June 2015

CFA Level I Mock Exam

Afternoon Session

The afternoon session of the June 2015 Level I Chartered Financial Analyst
(CFA) Mock Exam has 120 questions. Candidates are advised to allocate an
average of 1.5 minutes per question for a total of 180 minutes (3 hours) for this
session of the exam.

Questions

Topic

Minutes

121 138

Ethical and Professional Standards

139 153

Quantitative Methods

154 165

Economics

18

166 189

Financial Reporting and Analysis

36

190 197

Corporate Finance

12

198 209

Equity Investments

18

210 215

Derivatives

216 227

Fixed Income Investments

18

228 231

Alternative Investments

232 240

Portfolio Management

13.5

Total

180

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22.5


Question 121 through 138 relate to Ethical and Professional Standards.
121. Remy, CFA, manages investments for several oil companies. These firms are fairly
profitable, even though they pay a sizable share of their revenue in tariffs.
Because politics is such an important aspect of the companies' success, Remy maintains
relations with Congressman Frank and his wife Claire. Claire runs a not-for-profit charity
which provides clean water to communities in Africa.
In advance of an upcoming relevant energy bill vote, Remy offers to donate $1.5 million to
Claire's organization, but Claire rejects the donation. Has Remy most likely violated the
Standards?
A. Yes
B. No, because the donation didn't benefit Frank directly
C. No, because he didn't give any gift
122. Rodger Aaron, CFA, is another independent investment analyst. Rodger's reports contain 4
sections: Buy, Hold, Sell, and Watch.
While reviewing Province Agriculture's (PA) financial statements, Rodger finds an error in
the reports. He asks his friend Nelson Cobb to review his work, and Nelson agrees. This
would have a material negative effect on PA's financials and their reputation.
However, the contacts at PA are easy to work with and consistently provide Rodger
information needed for his analysis. If he mentions the error, they may not be so friendly in
the future. Other companies may also be leery and follow suit.
Someone will find the error, and Rodger doesn't want to get involved with the media or
politics. He adds PA to his Watch list, with the note:
"Province is consistently growing. They seem to be a likely buy target. Something feels
wrong, though. I can't pull the trigger."
Has Rodger most likely violated the Standards?
A. Yes, by omitting relevant information
B. Yes, by not notifying authorities
C. No

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123. Peter Ryun, CFA, is working with his supervisor in developing a compliance handbook for
the staff. Which of the following are not recommended procedures for compliance for the
Misconduct standard?
I. Global diversification
II. Asset class diversification
III. Avoiding overinvestment in one's employer's stock
A. II only
B. III only
C. All are recommended
124. Toni Witten, CFA, is a portfolio manager for Jones Enterprises. Most of Toni's work
involves client facing, and she doesn't exercise control over operations. Toni does manage
her own money outside of work as a hobby.
One day, Toni subscribed to an analyst report issued by Dez Romo, CFA. Dez is a popular
analyst, and her reports can impact the market. Toni is concerned about investing based on
Dez's advice, because only paid subscribers have access to these reports. Assume that the
reports are developed consistently with the Standards.
Is Toni most likely violating the Standards by investing as a result of the reports?
A. Yes
B. No, because the reports are considered immaterial
C. No, even though the reports are considered private and material
125. Isaiah West, CFA, issues weekly analysis reports on medical stocks. In Isaiah's last report,
he issued the following BUY rating for Clear Lean Electrics (CLE):
From blog reports, several hospitals have switched to CLE's products. The writers seem
happy with the products and are recommending CLE to their colleagues. However, CLE's
stock price hasn't moved significantly in months. Strong buy.
Though he didn't mention it in his report, Isaiah viewed the proper price for CLE at $23.
His report was popular and the stock increased to $25. Isaiah was surprised with his report's
popularity and the increase in CLE's price. After the increase, Isaiah shorted the security in
his portfolio, intending to sell after the earnings report is released.
Has Isaiah most likely violated the Market Manipulation Standard?
A. Yes, unless he sends an updated report to all original recipients first
B. Yes, because he may personally gain from misuse of his advice
C. No

