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

• Question 641:

  A fund that invests exclusively in Russian securities would be

  A. a global fund. Like most international and global funds, this one would probably be a load open-end fund.

  B. a global fund. Like most international or global funds, this one would probably be a load open-end fund. There has, however, been a recent increase in the number of international funds that closed-end.

  C. an international fund. Like most single country and emerging market funds, this one would probably be a closed-end fund. Most international and global funds, however, are load open-end funds.

  D. an international fund. Like most international and global funds, this one would probably be a no-load open-end fund. There has, however, been a recent increase in the number of international funds that are closed-end.

  E. an international fund. Like most single country and emerging market funds, this one would probably be a closed-end fund. Most international and global funds, however, are no-load open-end funds.

  F. an international fund. Like most international and global funds, this one would probably be a load open-end fund. There has, however, been a recent increase in the number of international funds that are closed-end.

  G. a global fund. Like most international or global funds, this one would probably be a closed-end fund.

  Correct Answer: E

  Funds that invest in non-U.S. securities are referred to as foreign funds. Foreign funds can be divided into two categories: (1) international funds, which invest only in non-U.S. stocks, (2) and global funds, which invest in both U.S. and non- U.S. securities. Most global and international funds are no-load open-end funds, although there are still a significant number of closed-end funds. Closed-end funds have the advantage of not being subject to major investor liquidations that would require the sale of stocks on an illiquid foreign stock exchange.

• Question 642:

  ________ diversify outside the stock market by combining common stock with fixed-income securities, including government bonds, corporate bonds, convertible bonds, or preferred stock.

  A. Balanced funds

  B. None of these answers

  C. Fixed income funds

  D. Bond funds

  Correct Answer: A

  Balanced funds diversify outside the stock market by combining common stock with fixed-income securities.

• Question 643:

  Net asset value (NAV) of an investment company is equal to

  A. the net value of its assets.

  B. the net value of its assets divided by the number of its shares outstanding.

  C. the net value of its assets divided by the number of shares issued.

  D. the net value of its assets plus depreciation expense.

  E. the net value of its assets plus depreciation expense, divided by the number of shares outstanding.

  Correct Answer: B

  An investment company sells shares in itself, and uses the proceeds to invest in a portfolio of individual investments such as stocks and bonds. If such a company sold 1 million shares for $50 dollars each, it would invest $50 million (minus commissions) into things like government bonds or speculative stocks. If the value of this portfolio increased to $60 million, the NAV would increase to $60.

• Question 644:

  Compute the Net Asset Value given the following total portfolio:

  Stock A - 1000 shares - market value = $ 12,000 Stock B - 5000 shares - market value = $ 25,000 Stock C - 1000 shares - market value = $ 2,000

  A. 6.1667

  B. 6.5841

  C. 5.5714

  D. 5.3241

  E. 7.4456

  Correct Answer: C

  NAV equals the total market value of all assets divided by the number of fund shares outstanding. ($12,000 + $25,000 + $2,000) / (1000 + 5000 + 1000) = $5.5714

• Question 645:

  If 50 units are sold at $7,500 to buy a piece of property for $1,000,000, how much money will be coming from the partners?

  A. $625,000

  B. $1,000,000

  C. $375,000

  D. $7,500

  Correct Answer: C

  Partners will supply (50 x 7,500) = $375,000.

• Question 646:

  ________ attempt to match the composition of the market.

  A. Balanced funds

  B. Growth funds

  C. Composite funds

  D. Market index funds

  Correct Answer: D

  They are funds that attempt to match a benchmark index of the market.

• Question 647:

  Funds distributed by a sales force are

  A. less common than those distributed through direct marketing.

  B. typically no-load funds.

  C. typically load funds.

  D. rare.

  Correct Answer: C

  Most funds are either distributed by a sales force (such as Merrill Lynch brokers, commission-based financial planners, or dedicated sales forces) or by direct marketing, with those distributed by a sales force being the more common. Funds distributed by a sales force typically charge a sales fee in order to compensate the salespeople.

• Question 648:

  One of the major benefits of mutual funds is ________.

  A. all of these answers are major benefits

  B. that they provide instant diversification

  C. that they are easily bought and sold

  D. that they have predictable returns

  E. that they are low-risk

  Correct Answer: B

  One of the major benefits of mutual funds is that they provide instant diversification. They are not necessarily low-risk, as there are many aggressive, speculative funds. Not all funds have high liquidity.

• Question 649:

  Management fees for open-end mutual funds tend to be

  A. about 0.5 to 1.5% of NAV. The management fees tend to be larger for large funds than for small funds because of the quickly increasing bureaucratic costs associated with larger funds. This has encouraged the existence of thousands of small mutual funds.

  B. about 1 to 2% of net asset value (NAV). The management fees are on a sliding percentage scale that increases with the size of the fund.

  C. about 1 to 1.5% of NAV. The management fees tend to be larger for large funds than for small funds because of the quickly increasing bureaucratic costs associated with larger funds. This has encouraged the existence of thousands of small mutual funds.

  D. about 0.4 to 1.2% of NAV. The management fees tend to be smaller for large funds than for small funds because of the substantial economies of scale that exist in managing financial assets.

  E. about 0.25 to 1% of NAV. The management fees are on a sliding percentage scale that decline with the size of the fund.

  Correct Answer: E

  Most management fees decline with the size of a fund. For example, a fund with assets of $500 million might charge management fees of 1%, a fund with assets of $1 billion might charge 0.75%, and a fund with assets of $6 billion might charge 0.25%.

• Question 650:

  Managed investment companies are appealing alternatives to individual investing because:

  A. few individual investors outperform the aggregate market averages

  B. many investors are not well informed

  C. the risk-return ratio is higher in mutual funds

  D. they offer a risk-free rate of return

  Correct Answer: A

  Efficient market studies have indicated that few investors outperform the aggregate market averages. This makes Managed investment companies a good alternative to direct investment because most of these companies offer a wide range of investment possibilities with a range of risk and return characteristics.