Mock Exams I messed up May Version Flashcards
fixed-charges coverage ratio formula
(EBIT + Lease payments) / (Interest payments + Lease payments)
In a set of common-size financial statements, unearned revenue should most likely be calculated as a percentage of:
A
sales.
B
assets.
C
liabilities.
B
assets.
Unearned revenue is created when a company receives payment for goods and services that have not been delivered yet. This amount is reported as a liability on the balance sheet.
Like all other liability accounts in a common-size balance sheet analysis, unearned revenue should be calculated as a percentage of total assets.
All else equal, which of the following accounting choice will most likely increase a company’s reported earnings during the current accounting period?
A
Increasing the provision for doubtful accounts
B
Increasing the salvage value of assets depreciated using the straight-line method
C
Switching from the FIFO method to the LIFO method in an inflationary environment
B
Increasing the salvage value of assets depreciated using the straight-line method
increasing the salvage value of an asset will decrease the depreciation expense each period under the straight-line method.
The loss on sale of equipment would most likely be reflected as an adjustment to which category in an indirect-format cash flow statement?
A
Investing Activity
B
Financing Activity
C
Operating Activity
C
Operating Activity
When using the indirect method to calculate CFO, adjustments must be made for any items that are reflected in net income without having affected operating cash flows.
In this example, the amount of any loss on the sale of equipment, which is a non-operating activity, has reduced net income and must be added back in order to arrive at CFO. Under the indirect method, this adjustment is made in the operating activities section of the cash flow statement.
Which of the following is least likely to be included in the portion of a corporate bond’s yield that reflects investors’ time preferences for current versus future nominal consumption?
A
Inflation premium
B
Liquidity premium
C
Real risk-free rate
B
Liquidity premium
Investors’ time preferences for current versus future real consumption are captured by the real risk-free rate. Adding an inflation premium produces a rate that reflects the tradeoff between current and future consumption in nominal terms.
The liquidity premium component of a corporate bond’s yield reflects compensation for the discount to market value that investors expect to incur in order to quickly convert their position into cash. By contrast, newly-issued government securities typically do not carry a liquidity premium due to the large number of investors who are active in the government bond market and are willing to pay the current market value.
DuPont ROE formula
ROE = Tax Burden * Interest Burden * EBIT Margin * Total Asset Turnover * Leverage
If stock market returns are small and positive but interspersed with occasional large negative returns, the market most accurately described as being:
A
leptokurtic.
B
mesokurtic.
C
negatively skewed.
C
negatively skewed.
This is an example of negative skewness. If there were instead frequent small losses and a few extreme gains, the distribution would be positively skewed.
The primary objective of the World Bank is most likely to:
A
ensure the stability of the international payment system.
B
address poverty in countries with developing economies.
C
provide a forum and framework for international trade negotiations
B
address poverty in countries with developing economies.
The primary objective of the World Bank is to assist countries with developing economies in their efforts to eradicate poverty.
Brian Gilman, CFA, has been asked to write a research report on Kennemetal, a major copper mining firm in which Gilman’s wife owns 750 shares. Which of the following statements is most accurate? Gilman:
A
must refuse to write the report on a company in which his wife owns shares.
B
may accept the assignment, but must disclose his wife’s stock ownership in the report.
C
may accept the assignment and is not required to disclose his wife’s stock ownership in the report.
B
may accept the assignment, but must disclose his wife’s stock ownership in the report.
Standard VI(A) - Disclosure of Conflicts requires members and candidates to “make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their client, prospective clients, and employer.” In this example, Gilman is not required to refuse this assignment, but he must disclose his wife’s ownership of the company’s stock if he chooses to accept it.
Last year, SparTech was an all-equity firm. After raising capital to finance an expansion, the company’s capital structure is currently 40% debt and 60% equity. Which of the following statements is most accurate? SparTech’s capital structure:
A
is currently simple, but would be complex if the company issued preferred stock.
B
was simple, but became complex when the company ceased being an all-equity firm.
C
is currently simple, but would be complex if the company began issuing employee stock options.
C
is currently simple, but would be complex if the company began issuing employee stock options.
A capital structure is considered to be complex when a company has issued convertible securities such as warrants, convertible bonds, and employee stock options.
A mix of debt and equity is considered a simple capital structure. In this example, adding preferred stock to the current capital structure, provided that it is not convertible, would not make it complex.
IFRS-compliant companies are least likely required to disclose which of the following for their intangible assets?
A
Fair value
B
Amortization method
C
Whether the useful lives are indefinite or finite
A
Fair value
Under IFRS, for intangible assets, a company must disclose whether the useful lives are indefinite or finite.
