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

• Question 661:

  Market index funds A. attempt to diversify out of securities.

  B. have management costs similar to those of regular mutual funds.

  C. attempt to outperform the market.

  D. None of these answers.

  E. have very high correlations with market indexes.

  Correct Answer: E

  Market index funds are closely matched in composition to specified market indexes such as the SandP 500. For this reason, a market index fund typically has correlation rates in excess of 0.99 with its chosen index. Because it only attempts to replicate the index, its management costs are very low.

• Question 662:

  Given the following:

  Return on Investor's Equity with 80% Financing = 50%

  Return on Investor's Equity with 0% Financing = 10%

  The investor is experiencing the effects of ________.

  A. negative leverage

  B. none of these answers

  C. cannot be determined by the information given

  D. positive leverage

  Correct Answer: D

  Remember that, in real estate, the use of debt financing to purchase a piece of property will affect its risk-return parameters. In this case, leverage has a positive effect.

• Question 663:

  According to the framework for real estate analysis, one determinant of value is demand. Which of following is not a subset of "demand"?

  A. Economic base

  B. Target market potential

  C. Mortgage financing conditions

  D. Sources of competition

  E. Tenant preferences

  F. None of these answers

  Correct Answer: D

  Sources of competition, along with market structure and inventorying competitors are SUPPLY determinants of value.

• Question 664:

  What is not a characteristic of a closed-end investment company?

  A. its stock trades on the regular secondary market

  B. the NAV is computed twice daily

  C. NAV is based on current market prices

  D. the NAV and market price are usually the same

  E. its market price is determined by supply and demand

  Correct Answer: D

  The market price is determined by the relative supply and demand for the investment company stock in the public secondary market. When trading these shares an investor will pay or receive this market price plus or minus a commission. The market price has historically been 5 to 20 percent below the NAV.

• Question 665:

  Which is not a true statement concerning the empirical evidence of mutual fund performance?

  A. sub-par performance is associated with low expense ratios

  B. managers can forecast large changes in the market

  C. all of these answers are false

  D. most fund managers achieved gross returns lower than the DJIA

  E. risk is not consistent with fund objectives

  F. all of these answers are true

  Correct Answer: C

  All of these are false. The opposite is true in all answers.

• Question 666:

  The direct capitalization approach equals: Market Value = Annual NOI / ________

  A. Market Capitalization Rate

  B. Market Discount Rate

  C. None of these answers

  D. Subject Property Capitalization Rate

  E. Subject Property Discount Rate

  Correct Answer: A

  The direct capitalization approach =

  Market Value = Annual NOI / Market Capitalization Rate

• Question 667:

  If an investment company originally issued 0.5 million shares for $30, then issued a further 0.1 million shares for $40, and its portfolio of investments now has a market value of $27 million and a book value of $19 million, what is its net asset value (NAV)?

  A. Not enough information

  B. $31.67

  C. $27 million

  D. $45

  E. $19 million

  Correct Answer: D

  An investment company sells shares in itself, and uses the proceeds to invest in a portfolio of individual investments such as stocks and bonds. The NAV is equal to the net value of the investment company's assets divided by the number of its shares outstanding. In this question the NAV is equal to $27 million / (500,000 + 100,000) = $45.

• Question 668:

  Load open-end funds charge

  A. sales fees of about 7.5 to 8% of NAV.

  B. sales and redemption fees of about 1 to 2% of NAV.

  C. sales and redemption fees of about 7.5 to 8% of NAV.

  D. sales fees of about 10 to 15% of NAV.

  E. sales fees of about 1 to 2% of NAV.

  Correct Answer: A

  Load funds charge a sales fee for share sales that is typically 7.5 to 8% of the NAV. Share prices are quoted with a NAV and an offering price. Load funds generally do not charge a redemption fee, but some no-load funds do charge a small one of about half a percent of NAV.

• Question 669:

  ________ is a position in which, if a property's return below its debt cost, the investor's return will be less than from an all-cash real estate deal.

  A. Negative leverage

  B. Positive leverage

  C. Excess financing

  D. None of these answers

  Correct Answer: A

  Remember that, in real estate, the use of debt financing to purchase a piece of property will affect its risk-return parameters.

• Question 670:

  Investment companies tend to be

  A. corporations that are managed by separate investment management companies. About 20% of funds, however, are managed by the internal management, rather than by outside companies.

  B. corporations that are self-managed. About 30% of funds, however, are managed by separate investment management companies that are chosen by their board of directors based on previous management experience.

  C. corporations that are managed by separate investment management companies. The board of directors of an investment company typically choose an investment management company to manage the fund. That company is very often the owner of the investment company.

  D. corporations that are managed by separate investment management companies. The board of directors of an investment company typically choose an independent investment management company to manage the fund.

  Correct Answer: C

  Investment management companies are corporations that are managed by investment management companies that tend to be their owners. A typical scenario would involve an investment management company forming an investment company, and the board of directors of that investment company proceeding to hire the parent investment management company to manage the new firm.