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

• Question 391:

  If the 50-day moving average line is above the 200-day moving average line but not by a large amount, technical analysts would consider this ________.

  A. a bearish indicator

  B. an under-bought market

  C. a bullish indicator

  D. a trend reversal

  Correct Answer: C

  Since a 50-day average reflects more recent events than the 200-day average, its rise above the 200-day average is interpreted as a bullish signal. However, if the gap gets too large, then the technician might consider the stock to be over- bought and infer that the stock price is about to fall.

• Question 392:

  Which of the following firms would likely have the lowest dividend payout ratio? Further, the capital structure of this firm would likely be weighted more heavily with debt or equity? Choose the best answer.

  A. A fledgling biotechnology company; equity

  B. A nationwide grocery chain; debt

  C. A healthcare company specializing in home care; debt

  D. A specialty retailer; equity

  E. A large computer manufacturer; debt

  Correct Answer: A

  Of the firms listed, the biotechnology company would be expected to have the lowest dividend payout ratio. The nascent biotechnology industry is characterized by a high degree of investment in research and development, along with a high growth rate and high level of uncertainty. All of these factors are conducive to a high retention rate, i.e. a low dividend payout ratio.

  Further, firms within industries associated with high growth rates and high levels of uncertainty are likely to be financed primarily with equity. This is reasoned by several factors, some of which include the following:

  Firms in new industries typically have a balance sheet weighted heavily toward intangible assets, which can neither be easily liquidated nor pledged as collateral for a loan. Firms in new industries are characterized by a high degree of research and development expenses. Equity provides firms with a higher degree of agility than debt financing. The cash flows of firms in developing industries are characterized by a high degree of uncertainty.

• Question 393:

  Which of the following is/are true about open-ended funds?

  I. Shares of the fund trade on an exchange.

  II. Shares of the fund can be redeemed at NAV, with or without redemption fees.

  III.

  It issues shares as and when demanded by investors bringing in additional funds.

  A.

  II only

  B.

  I and II

  C.

  I and III

  D.

  II and III

  E.

  III only

  F.

  I only

  G.

  I, II and III

  Correct Answer: D

  Open ended funds are mutual funds which buy and sell shares as and when demanded by investors. These funds may or may not have sales and redemption charges.

• Question 394:

  Which of the following must be estimated to determine the value of a stock that is to be held for one year?

  A. all of these answers

  B. required rate of return

  C. dividends

  D. expected sale price

  Correct Answer: A

  In order to determine the value of a stock that is to be held for one year, dividends, the required rate of return and the expected sale price must be estimated.

• Question 395:

  Assuming that the inflation rate and risk-free rate of interest are relatively high, which of the following correctly illustrates the calculation of the nominal risk-free rate?

  A. Nominal RFR = (1+ RFR)(1 + inflation premium) - 1

  B. Nominal RFR = (1 + RFR)(1 + inflation premium)

  C. Nominal RFR = RFR + E(I)

  D. None of these answers is correct.

  E. Nominal RFR = Real RFR * (1 + k)

  F. Nominal RFR = Real RFR * E(I)

  Correct Answer: A

  When either the real "inflation-free" interest rate or the expected inflation rate are significantly large, the calculation of the nominal risk-free rate differs from the equation used when these factors are significantly small. Specifically, the calculation of the nominal risk-free rate of interest when the inflation-free rate of interest and/or the inflation premium are significantly high is as follows:

  Nominal RFR = (1 + Real RFR)(1 + E(I)) - 1

  Where: Real RFR = the real inflation-free rate of interest and E(I) = the anticipated inflation rate.

  When the inflation-free rate of interest and/or the inflation premium are low, then the equation above can be approximated by the following:

  Nominal RFR = Real RFR + Inflation premium.

• Question 396:

  Which of the following is/are true?

  I. Proponents of efficient markets believe that new information is impounded correctly and gradually in stock prices.

  II. Technical analysts believe that new information spreads through the market rapidly and gets reflected in the prices, thus moving the markets.

  III.

  Fundamental analysts believe that stock prices are determined by supply and demand in the security markets.

  A.

  I and III

  B.

  II only

  C.

  III only

  D.

  I only

  Correct Answer: C

  Technicians believe that new information seeps into prices only gradually whereas efficient market theorists believe that this adjustment is extremely rapid; too rapid to allow consistent and systematic exploitation of particular kinds of information like dividend changes.

  As in any other market, prices in security markets are determined by supply and demand; this is not in dispute between technicians and non-technicians. What is in dispute is the source and nature of demand for securities; technicians believe that demand adjusts slowly to new information while non-technicians consider the process to be almost instantaneous.

• Question 397:

  The value of an asset is

  A. the present value of its expected future cash flows.

  B. the sum of its expected future cash flows.

  C. its replacement cost.

  D. its book value.

  Correct Answer: A

  One expects an asset to provide a stream of future cash flows during its lifetime. Future returns are worth less than current ones. One adjusts for this by taking the present value of all its expected cash flows.

• Question 398:

  Given that the real risk-free rate is 5%, the rate of inflation is 7%, and the growth in money supply is 9%, what is the exact nominal risk-free rate?

  A. 14.5%

  B. 14%

  C. 12%

  D. Not enough information.

  E. 12.4%

  Correct Answer: E

  The nominal risk-free rate is equal to (1 + RFR) x (1 + I) - I, where RFR is the real risk-free rate and I is the inflation rate. In this question, the nominal risk-free rate is (1.05) x (1.07) - 1 = 0.124 = 12.4%.

• Question 399:

  A stock paid a $10 per share dividend this year. Dividends are expected to grow at 5% per year, forever. What is the value of the stock if the appropriate discount rate is 9% per year?

  A. Not able to compute with the above data.

  B. $10.23

  C. $26.30

  D. $262.50

  Correct Answer: D

  Value = $10.5/(0.09-0.05)=$262.50.

• Question 400:

  An investor had purchased 66 shares of firm X on January 1, at a price of $236 per share. On May 16th, the stock underwent a 2-for-1 split. On December 31, the stock price stood at $156. If the investor realized a return of 35% during the year, his total dividend income during the year was:

  A. $435.60

  B. $250.80

  C. $501.60

  D. $156.00

  Correct Answer: A

  If the stock had not undergone the split, the year-end price would be 156 * 2 = $312, assuming no informational effects conveyed by the split. The per share income on each stock has been given to be 236

  * 0.35 = $82.60. Of this, $(312-236) = $76 is in capital gains. Thus, dividend income per share equals $(82.6-76) = $6.6. Since the investor held 66 of the original shares, his dividend income equals $6.6 * 66 = $435.6.