CFA Website questions i fucked up Flashcards
Peter Levinson, CFA, declared personal bankruptcy due to unpaid medical bills. After losing his receipt for a business dinner, he uses his wife’s receipt for a smaller amount from the same restaurant to submit his expense claim. Has Levinson most likely violated the Standards?
A.
No
B.
Yes, by declaring personal bankruptcy
C.
Yes, by using his wife’s receipt for his expense claim
C.
Yes, by using his wife’s receipt for his expense claim
Correct because according to the Standard I(D), misconduct, Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. And using his wife’s receipt for expense claim is a dishonest professional conduct.
A member has been asked by her supervisor to write a research report on a company. The member’s firm owns options to buy the company’s stock. The member’s firm does not possess material nonpublic information on the company. According to the Standards, the member should:
A.
outsource the report to an approved third-party research provider.
B.
place the stock on a restricted list and provide only factual information about the company.
C.
disclose in the research report the amount and the expiration date of the options held by her firm in the covered company.
C.
disclose in the research report the amount and the expiration date of the options held by her firm in the covered company.
because according to the recommended procedures for compliance with Standard VI (A), Disclosure of Conflicts, if a member, a candidate, or a member’s or candidate’s firm has outstanding agent options to buy stock as part of the compensation package for corporate financing activities, the amount and expiration date of these options should be disclosed as a footnote to any research report published by the member’s or candidate’s firm.
Therefore, if the member’s firm owns options to buy the company’s stock as part of the compensation for offering corporate finance solutions, the member should disclose in the research report the amount and the expiration date of the options held by her firm in the covered company.
Simon Jensen, CFA, a portfolio manager, participates in an IPO of PT Tech. Jensen prorates the oversubscribed issue on an odd-lot basis to suitable clients. After the successful IPO, his colleague Todd Durkny, a CFA candidate, initiates coverage of PT Tech and sends her “buy” recommendation to all clients by email. She then calls her premium fee-paying clients to discuss PT Tech in-depth. Whose actions are consistent with the Standards?
A.
Durkny’s only
B.
Jensen’s only
C.
Both Durkny’s and Jensen’s
A.
Durkny’s only
because according to Standard III (B), Fair Dealing, members and candidates may provide more personal, specialized, or in-depth service to clients who are willing to pay for premium services through higher management fees or higher levels of brokerage.
B is incorrect ecause according to to Standard III (B), Fair Dealing, If the issue is oversubscribed, then the issue should be prorated to all subscribers. This action should be taken on a round-lot basis to avoid odd-lot distributions. So, Jensen’s action is not consistent the Standard.
According to the recommended procedures for compliance with the Standard relating to performance presentation, members should:
A.
exclude terminated accounts from performance history.
B.
consider the knowledge of the audience to whom a performance presentation is addressed.
C.
use a representative account when presenting the performance of the weighted composite of similar portfolios.
B is Correct because according to Standard III (D), Performance Presentation, members can meet obligation of the Standard by considering the knowledge and sophistication of the audience to whom a performance presentation is addressed.
C is Incorrect because according to Standard III (D), Performance Presentation, members can meet obligation of the Standard by presenting the performance of the weighted composite of similar portfolios rather than using a single representative account.
Gurdeep Singh, CFA, is an analyst with a hedge fund and works closely with his supervisor, Joan Tanner, who earned her CFA designation 20 years ago. Singh becomes aware that Tanner uses her CFA designation even though she no longer pays her membership dues. Tanner uses the designation during several meetings that she and Singh have with the firm’s clients and emphasizes that all her team members, including herself, are CFA charterholders. Has Singh violated the Standards?
A.
No
B.
Yes, the Standard relating to knowledge of the law
C.
Yes, the Standard relating to reference to CFA Institute, the CFA designation, and the CFA program
B.
Yes, the Standard relating to knowledge of the law
B is Correct because according to Standard I(A), Knowledge of the Law, members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations.
