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

• Question 61:

  This measure of value-added is closely related to the NPV technique. The annual performance of management is evaluated by comparing the firm's net operating profit less adjusted taxes to the firm's total cost of capital in dollar terms, including the cost of equity. It is known as:

  A. None of these answers

  B. All of these answers

  C. Economic value-added

  D. Market value-added

  E. The Franchise Factor

  Correct Answer: C

  In economic value-added (EVA) analysis, if the firm's net operating profit less adjusted taxes (NOPLAT) during a specific year exceeds its dollar cost of capital, it has a positive EVA for the year and has added value for its stockholders. If the EVA is negative, the firm has not earned enough during the year to cover its cost of capital and the value of the firm has declined.

• Question 62:

  The breadth of the market indicates:

  A. The traded volume by sectors.

  B. The total number of issues traded.

  C. The number of advances versus declines in a day.

  D. The range of instruments traded in the market.

  Correct Answer: C

  The "breadth" of the market is used to refer to the amount of activity spread across all the instruments traded (as against the activity being concentrated on a few stocks or instruments). One measure of this breadth is given by the number of price increases and decreases over the previous day. The difference between the two not only serves as a partial explanation of the change in market direction but also indicates whether a rise or fall in the market is pervasive or influenced by a concentrated group of traded securities.

• Question 63:

  Unit labor cost varies

  A. positively with aggregate profit margin.

  B. logarithmically with aggregate profit margin.

  C. inversely with aggregate profit margin.

  D. convexly with aggregate profit margin.

  Correct Answer: A

  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. Unit labor cost is most often the major variable cost for a firm. If it increases (holding sales revenues constant), one would expect the profit margin to decline.

• Question 64:

  Which of the following is/are true about mutual funds?

  I. Mutual funds have significant market timing abilities.

  II. Mutual funds show a clear persistence of performance.

  III.

  Mutual funds can be used as instant diversification vehicles.

  A.

  II only

  B.

  III only

  C.

  I only

  D.

  II and III

  E.

  I, II and III

  Correct Answer: B

  Empirical evidence convincingly shows that mutual funds do not have a consistent ability to time the market downturns. Further, based on most empirical research, it is unlikely that mutual funds can consistently produce superior results, though evidence exists that consistency was achieved over some historical periods.

• Question 65:

  ________ techniques estimate future market values by applying basic valuation models to equity markets.

  A. Micro

  B. Technical

  C. Fundamental

  D. Macro

  Correct Answer: A

  The prefix 'micro' suggests that such techniques uses formulaic or hypothetical models to predict future market values rather than judging by broad-based economic indicators.

• Question 66:

  A stock price approaching its resistance level should

  A. trade at low volume.

  B. trade at high volume.

  C. soon rebound from its decline.

  D. be speeded along in its increase.

  Correct Answer: B

  The resistance level is the price range at which technicians expect a substantial increase in the supply of a stock. Technicians believe that after a stock has fallen from some previous higher price level, investors who bought at that higher level will wait for the price to come back up again to unload the stock at their break-even level. The stock must thus approach its resistance level from below, and once it reaches it, the extra selling will result in high volume.

• Question 67:

  Which of the following is a component of the risk premium?

  I. Business risk

  II. Financial risk

  III. Liquidity risk

  IV.

  Exchange rate risk

  V.

  Country risk

  A.

  III and V

  B.

  II and IV

  C.

  I, II, III, IV and V

  D.

  I, II, III and IV

  E.

  III and IV

  F.

  IV and V

  G.

  I and II

  Correct Answer: C

  The risk premium is comprised of each of these components which are influenced by differences in the general economic and political environment as well differences in trade relations and operating leverage employed within a country. After each of these components is analyzed, a unique risk premium may be assigned to a country.

• Question 68:

  An increase in the required rate of return will have what effect on the earnings multipliers of common stocks? Further, what effect could be expected from an increase in the dividend payout ratio?

  A. Earnings multipliers will decrease; earnings multipliers will increase

  B. Earnings multipliers will increase; earnings multipliers will decrease

  C. Earnings multipliers will remain unchanged; earnings multipliers will increase

  D. Earnings multipliers will increase; earnings multipliers will increase

  E. Earnings multipliers will decrease; earnings multipliers will decrease

  Correct Answer: A

  A simple method of determining the appropriate earnings multiplier for a common stock can be found by manipulating the Infinite Period Dividend Discount Model such that it resembles the following:

  P/E = [(d1/e1) / (k - g)]

  Where: P/E = the earnings multiplier expressed as the Price-to-Earnings Ratio, d1/e1 = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated annual growth rate.

  As you can see, an increase in the required rate of return, holding everything else equal, will lead to a decrease in the earnings multiplier. Opposite this effect, an increase in the dividend payout ratio will lead to an increase in earnings multipliers.

• Question 69:

  Technical analysts do not expect ________ to be as abrupt as do fundamental analysts.

  A. income adjustments

  B. none of these answers

  C. return adjustments

  D. price adjustments

  Correct Answer: D

  Technicians do not expect the price adjustment to be as abrupt as fundamental analysts and efficient market supporters do, but expect a gradual adjustment to reflect the gradual flow of information.

• Question 70:

  The nominal risk-free rate of return is equal to

  A. the federal funds rate + last period's rate of inflation.

  B. (1 + the real risk-free rate of return) x (1 + the expected rate of inflation) - 1.

  C. (1 + the real risk-free rate of return) x (1 + the federal funds rate) - 1.

  D. the real risk-free rate of return + the expected rate of inflation.

  Correct Answer: B

  The nominal risk-free rate of return is simply the real risk-free rate adjusted for inflation. The real risk-free rate is the absolute minimum rate that any investor would require.