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126. Christine Michaels, CFA, has $300M assets under management. Many of these assets are
individual stocks with voting rights. Which of the following proxy voting strategies least
likely violates the Loyalty, Prudence, and Care Standard?
A. Avoiding casting any votes
B. Casting votes consistently with her corporate proxy voting expert's advice
C. Voting consistently with management
127. Goldy Johnson, CFA, has managed assets at Michigan Blue, Inc. for 20 years. Next month,
Detroit Felines, will be issuing their initial public offering (IPO). Three of Goldy's clients
want to buy into Detroit Felines:
1. George Cord, an automobile manufacturer, 10,000 shares
2. Bernard Robertson, a local businessman, 5,000 shares
3. Erika Johnson, Goldy's sister who is investing through Michigan Blue, 3,000 shares
However, Detroit Felines is oversubscribed. Goldy will only be able to buy 1,200 shares of
Detroit Felines. Which of the following allocations is most consistent with the Standards?
Option George Cord
Bernard Robertson
Erika Johnson
1
700
300
200
2
400
400
400
3
800
400
0
A. Option 1
B. Option 2
C. Option 3
128. Tom Gronkowski, CFA, manages assets for Dani Edelman. Specifically, Tom oversees
Dani's international assets ($3M). The rest of Dani's portfolio ($15M) is managed by Tom's
colleagues at Boston Loyalty.
Dani also has $5M assets in a Swiss bank account that she did not disclose to Tom when he
asked her about any other funds.
According to the Standards, Tom is most likely responsible for managing Dani's
international assets:
A. As a self-contained portfolio
B. With respect to all Dani's assets at Boston Loyalty
C. With respect to all of Dani's assets
129. In order to satisfy the Performance Presentation Standard, compliance with the Global
Investment Performance Standards (GIPS) is:
A. sufficient but not necessary
B. necessary but not sufficient
C. both necessary and sufficient

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130. Gina Decker, CFA, recently started working as an investment analyst for New Transports.
Gina recommends fixed income securities to the portfolio manager, Jace Ivory.
Unfortunately, Jace and Gina have had a fair amount of conflict in the short time. Gina is
concerned that Jace, who is not affiliated with the CFA Institute, is not following the
supervisor duties of the Standards.
Which of the following is Gina required to do in accordance with the Loyalty Standard?
A. Provide Jace with a copy of the Code of Conduct and Standards
B. Put New Transport's interests ahead of her own in all matters
C. Avoid behavior that harms New Transport's interests
131. Ben Bell, CFA, recently left his employer, Steel and Mines Investing (SMI), for a
competitor, Nevermore. Ben brought a printed copy of two portfolios he created for SMI
clients as guidance at Nevermore. Only the stock list and weights were printed; no client
information was kept. Upon arriving at Nevermore, Ben contacted his former clients using
phone numbers he found online. Three of those clients switched to Nevermore immediately.
How did Ben most likely violate the Standards?
A. Only by bringing the portfolio printouts
B. Only by contacting former clients
C. Both by bringing the printouts and by contacting former clients
132. Which of the following attributes do the handbook recommend analysts consider in their
investment recommendations?
I. The firm's operational history
II. The industry business cycle
III. Limitations of quantitative models
A. I and II only
B. II and III only
C. I, II, and III
133. Vincent Wu, CFA, presented a proposal to a perspective client. The pitch discussed
historical returns and concluded with:
"If you invest your money with us, your account should grow 5% each year."
There was no disclaimer or mention that the 5% number is based on subjective assumptions.
Which Standard has Vincent most likely violated?
A. Diligence and Reasonable Basis
B. Communication with Clients and Prospective Clients
C. Loyalty

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134. Russell Harvin, CFA, just finished an analysis report on fixed income stocks. The report
contained 4 buy recommendations and 6 sell recommendations, in addition to commentary
on recent central bank actions. Russell's firm, Sea Holdings, has a policy to keep electronic
records for 5 years. There is no legal regulation on record retention.
Suppose Russell archives his electronic notes for 5 years, then deletes them. Has Russell
most likely violated the Standards?
A. Yes, because he didn't store the records in hard copy
B. Yes, because he didn't maintained records for 7 years
C. No
135. Jordan Morris, CFA, has $500M under management at her investment firm. Most of the
investment originates from institutional investors. One of her clients, Red Basin, needs
short-term liquidity. Jordan sells Red Basin's $5M holding of Gruden, Inc. This transaction
is sufficient to change the market, and the price of Gruden immediately decreases 2%.
None of Jordan's clients are in position to take advantage of the price drop. Jordan adds 200
shares of Gruden to her personal account an hour later. Has Jordan most likely violated the
Standards?
A. Yes
B. No, if Red Basin still has a diversified portfolio
C. No, if Jordan acted in the best interests of her clients
136. Michelle Wong, CFA, manages assets for a dozen small accounts. All her transactions are
brokered through Woods Brothers. Because of the volume, Woods gives Michelle's clients
a small discount on transaction fees. Woods also pays 5% of its fees back to Michelle's
employer, who reports those fees as revenue. Has Michelle most likely violated the Referral
Fees Standard?
A. Yes
B. Only if she doesn't disclose the fees to her clients
C. No
137. Which of the following are least likely required to maintain you active membership in the
CFA Institute each year?
A. Complete your credits in the Continuing Education (CE) program
B. Pay your dues
C. Sign and submit the Professional Conduct Program
138. Which of the following is the most appropriate use of the CFA mark?
A. Bobbi Martin, C.F.A.
B. Bobbi Martin is a candidate in the CFA Program
C. Bobbi Martin is a CFA-type analyst

