CFA Level I

Question #1 of 39 Question ID: 1220521

Other things equal, cash dividends on a stock during an option's life:

A) decrease the value of call options and put options on the stock.
B) increase the value of call options on the stock and decrease the value of put options on
the stock.
C) decrease the value of call options on the stock and increase the value of put options on
the stock.

Question #2 of 39 Question ID: 1220518

Which of the following factors is least likely to affect the valuation of a derivative contract during its life?

A) Cost of carry.
B) Investors’ risk aversion.

C) Standard deviation of the price of the underlying asset.

Question #3 of 39 Question ID: 1220517

With respect to futures transactions, the purpose of margin is to:

A) make closing out trades easier.

B) reduce price risk for futures investors.

C) provide security to the clearinghouse.

Question #4 of 39 Question ID: 1220523

In a one-period binomial model of an option value, the probabilities of an up-move and a down-move are:
 A) assumed to be equal to 0.5.
B) estimated based on historical data.
C) calculated from the model’s inputs.

Question #5 of 39 Question ID: 1220519

An investor borrows £1 million at the 90-day LIBOR rate of 2.3%. The investor simultaneously lends £1 million at the 30-day
LIBOR rate of 2.1%. Which of the following derivatives has the investor replicated with these two transactions?

A) An interest rate swap.

B) A forward rate agreement.
C) An option on 90-day LIBOR.

Question #6 of 39 Question ID: 1220520

From the perspective of the short position in a plain vanilla interest rate swap, an increase in expected short-term interest rates
will:

A) increase the price and value of the swap.

B) decrease the value, but not the price, of the swap.

C) increase the price and decrease the value of the swap.

Question #7 of 39 Question ID: 1220522

European call and put options with an exercise price of 60 and an expiration date of August 31 are available on an underlying
asset. The present value of the price of a forward contract on the same asset today is closest to the:

A) call price minus the put price plus the present value of 60.

B) put price minus the call price plus the present value of 60.
C) call price plus the put price minus the present value of 60.

Question #8 of 39 Question ID: 1220524

Regarding the main types of leveraged buyouts (LBOs), in a management buy-in:

A) the existing management team is involved in the purchase.

B) an external management team joins the existing management team.
 C) an external management team replaces the existing management team.

Question #9 of 39 Question ID: 1220525

Which of the following is most likely to be a characteristic of alternative investments?

A) Passive management.

B) Less efficient pricing than traditional investments.

C) High correlations with the returns of traditional investments.

Question #10 of 39 Question ID: 1220527

A hedge fund started the year with a value of €125 million. At year's end the value before fees is €150 million. The fund charges
2 and 20 with management fees calculated on end-of-year values. Incentive fees are net of management fees and calculated
using a 10% hard hurdle rate. Total fees paid for this year are closest to:

A) €4.9 million.
B) €5.5 million.

C) €7.4 million.

Question #11 of 39 Question ID: 1220526

An analyst using the comparable sales approach to value a real estate property should:

A) consider the most recent sale price of the property.

B) determine an appropriate discount rate for future cash flows from the property.
C) adjust for differences between this property and others that have been sold recently.

Question #12 of 39 Question ID: 1220528

The gold futures market is said to be in contango if prices for gold futures are currently:

A) equal to the spot price.

B) less than the spot price.

C) greater than the spot price.
Question #13 of 39 Question ID: 1220529

The effect of survivorship bias on hedge fund risk and returns from historical results is to overstate:

A) both risk and expected returns.

B) expected returns and understate risk.

C) risk and understate expected returns.

Question #14 of 39 Question ID: 1220530

It is most likely that, compared to investing directly in infrastructure assets, an investment in publicly traded infrastructure
securities:

A) provides less liquidity.

B) does not regularly distribute asset cash flows to securities holders.

C) provides access only to a small segment of the available infrastructure assets.

Question #15 of 39 Question ID: 1220535

Which of the following statements about the capital market line (CML) is most accurate?

A) Only risky portfolios plot on the CML.

B) Only efficient portfolios plot on the CML.

C) In equilibrium, all portfolios plot on the CML.

Question #16 of 39 Question ID: 1220531

Compared to property and casualty insurance companies, life insurance companies typically have investment horizons that are:

A) longer.
B) shorter.
C) the same.

Question #17 of 39 Question ID: 1220536

Two stocks, Shaw Inc., and Melon Inc., have identical total risk. The Shaw stock risk is composed of 60% systematic risk and
40% unsystematic risk, while the Melon stock risk is composed of 40% systematic risk and 60% unsystematic risk. In
equilibrium, according to capital market theory, Shaw has:

A) a higher expected return than Melon.

