Mock 8 Flashcards
According to the Standards, a member who manages an index fund is:
only required to invest in a manner consistent with the fund’s stated mandate.
only required to determine the suitability of the fund for those who invest in the fund.
both required to invest in a manner consistent with the fund’s stated mandate and to determine the suitability of the fund for those who invest in the fund.
only required to invest in a manner consistent with the fund’s stated mandate.
A is correct because according to Standard III(C), Suitability, “Some members … are responsible for managing a fund to an index or an expected mandate. The responsibility of these members and candidates is to invest in a manner consistent with the stated mandate. Members and candidates who manage pooled assets to a specific mandate are not responsible for determining the suitability of the fund as an investment for investors who may be purchasing shares in the fund.
Robert Dowling, CFA, is part of a research team. Dowling’s team has recommended a “buy” rating on a company, but Dowling does not agree with the recommendation. To comply with the Standard relating to diligence and reasonable basis, Dowling:
must decline to be identified with the report.
must ensure that the report reflects his opinion.
may continue to be identified with the report as long as the recommendation has a reasonable basis.
may continue to be identified with the report as long as the recommendation has a reasonable basis.
C is correct because according to Standard V (A), Diligence and Reasonable Basis, if a member “believes that the consensus opinion has a reasonable and adequate basis and is independent and objective, the member or candidate need not decline to be identified with the report. If the member or candidate is confident in the process, the member or candidate does not need to dissociate from the report even if it does not reflect his or her opinion.” Thus, Dowling may accept the group’s decision and may be identified with the report as long as it has a reasonable basis.
Mabel Albright, CFA, resigns to work at a new firm. For her research report at the new firm, she re-creates the supporting records from her memory and uses the historical recommendations she made at her previous firm. Albright violates the Standards:
only by re-creating the supporting records from her memory.
only by using the historical recommendations at her previous firm.
both by re-creating the supporting records from her memory and by using the historical recommendations at her previous firm.
both by re-creating the supporting records from her memory and by using the historical recommendations at her previous firm.
C is correct because according to Standard V(C), Record Retention, “The member or candidate cannot use historical recommendations or research reports created at the previous firm because the supporting documentation is unavailable. For future use, the member or candidate must re-create the supporting records at the new firm with information gathered through public sources or directly from the covered company and not from memory or sources obtained at the previous employer.”
According to the Code and Standards regarding knowledge of laws and regulations, CFA Institute members and candidates must:
understand the relevant regulations for all the countries where they trade securities.
have detailed knowledge of all the laws that could potentially govern the member’s activities.
spend a minimum of five hours per calendar year on continuing education activities related to applicable laws and regulations.
understand the relevant regulations for all the countries where they trade securities.
A is correct because Standard I(A) requires members and candidates to understand applicable laws and regulations in those countries where they trade or conduct business. While an understanding of laws and regulations is required, members and candidates can rely on legal counsel and compliance to be subject matter experts in these areas. The Standards do not require a minimum of five hours of continuing education.
Members should encourage their firms to establish which of the following procedures to avoid violations of Standard relating to independence and objectivity?
Procedure 1 Place a covered company on a restricted list if the firm is unwilling to disseminate adverse opinion on the company.
Procedure 2 Prohibit employees from receiving reimbursement from corporate issuers for air transportation when attending meetings at the issuers’ headquarters.
Procedure 1 only
Procedure 2 only
Both Procedure 1 and Procedure 2
Both Procedure 1 and Procedure 2
C is correct because according to the recommended procedures for compliance with Standard I(B), Independence and Objectivity, “[i]f the firm is unwilling to permit dissemination of adverse opinions about a corporate client, members and candidates should encourage the firm to remove the controversial company from the research universe and put it on a restricted list so that the firm disseminates only factual information about the company.” Therefore, Procedure 1 is correct.
Which of the following is least likely sufficient to meet recommended or required procedures for compliance with CFA Institute Standard III(A): Loyalty, Prudence, and Care?
Disclose any existing conflicts of interest.
