CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 191:

  A technical analyst would sell a stock when

  A. it leaves the bottom end of a flat trend channel.

  B. it is in a rising trend channel.

  C. it leaves the declining trend channel.

  D. it is in a trough.

  Correct Answer: A

  When the price of a stock falls below the bottom end a flat trend channel, a technical analyst would probably predict the beginning of a declining trend, and would sell the stock.

• Question 192:

  A preferred stock has a $500 par value and a dividend payout of $45 per year. Your required rate of return is 15%. What is the value of the preferred stock?

  A. not enough information to calculate it

  B. $400

  C. $350

  D. $300

  Correct Answer: D

  The value of a preferred stock is the stated annual dividend divided by the required rate of return on preferred stock.

  In this case, V = $45/.15 = $300

• Question 193:

  A firm has an earnings retention rate of 35% and it earns a 12% per year return on its equity. Calculate the expected annual growth rate of the firm's dividend?

  A. 5%

  B. 4.2%

  C. Not able to compute with the above data.

  D. 6%

  Correct Answer: B

  g=(RR)(ROE)=0.35*0.12=4.2%.

• Question 194:

  ________ should be analyzed before individual industries and companies to determine whether the economic and market outlook indicates an underweighting of asset classes.

  A. Historical trends

  B. Security markets

  C. Economies and security markets

  D. Economies

  Correct Answer: C

  Economies and security markets should be analyzed before individual industries and companies to determine whether the economic and market outlook indicates an underweighting of asset classes.

• Question 195:

  Interest rate expenses

  A. have been increasing more or less continuously. That increase was especially pronounced during the 1980s, when firms increased their debt financing and financial risk. Interest rate expenses as a percentage of sales have also been very volatile.

  B. have increased up to 1989, and have since been decreasing. That decrease is the result of an interest rate decline and of corporations reducing their debt levels. Interest rate expenses as a percentage of sales have also been very volatile.

  C. have been increasing more or less continuously. That increase was especially pronounced during the 1980s, when firms increased their debt financing and financial risk. Interest rate expenses as a percentage of sales have increased from 2.44% in 1977 to 7.47% in 1996.

  D. have increased up to 1989, and have since been decreasing. That decrease is the result of an interest rate decline and of corporations reducing their debt levels. Interest rate expenses as a percentage of sales have increased from 1.44% in 1977 to 3.47% in 1996.

  Correct Answer: B

  Interest rate expenses had increased up to 1989, rising from 1.44% of sales in 1977 to 3.47% in 1989. That increase was especially pronounced during the 1980s, when firms increased their debt financing and financial risk. That trend started reversing during the 1989-1990 recession because of an interest rate decline, and because of corporations reducing their debt levels. Interest rate expenses are generally fixed, and have therefore varied considerably as a percentage of sales, which are quite volatile.

• Question 196:

  Given a required rate of return of 10%, what is the present value of the coupon payments on a 10-year bond with coupon payments of $100 every six months (for a total of 20 payments)?

  A. $2353.95

  B. $1054.48

  C. Not enough information

  D. $1868.27

  E. $1246.22

  Correct Answer: E

  The value of the coupon payments can be thought of as the value of an annuity for 20 periods with a rate of return of 5% (half of 10%) for each period. Using appendix C in the book by Reilly and Brown, the present value is equal to $100 x 12.4622 = $1,246.22.

• Question 197:

  Consider the following transactional information for the investment account of an underwriting syndicate:

  1st Quarter Ending portfolio value: $50,800,000 Total amount invested: $46,100,000

  2nd Quarter Ending portfolio value: $51,100,000 Total amount invested: $50,800,000

  3rd Quarter Ending portfolio value: $51,000,000 Total amount invested: $51,100,000

  4th Quarter Ending portfolio value: $54,500,000 Total amount invested: $50,000,000

  Using this information, what is the annual time-weighted rate of return for this portfolio? Assume no taxes or transaction charges.

  A. None of these answers is correct.

  B. 20.59% per year

  C. 19.59% per year

  D. 22.14% per year

  E. 18.55% per year

  F. The time-weighted rate of return cannot be calculated from the information provided.

  Correct Answer: B

  The time-weighted rate of return is the preferred method of return calculation in the investment

  management industry, primarily because this method is not sensitive to significant additions and

  withdrawals of funds from portfolios under examination. The calculation of the time-weighted rate of return

  involves three steps, which are illustrated as follows:

  Step 1:

  Price the portfolio immediately prior to any significant additions or withdrawals. Separate the portfolio into a

  series of subperiods based on the dates of cash inflows and outflows.

  Step 2:

  Calculate the holding period return for each subperiod.

  Step 3:

  Determine the annualized holding period return by linking or compounding the holding period return of

  each subperiod. If the investment is for more than one year, use the geometric mean of the annual returns

  as the time-weighted rate of return. If the investment is for less than one year, compound the subperiod

  returns to obtain an annualized measurement.