In this case, by staying silent in a client meeting in which he knows false information is being given to a potential investor that could cause harm to that investor, Singh would be seen as assisting Tanner in providing that false information, even though Singh is not actively engaging in the misconduct himself Singh should report her conduct to the fund’s compliance department for it to address and should dissociate himself from the activity. By not dissociating himself from Tanner and their meetings with clients, Singh has violated the Standard.
C is Incorrect because Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program, states that when referring to the CFA designation, members and candidates must not misrepresent holding the CFA designation. Singh does not misrepresent his membership in CFA Institute; Tanner does. Therefore, Singh has not violated Standard VII(B).
According to the Standards, if a member cannot discharge supervisory responsibilities due to an inadequate compliance system, the member is:
A.
only required to decline in writing to accept supervisory responsibility.
B.
only required to report the inadequate compliance system to CFA Institute.
C.
both required to decline in writing to accept supervisory responsibility and to report the inadequate compliance system to CFA Institute.
A.
only required to decline in writing to accept supervisory responsibility.
A is Correct because according to Standard IV(C), Responsibilities of Supervisor, if the member or candidate clearly cannot discharge supervisory responsibilities because of the absence of a compliance system or because of an inadequate compliance system, the member or candidate should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to allow adequate exercise of supervisory responsibility. There is no requirement to report the firm’s inadequate compliance system to the CFA Institute.
C is Incorrect because according to Standard IV(C), Responsibilities of Supervisors, there is no requirement to report the firm’s inadequate compliance system to the CFA Institute.
Li Chen, is a CFA candidate and an equity research analyst at an independent research firm. Chen is contacted by Granite Technologies, Inc., to write an issuer-paid research report on the firm to increase awareness of Granite’s stock amongst the investment community. Which statement best represents how Chen should respond to this assignment request? Chen should:
A.
negotiate a flat fee and disclose this relationship in her report.
B.
decline to write the report as it will compromise her independence.
C.
accept long-term warrants on Granite’s stock in lieu of any cash compensation.
A.
negotiate a flat fee and disclose this relationship in her report.
A is Correct because by negotiating a flat fee, her independence and objectivity would not be questioned as her fee would not be based on the results of her research. In addition, by fully disclosing the relationship in her report she allows the reader to determine if her judgment is compromised. As a result, Chen is maintaining compliance with Standard I(B), Independence and Objectivity.
B is Incorrect because although issuer-paid research needs to be appropriately disclosed, members and candidates are not prohibited from engaging in it.
Which of the following actions are in violation of the Standard relating to market manipulation?
Action 1: Securing a dominant position in a financial instrument with an intent to influence the price of a related derivative.
Action 2: Entering large buy and sell trades between multiple proprietary accounts of the firm with the intent to increase trading volume.
A.
Action 1 only
B.
Action 2 only
C.
Both Action 1 and Action 2
C.
Both Action 1 and Action 2
C is Correct because Standard II(B), Market Manipulation, precludes transaction-based manipulation such as securing a controlling, dominant position in a financial instrument to exploit and manipulate the price of a related derivative and/or the underlying asset. So, Action 1 violates the Standard. Also, the Standard precludes other transaction-based manipulation such as attempting to buy and sell the stock using the accounts in hopes of raising the trading volume and the price. So, Action 2 also violates the Standard.
Which of the following statements regarding the Standard relating to record is most accurate?
A.
In the absence of regulatory guidance or firm policies, members must maintain records for at least five years
B.
A candidate as an unpaid intern does not need to obtain consent from his previous employer to re-issue research reports at his new firm
C.
A member is required to maintain third-party reports if they represent supporting documentation of recommendations made by the member
C.
A member is required to maintain third-party reports if they represent supporting documentation of recommendations made by the member
C is Correct because according to Standard V(C) relating to record retention, supporting documentation that assists the member or candidate in meeting the requirements for retention include outside research reports.
A is Incorrect because according to Standard V (C) relating to record retention, in the absence of regulatory guidance or firm policies, CFA Institute recommends maintaining records for at least seven (not five) years.