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Question 139 through 153 relate to Quantitative Methods.
139. In exactly two years, Alan will receive a payment of $5,000. Every two years after the first
payment, he will receive payments that are 20 percent greater than the previous payment.
Alan will receive a total of four payments. If Alan can earn 6 percent annually on his
investments, the present value of the four payments at the end of the first year is closest to:
A. $19,700
B. $20,880
C. $22,130
140. Beaufort, Inc. is planning to purchase new machinery for its plant. The machine costs $5
million to purchase and install. The machine is expected to generate $800,000 of cash
inflow at the end of each year for the next ten years. The machine will be sold at an
estimated $500,000 at the end of the tenth year. At a discount rate of 10 percent per annum,
the net present value of this project is closest to:
A. $90,900
B. $108,400
C. $371,300
141. If the effective annual yield is 11 percent, the present value of a cash flow of $800 to be
received in 90 days is closest to:
A. 720
B. 750
C. 780
142. The table below contains statistics for 3 portfolios.

Portfolio X
Portfolio Y
Portfolio Z

Mean Return
(%)
21.5
15.8
4.6

Standard Deviation (%)

Skewness

Kurtosis

41.8
28.0
9.8

-4.792
-2.662
-1.940

10.117
8.001
5.323

Based only on the information given in the table, which portfolio has the highest coefficient
of variation?
A. Portfolio X
B. Portfolio Y
C. Portfolio Z
143. The observations in a set of data have different values. Which of the following statements
best describes the data?
A. arithmetic mean < geometric mean < harmonic mean
B. arithmetic mean geometric mean harmonic mean
C. arithmetic mean > geometric mean > harmonic mean

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144. The probability that Stock X increases in value after one year is 0.7. The probability that
Stock Y increases in value after one year is 0.5. The probability that at least one of Stock X
and Y increases in value after one year is 0.9. The probability that exactly one of Stock X
and Y increase in value after one year is closest to:
A. 0.4
B. 0.6
C. 0.8
145. The covariance matrix for the returns of three assets is given:
Asset
A
B
C

A
0.3
0.2
0.2

B
0.2
0.6
0.1

C
0.2
0.1
0.8

The variance of portfolio return for a portfolio that contains all three assets in equal weights
is closest to:
A. 0.3
B. 0.5
C. 0.9
146. You manage a portfolio of ten stocks. Each stock independently has a 35 percent
probability of yielding a positive return. The probability that at least two stocks yield a
positive return is closest to:
A. 0.91
B. 0.94
C. 0.97
147. You are given the following closing prices for a stock.
Date
Closing Price ()
31 December 2001
1,065
31 December 2002
1,001
31 December 2003
1,213
31 December 2004
1,684
The mean continuous compounded annual return for the stock is closest to:
A. 15.3%
B. 17.3%
C. 19.4%
148. A researcher would like to gather a sample of fifty humans. He divides the range of human
height into ten intervals of equal length and randomly selects five humans from each
interval. This is an example of:
A. simple random sampling
B. systematic sampling
C. stratified sampling

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149. Which of the following statements is true?
A. Relative to the normal distribution, a -distribution is more peaked and has a thinner
tail.
B. Relative to the normal distribution, a -distribution is less peaked and has a thinner tail.
C. Relative to the normal distribution, a -distribution is less peaked and has a fatter tail.
150. An analyst tracks the annual returns for two portfolios, A and B, for 30 years. These
portfolios are rebalanced annually and are almost identical in various risk measures.
Therefore, their returns are deemed dependent. The average of difference in returns over 30
years is 0.82 percent. The sample standard deviation of differences is 1.41 percent. The
analyst would like to test if the mean difference is equal to 0. The appropriate test statistic
for this hypothesis test is closest to:
A. 3.2
B. 0.6
C. 3.2
151. Which of the following is true regarding a candlestick chart?
A. A dark body indicates the close price is higher than the open price.
B. A candlestick with no lower wick and a white body indicates the stock closed at the low
price.
C. A candlestick with no upper wick and a white body indicates the stock closed at the
high price of the day.
152. Emma, a technical analyst, notices that the stock price for Cooper Technology over the past
month follows the classic head and shoulder pattern with a neckline of 133 and a peak of
171. Todays close price is 129. The price target that Emma should estimate is closest to:
A. 87
B. 91
C. 95
153. The phenomenon where a short-term moving average crosses a long-term moving average
from below is known as the:
A. golden cross
B. silver cross
C. dead cross
Question 154 through 165 relate to Economics.
154. The price of bread has demand function given by the equation ! = 24 2 and supply
function given by the equation ! = 1.2 + 0.8. The equilibrium quantity is 6.
If the government imposed a price ceiling of 6.5, the amount of deadweight loss that would
result from the price ceiling is closest to:
A. 3.5
B. 7.0
C. 17.5

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155. Which of the following statements is most likely true?

