Mock questions Flashcards
Which of the following statements about the CFA Institute’s Professional Conduct Program (PCP) is least accurate?
A)
Possible sanctions include condemnation by a member’s peers or suspension of a candidate’s participation in the CFA Program.
B)
If the PCP staff determine that a sanction against a member is warranted, the member must either accept the sanction or lose the right to use the CFA designation.
C)
Members who cooperate with a PCP inquiry by providing confidential client information to PCP staff are not in violation of Standard III(E) Preservation of Confidentiality.
B)
If the PCP staff determine that a sanction against a member is warranted, the member must either accept the sanction or lose the right to use the CFA designation.
Robert Miguel, CFA, is a portfolio manager. On Saturday, one of his clients invited Miguel and his wife to be his guests at his luxury suite for a major league baseball playoff game, which they did. Miguel told his supervisor on Monday that they had attended the game with the client and that the suite was luxurious. Miguel has:
A)
not violated the Standards.
B)
violated the Standards because disclosure must be in writing.
C)
violated the Standards because he must disclose the gift prior to accepting.
A)
not violated the Standards.
In this case, Miguel has not violated the standards. For a gift from a client in appreciation of past service or performance, informing his supervisor verbally is sufficient. Standard I(B) Independence and Objectivity requires disclosure prior to accepting the gift “when possible,” but in cases such as this when there is short notice, notification afterward is permitted.
At his golf club on Saturday morning, Paul Corwin, CFA, sees Frank Roberts, a friend and institutional client of his, who tells him that he is planning to sell his house on the 7th fairway. While golfing that day, Corwin tells Robert Lowe, a realtor, that Roberts is planning to sell his house and may need a realtor. He also tells Lowe that he manages an equities account for Roberts. If Corwin has not received permission from Roberts, he has violated the Standard on preservation of confidentiality:
A)
both by disclosing Roberts’ plan to sell his home and that he is a client.
B)
by disclosing Roberts’ plan to sell his home but not by mentioning that he was a client.
C)
by disclosing that Roberts is a client of his but not by mentioning Roberts’ plan to sell his home.
C)
by disclosing that Roberts is a client of his but not by mentioning Roberts’ plan to sell his home.
Corwin violated Standard III(E) Preservation of Confidentiality by revealing his business relationship with Roberts without permission. Because the information that Roberts’ plans to sell his home is not received as part of his professional relationship with Roberts, it is not covered by the Standard.
Which of the following is least likely included in the CFA Institute Code of Ethics? Members of CFA Institute must:
A)
place their clients’ interests before their employer’s interests.
B)
strive to maintain and improve the competence of others in the profession.
C)
use reasonable care and exercise independent professional judgment.
A)
place their clients’ interests before their employer’s interests.
The requirement that members and candidates place their clients’ interests before their employer’s or their own is in Standard III(A) Loyalty, Prudence, and Care. The other choices are included in the CFA Institute Code of Ethics.
Dudley Thompson is a bond salesman for a small broker/dealer in London. His firm is the lead underwriter on a new junk bond issue for Ibex Corporation, and Thompson has sent details of the offering to clients. Thompson calls only his accounts over £1,000,000 for whom he thinks the issue is suitable. Thompson also posts his firm’s optimistic projections for Ibex’s performance in several Internet chat rooms. According to the Standards concerning market manipulation and fair dealing, Thompson is in violation of:
A)
both of these Standards.
B)
neither of these Standards.
C)
only one of these Standards.
B)
neither of these Standards.
Thompson has not violated Standard II(B) Market Manipulation by posting his firm’s projections for Ibex. A firm’s recommendation of a security may increase its price without any intent to mislead the market. The firm has disseminated the details of the offering to its clients fairly, so Thompson may call individual clients without violating the Standard III(B) Fair Dealing.
Angie Franklin, CFA, who covers technology stocks, joins a conference call for analysts presented by Cynthia Lucas, chief technology officer for LevelTech. Lucas tells the analysts that overseas shipments of the company’s important new product are going to be delayed due to manufacturing defects, which is new information to the analysts. After the meeting Franklin changes her rating on LevelTech from “buy” to “hold” and sends a note to accounts recommending the sale of LevelTech. Franklin:
A)
did not violate the Standards.
B)
violated the Standard on nonpublic information by revising her rating on LevelTech.
C)
violated the Standard on fair dealing by rating the stock a “hold” but recommending sale of the shares to her accounts.
B)
violated the Standard on nonpublic information by revising her rating on LevelTech.
Telling a selected group of analysts new information does not constitute public disclosure, and therefore acting or causing others to act on this information is a violation of Standard II(A) Material Nonpublic Information. Recommending the sale of a stock rated as a “hold” is not a violation of Standard III(B) Fair Dealing.
