CFA-Level-II exam material & Free CFA-Level-II AI Tutor

QUESTION: 20 Exam Topic: 2, Equity Investment

Yi Tang updates several economic parameters monthly for use by the analysts and the portfolio managers at her firm. If economic conditions warrant, she will update the parameters even more frequently. As a result of an economic slowdown, she is going through this process now.

The firm has been using an equity risk premium of 5.6%, found with historical estimates. Tang is going to use an estimate of the equity risk premium found with a macroeconomic model. By comparing the yields on nominal bonds and real bonds, she estimates the inflation rate to be 2.6%. She expects real domestic growth to be 3.0%. Tang does not expect a change in price/earnings ratios. The yield on the market index is 1.7% and the expected risk-free rate of return is 2.7%.

Elizabeth Trotter, one of the firm's portfolio Managers, asks Tang about the effects of survivorship bias on estimates of the equity risk premium. Trotter asks, "Which method is most susceptible to this bias, historical estimates, Gordon growth model estimates, or survey estimates?"
Tang wishes to estimate the required rate of return for Northeast Electric (NE) using the Capital Asset Pricing Model (CAPM) and the Fama-French three factor model. She is using the following information to accomplish this:

•The risk-free rate of return is 2.7%.
•The expected risk premiums arc:

•The beta coefficient in the CAPM is estimated to be 0.63.
•The betas (factor sensitivities) for the three Fama-French factors are 1.00 for the market factor, -0.76 for the size factor, and -0.04 for the book-to-markct factor.

Trotter also asks Tang about adjusted betas. She says, "We use a formula for the adjusted beta where the adjusted beta = (2/3) (regression beta) + (1/3) (1.0). How do the adjusted betas compare to the original regression betas?"

Trotter has one final question for Tang. Trotter says, "We need to estimate the equity beta for VixPRO, which is a private company that is not publicly traded. We have identified a publicly traded company that has similar operating characteristics to VixPRO and we have estimated the beta for that company using regression analysis. We used the return on the public company as the dependent variable and the return on the market index as the independent variable. What steps do I need to take to find the beta for VixPRO equity? The companies have different debt/equity ratios. The debt of both companies is very low risk, and I believe I can ignore taxes."

The best response to Trotter's question about survivorship bias is:

historical estimates.
Gordon model estimates.
survey estimates.

Answer(s): A

Explanation:

Historical estimates arc subject to survivorship bias. If the data are not adjusted for the effects of non-survivors, the returns based on survivors will be biased upwards. (Study Session 10, LOS 35-c)

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QUESTION: 21 Exam Topic: 2, Equity Investment

Yi Tang updates several economic parameters monthly for use by the analysts and the portfolio managers at her firm. If economic conditions warrant, she will update the parameters even more frequently. As a result of an economic slowdown, she is going through this process now.

The firm has been using an equity risk premium of 5.6%, found with historical estimates. Tang is going to use an estimate of the equity risk premium found with a macroeconomic model. By comparing the yields on nominal bonds and real bonds, she estimates the inflation rate to be 2.6%. She expects real domestic growth to be 3.0%. Tang does not expect a change in price/earnings ratios. The yield on the market index is 1.7% and the expected risk-free rate of return is 2.7%.

Elizabeth Trotter, one of the firm's portfolio Managers, asks Tang about the effects of survivorship bias on estimates of the equity risk premium. Trotter asks, "Which method is most susceptible to this bias, historical estimates, Gordon growth model estimates, or survey estimates?"

Tang wishes to estimate the required rate of return for Northeast Electric (NE) using the Capital Asset Pricing Model (CAPM) and the Fama-French three factor model. She is using the following information to accomplish this:

•The risk-free rate of return is 2.7%.
•The expected risk premiums arc:

•The beta coefficient in the CAPM is estimated to be 0.63.
•The betas (factor sensitivities) for the three Fama-French factors are 1.00 for the market factor, -0.76 for the size factor, and -0.04 for the book-to-markct factor.

