most likely violated standards with regard to the integrity of capital markets?
A. No
B. Yes, both Jones and Wong have acted on insider information
C. Yes, Jones' recommendation is based on insider information
Answer = A
Jones has used the mosaic theory to combine nonmaterial, nonpublic information with material public information.
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard II(A) Material Nonpublic Information
18. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, trading on
material nonpublic information is least likely to be prevented by establishing:
A. firewalls.
B. personal trading limitations.
C. selective disclosure.
Answer = C
Selective disclosure occurs when companies discriminate in making material nonpublic information public. Corporations that disclose information on a limited basis create the potential for insider-trading violations. See Standard II(A).
2014 CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard II(A)
19. An analyst collects data relating to five commonly used measures of leverage and interest
coverage for a randomly chosen sample of 300 firms. The data comes from those firms’ fiscal year 2012 annual reports. This data are best characterized as:
A. cross-sectional data.
B. longitudinal data.
C. time-series data.
Answer = A
Data on some characteristics of companies at a single point in time are cross-sectional data.
2014 CFA Level I
“Sampling and Estimation,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 2.3
20. Common stock prices are approximately lognormally distributed. Therefore, it is most likely that
conventional (discrete) common stock prices are:
A. leptokurtic.
B. skewed to the right.
C. skewed to the left.
Answer = B
The lognormal distribution is truncated at zero and skewed to the right (positively skewed).
2014 CFA Level I
“Statistical Concepts and Market Returns,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Sections 8–9
“Common Probability Distributions,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 3.4
21. Given a large random sample, which of the following types of data are least appropriately
analyzed with nonparametric tests?
A. Ranked data (e.g., 1st, 3rd)
B. Signed data (e.g., number of +'s and –'s)
C. Numerical values (e.g., 28.43, 79.11)
Answer = C
Nonparametric tests are primarily concerned with ranks, signs, or groups, and they are used when numerical parameters are not known or do not meet assumptions about distributions. Even if the underlying distribution is unknown, parametric tests can be used on numerical data if the sample is large.
2014 CFA Level I
“Hypothesis Testing,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 5
22. An analyst determines that 60% of all U.S. pension funds hold hedge funds. In evaluating this
probability, a random sample of 10 U.S. pension funds is taken. Using the binomial probability function, the probability that exactly 6 of the 10 firms in the sample hold hedge funds is closest to:
A. 11.2%.
B. 25.1%.
C. 60.0%.
Answer = B
The number of trials is 10 (n), the number of successes is 6 (x), and the probability of success is 0.60 (p). Using the following formula:
and the values given,
2014 CFA Level I
“Common Probability Distributions,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 2.2
23. The least accurate statement about measures of dispersion for a distribution is that the:
A. arithmetic average of the deviations around the mean will be equal to one.
B. mean absolute deviation will be either less than or equal to the standard deviation.
C. range provides no information about the shape of the data distribution.
Answer = A
The arithmetic sum of the deviations around the mean will always equal zero, not one.
2014 CFA Level I
“Statistical Concepts and Market Returns,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Sections 7.1, 7.2, and 7.4.2
24. With Bayes’ formula, it is possible to update the probability for an event given some new
information. Which of the following most accurately represents Bayes’ formula?
A.
B.
C.
Answer = C
In probability notation, Bayes’ formula can be written concisely as
.
2014 CFA Level I
“Probability Concepts,” by Richard A. DeFusco, CFA, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Sections 2, 4.1
25. An analyst gathers the following information about the performance of a portfolio ($ millions):
The portfolio’s annual time-weighted rate of return is closest to:
A. 8%.
B. 27%.
C. 32%.
Answer = C
The time-weighted return (TWR) is found as follows:
2014 CFA Level I
“Discounted Cash Flow Applications,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Sections 3 and 3.2
26. When dealing with mutually exclusive projects, the most reliable decision rule is:
A. IRR.
B. time-weighted rate of return.
C. NPV.
Answer = C
The NPV rule’s assumption about reinvestment rates is more realistic and more economically
relevant than the IRR rule because it incorporates the market-determined opportunity cost of capital
as a discount rate. In contrast, the IRR calculation assumes reinvestment at the IRR, which sometimes cannot be achieved because it is too high. Time-weighted rate of return suffers similar shortcomings as IRR.
2014 CFA Level I
“Discounted Cash Flow Applications,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 2.1, 2.2, 2.3, 3.2
“Capital Budgeting,” by John D. Stowe and Jacques R. Gagné
Section 4
27. A group of fund analysts have to select the first, second, and third best fund manager of the year
for 2012 based on their subjective judgment. If 10 fund managers are candidates for the three awards, the number of ways in which each analyst can make his ranking is closest to:
A. 120.
B. 30.
C. 720.
Answer = C
This problem is a counting one in which order does matter.
For this reason, use the permutation formula,
where
n is the total number of fund managers; in the problem, n = 10.
r is the number of fund managers that will receive the awards (first, second, and third); in the problem, r = 3.
There are 720 ways that each analyst can rank 3 fund managers out of 10, when order does matter. 2014 CFA Level I
“Probability Concepts,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 4.2
28. A major investment data service provides information on analysts’ performance using the
following scale:
The most appropriate test to determine whether the analysts’ average performance differed b etween two consecutive 10-year periods is a:
A. sign test.
B. Mann-Whitney U-test.
C. Wilcoxon signed-rank test.
Answer = B
The Mann-Whitney U-test is most appropriate for tests of differences in means for nonparametric data such as analysts’ rankings.