A. If the price elasticity of demand is negative, then the demand curve slopes downward.
B. If the income elasticity of demand for a good is positive, then the good is classified as
an inferior good.
C. If the cross-price elasticity of demand between two goods is negative, then the two
goods are classified as substitutes.
156. Leonards marginal rate of substitution of blackberries for strawberries is 2. The number of
blackberries that he will be willing to trade in exchange for 10 strawberries is closest to:
A. 5
B. 10
C. 20
157. A firm operating with perfect competition will most likely stop production in the long run
but still meet its fixed costs obligations in the short run when:
A. average revenue is less than average fixed cost
B. average revenue is less than average total cost
C. average revenue is less than average variable cost
158. A mobile phone manufacturer employs unskilled, semi-skilled, and skilled workers. The
marginal revenue product of unskilled workers is lower than that of semi-skilled and skilled
workers. The equilibrium wages for unskilled, semi-skilled, and skill workers are $60 per
day, $120 per day, and $300 per day. The government passes a law to raise the minimum
wage to $80 per day. The manufacturer will most likely respond to this new law by:
A. employing more unskilled workers
B. employing fewer unskilled workers
C. no response
159. Firms operate with perfect competition in a market. The demand schedule for the market is
given by = 42 3, where 0. The long-run average cost and marginal cost of each
firm are 3! 18 + 7 and 9! 36 + 7, respectively. The long-run competitive
equilibrium most likely occurs at a price of:
A. 14
B. 23
C. 33

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160. Japanese workers who are paid 1,500 per hour are able to produce 200 calculators per
hour. The workers develop a new technique to increase production to 300 calculators per
hour. In addition, wages per hour increase by 20%.
Which of the following is most accurate?
A. The short-run aggregate supply curve will shift to the left and the long-run aggregate
supply curve will shift to the left.
B. The short-run aggregate supply curve will shift to the right and the long-run aggregate
supply curve will shift to the left.
C. The short-run aggregate supply curve will shift to the right and the long-run aggregate
supply curve will shift to the right.
161. Early in a recovery, inventory levels tend to:
A. rise as companies increase production to accommodate an increase in sales
B. fall as companies try to increase profit after the recession
C. fall as sales pick up but companies are slow to increase production
162. You are given the following aggregate price levels for Country X over a 10-year period.
Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Consumer Price Index

112
715
819
903
951
969
978
983
987
989

Which of the following is least accurate?

A. Country X has experienced disinflation during this 10-year period.
B. Country X has experienced deflation during this 10-year period.
C. Country X has experienced hyperinflation during this 10-year period.
163. The government of Country Z raised government spending by $20 billion. This caused total
incomes and spending to increase by $52 billion. If the net tax rate is 30%, the marginal
propensity to save is closest to:
A. 0.12
B. 0.62
C. 0.88

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164. Country A and Country B are neighboring countries. They have eliminated all barriers to
the flow of goods and services and created a common trade policy against all other
countries. However, they do not allow the free movement of factors of production, do not
have common economic institutions, and do not coordinate economic policies between
them. Country A and Country B are most likely a part of a:
A. free trade area
B. common market
C. customs union
165. You are given the following information:
The KRW/GBP spot exchange rate is 1,743.36.
The KRW interest rate is 1.10%.
The GBP interest rate is 1.15%.
Interest rates are quoted on a 360-day year basis.
The 180-day forward points in KRW/GBP is closest to:
A. 43
B. 43
C. 4,300
Question 166 through 189 relate to Financial Reporting and Analysis.
166. Which of the following statements is most accurate?
A. The income statement presents information on a companys current financial position.
B. The balance sheet presents information on the profitability of a companys business
over a period of time.
C. Comprehensive income includes all items that impact owners equity but are not the
result of transactions with shareowners.
167. On 1 July 2014, SALT Solutions paid $100,000 in wages to its employees 3 months in
advance. This transaction would most likely result in:
A. no change in net assets
B. a decrease in net assets
C. an increase in net assets
168. At the end of an accounting period, 7Verbs Inc. has not paid cash for an expense that it has
incurred. 7Verbs should record:
A. an accrued revenue
B. an accrued expense
C. a deferred expense
169. Which of the following is least likely a characteristic of an effective financial reporting
framework?
A. Consistency
B. Timeliness
C. Transparency