Establish a regular client meeting schedule.
Seek best execution when trading on behalf of clients.
Disclose any existing conflicts of interest.
A is correct. Disclosing any existing conflict of interest is least likely adequate to comply with the recommended or required procedure for compliance with CFA Institute Standard III(A): Loyalty, Prudence, and Care. The recommended procedure for compliance states that members and candidates must disclose all actual and potential conflicts of interest so that clients can evaluate those conflicts.
A member is developing allocation procedures for block trades and new issues. According to the recommended procedures for compliance with the Standard relating to fair dealing, the member’s allocation procedures should involve:
prohibiting consideration of advanced interest when allocating trades for new issues.
bundling orders on a first-in, first-out basis for efficiency as appropriate for the asset class.
giving client accounts participating in a block trade execution prices corresponding to order arrival time.
bundling orders on a first-in, first-out basis for efficiency as appropriate for the asset class.
B is correct because according to the recommendations for Standard III (B), Fair Dealing, procedures should include “processing and executing orders on a first-in, first-out basis with consideration of bundling orders for efficiency as appropriate for the asset class or the security.”
According to the recommended procedures for compliance with the Standard relating to additional compensation arrangements, a member should make an immediate written report specifying the proposed compensation arrangements:
only to her supervisor.
only to her supervisor and to her firm’s compliance officer.
to her supervisor, to her firm’s compliance officer, and to her clients.
only to her supervisor and to her firm’s compliance officer.
B is correct because according to the recommended procedures for compliance with Standard IV(B), Additional Compensation Arrangements, “Members and candidates should make an immediate written report to their supervisor and compliance officer specifying any compensation they propose to receive for services…”
According to the recommended procedures for compliance with the Standard relating to responsibilities of supervisors, a member should encourage her employer to:
integrate a code of ethics into compliance procedures.
build incentive structures based on how much revenue is generated for the firm.
write a code of ethics in plain language and without numerous detailed procedures
write a code of ethics in plain language and without numerous detailed procedures.
C is correct because according to the recommended procedures for compliance with Standard IV (C), Responsibilities of Supervisors, “Stand-alone codes of ethics should be written in plain language and should address general fiduciary concepts. They should be unencumbered by numerous detailed procedures.”
For a retail client’s account to be included in a GIPS®-compliant firm’s composite, it will most likely be in a composite:
composed of discretionary accounts.
restricted to retail accounts.
with both fee-paying and non-fee-paying accounts
composed of discretionary accounts.
A is correct. A composite must include all actual, fee-paying, discretionary segregated accounts managed in accordance with the same investment mandate, objective, or strategy.
Which of the following should a GIPS®-compliant firm most likely provide to each prospective client?
A list of composite descriptions upon request
A copy of the GIPS standards
A compliant presentation every six months
A list of composite descriptions upon request
A is correct. GIPS-compliant firms must provide a complete list of composite descriptions to any prospective client that makes such a request. The list must include terminated composites for a minimum of five years after the composite termination date
If the effective annual rate is 6% with monthly compounding, the periodic rate is closest to:
0.487%.
0.500%.
0.514%.
0.487%.
A is correct because the periodic rate is found using the equation EAR = (1 + periodic interest rate)m – 1 and solving for the periodic rate; 0.06 = (1 + periodic interest rate)12 – 1; periodic interest rate = 1.06(1/12) – 1 = 0.487%. Alternatively, the periodic rate is the stated annual rate of 5.841% divided by 12 periods or 0.487%; 0.06 = (1 + stated annual rate / 12)12 – 1; stated annual rate = (1.06(1/12) – 1) × 12 = 5.841%. Calculator solution: ICONV; EFF = 6%; C/Y = 12; compute NOM = 5.841%; 5.841%/12 = 0.487%.