When a client asks her how she makes investment decisions, Petra Vogler, CFA, tells the client she uses mosaic theory. According to Vogler, the theory involves analyzing public and nonmaterial nonpublic information including the evaluation of statements made to her by company insiders in one-on-one meetings where management discusses new earnings projections not known to the public. Vogler also gathers general industry information from industry experts she has contacted. Vogler violates the CFA Institute Standards of Professional Conduct because of her use of:
A.
industry expert information.
B.
one-on-one meeting information.
C.
nonmaterial nonpublic information.
B.
one-on-one meeting information.
B is Correct because Vogler violated Standard II(A), Material Nonpublic Information, by using information not known to the public that is selectively disclosed by company insiders in one-on-one meetings. Earnings estimates would likely be considered material and nonpublic information. Information made available to analysts remains nonpublic until it is made available to investors in general. Under the mosaic theory it is acceptable to use information from industry contacts as long as the analyst uses appropriate methods to arrive at her conclusions.
C is Incorrect because it is acceptable to use nonmaterial nonpublic information in her analysis, and this use is not a violation of Standard II(A), Material Nonpublic Information.
Colleen O’Neil, CFA, manages a private investment fund with a balanced global investment mandate. Her clients insist that O’Neil’s personal investment portfolio replicate the investments within their portfolio to ensure them that she is willing to put her money at risk. By undertaking which of the following simultaneous investment actions for her own portfolio would O’Neil most likely be in violation of Standard VI(B), Priority of Transactions?
A.
Sale of a listed US blue chip value stock
B.
Participation in a popular frontier market IPO
C.
Purchase of a UK government bond in the primary market
B.
Participation in a popular frontier market IPO
B is Correct because Standard VI(B), Priority of Transactions, dictates that members and candidates give their clients and employer priority when making personal investment transactions. Even when clients allow or insist the manager invest alongside them, the manager’s transactions must never adversely affect the interests of the clients. A popular or “hot” IPO in a frontier market is likely to be oversubscribed. In such cases, Standard VI(B) dictates that the manager should not participate in this event to better ensure that clients would have a higher probability of getting their full subscription allotment, even though clients have allowed or dictated she do so.
A is Incorrect because the clients are unlikely be harmed by the manager also selling a US blue chip value stock in a stable market as the liquidity of the stock is likely to be large enough that a simultaneous sale would not negatively impact on the price of the share.
If a firm’s supply curve equals its long-run marginal cost schedule, the firm most likely operates in a market structure of:
A.
oligopoly.
B.
monopoly.
C.
perfect competition.
C.
perfect competition.
C is Correct because the long-run marginal cost schedule is the perfectly competitive firm’s supply curve. In perfect competition, the firm’s supply schedule is represented by the marginal cost schedule.
B is Incorrect because the monopolist does not have a well-defined supply function that determines the optimal output level and the price to charge. A monopolistic firm does not have a supply curve but will produce the quantity that maximizes profit, which is the intersection of marginal cost and marginal revenue.
The reversal of an inventory write-down:
A.
reduces cost of sales.
B.
increases other comprehensive income.
C.
is permitted under both IFRS and US GAAP.
A.
reduces cost of sales.
A is Correct because in each period subsequent to inventory write-down, a new assessment of net realisable value is made. Reversal (limited to the amount of original write-down) is required for a subsequent increase in value of inventory previously written down. The reversal of any write-down of inventories is recognized as a reduction in cost of sales (reduction in the amount of inventories recognized as an expense).
B is incorrect because five items are treated as other comprehensive income under IFRS: foreign currency translation adjustments in consolidating financial statements of foreign subsidiaries, unrealized gains or losses on derivative contracts accounted for as hedges, unrealized gains and losses on available for sale securities and certain costs of a company’s defined benefit post-retirement plans that are not recognized in the current period and gains or losses from revaluation of fixed assets. The reversal of inventory write-downs is not one of them. The reversal of any write-down of inventories is recognized as a reduction in cost of sales (reduction in the amount of inventories recognized as an expense).