Trotter also asks Tang about adjusted betas. She says, "We use a formula for the adjusted beta where the adjusted beta = (2/3) (regression beta) + (1/3) (1.0). How do the adjusted betas compare to the original regression betas?"

Trotter has one final question for Tang. Trotter says, "We need to estimate the equity beta for VixPRO, which is a private company that is not publicly traded. We have identified a publicly traded company that has similar operating characteristics to VixPRO and we have estimated the beta for that company using regression analysis. We used the return on the public company as the dependent variable and the return on the market index as the independent variable. What steps do I need to take to find the beta for VixPRO equity? The companies have different debt/equity ratios. The debt of both companies is very low risk, and I believe I can ignore taxes."

The required rate of return for NE estimated with the CAPM is closest to:

5.7%.
6.0%.
6.3%.

Answer(s): B

Explanation:

With the CAPM, the required return is:
required rate of return = risk-free rate + beta x equity risk premium required return for NE = 27% + 0.63(5.2%) = 5.976 = 6.0%
(Study Session 10, LOS 35.d)

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QUESTION: 22 Exam Topic: 2, Equity Investment

Yi Tang updates several economic parameters monthly for use by the analysts and the portfolio managers at her firm. If economic conditions warrant, she will update the parameters even more frequently. As a result of an economic slowdown, she is going through this process now.
The firm has been using an equity risk premium of 5.6%, found with historical estimates. Tang is going to use an estimate of the equity risk premium found with a macroeconomic model. By comparing the yields on nominal bonds and real bonds, she estimates the inflation rate to be 2.6%. She expects real domestic growth to be 3.0%. Tang does not expect a change in price/earnings ratios. The yield on the market index is 1.7% and the expected risk-free rate of return is 2.7%.

Elizabeth Trotter, one of the firm's portfolio Managers, asks Tang about the effects of survivorship bias on estimates of the equity risk premium. Trotter asks, "Which method is most susceptible to this bias, historical estimates, Gordon growth model estimates, or survey estimates?"

Tang wishes to estimate the required rate of return for Northeast Electric (NE) using the Capital Asset Pricing Model (CAPM) and the Fama-French three factor model. She is using the following information to accomplish this:

•The risk-free rate of return is 2.7%.
•The expected risk premiums arc:

•The beta coefficient in the CAPM is estimated to be 0.63.
•The betas (factor sensitivities) for the three Fama-French factors are 1.00 for the market factor, -0.76 for the size factor, and -0.04 for the book-to-markct factor.

Trotter also asks Tang about adjusted betas. She says, "We use a formula for the adjusted beta where the adjusted beta = (2/3) (regression beta) + (1/3) (1.0). How do the adjusted betas compare to the original regression betas?"

Trotter has one final question for Tang. Trotter says, "We need to estimate the equity beta for VixPRO, which is a private company that is not publicly traded. We have identified a publicly traded company that has similar operating characteristics to VixPRO and we have estimated the beta for that company using regression analysis. We used the return on the public company as the dependent variable and the return on the market index as the independent variable. What steps do I need to take to find the beta for VixPRO equity? The companies have different debt/equity ratios.

The debt of both companies is very low risk, and I believe I can ignore taxes."

The required rate of return for NE estimated with the Fama-French three factor model is closest to:

5.3%.
6.0%.
6.3%.

Answer(s): A

Explanation:

With the Fama-French three factor model, the required return is:

(Study Session 10, LOS 35.d)

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QUESTION: 23 Exam Topic: 2, Equity Investment

Yi Tang updates several economic parameters monthly for use by the analysts and the portfolio managers at her firm. If economic conditions warrant, she will update the parameters even more frequently. As a result of an economic slowdown, she is going through this process now.