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170. Orange Inc. is a manufacturer of electronic appliances. At the beginning of 2014, it
purchased a machine for $750,000. The estimated useful life of the machine is 6 years. The
estimated residual value of the machine is $40,000.
Assuming Orange Inc. uses the accelerated method of depreciation with an acceleration
factor of 250 percent, its depreciation expense for 2016 is closest to:
A. $106,337
B. $136,718
C. $182,292
171. For the year ended 31 December 2014, MFE Inc. reported net income of $3 million. The
company declared and paid $200,000 of dividends on preferred stock. The company had a
weighted average of 600,000 common shares outstanding from the beginning of the year.
The average market price of the companys stock for the year was $50. The company also
had 50,000 warrants outstanding with an exercise price of $30 per share.
If the market price of the company at year end was $60 per share, the companys diluted
EPS is closest to:
A. 4.20
B. 4.52
C. 4.60
172. The average quick ratio for an industry is 4.80. The following information is available for a
company in the industry:
As at December 31
Cash and cash equivalents
Short-term marketable securities
Accounts receivable
Inventory
Accounts payable
Taxes payable
Installment loan payable, due in four equal
annual payments on October 31.
Long term bonds payable

$ 000s
3,000
300
1,500
400
650
200
800
50

Using the quick ratio, when compared with the industry, the firm is best described as being:
A. as liquid
B. less liquid
C. more liquid
173. Which of the following financial assets is most likely measured at amortized cost?
A. Held-to-maturity investments
B. Held-for-trading investments
C. Available-for-sale investments

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174. An analyst has gathered the following company information:
Net income
Depreciation
Interest expense
Fixed capital expenditures
Working capital expenditures
Net debt repayment
Net borrowing
Tax rate

$3,000
$250
$125
$1,500
$275
$25
$1,250
30%

The companys free cash flow to firm (FCFF) and free cash flow to equity (FCFE) are
closest to:
FCFF
FCFE
A.
$1,563
$2,700
B.
$2,700
$1,563
C.
$1,563
$2,725
175. An analyst has compiled the following company information:
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Interest paid (included in CFO)
Taxes paid

$ millions
104.4
(10.8)
54.5
20.2
16.0

The cash flow interest coverage ratio for the year is closest to:
A. 5.96
B. 6.96
C. 8.33
176. An analyst has gathered the following company data:
Inventory turnover
Receivables turnover
Payables turnover

2014
11.4
13.0
9.1

2013
10.7
14.6
10.4

Based on this data, the analyst would least likely conclude that:
A. management of inventory has contributed to improved liquidity.
B. management of receivables has contributed to improved liquidity.
C. management of payables has contributed to improved liquidity.

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177. In order to examine a companys ability to meet short-term obligations, which of the
following ratio would an analyst most likely examine?
A. Working capital turnover
B. Defensive interval ratio
C. Debt-to-equity ratio
178. Compared to a company that uses the LIFO method, during periods of falling prices and
stable inventory quantities, a company that uses the FIFO method will least likely have:
A. higher profitability ratios
B. higher solvency ratios
C. higher activity ratios
179. An analyst gathers the following company information:
Cost of ending inventory
Estimated selling price
Estimated selling cost
Current replacement cost
Normal profit margin

$213,000
$220,000
$8,000
$199,000
$1,000

The companys inventory assuming IFRS and U.S. GAAP is closest to:
IFRS
U.S. GAAP
A.
$212,000
$199,000
B.
$212,000
$211,000
C.
$213,000
$211,000
180. Which of the following will most likely result in a smaller annual depreciation amount?
A. Longer useful life and lower expected residual value
B. Longer useful life and higher expected residual value
C. Shorter useful life and higher expected residual value
181. MLC Inc. elected to use the revaluation model for its machinery. The company purchased a
machine at the end of 2012 for $25,000. The machines fair value at the end of 2013 is
$27,000. The machines fair value at the end of 2014 is $22,000.
The revaluation surplus and change to the companys income statement as a result of the
revaluation at the end of 2014 are closest to:
Revaluation Surplus
Income Statement
A.
-$5,000
0
B.
0
-$5,000
C.
0
-$3,000