ROA dormula dupont style
ROA = tax burden * interest burden * EBIT MArgin * toal asset turnover
pre-tax margin formula
Pre-tax margin = iinterest urden * EBIT Margin
or
ROA / (total asset turnover * tax burden)
The use of neural networks to identify patterns through multistage, non-linear data processing best describes:
A.
deep learning.
B.
supervised learning.
C.
unsupervised learning.
A.
deep learning.
Correct because in deep learning, (or deep learning nets), computers use neural networks, often with many hidden layers, to perform multistage, non-linear data processing to identify patterns.
Deep learning may use supervised or unsupervised machine learning approaches.
By taking a layered or multistage approach to data analysis, deep learning develops an understanding of simple concepts that informs analysis of more complex concepts.
do you include common share dividends in the subtraction of net income when calculating Earnings per share?
nah, only preferred dividends
Which of the following market structures has low barriers to entry?
A.
A monopoly
B.
An oligopoly
C.
Monopolistic competition
C.
Monopolistic competition
Correct because monopolistic competition has low barriers to entry.
Assuming perfect capital mobility and a credibly fixed exchange rate, a decrease in a country’s default-free interest rate below that of other countries will most likely cause:
A.
significant inflow of capital to the country.
B.
significant outflow of capital from the country.
C.
no significant inflow or outflow of capital for the country.
B is Correct because it is worthwhile to emphasize the basic point by considering what would happen in an idealized world of perfect capital mobility.
If the exchange rate were credibly fixed, then any attempt to decrease default-free interest rates in one country below those in another—that is, to undertake independent, expansionary monetary policy—would result in a potentially unlimited outflow of capital because funds would seek the higher return.
A is Incorrect because under assumption of full capital mobility and if the exchange rate were credibly fixed, then any attempt to decrease default-free interest rates in one country below those in another would result in a potentially unlimited outflow (not inflow) of capital because funds would seek the higher return.
Credit cycles tend to be:
A.
shorter than business cycles.
B.
of the same length as business cycles.
C.
longer than business cycles.
C.
longer than business cycles.
C is Correct because credit cycles tend to be longer, deeper, and sharper than business cycles. Although the length of a business cycle varies from peak to trough, the average length of a credit cycle is mostly found to be longer than that of the business cycle.
With respect to transparency, effective central banks:
A.
outline their view on credit conditions.
B.
separate control from political influence.
C.
determine the definition of inflation that they target.
A.
outline their view on credit conditions.
A. Correct because one way of establishing credibility is for a central bank to be transparent in its decision making. They will consider and outline their views on the following subjects, usually in this order: Broad money aggregates and credit conditions.
Value chain analysis most likely involves identifying the:
A.
firm’s pricing strategy.
B.
firm’s break-even points.
C.
specific activities carried out by the firm.
C.
specific activities carried out by the firm.
Correct because value chain analysis provides a link between the firm’s value proposition for customers and its profitability. It involves identifying the specific activities carried out by the firm.
A common capital allocation pitfall is:
A.
basing investment decisions on earnings per share.
B.
ignoring sunk costs in the decision-making process.
C.
incorporating the responses of competitors into the analysis.
A.
basing investment decisions on earnings per share.
Correct because paying too much attention to short-run accounting numbers can result in a company choosing investments that are not in the long-run economic interests of its shareholders. EPS is an accounting based measure.
If practical, retrospective application is required for a change in:
A.
accounting policies only.
B.
accounting estimates only.
C.
both accounting policies and accounting estimates.
A.
accounting policies only.
Correct because changes in accounting policies are reported through retrospective application unless it is impractical to do so. Changes in accounting estimates, however, are handled prospectively.
For similar amounts, which of the following actions will have the largest effect on GDP? An increase in:
A.
government spending.
B.
social transfers to all citizens.
C.
social transfers to the poorest citizens.