An investor gathers the following information:
Account 1 Account 2 Account 3
Stated annual interest rate 6.1% 6.3% 6.2%
Compounding frequency Daily Annual Quarterly
If a $1,000 deposit is made today, the future value in one year will be greatest for:
A. Account 1.
B. Account 2.
C. Account 3.
C. Account 3.
C is correct because the account with the highest effective annual rate (EAR) will have the greatest future value in one year. “The effective annual rate is calculated as follows: EAR = (1 + Periodic interest rate)m – 1. The periodic interest rate is the stated annual interest rate divided by m, where m is the number of compounding periods in one year.” (pp. 315-316) The EAR of Account 3 is (1 + 0.062/4)4 – 1 = 0.06346 = 6.35%, compared to (1 + 0.061/365)365 – 1 = 0.06289 = 6.29% for Account 1 and 6.30% for Account 2. The resulting future values are: $1,063.46 for Account 3, compared to $1,062.89 for Account 1 and $1,063.00 for Account 2.
An analyst gathers the following cumulative absolute frequency distribution of ratings for a bond portfolio:
Rating Cumulative Absolute Frequency
AA 3
A 8
BBB 12
BB 24
The relative frequency of BBB rated bonds is closest to:
A. 17%.
B. 26%.
C. 50%.
17%.
A is correct because “[t]he cumulative absolute frequency cumulates (meaning, adds up) the absolute frequencies as we move from the first bin to the last bin.” The absolute frequency of BBB rated bonds is equal to the cumulative absolute frequency of BBB rated bonds minus the cumulative absolute frequency of the previous bin [A rated bonds]: 12 – 8 = 4. “For the last bin, the cumulative absolute frequency will equal the number observations in the dataset [24].” Hence, the relative frequency of BBB rated bonds “is calculated as the absolute frequency of each unique value of the variable divided by the total number of observations,” which is 4/24 = 0.167 ≈ 17%.
If all paired observations of random variables X and Y satisfy the equation Y = –0.2 + 0.8X, the correlation between X and Y is:
0.6.
0.8.
1.0.
1.0.
C is correct because if all data points lie exactly on the line Y = –0.2 + 0.8X, this indicates a perfect (positive) linear relationship, and “[a] correlation of 1 indicates a perfect linear relationship.” Also, “[e]ven if the slope of the line were different (but positive), the correlation between the two variables would still be +1 as long as all the points lie on that straight line.”
An analyst gathers the following information about three events:
The odds for Event 1 are 3 to 4.
The odds against Event 2 are 6 to 8.
The probability of Event 3 is 0.52.
The event with the highest probability of occurring is:
Event 1.
Event 2.
Event 3.
Event 2.
B is correct because the probability of Event 2 occurring is 8/(6 + 8) = 8/14 = 0.57, since “[g]iven odds against E of ‘a to b’, the implied probability of E is b/(a + b).” This probability is higher than the probability of either Event 1 (0.43 = 3/(3 + 4) = 3/7) or Event 3 (0.52).
The calculation can be simplified by noticing that the odds for Event 2 are 8 to 6, i.e. 4 to 3, which is the reciprocal of the odds for Event 1, so the probability of Event 2 occurring is 1 – 0.43 = 0.57.
For two random events A and B, the conditional probability of A occurring given that B has occurred is equal to:
one, if A and B are mutually exclusive and exhaustive.
the unconditional probability of A, if A and B are independent.
the joint probability of A and B multiplied by the probability of B.
the unconditional probability of A, if A and B are independent.
B is correct because “[t]wo events A and B are independent if and only if P(A | B) = P(A)”.
An analyst gathers the following probability distribution of a company’s earnings:
Probability Earnings
($ millions)
0.25 100
0.70 300
0.05 600
The standard deviation of the company’s earnings is closest to:
$115 million.
$134 million
$375 million.
$115 million.
A is correct because the expected value is calculated as E(X) = P(X1)X1 + P(X2)X2 + … + P(Xn)Xn = 0.25×100 + 0.70×300 + 0.05×600 = 25 + 210 + 30 = 265 and the variance is calculated as σ2(X) = E{[X − E(X)]2 } = 0.25×(100 – 265)2 + 0.70×(300 – 265)2 + 0.05×(600 – 265)2 = 6,806.25 + 857.50 + 5,611.25 = 13,275 and the “[s]tandard deviation is s the positive square root of variance”, i.e. 13,2751/2 ≈ $115.22 ≈ $115 million
A normal random variable, X, has a mean of 4.0 and a standard deviation of 2.0. A value X = 10.0 corresponds to a standardized value of:
1.5.