B) a lower expected return than Melon.

C) the same expected return as Melon.

Question #18 of 39 Question ID: 1220532

During the portfolio management process, a benchmark should be defined during the:

A) planning step.
B) feedback step.

C) execution step.

Question #19 of 39 Question ID: 1220537

Which of the following items is most likely to be found in the appendix to an investment policy statement?

A) Portfolio rebalancing guidelines.

B) Authorization for the use of derivatives.
C) Restrictions with respect to social investing.

Question #20 of 39 Question ID: 1220533

Historically, returns on major asset classes have exhibited:

A) positive skewness and negative excess kurtosis.

B) negative skewness and positive excess kurtosis.
C) negative skewness and negative excess kurtosis.

Question #21 of 39 Question ID: 1220534

The curve representing the set of portfolios that has the highest expected return for a given level of risk is the:

A) utility curve.

B) efficient frontier.
C) indifference curve.
Question #22 of 39 Question ID: 1220509

Kay Boyle, CFA, lives and works in a country that requires financial firms to retain all emails and text messages sent to
customers for at least three years. Boyle's firm has a policy of retaining records for at least five years. Under the Code and
Standards, how long is Boyle required to retain emails and text messages she sends to customers?

A) Five years because the firm’s policy is more strict than the applicable law.
B) Three years because this is the applicable law for emails and text messages.
C) Seven years because the Standards are more strict than the applicable law or the firm’s
policy.

Question #23 of 39 Question ID: 1220501

Bob Reynolds, CFA, is bearish on JBH Manufacturing Company and takes a short position in the stock. Reynolds posts negative
claims about company management, which are untrue, to several popular investment bulletin boards on the Internet. According
to CFA Institute Standards of Professional Conduct, Reynolds has violated the Standard concerning:

A) fair dealing.

B) communication with clients.

C) market manipulation.

Question #24 of 39 Question ID: 1220500

Judy Nicely, CFA, works for a large brokerage firm managing portfolios for individuals. In a meeting with Patty Owen, a client,
Nicely suggests moving a portion of Owen's portfolio to U.S. bank certificates of deposit. Nicely states that the principal is
guaranteed up to Federal Deposit Insurance Corporation limits. Nicely has:

A) complied with CFA Institute Standards.

B) violated the Standards by making an inappropriate assurance or guarantee.
C) violated the Standards by misrepresenting the terms and character of the investment.

Question #25 of 39 Question ID: 1220502

The recommended procedures for the Standard on material nonpublic information state that a firm's internal information "firewall"
should include:
 A) a prohibition against buying and selling when the firm possesses material nonpublic
information.
B) a reporting system in which authorized personnel review and approve interdepartmental
communications.
C) distribution of a restricted list to all employees in the relevant departments of the firm.

Question #26 of 39 Question ID: 1220499

The primary principles on which the CFA Institute Bylaws and Rules of Procedure for Proceedings Related to Professional
Conduct are based least likely include:

A) fair process.
B) confidentiality.
C) global application.

Question #27 of 39 Question ID: 1220503

According to the Standard concerning fair dealing, new or changed investment recommendations should be made available to:

A) all clients.
B) clients who have indicated a prior interest in that type of security.

C) only clients who have selected a level of service that includes such notification.

Question #28 of 39 Question ID: 1220504

Randy Green, CFA, is a principal in an investment advisory firm. His firm has been retained by Bob Harris to manage a
retirement fund of which Harris is a director. Green writes Harris a letter that states he will personally oversee the account and
will always act in Harris's best interest. If Green acts in accordance with this statement, he will:

A) not violate the Code and Standards.

B) violate the Standard concering priority of transactions.
C) violate the Standard concering loyalty, prudence, and care.

Question #29 of 39 Question ID: 1220505

Fran Bitner, CFA, manages a portfolio for a retail client. The client calls Bitner and requests a trade that Bitner believes is
unsuitable according to the client's IPS, but would not have a material impact on the client's overall portfolio. According to the
Code and Standards, Bitner's most appropriate action is to:

A) evaluate whether to continue her advisory relationship with this client.

B) open an unmanaged account in which the client may execute this trade, if her firm’s
policies allow this.

C) discuss with the client how this trade deviates from the IPS, and follow her firm’s
policies for obtaining client approval.

Question #30 of 39 Question ID: 1220506

Nancy Wiley, CFA, suspects that one of her clients is involved in illegal money-laundering activity, and may have large amounts
of unreported income. To comply with the Code and Standards, Wiley's best course of action is to:

A) report the suspected activity to the authorities, as required by law.