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182. Divergent Company purchased equipment for $15,000. To depreciate the equipment, the
company uses the straight-line depreciation method with an estimated residual value of
zero for both accounting and tax purposes. For accounting purposes, the equipment is
depreciated over 5 years. For tax purposes, the equipment is depreciated over 3 years. The
statutory tax rate is 30%.
The amount of deferred tax liability (DTL) or deferred tax asset (DTA) recognized on the
balance sheet at the end of the second year is closest to:
A. $1,200 DTA
B. $1,200 DTL
C. $4,000 DTL
183. A permanent difference will most likely occur when:
A. the timing of tax payments is uncertain
B. the amount of tax payments is uncertain
C. accounting standards require recognition of an expense that is not permitted under tax
laws
184. Compared to using a capital lease, a lessee that uses an operating lease will most likely
report higher:
A. cash flow from operating activities
B. cash flow from investing activities
C. cash flow from financing activities
185. Which of the following least accurately describes a defined benefit plan?
A. The amount of pension that is ultimately paid by the plan depends on the performance
of the plans assets.
B. The employer promises to make periodic payments to employees after retirement.
C. If the present value of the estimated pension obligation exceeds the fair value of the
funds assets, the employers balance sheet will reflect a net pension liability.
186. Which of the following is least likely a common accounting warning sign?
A. Excessive use of operating leases by lessees.
B. Use of long useful lives for depreciation and amortization
C. Unusually high revenues in the final quarter that can be attributed to seasonality.
187. Which of the following will least likely occur to a company with constant sales delays
payment to its vendors?
A. An increase in account payables
B. An increase in cost of goods sold
C. An increase in days sales in payables

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188. Which of the following is least likely assessed in a credit analysis?

A. Character
B. Covenant
C. Contribution
189. Which of the following is least likely to be used to screen for attractive equity investment?
A. Low price-to-cash flow ratio
B. Higher-than-average return on assets
C. High price-to-earning ratio
Question 190 through 197 relate to Corporate Finance.
190. TKT Inc. is considering investing in two projects, Project I and Project II. Project I and
Project II requires an initial outlay of $5 million and $4.5 million respectively. The two
projects are expected to generate the following cash flows:
Year
1
2
3
4

Project I ($ millions)
1.5
2.4
2.6
2.2

Project II ($ millions)
1.2
2.2
2.4
3.0

Assuming the required rate of return on the investment is 26%, which project should the
company choose to invest?
A. Project I only, because the IRR for Project II is less than the required rate of return.
B. Project II only, because the IRR for Project I is less than the required rate of return.
C. Both Project I and Project II, because the IRR for both projects are more than the
required rate of return.
191. TKT Inc. is considering investing in a project located at an emerging country. An analyst
has gathered the following information:

The yield on the emerging countrys U.S. dollar-denominated 10-year government

bond is 7.0%.
The yield on 10-year U.S. Treasury bond is 4.8%.
The annualized standard deviation of the emerging country index is 25%.
The annualized standard deviation of the emerging countrys U.S. dollar-denominated
10-year government bond is 16%.
The appropriate beta for the project is 1.4.
The market risk premium is 8%.
The risk-free interest rate is 6%.

The appropriate country risk premium and the cost of equity that TKT should use for the
project in the emerging country are closest to:

2015 Passed Tense / Adapt Prep

A.
B.
C.

Country Risk Premium

0.014
0.014
0.034

Cost of Equity
0.172
0.192
0.220

192. An analyst gathered the following data about a company:

Source of Capital
Debt
Preferred stock
Common stock

Book Value ($ millions)

27
18
45

Market Value ($millions)

20
28
32

Before-tax cost of debt = 6%

Cost of common equity = 8%
Cost of preferred equity = 10%
Marginal tax rate = 30%

The companys weighted average cost of capital is closest to:

A. 0.073
B. 0.078
C. 0.082
193. The unit contribution margin for a product is $20. Assuming fixed operating costs of
$800,000 and 100,000 units of the product have been sold, a 15% increase in the number of
units sold will increase the operating income by:
A. 1.7%
B. 16.7%
C. 25.0%
194. The components of business risk most likely include:
A. operating risk and sales risk
B. operating risk and financial risk
C. sales risk and financial risk
195. If a company finances its share repurchase by borrowing at an after-tax borrowing rate that
is lower than the companys earning yield, the earning per share of the company going
forward will most likely:
A. increase
B. decrease
C. remain unchanged