A.
government spending.
Correct because government spending increases have a much bigger effect (six times bigger) on GDP than similar size social transfers because the latter are not considered permanent.
All else being equal, cash dividends paid to common shareholders result in a:
A.
lower ROA than if no dividends were paid.
B.
higher ROE than if no dividends were paid.
C.
lower net profit margin than if no dividends were paid.
B.
higher ROE than if no dividends were paid.
Correct because ROE = Net income / Average total equity.
The basic components of owners’ equity are paid- in capital and retained earnings. Retained earnings include the cumulative amount of the company’s profits that have been retained in the company. For retained earnings, a dividend payment is the most common decrease.
Declaring and paying cash dividends to shareholders does not change net income but reduces retained earnings thus decreases total equity. As a result, ROE will increase compared to no dividends declared and paid.
Ignoring income taxes, the recognition of an impairment loss on long-lived assets most likely results in a:
A.
lower quick ratio.
B.
higher total asset turnover ratio.
C.
lower cash flow from operations.
B.
higher total asset turnover ratio.
Correct because the amount of the impairment loss will reduce the carrying amount of the asset on the balance sheet and will reduce net income on the income statement. Total asset turnover = Revenue / Average total assets. While Revenue (the numerator) is unaffected, the reduction of the carrying amount of the equipment (an asset) would lead to a lower average total assets; thus the ratio would increase.
C is Incorrect because the impairment loss is a non-cash item and will not affect cash from operations.
If a deferred tax asset resulted in the past, but the criteria of economic benefits is not met on the current balance sheet date, the company should:
A.
perform an impairment test.
B.
reverse the deferred tax asset.
C.
establish a valuation allowance.
B.
reverse the deferred tax asset.
B Correct because if a deferred tax asset or liability resulted in the past, but the criteria of economic benefits is not met on the current balance sheet date, then, under IFRS, an existing deferred tax asset or liability related to the item will be reversed.
C is Incorrect because if a deferred tax asset or liability resulted in the past, but the criteria of economic benefits is not met on the current balance sheet date, then, under IFRS, an existing deferred tax asset or liability related to the item will be reversed. Under US GAAP, a valuation allowance is established.
Which of the following is best described as a means of influencing another country’s decisions without force or coercion?
A.
Soft power
B.
Standardization
C.
Regulatory cooperation
A.
Soft power
Correct because soft power is a means of influencing another country’s decisions without force or coercion.
All else being equal, an increase in the inventory valuation allowance account in the current reporting period most likely increases the:
A.
interest coverage ratio.
B.
working capital turnover ratio.
C.
days of inventory on hand ratio.
B.
working capital turnover ratio.
Correct because IFRS state that inventories shall be measured (and carried on the balance sheet) at the lower of cost and net realisable value. In the event that the value of inventory declines below the carrying amount on the balance sheet, the inventory carrying amount must be written down to its net realisable value and the loss (reduction in value) recognised as an expense on the income statement. This expense may be included as part of cost of sales or reported separately. Frequently, rather than writing inventory down directly, an inventory valuation allowance account is used. The allowance account is netted with the inventory accounts to arrive at the carrying amount that appears on the balance sheet. Accordingly, because revenue is not affected by the inventory write-down, the working capital turnover ratio (Revenue / Average working capital) increases (as the denominator decreases, as inventory is part of working capital) by an increase in the inventory valuation allowance account in the current reporting period.
According to the Modigliani–Miller propositions, if there are no taxes, an increase in financial leverage will increase the cost of equity and:
A.
decrease the WACC.
B.
have no effect on the WACC.
C.
increase the WACC.
B.
have no effect on the WACC.
Which of the following market structures is characterized by high barriers to entry and products with close substitutes within the market?
A.
Oligopoly
B.
Monopoly
C.
Monopolistic competition
A.
Oligopoly
Correct because entry into oligopoly markets is difficult, with fairly high costs and significant barriers to competition. The products offered by each seller are close substitutes for the products offered by other firms and are highly differentiated through marketing, features, and other non-pricing strategies.
