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Test Prep CFA-Level-I Exam
CFA® Level I Chartered Financial Analyst (Page 154 )

Updated On: 11-Jan-2026
Page 154 of 793
PDF with 3963 Questions

Using the following assumptions, calculate the rate of return on a margin transaction for an investor who purchases the stock and the stock price at which the investor who shorts the stock will receive a margin call. What of the following choices is closest to the correct answer? The margin transaction return is:

  1. -12.00%, and the investor will receive a margin call at a stock price of $16.67.
  2. 24.00%, and the investor will receive a margin call at a stock price of $30.00.
  3. 48.00%, and the investor will receive a margin call at a stock price of $20.83.
  4. -24.00%, and the investor will receive a margin call at a stock price of $30.00.

Answer(s): D

Explanation:

To obtain the result:
Part 1: Calculate Margin Return:
Margin Return % = [((Ending Value - Loan Payoff) / Beginning Equity Position) ­ 1] * 100 = [(([$22 * 1,000] ­ [$25 * 1,000 * 0.50]) / ($25 * 0.50 * 1,000)) ­ 1] * 100 =-24.00%.
Alternative (Check):Calculate the all cash return and multiply by the margin leverage factor.
= [(22,000 ­ 25,000)/22,000] * [1 / 0.50] = -12.00% * 2.0 = -24.00% Part 2:Calculate Margin Call Price:
Since the investor isshort(sold the stock), the formula for the margin call price is:
Margin Call = (original price) * (1 + initial margin) / (1 + maintenance margin) = $25 * (1 + 0.50) / (1 + 0.25) =$30.00



Which of the following statements about securities markets is FALSE?

  1. Characteristics of a well-functioning securities market include: many buyers and sellers willing to trade at below market price, low bid-ask spreads, timely information on price and volume of past transactions, and accurate information on supply and demand.
  2. Secondary markets, such as the over-the-counter (OTC) market, provide liquidity and price continuity.
  3. A limit buy order and a stop buy order are both placed below the current market price.
  4. When Conglomerate, Inc. trades directly with MultiNational, Ltd., it is using the fourth market.

Answer(s): C

Explanation:

A limit buy is placed below the current market price, but a stop buy order is placed above the current market price (stop buy orders are often placed to protect a short sale from a rising market).
The other choices are true. A well-functioning securities market includes the following characteristics:
The fourth market is the direct exchange of securities (no intermediaries and no transaction costs).



The table below lists information on price per share and shares outstanding for three stocks ­ Rocking, Payton, and Strand.



Using the information in the table, determine which of the following statements is FALSE?

  1. The geometric return is less than 11.7%.
  2. If the three stocks comprise an index, a change in Stock Payton would have the biggest impact if the index was market-value weighted.
  3. An investor creating a price-weighted index of these three stocks would need to change his holdings at year-end to reflect the price changes.
  4. If the three stocks comprise an index, a change in Stock Strand would have the biggest impact if the index was price-weighted.

Answer(s): C

Explanation:

A price-weighted index assumes that the investor holds an equal number of shares of each stock in the index.
Since the number of stocks did not change, the investor would not need to change his holdings.
The other statements are true. A price-weighted index is most influenced by the stock with the highest per- share price (Strand). A market-value weighted index is most influenced by the stock with the largest market capitalization (Payton). The geometric return is always less than the arithmetic return (see calculation).
The arithmetic and geometric return are calculated as follows:
Arithmetic return = sum of: (1 + stock return) divided by the number of stocks minus 1, or [(1.5 + 1.0 + 0.85) / 3] ­ 1 = 0.117, or 11.7%. Thus, the geometric average must be less than 11.7%.
Check of geometric average: = product of (1+ stock return), all to the 1/n power (or nth root) minus 1.
= [(1.5)*(1.0)*(0.85)]1/3- 1 = 0.084, or 8.4%



Which of the following statements about the implications of tests for the efficient market hypothesis (EMH) is FALSE?

  1. By purchasing an index fund, an investor can match the market return and minimize costs.
  2. Technical trading rules do not consistently provide excess returns after adjusting for trading costs and taxes.
  3. Other than corporate insiders and market specialists, most traders have monopolistic access to information, which rejects the strong-form EMH.
  4. The best way to measure the performance of investments professionals is against a randomly selected buy- hold strategy of stocks (assuming the same risk level).

Answer(s): C

Explanation:

Other than corporate insiders and market specialists, no other group has monopolistic access to information, which supports the strong-form EMH. The other statements are true.



Kaylee Sumners, Level 1 CFA candidate, has just finished reviewing flash cards for the reading on the efficient market hypothesis (EMH). Confused by the different tests for the different forms of the EMH, she outlines the information (of which four summary points appear below) from memory. It appears that Sumners should review the material because three of the points are incorrect. Which of her summary points is CORRECT?

  1. Early tests of the semi-strong form used the equation: ReturnAbnormal = ReturnActual - (RMarket * BetaStock).
  2. The superior historical performance of exchange specialists and corporate insiders rejects the semi-strong form of the EMH.
  3. Cross-sectional tests such as the price-earnings ratio, neglected firms tests, and book value to market value tests support the semi-strong form of the EMH.
  4. Statistical and trading rule tests support the weak-form of the EMH.

Answer(s): D

Explanation:

These two tests support the weak-form EMH contention that security prices reflect all historical market information and that mechanical trading rules do not result in superior returns.
The other statements are false.Latertests of the semi-strong form EMH used the equation: ReturnAbnormal= ReturnActual­ (RMarket* BetaStock). Early tests omitted beta, using the formula: ReturnAbnormal= ReturnActual­ RMarket. The superior historical performance of exchange specialists and corporate insiders rejects thestrongform of the EMH. Cross-sectional tests such as the price-earnings ratio, neglected firms tests, and book value to market value testsrejectthe semi-strong form of the EMH. These tests show that certain stocks have high realized returns (for example, low P/E stocks and high book value to market value stocks).



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