2.0.
3.0.
3.0.
C is correct because “[i]f we have X ~ N(μ, σ2)…, we standardize it using the formula Z = (X − μ)/σ.” In this case, Z = (X – μ)/σ = (10 – 4) /2 = 3.
An analyst gathers the following information about a sample from a population with a lognormal distribution:
Sample size 30
Sample mean 2.27
Sum of squared deviations from the sample mean 12.00
The standard error of the sample mean is closest to:
0.12.
0.41.
0.64.
0.12.
A is correct because when the standard deviation of the population is not known, the standard error of the sample mean sX̅ = s/(n)0.5, where s is the standard deviation and n is the sample size. Since the variance s2 = Σ(Xi – X̅)2/(n – 1) = 12/(30 – 1) = 0.4138; s = 0.41380.5 = 0.6433, so that sX̅ = 0.6433/300.5 = 0.1174 ≈ 0.12.
Which of the following statements about the p-value is most accurate?
The smaller the p-value, the smaller the chance of a false positive.
The p-value is a calculated test statistic used in hypothesis testing.
The smaller the p-value, the stronger the evidence against the alternative hypothesis.
The smaller the p-value, the smaller the chance of a false positive.
A is correct because “[t]he smaller the p-value, the smaller the chance of making a Type I error,” and “[a] Type I error is a false positive.”
An analyst runs a simple linear regression using 35 months of data to assess a country’s short-term interest rate as a function of its inflation rate, with the following results:
Source Degrees of Freedom Sum of Squares Mean square
Regression 1 17.3009 17.3009
Error 33 20.2299 0.6130
Total 34 37.5308
The value of the standard error of the estimate is closest to:
0.68.
0.78.
1.05.
0.78.
B is correct because the standard error of the estimate in a linear regression is the square root of the mean square error, thus 0.61300.5 = 0.7829 ≈ 0.78.
Which of the following theories of the business cycle focuses more on the role of money?
Keynesian
Neoclassical
The Austrian School
The Austrian School
C is correct because “[t]he so-called Austrian school, another “non-intervention” theory, shares many views of the neoclassical economists. In contrast to the neoclassical school, however, it focuses on the role of money, which they believe does more than facilitate the exchange of goods and services.”
Quantitative easing addresses the monetary policy challenges most likely caused by:
expected periods of deflation.
actions of bond market vigilantes.
inflationary demand shocks or supply shocks.
expected periods of deflation.
A is correct. In a deflationary environment, reducing rates below zero may become ineffective and result in a liquidity trap. The next step to deter deflation is quantitative easing.
A country seeking nationalism but willing to cooperate with other countries is best classified as:
autarkic.
bilateral.
hegemonic.
bilateral.
B is correct because bilateralism describes a country seeking both nationalism and cooperation. “Bilateralism is the conduct of political, economic, financial, or cultural cooperation between two countries.”
A country’s international transactions accounts data for last year are presented in its domestic currency:
Transaction Amount
Exports of goods and services 10,000
Import of goods and services 14,216
Investment income payments made to foreigners 2,519
Investment income received from foreigners 3,409
Net change in assets owned abroad 1,548
Net change in foreign-owned assets domestically 4,989
Unilateral current transfers received 346
Unilateral current transfers paid 1,107
Statistical discrepancy 646
The current account balance is closest to:
–4,087.
–4,216.
–4,345.
A is correct.