2014 CFA Level I
“Hypothesis Testing,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 5
29. A consultant starts a project today that will last for three years. Her compensation package
includes the following:
If she expects to invest these amounts at an annual interest rate of 3%, compounded annually until her retirement 10 years from now, the value at the end of 10 years is closest to:
A. $566,466.
B. $618,994.
C. $460,590.
Answer = A
Calculate the future value (FV) of each of the cash flows to the end of 10 years:
FV10 = $100,000 × (1.03)9 + $150,000 × (1.03)8 + $200,000 × (1.03)7
= $130,477 + $190,016 + $245,975
= $566,468
2014 CFA Level I
“The Time Value of Money,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 4.2
30. An increase in which of the following items will most likely result in a wider confidence interval for
the population mean?
A. Degrees of freedom
B. Sample size
C.Reliability factor
Answer = C
An increase in the reliability factor (the degree of confidence) increases the width of the confidence interval. Increasing the sample size and increasing the degrees of freedom both shrink the confidence interval.
2014 CFA Level I
“Sampling and Estimation,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto,
and David E. Runkle
Sections 4.2, 4.3
31. The bond-equivalent yield for a semi-annual pay bond is most likely:
A. equal to the effective annual yield.
B. more than the effective annual yield.
C. equal to double the semi-annual yield to maturity.
Answer = C
The bond equivalent yield for a semi-annual pay bond is equal to double the semiannual yield to maturity and is lower than the effective annual yield.
2014 CFA Level I
“Discounted Cash Flow Applications,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 4
32. An analyst determines that approximately 99% of the observations of daily sales for a company
are within the interval from $230,000 to $480,000 and that daily sales for the company are
normally distributed. If approximately 99% of all the observations fall in the interval μ±3σ,then using the approximate z-value rather than the precise table, the standard deviation of daily sales for the company is closest to:
A. $62,500.
B. $41,667.
C. $83,333.
Answer = B
Given that sales are normally distributed, the mean is centered in the interval. MeanUnder a normal distribution, 99% of the observations will be approximately plus or minus three standard deviations. Next, use the following formula:
Z=(X-μ)/σ
or, by rearranging:
σ=(X-μ)/Z,
where Z = 3,
X = $480,000, and
μ = $355,000.
Thus, ($480,000 – $355,000)/3.0 = $41,667.
Alternatively, use Z = –3, X = $230,000, and μ = $355,000: ($230,000 – $355,000)/(–3.0) = $41,667.
2014 CFA Level I
“Common Probability Distributions,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 3.2
33. A risk manager would like to calculate the coefficient of variation of a portfolio. The following table
reports the annual returns of the portfolio and of the risk-free rate over the most recent five years:
The coefficient of variation of the portfolio is closest to:
A. 0.90.
B. 0.74.
C. 1.00.
Answer = C
First, calculate the sample mean return as follows:
,
34. An analyst gathered the following information about a stock index:
If the analyst takes a sample of 36 companies from the index, the standard error of the sample mean is closest to:
A. $400,000.
B. $533,333.
C. $88,889.
Answer = B
The standard error of the sample mean is equal to the population standard deviation (s) divided by the square root of the number of observations in the sample (n):
2014 CFA Level I
“Sampling and Estimation,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto,
and David E. Runkle
Section 3.1
35. An economist states that the probability of having the gross domestic product (GDP) of a country
higher than 3% is 0.20. What are the odds against a GDP higher than 3%?
A. 4 to 1
B. 5 to 1
C. 6 to 1
Answer = A
Given the probability of an event, P (E), the odds against that event are ,and using the input from the problem, Odds against E = (1 - 0.2) / 0.2 = 4. This result means that given the probability stated by the economist, the odds against a GDP higher than 3% are 4 to 1.
2014 CFA Level I
“Probability Concepts,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 2
36. A trader determines that a stock price formed a pattern with a horizontal trendline that connects
the high prices and a trendline with positive slope that connects the low prices. Given the pattern formed by the stock price, the trader will most likely:
A. purchase the stock because the pattern indicates a bullish signal.
B. avoid trading the stock because the pattern indicates a sideways trend.
C. sell the stock because the pattern indicates a bearish signal.
Answer = A
2014 CFA Level I
“Technical Analysis,” by Barry M. Sine and Robert A. Strong
Section 3.3.2.1
37. Relative to traditional investments, alternative investments are most likely to be characterized by
higher:
A. liquidity.
B. fees.
C. transparency.
Answer = B
Alternative investments are often characterized by high fees.
2014 CFA Level I
"Introduction to Alternative Investments," by Terri Duhon, George Spentzos, and Scott D. Stewart Section 2
38. The following information is available about a hedge fund:
Assume management fees are calculated using end-of-period valuation. The investor's net return given this fee structure is closest to:
A. 9.68%.
B. 10.88%.
C. 9.79%.
Answer = C
Management fee: 1% of $112 million = $1.12 million.
Incentive fee: 10% of ($12 million – $ 1.12 million) = $1.088 million.
Fund value after fees: $112 million – $1.12 million – $1.088 million = $109.792 million
Investor return: ($109.792 million / $100 million) – 1 = 9.79%.
2014 CFA Level I
"Introduction to Alternative Investments," by Terri Duhon, George Spentzos, and Scott D. Stewart Section 3.3