  To begin the process of determining the time-weighted rate of return, we would break the portfolio up into

  the subsequent series of cash flows. However, in this example, the cash flows are already aggregated for

  us and we can move on to the next step: determining the holding period return for each subperiod. This

  process is detailed as follows:

  Quarter 1 holding period return = [($50,800,000 ending value - $46,100,000 invested) / $46,100,000

  invested] = 10.19523%

  Quarter 2 holding period return = [($51,100,000 ending value - $50,800,000 invested) / $50,800,000

  invested] = 0.59055%

  Quarter 3 holding period return = [($51,000,000 ending value - $51,100,000 invested) / $51,100,000

  invested] = (0.1957%)

  Quarter 4 holding period return = [($54,500,000 ending value - $50,000,000 invested) / $50,000,000

  invested] = 9.00%

  Now that the holding period return for each subperiod has been determined, we must annualize the return

  measure by taking the product of all four quarterly returns. This process is illustrated below:

  [(1 + .10195) * (1 + .00591) * (1 - .00196) * (1 + .09) - 1] = .2059 or 20.59%

  When calculating the time-weighted rate of return, remember that the total amount invested is the relevant

  figure, not the beginning portfolio value. Notice that during the fourth quarter, the total amount invested

  does not equal the ending amount for the third quarter. This differential could be explained by numerous

  phenomena. Perhaps the difference is due to a cash withdrawal from the account. Maybe it was used to

  pay expenses or meet an outstanding margin call. What is important to note is the fact that this money was

  not invested, and should not be included in the holding period return for the fourth quarter. So said,

  whenever possible you should use the total amount invested rather than the beginning portfolio value in

  the calculation of the subperiod holding period return.

  If you chose 19.59%, remember that in the calculation of the time-weighted rate of return, it is the

  geometric mean that is used rather than the arithmetic mean.

• Question 198:

  This is the measure of the number of buyers versus sellers to indicate the institutional investor sentiment.

  A. Block Uptick-Downtick Ratio

  B. Mutual Fund Cash Positions

  C. Margin Debt

  D. Short Sales by Specialists

  Correct Answer: A

  If a block trade (institutional trading) price is higher than prior transaction price, this is called uptick, if otherwise then downtick: the development of block uptick (buyers) downtick (sellers) ratio indicates investors' sentiment. A ratio bigger than one indicatesmore buyers, i.e. bullish sentiment.

• Question 199:

  The rate of inflation

  A. has been found to vary inversely with the aggregate profit margin.

  B. has been found to vary positively with the aggregate profit margin.

  C. has an unresolved affect on aggregate profit margin.

  D. has been found not to affect aggregate profit margin.

  Correct Answer: C

  Finkel and Tuttle found that the capacity utilization rate, unit labor costs, rate of inflation, and foreign competition were the four major variables that affected the aggregate profit margin. They postulated that the rate of inflation was positively related to profit, while others have postulated the opposite.

• Question 200:

  A portfolio manager with Churn Brothers Brokerage is trying to determine whether shares of Mile High

  Airlines are fairly valued. In his analysis, the portfolio manager is using the two-stage dividend discount

  model, and has ascertained the following information:

  Mile High Airlines is expected to grow at a rate of 20% per year for the next four years.

  At t5, Mile High Airlines is anticipated to return to its long-term growth rate of 10% per year. D0 = $0.44

  r = 15.75% per year

  Common shares outstanding = 1,500,000

  Given this information, what is the value of Mile High Airlines? Use the two-stage dividend discount model.

  A. $20.77

  B. The answer cannot completely be calculated from the information provided.

  C. None of these answers is correct.

  D. $16.91

  E. $11.65

  F. $21.23

  Correct Answer: E

  The multi-stage dividend discount model is a more realistic way of valuing fast-growing companies that pay dividends. With this model, it is necessary to estimate the above average, or "supernormal," rate of growth, as well as the long-term rate of growth. Once these growth rates have been determined, they are used to calculate the anticipated annual dividends leading up to the point at which the growth rate decelerates to the long-run rate of growth.

  Incorporating the given information into the two-stage dividend discount model will yield the following

  P = {[$0.44 * 1.20) / 1.1575] + [($0.528 * 1.20 / 1.33981] + [($0.6336 * 1.20) / 1.55083] + [($0.76032 * 1.20) / 1.79508] + [($0.91238 * 1.10) / (.1575 - .1)]/1.55083} which can further be developed into:

  P = {$0.45616 + $0.4729 + $0.49027 + $0.50827 + $9.72} = $11.65 As you can see, the number of common shares outstanding was not necessary in this instance, and was provided largely as a distraction. However, in some cases knowing the number of common shares outstanding will be necessary in order to convert a company's dividends paid to a per-share basis.