If an asset is deemed to have an indefinite life, the company must disclose the reasons for this judgment as well as the asset’s carrying value.
For intangible assets with finite useful lives, for each class of intangible asset, the company must disclose:
Estimated useful lives
Amortization methods
Gross carrying amount
Accumulated amortization at the beginning and end of the period, where amortization is included on the income statement
A reconciliation of the carrying amount at the beginning and end of the period
Nathan Bradley, CFA, an independent equity analyst, accepts an offer from Whitten Manufacturing (WMN) to write a research report analyzing the company’s stock. Before undertaking any work on the report, Bradley agrees to accept a flat fee and a fixed number of WMN stock options as compensation. Neither the value of the fee or the number of options Bradley receives is linked to his report’s conclusions or recommendations. One year after the report is issued, Bradley exercises the options. Has Bradley most likely violated the Standards?
A
No
B
Yes, with respect to independence and objectivity only
C
Yes, with respect to both independence and objectivity and additional compensation arrangments
B
Yes, with respect to independence and objectivity only
Issuer-paid research, such as the work described in this example, is allowed by Standard I(B) - Independence and Objectivity under certain conditions. Bradley would not have violated this Standard by accepting a flat fee that was agreed in advance of him undertaking any work and was not linked to his report’s conclusions or recommendations. However, Bradley does violate this Standard by accepting a compensation package that includes options to purchase WMN shares as this type of equity-based compensation could reasonably be expected to influence his ability to remain independent and objective. Bradly will likely be biased to release a positive report as that will increase the value of his stock options of WMN.
There is no indication that Bradley has violated Standard IV(B) - Additional Compensation Arrangements, which prohibits members and candidates from accepting compensation for work that conflicts with the interest of their employer without receiving written consent from all parties involved.
An analyst gathers the following information with respect to the machine used by a company that issues financial statements in accordance with US GAAP.
Undiscounted expected future cash flows $21,000
Present value of expected future cash flows $18,000
Fair value
$19,000
Estimated selling cost
$3,000
The company is currently carrying this asset at $20,000. Based on the information presented above, the company will most likely:
A
continue carrying this asset at $20,000.
B
revise the carrying value of this asset down to $16,000.
C
revise the carrying value of this asset down to $18,000.
A
continue carrying this asset at $20,000.
According to US GAAP, an asset’s carrying amount is considered to be recoverable if it is less than the undiscounted value of expected future cash flows. In this example, the company would continue to carry this asset at $20,000 because this amount is less than the $21,000 value of undiscounted expected future cash flows.
cost of trade credit
(1 + Discount / (1 - Discount))^(365/Days Beyond DIscount Period) - 1
DRB Construction purchased a fixed asset worth $4,000 at the beginning of the year. The company records a $600 depreciation expense attributable to this asset on its income statement for the first year of ownership. For tax purposes, DRB is allowed to depreciate 25% of the asset each year. The asset’s tax base after one year is closest to:
A
$1,000.
B
$3,000.
C
$3,400.
B
$3,000.
The tax base of an asset is the amount that will be deductible for tax purposes in future periods. This is equal to the purchase price of the asset minus the depreciation allowed for tax purposes for the year. In this example, the tax base is:
$4,000 - 25% * $4,000 = $3,000
correlation formula between two stocks
COV A, B = E [(A - E(A)) * (B - E(B))]
correlation = COV / (standard dev A * standard dev B)
Carla Pollini, CFA, is responsible for recommending third-party managers for a defined benefit pension plan. While reviewing several proposals for the plan’s latest allocation, Pollini learns that Roberto Lacobucci, manager of the Eurasian Equity Fund, directs a percentage of the fund’s profits to an animal sanctuary. After concluding her review of several funds, Pollini recommends that the plan’s trustees choose the Eurasian Equity Fund. Her methodology for ranking the various proposals includes consideration of each fund’s commitment to environmental, social, and governance (ESG) factors.
Pollini does not disclose to the trustees that she made a personal donation to the animal sanctuary that is supported by the Eurasia Equity Fund. Has Pollini most likely violated the Standards?
A
No
B
Yes, with respect to disclosure of conflicts
C
Yes, with respect to both disclosure of conflicts and independence and objectivity
A
No
ollini would have violated Standard I(B) - Independence and Objectivity if she had solicited a donation from Lacobucci for one of her preferred charities when deciding whether to recommend his fund to the pension plan’s trustees. However, she does not compromise her independence or objectivity by making a personal donation to a charity that she learned about while conducting due diligence as part of her professional responsibilities. Even if Lacobucci had solicited the donation, and there’s no evidence that he did, Pollini would not violate the Standards by making a donation because she would not be using her position as the person responsible for recommending funds to benefit personally.