An advantage of indirect taxes as a fiscal policy tool is that such taxes:
A.
can be adjusted almost immediately.
B.
minimize interference with consumer choices.
C.
have a greater impact on aggregate spending and output than direct government spending.
A.
can be adjusted almost immediately.
Correct because indirect taxes, which are taxes on spending including excise taxes on fuel, alcohol, and tobacco as well as taxes on gambling winnings, can be adjusted almost immediately after they are announced and can influence spending behavior instantly.
C is Incorrect because direct government spending has a far bigger impact on aggregate spending and output than tax cuts or transfer increases.
The replacement of existing trades on a swap execution facility by the central counterparty is best described as:
A.
novation.
B.
market making.
C.
marking to market.
A.
novation.
Correct because, under central clearing, a derivatives trade is executed in Step 1 on a swap execution facility (SEF), a swap trading platform accessed by multiple dealers. The original SEF transaction details are shared with the CCP (central counterparty) in Step 2, and the CCP replaces the existing trade in Step 3. This novation process substitutes the initial SEF contract with identical trades facing the CCP.
When developing an IPS, an investor’s desire to earn an inflation-adjusted annual rate of return of at least 2% is best classified as a(n):
A.
relative risk objective.
B.
relative return objective.
C.
absolute return objective.
C.
absolute return objective.
Correct because return objectives may be stated on an absolute or a relative basis. As an example of an absolute objective, the client may want to achieve a particular percentage rate of return. This objective could be a nominal rate of return or could be expressed in real (inflation-adjusted) terms.
During the lockout period for a non-amortizing asset-backed security, the principal payment of €100 million on a €1 billion face value issue will result in the security having a total face value of:
A.
€0.9 billion.
B.
€1.0 billion.
C.
€1.1 billion.
B.
€1.0 billion.
Correct because during the lockout period any principal received is reinvested to acquire additional loans with a principal equal to the total principal received from the cash flow keeping the face value of the issue at €1 billion.
In contrast to risk tolerance, risk budgeting focuses more on:
A.
how risk is taken.
B.
the appetite for risk.
C.
what is and is not acceptable risk.
A.
how risk is taken.
Correct because whereas risk tolerance focuses on the appetite for risk and what is and is not acceptable, risk budgeting has a more specific focus on how that risk is taken.
In which section of an IPS is the rebalancing policy most likely found?
A.
Appendices
B.
Investment Guidelines
C.
Evaluation and Review
A.
Appendices
Correct because Appendices details (A) Strategic Asset Allocation (B) Rebalancing Policy. Many investors specify a strategic asset allocation (SAA), also known as the policy portfolio, which is the baseline allocation of portfolio assets to asset classes in view of the investor’s investment objectives.
B is Incorrect because Investment Guidelines provides information about how policy should be executed (e.g., on the permissible use of leverage and derivatives) and on specific types of assets excluded from investment, if any. It is Appendices that details (A) Strategic Asset Allocation (B) Rebalancing Policy.
The value of a swap contract at initiation is most likely equal to:
A.
zero.
B.
the price of the swap.
C.
the present value of the fixed payments on the swap.
A.
zero.
Correct because the value (not the price) of the swap is typically zero at initiation and the fixed swap price is typically determined such that the value of the swap will be zero at initiation.
Companies that are candidates for a leveraged buyout most likely:
A.
require start-up capital.
B.
generate a high level of cash flow.
C.
are experiencing a rapid deterioration in operations.
B.
generate a high level of cash flow.
Correct because a leveraged buyout (LBO) occurs when a group of investors (such as the company’s management or a private equity partnership) uses a large amount of debt to purchase all of the outstanding common shares of a publicly traded company.
Companies that are candidates for these types of transactions generally have large amounts of undervalued assets (which can be sold to reduce debt) and generate high levels of cash flows (which are used to make interest and principal payments on the debt).