According to the Code and Standards, members and candidates who are involved in distributing an initial public offering (IPO) of equity shares and wish to participate in the IPO:
A)
may participate unless the IPO is oversubscribed.
B)
may not participate because this creates a conflict of interest.
C)
must obtain pre-clearance from a supervisor before participating.
A)
may participate unless the IPO is oversubscribed
Standard VI(B) Priority of Transactions recommends, but does not require, that a member or candidate obtain pre-clearance from his or her supervisor before participating in an equity IPO. Guidance for Standard III(B) Fair Dealing states that members and candidates distributing IPO shares must distribute shares in an oversubscribed IPO to clients and may not withhold shares for themselves.
Shan Ang, CFA, is a portfolio manager at Huang Investments. Lian Jan, an old friend of Ang’s, is an executive recruiter in the same city. Jan proposes that she will refer any high-level executives that she places locally to Ang, in exchange for one round of golf at Ang’s country club for each new client. According to the Standard concerning referral fees, Ang would be required to disclose this referral arrangement:
A)
only to all prospective clients referred by Jan.
B)
to his employer and all prospective clients referred by Jan.
C)
to all prospective clients, current clients, and his employer.
B)
to his employer and all prospective clients referred by Jan.
Standard VI(C) Referral Fees states that members and candidates must disclose to employers and to affected prospects and clients, before entering into any formal agreement for services, any benefits received for the recommendation of services provided by the member.
Other things equal, a country is most likely to have a current account deficit if it also has:
A)
a low savings rate.
B)
a government budget surplus.
C)
a low rate of domestic investment.
A)
a low savings rate.
As shown by the fundamental macro relationship (X – M) = (S – I) – (G – T), a current account deficit (X < M) is associated with a low savings rate, a high rate of domestic investment, or low government savings (i.e., a budget deficit).
Haltata Turf & Sod currently uses the first in, first out (FIFO) method to account for inventory. Due to significant tax-loss carryforwards, the company has an effective tax rate of zero. Prices are rising and inventory quantities are stable. If the company were to use last in, first out (LIFO) instead of FIFO:
A)
net income would be lower and cash flow would be higher.
B)
cash flow would remain the same and working capital would be lower.
C)
gross margin would be higher and stockholder’s equity would be lower.
B)
cash flow would remain the same and working capital would be lower.
In the absence of taxes, there is no difference in cash flow between LIFO and FIFO. In addition, using LIFO would result in lower working capital (inventory is lower). Using LIFO would result in lower net income because of a lower gross margin (cost of goods sold is higher).
The five steps required for a company to record revenue on a long-term contract are least likely to include:
A)
identifying a customer contract.
B)
receiving proportional payments.
C)
identifying separate performance obligations in the contract.
B)
receiving proportional payments.
Receipt of payments is not one of the required steps described by accounting standards to recognize revenue for a long-term contract
The probability that an acquisition has been executed well is 48%. If it is executed well, the probability of EPS greater than $3.20 is 55%. If the acquisition has not been executed well, the probability of EPS less than or equal to $3.20 is 65%. The unconditional probability of EPS greater than $3.20 is closest to:
A)
45%.
B)
48%.
C)
55%
A)
45%.
The unconditional probability, Prob(EPS>$3.20), is equal to Prob(executed well) × Prob(EPS > $3.20)|executed well) + Prob(not executed well) × Prob(EPS > $3.20|not executed well) = 0.48 × 0.55 + (1 – 0.48)(1 – 0.65) = 0.446.
Which of the following statements about monopolists is most accurate?
A)
Monopolists have imperfect information about the demand curve for their product.
B)
Without government intervention, monopolists will always earn economic profits.
C)
A monopolist maximizes total revenue where marginal revenue equals marginal cost.
A)
Monopolists have imperfect information about the demand curve for their product.
Demand curves are not observable so a monopolist must search for the profit maximizing price. Because demand information is not perfect, a monopolist is a price searcher. The other statements are false. Although a monopolist can earn positive economic profits in the long run, they are not guaranteed; if average total costs exceed price, the monopolist will experience economic losses. A monopolist maximizes profit, not revenue, where marginal revenue equals marginal cost.
A central bank’s ability to achieve its policy goals is most likely to be limited by available resources when which of the following actual rates is below its target rate?
A)
Interest rate.
B)
Inflation rate.
C)
Exchange rate.
C)
Exchange rate.
With exchange rate targeting, a central bank’s ability to increase the value of the domestic currency is limited by the amount of foreign reserves the country has available to buy its own currency in the foreign exchange market. While inflation targeting and interest rate targeting have limitations (e.g., liquidity trap conditions may exist, interest rates are bounded by zero), the central bank’s resources are not typically a limitation.