Neither has Pollini violated Standard VI(A) - Disclosure of Conflicts. The fact that she has decided to personally support the same charity as Lacobucci is not something that could reasonably be expected to impair her independence and objectivity.
Harmonic mean formula
1 / (((1/x1) + 1/(x2) + 1/(x3)) / n)
Free Cash Flow to Firm formula
NI + Depreciation + Debt Repayment * (1 - tax rate) - FC Inv - WC Inv
FC Inv = Fixed capital investment
WC Inc = Working Capital Investment
how to find the days of number payable from the cash conversion cycle
CCC = DOH + DSO - DP
DOH = 365 / Inventory turnover
DSO = 365 / Receivables turnover
Then you find DP form that
Marge Varney, CFA, provides retirement planning services for her clients, including Kendra Hodge and Philippe Bourque. Both Hodge and Bourque own 1,000 shares of Philatech Industries (PHI). These positions account for 2% of Hodge’s total wealth and 40% of Bourque’s. After scrutinizing the company’s latest financial reports, Varney becomes convinced that PHI will underperform over the next 5 years. She e-mails both Hodge and Bourque a copy of a detailed report that she prepared to support her recommendation that they each sell at least 20% of their PHI shares. Within 5 minutes, Bourque replies to Varney’s e-mail, authorizing her to sell 200 PHI shares from his account. A few minutes after that, Hodge replies with the same instructions. Immediately after receiving Hodge’s email, Varney submits sell orders on behalf of both clients’ accounts. Has Varney most likely violated the Standards?
A
No
B
Yes, with respect to fair dealing
C
Yes, with respect to communication with clients and prospective clients
B
Yes, with respect to fair dealing
Standard V(B) - Communication with Clients and Prospective Clients requires members and candidates to use reasonable judgment in identifying which factors are important to their recommendations and include those factors in communications with clients. This creates an obligation to consider each client’s particular circumstances when making recommendations.
In this case, Hodge and Bourque both own 1,000 shares of PHI. However, selling 200 of these shares will have a disproportionately large impact on Bourque’s portfolio. Varney violated this Standard by taking a “one-size-fits-all” approach with two clients who have very different circumstances. At a minimum, Varney should have taken additional time with Bourque to go over the significant impact that this trade would have on his portfolio.
There is no indication that Varney has violate
Guy Lapierre, CFA, is an investment advisor who works with individual investors, many of whom require the services of a tax specialist. Lapierre’s colleague, Jeanette Fung, pays Lapierre $1,000 for every referral who becomes one of her clients. In a meeting with his client, Eugene Randolph, Lapierre recommends Fung’s services as a tax specialist, adding, “If you become one of Jeanette’s clients, she will pay me a flat fee in cash for the referral.” Randolph later met with Fung but decided not to become a client of hers. This decision was based in part on his belief that, by paying referral fees, Fung would have to charge excessively high rates for her services. Has Lapierre most likely violated the Standards?
A
Yes
B
No, because Randolph did not become Fung’s client
C
No, because he disclosed that he had a referral fee arrangement with Fung
A
Yes
According to Standard VI(C) - Referral Fees, members and candidates must disclose the nature of any referral fee arrangements to clients, prospective clients, and employers as well as an estimate of the value of the compensation. In this case, Lapierre disclosed the nature of the arrangement (Fung pays him a flat fee in cash when his referrals become her clients), but he did not provide an estimate of the value of the compensation. Such an incomplete disclosure is a violation of this Standard.
Under IFRS, a reversal of a prior-year inventory write-down is most likely recorded as:
A
non-operating income.
B
other comprehensive income.
C
a reduction in cost of goods sold.
C
a reduction in cost of goods sold.
Under IFRS, reversals of inventory write-downs are recognized by reducing the cost of goods sold.
Charles Telford, CFA, is a research analyst for Edgemont Investments, and one of the companies he covers is Jackson Dynamics (JDN). Knowing that many of Edgemont’s clients own JDN shares, Telford increases his projection of the company’s next quarterly earnings in order to augment their returns. Neither Telford or any members of his immediate family owns any JDN shares and his compensation is unaffected by the returns on clients’ portfolios. Has Telford most likely violated the Standards?
A
No, because he served the clients’ interests
B
Yes, with respect to market manipulation only
C
Yes, with respect to market manipulation and independence and objectivity
B
Yes, with respect to market manipulation only
Telford acted with the intention of artificially manipulating the price of JDN shares, which is a violation of Standard II(B) - Market Manipulation.
