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Free Test Prep CFA-Level-I Exam Questions (page: 78)

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Ned Jones, CFA, manages an endowment fund. The fund's asset allocation includes domestic stocks and bonds, international stocks and bonds, as well as real estate investments. Jones wants to establish an accurate benchmark to compare the fund's performance against. Which of Jones' following statements concerning indexes to be used for benchmarking is least likely correct?

  1. The creation of an investment bond index is difficult because of bond pricing issues, and because the universe of bonds is constantly changing.
  2. Correlations between bond index returns for different countries have tended to be lower than correlations between different bond indexes within a single country.
  3. Sovereign bond indexes outside the United States represent after tax returns.

Answer(s): C



Two stocks have identical risk, but one of them offers a higher expected return than the other. This apparent inefficiency in the market:

  1. indicates that arbitrageurs must be unaware of the mispricing.
  2. may persist and even grow larger before any correction occurs.
  3. can only arise when arbitrageurs lack the capital to exploit the situation.

Answer(s): B

Explanation:



Three equity analysts at Schiler & Company are debating their supervisor's claim that significant excess return can be generated by exploiting inefficiencies in the capital markets. Analyst A states, "... the large number of profit maximizing investors researching investment opportunities creates an efficient market." Analyst B rebuts by stating, "Over the past three years, my technical analysis strategy has outperformed all the major benchmarks, which proves the markets are not efficient." Analyst C states, "High transactions costs improve the information efficiency of capital markets." The statement that is most likely to be correct was made by:

  1. Analyst
  2. Analyst B
  3. Analyst C

Answer(s): A



Rose Half, CFA, is analyzing EI Toro Electric Company. She has collected the following data:
What is El Toro Electric Company's expected long-run rate of return?

  1. 10.5%.
  2. 13.3%.
  3. 15.0%.

Answer(s): B

Explanation:



Peterson Manufacturing has earnings per share of $4.00 and paid a dividend of $1.00 per share. Peterson's return on equity is 16.0%. Peterson is considering a debt issue that would increase its financial leverage. Peterson is also considering increasing its dividend payout ratio. Assuming all other factors are constant, Peterson's potential growth rate:

  1. will increase due to the increased leverage, and increase further due to the higher payout ratio.
  2. will increase due to the higher payout ratio, but this increase will be offset to some extent by the increased leverage.
  3. will increase due to the increased leverage, but this increase will be offset to some extent by the higher payout ratio.

Answer(s): C



Curzon Corp reported the following in its Shareholder's Equity account:
In calculating a Price to Book value for Curzon, the appropriate book value per common share is closest to:

  1. $10.50
  2. $12.50
  3. $13.13

Answer(s): B

Explanation:



Given the academic research supporting the efficiency of the stock market, which of the following is the least accurate description of a portfolio manager's role in an efficient market?

  1. Identifying and specifying a client's objectives and constraints.
  2. Specifying an explicit investment strategy to meet the client's needs.
  3. Diversifying the client's portfolio across all asset classes to eliminate systematic risk.

Answer(s): C

Explanation:



A U.S. investor is considering investing in a security of a company in a developing country. The country's market is characterized by infrequent trading, high inflation, large market volatility, low operating leverage, political unrest, low debt usage, and a depreciating exchange rate. In determining the appropriate country risk premium for the developing country, the investor should consider:

  1. liquidity risk, exchange rate risk, financial risk, business risk, balance sheet risk
  2. financial risk, liquidity risk, exchange rate risk, country risk, business risk
  3. business risk, variability risk, country risk, exchange rate risk, financial risk

Answer(s): B



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