B) report the activity and dissociate from managing that client’s account.
C) inform her supervisor, check with her firm’s compliance department and possibly
outside counsel, and allow her employer to determine the proper steps to take.

Question #31 of 39 Question ID: 1220507

With respect to a member's activities when leaving a firm, under the Code and Standards, it is least likely that:

A) using knowledge of client names after leaving the firm is permissible.

B) it is acceptable to take firm records or work performed on the employer’s behalf, if the
employer grants permission.
C) the employee’s skills and knowledge obtained while employed are considered
confidential or privileged information of the employer.

Question #32 of 39 Question ID: 1220508

Hugh Nelson, CFA, has recently been offered a supervisory role at his firm. Nelson will be responsible for managing a large staff
of portfolio managers and securities analysts. Before accepting the position, Nelson reviews the firm's compliance policies and
procedures. Nelson feels the procedures and policies are adequate, with one major exception, a trade allocation procedure.
Nelson's most appropriate action is to:

A) accept the position and encourage the firm to implement adequate trade allocation
procedures.
B) decline in writing to accept the promotion until adequate compliance procedures are in
place.
 C) accept the position, implement an adequate trade allocation procedure, and encourage
the firm to adopt policies consistent with CFA Institute Standards.

Question #33 of 39 Question ID: 1220511

John Malone, CFA, manages pension funds at BNA Trust Company. Malone's wife is on the board of directors of Barley
Corporation and owns 3% of its outstanding stock. BNA Trust's research division has recently recommended Barley stock to its
trust officers and pension fund portfolio managers. Based on the CFA Institute Standards, Malone:

A) may purchase the stock after disclosing his spouse’s ownership interest to his
supervisor and to the trustees of the pension funds he manages.

B) may not purchase the stock because he is not able to be unbiased and objective, given
his spouse’s affiliation with Barley.
C) is free to act with no restrictions because he is not a beneficial owner of the Barley
stock.

Question #34 of 39 Question ID: 1220512

Roger Smith, CFA, manages a retirement account for his father-in-law. Smith notices that a stock his father-in-law owns has
been downgraded by his firm's research department. Smith places a "sell" order for the entire position in that stock for three
clients' accounts, one of which belongs to his father-in-law. According to the CFA Institute Standards of Professional Conduct,
Smith:

A) has violated the Standards because he has beneficial ownership in the account.
B) has not violated any Standard because his father-in-law’s account should be treated
like any other firm account.
C) has violated the Standards by entering a transaction before all clients have had
adequate opportunity to act on the recommendation.

Question #35 of 39 Question ID: 1220513

Janet Todd passed Level II of the CFA program in June of last year and wants to note on her résumé her involvement in the CFA
program. Todd passed both Level I and Level II of the CFA examination on her first attempts and plans to register for the Level III
examination next year. Which of the following is an acceptable reference to her participation in the CFA Program? Janet Todd:

A) is a Level III Candidate in the CFA program.

B) is a Level II CFA.
C) passed the Level I and Level II CFA examinations on her first attempts.
Question #36 of 39 Question ID: 1220510

Tom Laird, CFA, subscribes to several different analytical and research reporting services, reviews their research, and presents
the analysis he believes is accurate to his clients. Laird attributes the material to its sources. Laird's method of providing analysis
to his clients:

A) does not violate any Standards.

B) violates the Standard on diligence and reasonable basis.
C) violates the Standard related to independence and objectivity.

Question #37 of 39 Question ID: 1220514

Apex Investments has adopted the Global Investment Performance Standards (GIPS)®. The firm had presented performance for
a high yield fixed income composite, but discontinued it one year ago. With respect to the discontinued composite, GIPS:

A) requires that Apex include it on the firm’s list of composites.

B) does not require that Apex include the discontinued composite on the firm’s list of
composites or make any specific disclosure about it.
C) requires that Apex include information regarding the discontinued composite in the
“Disclosures” section of the presentation, but does not require its inclusion as a
composite.

Question #38 of 39 Question ID: 1220515

The GIPS requirements regarding performance presentation of real estate investments:

A) apply to most real estate investments, regardless of the degree of leverage or the
degree of management by the firm.

B) may or may not apply, depending on the level of control the firm has over the
management of the investment.
C) apply when leverage is involved in the real estate investment, but only for those real
estate investments managed primarily by the firm.

Question #39 of 39 Question ID: 1220516

When regulations in a GIPS-compliant firm's home country conflict with GIPS, the firm must:

A) present results in compliance with GIPS, and must separately present results following
country-specific regulations.
B) follow any applicable country-specific regulations and disclose the conflict in the GIPS-
compliant presentation.
C) abide by the stricter of GIPS or the country-specific regulations.