There is no indication that Telford violated Standard I(B) - Independence and Objectivity.
marginal propensity to save formula
- find fiscal multiplier
FM = 1 / (1 - c * (1 - t))
c = marginal propensioty to consume
Fiscal multiplier = Consumer spending / Government Spending
- find c
- marginal propensity to save = 1 - c
the equation for the forward rate of currency rate
1 + i (domestic) = spot rate (foreign/domestic) * (1 + i (foreign) * (1 / Forward rate (foreign / domestic))
On average, firms in an industry carry 45 days of inventory. If a company turns its inventory over 8.7 times per year, its rate of inventory turnover is most likely:
A
quicker than the industry average and it had more days of inventory.
B
quicker than the industry average and it has fewer days of inventory.
C
slower turnover than its average competition and it has more days of inventory.
B
quicker than the industry average and it has fewer days of inventory.
Autarky and bilateralism are most likely located on the same side of which axis in the geopolitical risk assessment framework?
A
Nationalism/Globalization
B
Cooperation/Non-cooperation
C
Multilateralism/Anti-Globalization
A
Nationalism/Globalization
While autarky and bilateralism are on opposite sides of the Cooperation/Non-cooperation axis of the geopolitical risk assessment framework, they are located on the same side of Nationalism/Globalization axis.
Both models are characterized by resistance to global efforts among large numbers of countries to address areas of common concern.
Robert Choi, CFA, works for Challenger Asset Management, which offers its clients ten emerging market equity funds. All ten funds had negative five-year returns, although each has outperformed its benchmark. Choi approves an advertisement that includes a statement that the company’s funds have provided investors with “positive excess returns” for investors seeking exposure to these markets. Each fund’s five-year returns are presented alongside the returns of their relevant benchmark and a website where potential clients can obtain more detailed information is listed. Has Choi most likely violated the Standards?
A
No
B
Yes, by failing to provide sufficient information
C
Yes, by misleading potential clients with the implication that returns have been positive
A
No
According to Standard III(D) - Performance Presentation, members and candidates must ensure that communication of performance is “fair, accurate, and complete.”
In this example, the claim of positive excess returns is accurate because, although the funds have posted negative returns, each fund has outperformed its relevant benchmark. The clients are also given a presentation of the five-year returns with the benchmark returns, eliminating any potential misinterpretation.
When the format of communications does not allow for a detailed presentation, it is recommended that a reference to the limited nature of the information be made, and more detailed information must be provided upon request.
Which of the following statements about preference shares is most likely correct?
A
Preference shareholders are paid dividends after common shareholders
B
Compared to common shares, preference shares are less risky because their dividend payments are fixed and known
C
Because their claims rank above those of common shareholders, preference shareholders will receive par value in the event of a liquidation
B
Compared to common shares, preference shares are less risky because their dividend payments are fixed and known
Which of the following statements is most accurate?
A
US Treasury securities do not expose investors to liquidity risk
B
On-the-run US Treasury securities are less liquid than otherwise equivalent off-the-run US Treasury securities
C
Off-the-run US Treasury securities carry greater liquidity risk than otherwise equivalent on-the-run US Treasury securities
C
Off-the-run US Treasury securities carry greater liquidity risk than otherwise equivalent on-the-run US Treasury securities
Investors who hold off-the-run US Treasury securities have some exposure to liquidity risk as these seasoned issues are less liquid than otherwise equivalent on-the-run US Treasury securities.
US Treasury securities do not carry credit risk. However, investors are still exposed to liquidity risk especially when the demand for risky assets increases and investors cannot sell the treasuries without taking a huge loss.
The party to a futures contracts who has received a margin call is least likely to take which of the following actions?
A
Close out the contract without depositing additional funds
B
Deposit additional funds to bring the account balance to the initial margin
C
Deposit additional funds to bring the account balance to the maintenance margin
C
Deposit additional funds to bring the account balance to the maintenance margin
When a party’s account balance falls below the maintenance margin, a margin call is made. The party must deposit additional funds sufficient to bring the account’s balance back to the initial margin level, not just back to the maintenance margin. Alternatively, the party can close out (settle) the contract without having to deposit any additional funds.
formula to find the implied arbitrage free forward rate
spot rate * e^((rf - rd) * n)
Which of the following types of markets is most likely characterized by extended periods of complete illiquidity during the trading day?
A
Call markets
B
Brokered markets
C
Continuously traded markets
A
Call markets
Call markets conduct periodic auctions to determine a clearing price that maximizes trading volume. Such markets can be highly liquid at the specific auction times, but they are completely illiquid at all other times.