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196. The purchaser of the stock will not receive the dividends if the stock was bought on or after
the:
A. declaration date
B. ex-dividend date
C. holder-of-record date
197. Which of the following will least likely cause a drag on liquidity?
A. Uncollectable receivables
B. Tight short-term credits
C. Obsolete inventory
Question 198 through 209 relate to Equity Investments.
198. Which of the following financial intermediaries are most likely to add risk to their
portfolio?
A. Insurance companies
B. Arbitrageurs
C. Depository institutions
199. Jamie Wilson sells 20 out-of-the-money put contracts on Blackboards Inc. Each contract is
for 1,000 shares of the underlying. Jamie will be exposed if the price of Blackboards
A. Decreases
B. Increases
C. Remains level
200. Which of the following market types most likely requires matching rules?
A. Order-driven markets
B. Quote-driven markets
C. Brokered markets
201. The T&Q 450 index starts at a price of 5,000. For the first 3 years, the index has returns of
20%, 10%, and -10%. The index does not pay dividends. After 3 years, the price of the
index is closest to:
A. 5,950
B. 6,000
C. 6,050
202. Which index method will most likely result in a value tilt?
A. Fundamental weighting
B. Market capitalization weighting
C. Price weighting

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203. Which of the following are least common uses of stock indexes?
A. A proxy for the market
B. A method to generate alpha
C. A gauge of investor confidence
204. Which of the following is least accurately considered an information-acquisition cost?
A. Research soft dollars
B. Subscription to an equity database
C. Broker commission
205. Various studies have shown that value stocks consistently outperform expectations.
Because these stocks can be categorized by publicly available data (dividend yield, P/E
ratio, market-to-book ratios), these studies contradict Fama's semi-strong market
hypothesis. How does the CFA curriculum mention Fama used this information?
A. Concluding that the semi-strong market form does not hold
B. Disputing the studies
C. Adding a value factor to the valuation model
206. In the popular baseball movie Moneyball, Brad Pitt (playing Billy Beane), leads his players
to focus on the end goal:
You get on base, we win. You don't, we lose. And I hate losing, Chavy. I hate it. I hate
losing more than I even wanna win. There's a difference.
Which behavioral term most accurately describes this sentiment?
A. Overconfidence
B. Gambler's fallacy
C. Risk aversion
207. Adam Ventures (AV) has the following earnings for 2014. Numbers in millions.

Net Income: $2.5

Payments to preference shareholders: $0.5
Income available to common shareholders: $2.0

AV's beginning of year stock is valued at $20 per share, with a book value of $15/share.
AV has 500,000 shares outstanding.
AV's return on equity is closest to:
A. 20%
B. 27%
C. 32%

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208. The industry cycle method most typically associated with slow growth and high prices is:
A. Decline
B. Embryonic
C. Shakeout
209. A perpetual preferred stock pays $5 annual dividends at a par value of $100. The current
stock price is $75. The market's required rate of return on this security is closest to:
A. 5%
B. 7%
C. 10%
Question 210 through 215 relate to Derivatives.
210. With respect to derivatives, which of the following is least accurate?
A. Derivatives generally trade at higher transaction costs than comparable spot market
transactions.
B. Derivatives are often more liquid than their underlying.
C. Derivatives are characterized by a relatively high degree of leverage.
211. Which of the following will least likely make futures and forward prices equivalent?
A. Interest rates are constant.
B. Futures prices and interest rates are uncorrelated.
C. The volatilities of future prices and forward prices are constant.
212. With respect to European call option, which of the following is least accurate?
A. The value of the option is directly related to the volatility of the underlying
B. The value of the option is directly related to the risk-free interest rate.
C. The value of the option is directly related to the exercise price.
213. When the price of the underlying is above the exercise price, a call option is:
A. In-the-money
B. At-the-money
C. Out-of-the-money
214. At expiration, American put options are worth:
A. Less than European put options.
B. The same as European put options.
C. More than European put options.

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215. A bond is currently selling for $95 per $100 face value. A put option with an exercise price
of $100 is currently selling for $8. For a protective put, which of the following is least
accurate?
A. If the price of the bond at expiration is $90, the value of a short position at expiration is
$100.
B. The maximum loss to a long position is $3.
C. The breakeven bond price at expiration is $103.
Question 216 through 227 relate to Fixed Income Investments.
216. Shady Business (SB), an interior decorating company, needs to borrow 50 million during
the next 6 months. Which public offering method will most likely give SB the most
assurance of receiving all 50 million?
A. Underwritten
B. Best effort
C. Preferred stock
217. Which of the following statements about the relation between bid-ask spreads and liquidity
is most accurate?
A. Bid-ask spreads are unrelated to a security's liquidity
B. High bid-ask spreads indicate a high liquidity
C. High bid-ask spreads indicate a low liquidity
218. Across The Nation (ATN) issues a 10-year bond which pays LIBOR + 50 bps. Investors
buy this bond for par. Which of the following descriptions of the bond is most accurate?
A. Floating rate
B. Credit-linked
C. Step-up
219. Jokes 4 Evah issues the following vanilla bonds:
Bond
X
Y
Z

Annual Coupon
5
7
9

Maturity (years)
12
10
11

Discount Rate
7
7
7

Which of the following bonds is most likely trading at a discount?