Transaction Amount Totals
Export of goods and services and income receipts 13,409
Export of goods and services 10,000
Investment income received from foreigners 3,409
Import of goods and services and income payments –16,735
Import of goods and services –14,216
Investment income payments made to foreigners –2,519
Net unilateral current transfers –761
Unilateral current transfers received 346
Unilateral current transfers paid –1,107
Current account balance –4,087
An analyst gathers the following information about foreign exchange spot prices:
1 January Year 1 1 January Year 2
USD/EUR 1.4025 1.3600
CAD/USD 1.0800 1.0450
Note: USD/EUR exchange rate quote convention is USD per EUR.
USD = US dollar; EUR = euro; CAD = Canadian dollar.
The percentage appreciation of the EUR/CAD is closest to:
6.17%.
6.47%.
6.58%.
6.58%.
C is correct because the EUR / CAD spot price increased from 0.6602 to 0.7036, which is an increase of 6.58%.
First, find the CAD / EUR cross quotes; S0 = 1.4025 × 1.0800 = 1.5147; S1 = 1.3600 × 1.0450 = 1.4212.
Second, convert CAD to the base currency; S0 = 1 / 1.5147 = 0.6602; S1 = 1 / 1.4212 = 0.7036. Third, find the percentage change; (0.7036 / 0.6602) – 1 = 0.0658, or 6.58%.
An alternative solution is to take (S0 / S1) − 1 from the original cross quote, which is essentially the same as converting CAD to the base currency and using (S1 / S0) – 1; (1.5147 / 1.4212) −1 = 0.0658, or 6.58%.
An analyst gathers the following information:
CAD/EUR spot exchange rate 1.4356
CAD 12-month risk-free rate 2.0%
EUR 12-month risk-free rate 0.5%
CAD/EUR is the amount of CAD per 1 EUR.
The CAD/EUR 12-month forward points are closest to:
–211.
21.
214.
214.
C is correct because the 12-month forward rate is first calculated, then followed by the forward points.
The 12-month forward rate is (CAD/EUR) x ((1 + CAD interest rate) / (1 + EUR interest rate)) = 1.4356 x ((1 + 0.02)/(1 + 0.005)) ≈ 1.4570.
The forward points is the difference between the forward rate and the spot rate, and scaled up by 10,000 = (1.4570 – 1.4356) x 10,000 = 214.
Which of the following most likely presents information on the financial performance of a company’s business activities over a period of time? The statement of:
operations
financial position
changes in equity
operations
A is correct because “[t]he income statement presents information on the financial performance of a company’s business activities over a period of time. It communicates how much revenue and other income the company generated during a period and the expenses it incurred to generate that revenue and other income. … The income statement is sometimes referred to as a statement of operations or profit and loss (P&L) statement.”
Which of the following most likely enforces financial reporting requirements?
Regulatory authorities
Standard-setting bodies
Accounting standards boards
Regulatory authorities
A is correct because “[a] distinction must be made between standard-setting bodies and regulatory authorities. Standard-setting bodies, such as the IASB and FASB, are typically private sector, self-regulated organizations with board members who are experienced accountants, auditors, users of financial statements, and academics. The requirement to prepare financial reports in accordance with specified accounting standards is the responsibility of regulatory authorities. Regulatory authorities, such as the Accounting and Corporate Regulatory Authority in Singapore, the Securities and Exchange Commission (SEC) in the United States, and the Securities and Exchange Commission of Brazil have the legal authority to enforce financial reporting requirements and exert other controls over entities that participate in the capital markets within their jurisdiction. In other words, generally, standard-setting bodies set the standards and regulatory authorities recognize and enforce the standards.”
At year end, a company has non-convertible debt, ordinary shares, and employee stock options outstanding. The company’s capital structure is considered to be:
complex, because the company has both debt and equity.
complex, because the options are convertible into ordinary shares.
simple, if the options are antidilutive.
complex, because the options are convertible into ordinary shares.
B is correct. When a company has issued any financial instruments that are potentially convertible into common stock, it is said to have a complex capital structure. Potentially convertible financial instruments include convertible bonds, convertible preferred stock, employee stock options, and warrants. Any antidilutive effect of a convertible security relates to the calculation of EPS and is not part of the distinction of simple vs. complex capital structure.