By contrast, trading can occur whenever a continuously traded market is open. While brokered markets are used as a venue for trading illiquid assets, they are never characterized by complete illiquidity.
Compared to an otherwise identical option-free bond, a putable bond’s convexity is most likely:
A
lower.
B
the same.
C
higher.
C higher.
a putable bond behaves like an equivalent option-free bond if interest rates are below its exercise rate.
However, as the interest rates increase and the put option becomes more valuable, the value of the putable bond will decrease more slowly than that of the vanilla bond.
The prices of bonds with more convexity appreciate more when interest rates fall and depreciate less when interest rates rise. All else equal, adding a put option to an option-free bond increases convexity.
no arbitrage forward price for a stock steps
- Forward rate = Spot rate * (1 + r)^T
- determine contract’s mark-to-market value from the perspective of the long party
Vt(T) = St - F0(T) * (1 + r)^(-(T-t))
Which of the following is least likely correct with regard to the value at risk (VaR) measure?
A
It is a maximum extreme loss metric
B
It measures the size of the tail of the distribution of profits for an entity
C
It contains three elements – an amount stated in the units of currency, a time period, and a probability
A
It is a maximum extreme loss metric
VaR is a minimum extreme loss metric. VaR is interpreted as the minimum loss an entity can have with some probability.
VaR measures the size of the tail of the distribution of profits for an entity.
It contains the following three elements:
An amount stated in the units of currency
A time period
A probability
In order to value an equity security, an analyst has collected information regarding cash flows available to be distributed to shareholders, capital expenditures of the company, and working capital needs. The analyst is most likely using:
A
a multiplier model.
B
a present value model.
C
an asset-based valuation model.
B
a present value model.
Cash flows available to be distributed to shareholders, capital expenditures of the company and working capital needs of the company are inputs required for determining equity value using a present value model.
Compared to a multiple-price auction process for a sovereign bond issue, a single-price auction is most likely to result in:
A
a wider range of bids a lower cost of funds.
B
a narrower range of bids a lower cost of funds.
C
a narrower range of bids a higher cost of funds.
A
a wider range of bids a lower cost of funds.
A single-price auction requires all bonds in the issue to be purchased for the same price. In other words, those who submit bids with lower yields can benefit from higher-yield (lower price) bids. This dynamic tends to reduce the issuer’s borrowing costs because participants can submit low-yield competitive bids that have a high likelihood of being accepted while knowing that the yield they actually receive is likely to be higher.
By contrast, in a multiple-price auction, participants are required to pay the specific price that they have bid. This structure incentivizes a narrower range of bids.
Which of the following statements is most accurate?
A
Stablecoins can be exchange for fiat money
B
A stablecoin is collateralized by a basket of assets
C
A stablecoin’s volatility is mitigated by regulatory backing
B
A stablecoin is collateralized by a basket of assets
in order to minimize their volatility, stablecoins are collateralized by a basket of assets, to which their value is linked. While the assets in these baskets are often legal tender, stablecoins cannot be exchanged for fiat money. Nor do they have any legal or regulatory backing.
In an investment policy statement (IPS), a client’s risk objectives should most likely be stated:
A
in relative terms only.
B
in absolute terms.
C
in either absolute or relative terms.
C
in either absolute or relative terms.
Either absolute or relative are acceptable approaches to specifying risk objectives. If relative, they should reference a suitable benchmark, such tracking risk relative to an index.
hich of the following is most likely the biggest source of risk from holding non-negotiable certificates of deposit (CDs) rather than negotiable CDs?
A
Credit risk
B
Liquidity risk
C
Interest rate risk
B
Liquidity risk
If a certificate of deposit (CD) is non-negotiable, investors are not allowed to sell the certificate. They will also pay a withdrawal penalty to access the money early. Negotiable CDs allow investors to sell the certificate on the open market.
Which of the following statements is most accurate? General obligation bonds issued in the US municipal bond market:
A
may be taxable.
B
are considered riskier than revenue bonds.
C
are backed by the full faith and credit of the federal government.
A
may be taxable.
While coupon payments from most US municipal bonds are exempt from federal income tax, some non-sovereign government bonds are taxable.
General obligation municipal bonds are backed by the issuer’s taxation authority, but their performance is not guaranteed by the federal government. These are considered to be less risky than revenue bonds, which are dependent on a single source of revenue (e.g., road tolls).
treynor ratio formula
- find weighted average Beta
- find protfolio return
- (Portfolio return - RF) / Portfolio Beta
The formula for linear interpolation is:
Low value + (High value - Low value) * (Goal reference - Low reference) / (High reference - low reference)
maximum initial leverage ratio formula
1 / initial margin requirement
The put-call parity formula is:
s0 + p0 = c0 + X / ((1 + r)^T)
s0: value of the underlying asset today
p0: today’s put price
c0: today’s call price
X: strike price
enterprise value formula
EV = market capitalization
+ MV of preferred stock
+ MV of debt
- (Cash + Short-term investments)
Angel investments in start-up companies are most likely made in the:
A
idea stage.