Acme Corp. purchased a new stamping machine for $100,000, paid $10,000 for shipping, and paid $5,000 to have it installed in their plant. Based on an estimated salvage value of $25,000 and an economic life of six years, the difference between straight-line depreciation and double-declining balance depreciation in the second year of the asset’s life is closest to:
A)
$7,220.
B)
$10,556.
C)
$16,666.
B)
$10,556.
Straight line depreciation is (100,000 + 10,000 + 5,000 − 25,000) / 6 = 15,000 each year. Double-declining balance depreciation in the second year is: 115,000 (2/3)(1/3) = 25,556. The difference is $10,556. Remember that salvage value is not part of the declining balance calculation.
From the point of view of a financial analyst, when evaluating companies that use different inventory cost assumptions, in a period of:
A)
stable prices, LIFO inventory is preferred to FIFO inventory.
B)
decreasing prices, FIFO inventory is preferred to LIFO inventory.
C)
increasing prices, FIFO cost of sales is preferred to LIFO cost of sales.
B)
decreasing prices, FIFO inventory is preferred to LIFO inventory.
The most useful estimates of inventory and cost of sales are those that best approximate current cost. Whether prices are increasing or decreasing, FIFO provides a better estimate of inventory values, and LIFO provides a better estimate of cost of sales. If prices are stable, there is no difference between LIFO and FIFO estimates of inventory or cost of sales.
Incorrect production decisions are most likely to occur when the inflation rate is:
A)
lower than expected only.
B)
higher than expected only.
C)
either higher or lower than expected.
C)
either higher or lower than expected.
Either higher-than-expected or lower-than-expected inflation can cause producers to misinterpret unexpected changes in the price level as signals of increases or decreases in demand, and produce more or less than the equilibrium quantity of output. (
Which of the following statements about elasticity is least accurate?
A)
Both demand and supply are more elastic in the long run than in the short run.
B)
When demand is inelastic, an increase in price will cause a decrease in the total expenditure on a good.
C)
When the price of a product increases, consumers will reduce their consumption by a larger amount in the long run than in the short run.
B)
When demand is inelastic, an increase in price will cause a decrease in the total expenditure on a good.
If demand is inelastic, the percentage change in quantity demanded is smaller than the percentage change in price; quantity demanded is relatively unresponsive to price changes. A price increase increases total expenditures on a good
For 20X1, Belcher Motors reported a decrease in its deferred tax liabilities, a decrease in its deferred tax assets, and an increase in its valuation allowance. To an analyst, this would most likely suggest that the company has:
A)
decreased its estimate of future profitability.
B)
increased the estimated useful life of some capitalized assets.
C)
increased its estimate of the period over which unearned revenue will be recognized.
A)
decreased its estimate of future profitability.
The increase in the valuation allowance tells us that the company has decreased its estimate of its future profitability and thus its ability to realize the benefits of its deferred tax assets. A longer period for recognition of unearned revenue would not affect the temporary differences reflected in deferred tax assets. Increasing the estimate of assets’ useful lives would tend to slow financial statement depreciation relative to depreciation for tax, which would increase deferred tax liability going forward, other things constant. Decreases in the carrying values of both a DTL and a DTA may reflect a decrease in the tax rate.
Which of the following statements about hypothesis testing is most accurate?
A)
Rejecting a true null hypothesis is a Type I error.
B)
The power of a test is the probability of failing to reject the null hypothesis when it is false.
C)
For a one-tailed test regarding the value of parameter X, the null hypothesis would be H0: X = 0, and the alternative hypothesis would be HA: X ≠ 0.
A)
Rejecting a true null hypothesis is a Type I error.
Type I error is rejecting the null hypothesis when it is true. The power of a test is the probability of rejecting the null hypothesis when it is false. HA: X ≠ 0 indicates a two-tailed test, while HA: X < 0 or HA: X > 0 indicates a one-tailed test.
Which of the following statements regarding the money supply and determination of short-term interest rates is least accurate?
A)
On balance, growth in real GDP tends to increase the transactional demand for money.
B)
If the short-term interest rate is greater than the equilibrium rate, there will be excess supply of real money balances.
C)
An increase in the real money supply from an initial equilibrium situation will cause households and businesses to sell interest- bearing securities.
C)
An increase in the real money supply from an initial equilibrium situation will cause households and businesses to sell interest- bearing securities.
From an initial equilibrium, an increase in real money balances will leave households and businesses with more money than they wish to hold, so they will purchase interest-bearing securities, driving their prices up and yields down until a new equilibrium short-term rate is established.