The firm has been using an equity risk premium of 5.6%, found with historical estimates. Tang is going to use an estimate of the equity risk premium found with a macroeconomic model. By comparing the yields on nominal bonds and real bonds, she estimates the inflation rate to be 2.6%. She expects real domestic growth to be 3.0%. Tang does not expect a change in price/earnings ratios. The yield on the market index is 1.7% and the expected risk-free rate of return is 2.7%.

Elizabeth Trotter, one of the firm's portfolio Managers, asks Tang about the effects of survivorship bias on estimates of the equity risk premium. Trotter asks, "Which method is most susceptible to this bias, historical estimates, Gordon growth model estimates, or survey estimates?"

Tang wishes to estimate the required rate of return for Northeast Electric (NE) using the Capital Asset Pricing Model (CAPM) and the Fama-French three factor model. She is using the following information to accomplish this:

•The risk-free rate of return is 2.7%.
•The expected risk premiums arc:

•The beta coefficient in the CAPM is estimated to be 0.63.
•The betas (factor sensitivities) for the three Fama-French factors are 1.00 for the market factor, -0.76 for the size factor, and -0.04 for the book-to-markct factor.

Trotter also asks Tang about adjusted betas. She says, "We use a formula for the adjusted beta where the adjusted beta = (2/3) (regression beta) + (1/3) (1.0). How do the adjusted betas compare to the original regression betas?"

Trotter has one final question for Tang. Trotter says, "We need to estimate the equity beta for VixPRO, which is a private company that is not publicly traded. We have identified a publicly traded company that has similar operating characteristics to VixPRO and we have estimated the beta for that company using regression analysis. We used the return on the public company as the dependent variable and the return on the market index as the independent variable. What steps do I need to take to find the beta for VixPRO equity? The companies have different debt/equity ratios. The debt of both companies is very low risk, and I believe I can ignore taxes."

Which of the following is the best answer that Tang should give the portfolio manager to the question about adjusted betas?

The regression betas are all increased by 0.33.
Regression betas that are above 1.0 are adjusted upward and regression betas that arc below
1.0 are adjusted downward.
Regression betas are adjusted to be closer to 1.0 by roughly 1/3 of their original difference from 1.0.

Answer(s): C

Explanation:

The adjusted betas are adjusted to be closer to 1.0, with the adjusted betas being closer to 1.0 by 1/3 of the original difference between the regression beta and 1.0. For example, if the original beta were 1.6, the adjusted beta is (2/3) (1.6) + (1/3) (1.0) s 1.4. If the original beta were 0.7, the adjusted beta is (2/3) (0.7) + (1/3) (1.0) = 0.8. (Study Session 10, LOS 35.e)

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QUESTION: 24 Exam Topic: 2, Equity Investment

Yi Tang updates several economic parameters monthly for use by the analysts and the portfolio managers at her firm. If economic conditions warrant, she will update the parameters even more frequently. As a result of an economic slowdown, she is going through this process now.

The firm has been using an equity risk premium of 5.6%, found with historical estimates. Tang is going to use an estimate of the equity risk premium found with a macroeconomic model. By comparing the yields on nominal bonds and real bonds, she estimates the inflation rate to be 2.6%. She expects real domestic growth to be 3.0%. Tang does not expect a change in price/earnings ratios. The yield on the market index is 1.7% and the expected risk-free rate of return is 2.7%.

Elizabeth Trotter, one of the firm's portfolio Managers, asks Tang about the effects of survivorship bias on estimates of the equity risk premium. Trotter asks, "Which method is most susceptible to this bias, historical estimates, Gordon growth model estimates, or survey estimates?"
Tang wishes to estimate the required rate of return for Northeast Electric (NE) using the Capital Asset Pricing Model (CAPM) and the Fama-French three factor model. She is using the following information to accomplish this:

•The risk-free rate of return is 2.7%.
•The expected risk premiums arc:

•The beta coefficient in the CAPM is estimated to be 0.63.
•The betas (factor sensitivities) for the three Fama-French factors are 1.00 for the market factor, -0.76 for the size factor, and -0.04 for the book-to-markct factor.