B
seed stage.
C
early stage.
A
idea stage.
hich of the following statements is most accurate? Unlike other types of asset-backed securities, a collateralized debt obligation (CDO):
A
has a collateral manager.
B
does not have an equity tranche.
C
does not require the creation of a special purpose entity.
A
has a collateral manager.
A CDO issues debt through a special purpose entity and uses the proceeds to purchase assets that are expected to generate a portfolio return in excess of the cost of debt.
The portfolio of assets is created and overseen by a CDO manager, also known as a collateral manager.
The CDO structure involves several different types of tranches that offer different levels of expected returns.
The most senior tranches are relatively low-risk, low-return, while the residual (equity) tranche offers the highest expected return for investors with higher levels of risk tolerance.
duration gap formula
macaulay duration - investment horizon
macaulay duration = modified duration * (1 + rf)
Which of the following measures is most accurately described as the return that investors require in excess of a reference rate as compensation for holding a floating-rate note?
A
Quoted margin
B
Discount margin
C
Yield to maturity
B
Discount margin
An analyst valuing a struggling company with insufficient cash flow to pay dividends would most likely use:
A
a P/E multiplier model.
B
an asset-based valuation model.
C
either a P/E multiplier model or an asset-based valuation model.
B
an asset-based valuation model.
It would be best to use an asset-based valuation model in this case. Since it values the company as the sum of the pieces, the calculation does not depend on current financial performance.
A private debt firm raising funds for a leveraged buyout is considering mezzanine financing as an alternative source of capital. Compared to direct lending, mezzanine financing most likely:
A
has higher seniority.
B
pays a lower coupon rate.
C
offers greater upside potential.
C
offers greater upside potential.
The loan provided by private debt investors through direct lending is typically senior and secured, while mezzanine debt refers to private credit that is subordinated to senior secured debt but senior to equity in the borrower’s capital structure.
Due to the junior ranking and the fact that it is usually unsecured, mezzanine debt is riskier than senior secured debt. Investors of mezzanine debt would demand higher interest rates to compensate for the heightened risk profile.
calculating the fair value of a put option using the put-call parity formula:
p0 = c0 - s0 + X/(1 + r)
The spot price of silver is $15.50 per ounce and the price of a 1-year forward contract is $16.20 per ounce. If the risk-free rate is 4.0% which of the following statements about the silver market is most likely correct?
A
The market is in contango and the convenience yield is greater than storage costs
B
The market is in contango and storage costs are greater than the convenience yield
C
The market is in backwardation and the convenience yield is greater than storage costs
B
The market is in contango and storage costs are greater than the convenience yield
When forward prices exceed the spot price, as in this example, a commodity market is described as being in contango.
we then use the formula to confirm which is greater between storage costs and convenience yield
futures prices = spot price * (1 + r) + Storage costs - convenience yield
A company announces improved quarterly financial results that are consistent with market expectations. The value of the company’s shares, which trade in an informationally-efficient market is most likely to:
A
remain unchanged.
B
increase immediately.
C
increase over the course of the trading day.
A
remain unchanged.
In an efficient securities market, stock prices shall be adjusted or shall react only to “unexpected” or “surprise” elements of new information. Quarterly financial results that are consistent with market expectations should not cause prices to change.
Which of the following types of investors most likely expect a return of at least the risk-free rate as compensation for holding a risky asset?
A
Risk-averse only
B
Risk-averse and risk-neutral only
C
Risk-averse, risk-neutral, and risk-seeking
B
Risk-averse and risk-neutral only
Risk-adverse investors expect to earn a premium above the risk-free rate as compensation for holding risky assets. Although risk-neutral investors do not expect a premium, they do require a return equal to the risk-free rate.
Compared to typical alternative investment vehicles, liquid alternative investment products marketed to retail investors are most likely to be characterized by lower:
A
use of leverage.
B
regulatory constraints.
C
allocations to liquid assets.
A
use of leverage.
Alternative investment vehicles such as limited partnerships are generally restricted to accredited investors, such as institutions and high-net-worth individuals. More recently, asset managers have developed liquid alternative vehicles as pooled investment products for retail investors. Compared to typical alternative investment vehicles, liquid alternatives are more highly regulated, use less leverage, have higher allocations to liquid assets, and do not charge performance fees.