A. X
B. Y
C. Z

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220. A money market security matures in 90 days at $1,000,000. With an add-on rate of 1.5%,
its price is closest to:
A. $985,221
B. $996,250
C. $996,264
221. A bond pays increasing coupons until its maturity in 15 years. The bond has a Macaulay
duration of 12.8. At an annual effective interest rate of 5%, the bond's modified duration is
closest to:
A. 12.2
B. 12.8
C. 13.4
222. Which duration metric most accurately calculates the sensitivity of the security's value with
respect to changes in the benchmark yield curve?
A. Effective duration
B. Modified duration
C. Macaulay duration
223. You are provided with the following information on a bond:

Current price: 91.47

Price if the yield increases by 2%: 76.83
Price if the yield decreases by 2%: 109.47

The approximate convexity for the bond is closest to:

A. 90
B. 100
C. 110
224. A bond has a recovery rate of 60% and a loss severity given default of $20,000. This bond's
expected loss is closest to:
A. $8,000
B. $12,000
C. $20,000
225. Which of the following factors is least likely to affect a security's recovery rate?
I. Industry
II. Credit Cycle
III. Seniority
A. I
B. III
C. All are significant

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226. Which of the following is least likely to be one of Porter's five major competitive forces?
A. Barrier to entry
B. Level of competition
C. Political and legal influences
227. Which of the following least impacts a bond's credit spread?
A. Liquidity premium
B. Credit cycle
C. Supply and demand
Question 228 through 231 relate to Alternative Investments.
228. Which of the following hedge fund structures are designed to benefit the limited partner
(LP)?
A. Management fees
B. Incentive fees
C. High water marks
229. Which of the venture capital formative-stage financing occurs latest?
A. Angel investing
B. Early stage financing
C. Seed capital
230. As of September 5, 2014, the current price of corn is $3.60 per bushel. Farmers have
stopped asking if they will profit this year - the question now is how much will they lose
for their year's work.
Under which of the following 6-month futures corn prices would backwardation most likely
be present?
A. $3.20 per bushel
B. $3.60 per bushel
C. $4.00 per bushel
231. Which of the following exit strategies are least common for private equity investors?
A. Selling the company to a competitor
B. Designing an initial public offering
C. No exit - holding the company indefinitely

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Question 232 through 240 relate to Portfolio Management.
232. After receiving the client's IPS, you run analysis and determine to put 40% of the portfolio
in domestic stocks, 30% in domestic fixed income, and 30% in international investments.
You also make a proposal on the specific investments.
This analysis most accurately occurs during which step of the investment process?
A. Planning
B. Execution
C. Feedback
233. Consider the following utility function:
1
= +
2
Which of the following most accurately describes the bounds of for a risk-averse
investor?
A. Less than 0
B. Greater than 0
C. Greater than or equal to 0
234. Which of the following is least accurate regarding the Markowitz efficient frontier?
A. The returns from adding risk increase as you add more risk
B. It contains the global minimum variance portfolio
C. All optimal portfolios of risky assets are included
235. Which of the following is most accurately considered systematic risk?
A. Discovery of oil
B. Threats of lawsuits
C. Changes in interest rates
236. Which of the following is least accurately included in the Fama-French three-factor
model?
A. Momentum factor
B. Value/growth factor
C. Company size factor
237. Sigmund Wallace has $1M of investable assets and a conservative investing style. Sigmund
has worked diligently accumulating his wealth and doesn't want to lose it all in the stock
market. Sigmund most likely has:
A. Low willingness to assume risk and high ability to assume risk
B. High willingness to assume risk and low ability to assume risk
C. Low willingness to assume risk and low ability to assume risk

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238. A portfolio consists of two assets. There is no reduction in the portfolio risk when the
correlation between the two assets is:
A. -1
B. 0
C. +1
239. With respect to the indifference curve, which of the following is least accurate?
A. The slope of the indifference curve represents the additional return required by the
investor to assume an additional unit of risk.
B. For two indifference curves, the indifference curve that lies further to the northwest has
a higher level of utility.
C. At a given level of risk, the indifference curve for a more risk-seeking investor would
have a greater slope than that of a less risk-seeking investor.
240. Which of the following will least likely have a minimum investment requirement?
A. Mutual funds
B. Hedge funds
C. Separately managed accounts

2015 Passed Tense / Adapt Prep