Trotter also asks Tang about adjusted betas. She says, "We use a formula for the adjusted beta where the adjusted beta = (2/3) (regression beta) + (1/3) (1.0). How do the adjusted betas compare to the original regression betas?"

Trotter has one final question for Tang. Trotter says, "We need to estimate the equity beta for VixPRO, which is a private company that is not publicly traded. We have identified a publicly traded company that has similar operating characteristics to VixPRO and we have estimated the beta for that company using regression analysis. We used the return on the public company as the dependent variable and the return on the market index as the independent variable. What steps do I need to take to find the beta for VixPRO equity? The companies have different debt/equity ratios. The debt of both companies is very low risk, and I believe I can ignore taxes."

What response should Tang give Trotter about estimating the equity beta for VixPRO?

Estimate the beta for VixPRO by regressing the returns for VixPRO on an index of non-traded equity market securities.
Estimate the VixPRO beta as the multiplying the public company beta times the ratio of the equity risk premium of the market to the risk-free rate of return.
Estimate the unlevered beta for the public company based on its debt/equity ratio. Then use that unlevered beta and estimate the equity beta for VixPRO based on the VixPRO debt/equity ratio.

Answer(s): C

Explanation:

Unlever the beta for the public company (which we will denote PC). Assuming no taxes and no bond risk, this is:

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CFA-Level-II Practice Questions, What to Expect and How to Prepare

The CFA Level II Chartered Financial Analyst exam serves as a critical milestone for investment professionals aiming to demonstrate advanced proficiency in asset valuation and portfolio management. Candidates who pursue this certification are typically working as financial analysts, portfolio managers, or investment researchers who need to prove their ability to apply complex financial tools to real-world scenarios. Employers in the global finance sector prioritize this certification because it signals a candidate's deep understanding of the rigorous standards required for ethical and technical financial analysis. By passing this exam, professionals validate their capability to handle the sophisticated demands of modern investment management, which is essential for career advancement in high-stakes financial environments. This certification exam is designed to test not just the retention of information, but the practical application of investment theory in a professional context.

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CFA CFA-Level-II Exam Prep
CFA Level II Chartered Financial Analyst (Page 26 )

QUESTION: 20 Exam Topic: 2, Equity Investment

Explanation:

QUESTION: 21 Exam Topic: 2, Equity Investment

Explanation:

QUESTION: 22 Exam Topic: 2, Equity Investment

Explanation:

QUESTION: 23 Exam Topic: 2, Equity Investment

Explanation:

QUESTION: 24 Exam Topic: 2, Equity Investment

Explanation:

`result is 7`

CFA-Level-II Practice Questions, What to Expect and How to Prepare

What the CFA-Level-II Exam Covers

Are These Real CFA-Level-II Exam Questions?

How to Prepare for the CFA-Level-II Exam

What to Expect on Exam Day

Who Should Use These CFA-Level-II Practice Questions

CFA CFA-Level-II Exam Prep CFA Level II Chartered Financial Analyst (Page 26 )

QUESTION: 20 Exam Topic: 2, Equity Investment

Explanation:

QUESTION: 21 Exam Topic: 2, Equity Investment

Explanation:

QUESTION: 22 Exam Topic: 2, Equity Investment

Explanation:

QUESTION: 23 Exam Topic: 2, Equity Investment

Explanation:

QUESTION: 24 Exam Topic: 2, Equity Investment

Explanation:

result is 7

CFA-Level-II Practice Questions, What to Expect and How to Prepare

What the CFA-Level-II Exam Covers

Are These Real CFA-Level-II Exam Questions?

How to Prepare for the CFA-Level-II Exam

What to Expect on Exam Day

Who Should Use These CFA-Level-II Practice Questions

CFA CFA-Level-II Exam Prep
CFA Level II Chartered Financial Analyst (Page 26 )

`result is 7`