A security’s excess return is most likely plotted against the market’s excess return on the:
A
capital market line.
B
security market line.
C
security characteristic line.
C
security characteristic line.
The security characteristic line plots the performance of a specific security (or portfolio) against that of the market portfolio. It is a plot of the excess return of a security against the excess return on the market.
Kyle Hodgson is an equity analyst covering the automotive parts sector for Frontier Capital. For his latest project, Hodgson uses a simple linear regression model to determine the sensitivity of Cranston Automotive (CRA) stock returns to the overall equity market, which is the beta measure.
Hodgson gathers 48 months of return data for CRA, the dependent variable, and a benchmark equity index, the independent variable.
Given his chosen model, Hodgson is least likely to observe the:
A
fitted parameter for beta.
B
estimated parameter for beta.
C
population parameter for beta.
C
population parameter for beta.
Linear regression analysis computes a line that provides the best fit for the observed values of the independent and dependent variables. However, the regression coefficients (intercept and slope) are only estimates of the population parameters, which cannot be observed.
The coefficients generated by a linear regression analysis are referred to as estimated parameters or fitted parameters.
Which of the following statements is most accurate?
A
IFRS allow interest paid to be reported as an investing cash flow
B
US GAAP require dividends received to be reported as a financing cash flow
C
IFRS allow the indirect format to be used for presenting the statement of cash flows
C
IFRS allow the indirect format to be used for presenting the statement of cash flows
Both IFRS and US GAAP encourage companies to use the direct method when presenting the statement of cash flows, but both standards also allow the use of the indirect method.
Under IFRS, actuarial gains from a defined benefit pension plan will most likely be recognized on the sponsor’s:
A
income statement.
B
statement of other comprehensive income and amortized over time.
C
statement of other comprehensive income and not amortized over time.
C
statement of other comprehensive income and not amortized over time.
Under IFRS, actuarial gains and losses are part of remeasurements, which are recognized on the sponsor’s statement of other comprehensive income and are not subsequently amortized.
he modeling of relationships using labeled training data is most accurately described as:
A
data curation.
B
supervised learning.
C
unsupervised learning.
B
supervised learning.
Collusion in price setting is most likely to occur when firms:
A
have similar cost structures.
B
sell heterogeneous products.
C
fill infrequent orders at relatively high prices.
A
have similar cost structures.
Collusion is more likely if products are homogeneous and firms have similar cost structures. Collusion becomes less likely if firms make infrequent sales for relatively high prices.
A firm in a monopolistically competitive market most likely:
A
maximizes the selling price of its goods.
B
sells fewer goods than is socially optimal.
C
sets a price at the point where its marginal cost curve intersects with the demand curve.
B
sells fewer goods than is socially optimal.
A monopolistically competitive firm focuses on product differentiation. The different varieties of products offered imply there would be fewer goods sold than is socially optimal as opposed to a perfectly competitive firm. In this market, companies profit through innovation and experiment instead of price competition that tries to maximize the quantities sold.
interest coverage ratio formula
(CFO + Interest paid + taxes paid) / Interest paid
Companies that issue financial statements in accordance with IFRS are least likely required to disclose:
A
the main classes of assets affected by impairment losses.
B
an itemized list of assets that have incurred impairment losses.
C
the events and circumstances responsible for the recognition of impairment losses.
B
an itemized list of assets that have incurred impairment losses.
According to IFRS, companies are required to disclose the amounts of impairment losses (and/or reversals of impairment losses) for each asset class. An itemized list of assets that have incurred impairment losses is not required.
Companies must also disclose the main classes of assets affected by impairment losses (and/or reversals of impairment losses) as well as the events and circumstances that lead to these losses and/or reversals of losses being recognized.
steps to find the standard error of the sample mean
- average of the resample means
- average of resample means * (1 / n - 1)
- Square root of amount found in 2
The financial statement analysis framework includes the following steps:
Step 1: Articulate the purpose and context of the analysis
Step 2: Collect input data
Step 3: Process data
Step 4: Analyze/interpret processed data
Step 5: Develop and communicate conclusions/recommendations
Step 6: Follow-up
During which of these steps would an analyst most likely perform Monte Carlo simulations?
A
Step 2
B
Step 3
C
Step 4
B
Step 3
After collecting input data in Step 2, analysts use statistical methods such as Monte Carlo simulations in Step 3.
Monte Carlo simulation
A Monte Carlo simulation is a way to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables. It is a technique used to understand the impact of risk and uncertainty. Monte Carlo simulations can be applied to a range of problems in many fields, including investing, business, physics, and engineering. It is also referred to as a multiple probability simulation.
A Monte Carlo simulation is a model used to predict the probability of a variety of outcomes when the potential for random variables is present.
Monte Carlo simulations help to explain the impact of risk and uncertainty in prediction and forecasting models.
A Monte Carlo simulation requires assigning multiple values to an uncertain variable to achieve multiple results and then averaging the results to obtain an estimate.
These simulations assume perfectly efficient markets.
Monte Carlo simulations are increasingly used in conjunction with artificial intelligence.
coefficient of variation formula
CV = s/X
sample standard deviation / sample mean
Enrico Traina, CFA, owns and operates a small investment advisory firm. When dealing with clients, Traina only recommends securities that appear on his list of approved investments, but he does not mention that the due diligence on the securities that appear on this list has been conducted by one of the brokerage firms that he uses to execute trades for his clients’ accounts. Traina believes that the broker’s research methods are sound and is careful to recommend stocks that are consistent with a client’s investment policy statement (IPS). Traina has most likely violated the Standards with respect to:
A
misrepresentation only.
B
communication with clients and prospective clients only.
C
both misrepresentation and communication with clients and prospective clients.
C
both misrepresentation and communication with clients and prospective clients.
Triana violates Standard I(C) - Misrepresentation by knowingly omitting to mention that the due diligence on the securities he recommends has been conducted by a third party.
Failing to mention this fact is also a violation of Standard V(B) - Communication with Clients and Prospective Clients, which requires members and candidates to disclose “the basic format and general principles of the investment process they use to analyze investments, select securities, and construct portfolios.”
Calvin Beauregard, CFA, works as an analyst with a securities dealer. For each potential investment that he is assigned to work on, Beauregard adheres to local laws by retaining electronic copies of all relevant documents for six years, at which point they are removed from the firm’s server. Documents that are produced as hard copies are scanned and saved in digital form before the original copies are securely shredded. Has Beauregard most likely violated the Standards?
A
No
B
Yes, by destroying hard copies of documents
C
Yes, by retaining records for less than seven years
A
No
Beauregard has not violated the Standards. According to Standard V(C) - Record Retention, members and candidates must maintain hard or soft copies of all documents that support their “investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.” While CFA Institute recommends that records be maintained for a period of seven years, Beauregard does not violate this Standard by maintaining his records for the six-year period required by local laws.
Under the matching principle, administrative costs are least likely to be recognized as expenses for the period when:
A
cash is paid.
B
the benefit is received.
C
the corresponding revenue is recognized.
C
the corresponding revenue is recognized.
Under the matching principle, expenses that can be directly tied to revenues are recognized when the revenue is recognized. For example, the cost of goods sold expense is recognized when inventory is sold.
However, expenses that cannot be easily linked to specific revenues should be recognized during the period when they are incurred or the benefit is received. For example, the salary of an inventory warehouse manager is not directly linked to the sale of any particular item that has been stored in the facility. The company should recognize this expense as it receives the benefit of the manager’s services and pays the manager’s salary.
Which of the following statements is most accurate? Under US GAAP, companies that use the FIFO method must measure inventories at:
A
cost.
B
the lower of cost or market value.
C
the lower of cost or net realizable value.
B
the lower of cost or market value.
Historically, US GAAP required inventories to be measured at the lower of cost or market value. Since 15 December 2016, companies that do not use LIFO or retail inventory methods must carry inventories at the lower of cost or net realizable value. This new requirement is similar to the reporting requirements imposed by IFRS.
Which of the following is most accurate with respect to Modigliani and Miller’s Proposition II without taxes?
A
The cost of equity increases linearly with the debt-to-equity ratio.
B
The market value of a company is not affected by the capital structure of the company.
C
The market value of a levered company is equal to the value of an unlevered company plus the value of the debt tax shield
A
The cost of equity increases linearly with the debt-to-equity ratio.
Which of the following statements is most likely correct regarding currencies that trade in foreign exchange markets?
A
The currency with the higher interest rate will trade at a forward discount
B
Currencies trade in foreign exchange markets based on real exchange rates
C
An increase in a direct exchange rate quote means that the domestic currency is appreciating versus the foreign currency
A
The currency with the higher interest rate will trade at a forward discount
The currency with the higher interest rate will tend to trade at a forward discount.
Currencies trade in foreign exchange markets based on nominal rather than real exchange rates.
A direct exchange rate quote uses the domestic currency as the price currency and the foreign currency as the base currency. An increase in this rate means that it takes more units of the price (domestic) currency to purchase one unit of the base (foreign) currency. Therefore, the domestic currency is depreciating relative to the foreign currency if the direct exchange rate quote increases.
