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

• Question 691:

  ________ financing is one of the early stages of financing in venture capital.

  A. Mezzanine

  B. Asset-backed

  C. Turnaround

  D. Bridge

  E. none of these answers.

  F. Seed

  Correct Answer: F

  There are three early stages of financing:

  1.

  Seed financing. This is capital (typically less than $50,000) that is provided at the "idea" stage, which goes for product development and market research.

  2.

  Start-up financing. This capital is used in product development and initial marketing for firms in business under one year and has not sold their product commercially.

  3.

  First-stage financing. This is capital provided to initiate commercial manufacturing and sales.

• Question 692:

  The "family of funds" approach of investment companies ________.

  A. promotes flexibility for the investor

  B. improves the net risk-return exposure

  C. all of these answers

  D. discourages investors from switching from one fund to the other

  E. consistently outperforms the market

  Correct Answer: A

  The "family of funds" approach of investment companies promotes flexibility and increases the total capital managed by the investment firm. It allows investors to switch among funds as economic or personal conditions change.

• Question 693:

  If the discount relative to the NAV of a closed-end investment company ________ during the holding period, the investor will likely experience ________ excess returns.

  A. does not change; zero

  B. increases; positive

  C. declines; positive

  D. declines; negative

  Correct Answer: C

  It is intuitive that if the discount increases, the share price has decreased relative to the NAV and the investor loses because he had originally bought the shares at a higher price. The analysis of these discounts remains a major question in modern finance.

• Question 694:

  What is the major difference between venture capitalists and other types of portfolio managers?

  A. Venture capitalists only invest in start-up companies, while other types of portfolio managers do not.

  B. Portfolio managers do not become too involved with the companies they invest in, while venture capitalists do.

  C. Portfolio managers cannot exert control over a company in the way a venture capitalist can.

  D. There are no major differences between the two.

  E. Venture capitalists require a much higher rate of return over the life of the investment.

  Correct Answer: B

  The major difference between venture capitalists and other types of portfolio managers is that portfolio managers do not become too involved with the companies they invest in because they may have to liquidate positions quickly. This is the direct opposite of venture capitalists who must establish more personal relationships with the entrepreneurs in whom they invested over much longer time periods.

• Question 695:

  The management of the portfolio of securities held by an investment company is usually handled by ________.

  A. the board of directors

  B. the CEO or the CFO

  C. a separate investment management company

  D. a group of elected shareholders

  Correct Answer: C

  The management of the portfolio of securities held by an investment company is usually handled by a separate investment management company which is hired by the board of directors.

• Question 696:

  Which of the following statements is true?

  A. One-half of all mutual funds are 95% or more diversified, providing one of their most important benefits. Studies have also found that most mutual funds have maintained the stability of their correlation with the market, and of their risk- adjusted returns.

  B. Three-quarters of all mutual funds are 90% or more diversified, providing one of their most important benefits. Studies also have found that most mutual funds have maintained the stability of their correlation with the market, and of their risk class.

  C. Three-quarters of all mutual funds are 95% or more diversified, providing one of their most important benefits. Studies also have found that most mutual funds have maintained the stability of their correlation with the market, but not of their risk class.

  D. Three-quarters of all mutual funds are 80% or more diversified, providing one of their most important benefits. But studies also have found that most mutual funds have not maintained the stability of their correlation with the market, or of their risk class.

  Correct Answer: B

  Diversification is one of the main benefits of mutual funds. Most funds are highly diversified, and tend to keep their level of diversification with the market. They also tend to maintain the same risk class, if not consistent risk-adjusted returns.

• Question 697:

  Mutual funds have

  A. sometimes maintained the stability of their correlation with the market.

  B. generally maintained the stability of their correlation with the market.

  C. rarely maintained the stability of their correlation with the market.

  D. tended to decrease their level of diversification over time.

  Correct Answer: B

  Mutual fund managers rarely change the makeup of reasonably well diversified portfolios substantially. Studies have also found that funds tend to remain consistent in their risk class. This consistency allows investors to maintain their diversification and desired risk class.

• Question 698:

  Which is a most correct statement concerning companies that receive venture capital?

  A. The company has little control over its own future.

  B. The success rate is about the same for companies that receive venture capital funding and for those that do not.

  C. None of these statements are correct.

  D. The success rate is much higher for companies that do not receive funding because entrepreneurs do not have to deal with undue control of venture capitalists.

  E. These companies are much more likely to succeed than companies that do not receive such funding.

  Correct Answer: E

  Companies that receive venture capital are far more likely to succeed than companies that do not receive such funding. Studies show that there is only a 10% to 20% failure rate for investments in a venture capitalist's portfolio, as compared to a 10%-20% success rate for all new companies.

• Question 699:

  The NAV of an investment company equals the ________ of all its assets ________ the number of fund shares outstanding.

  A. total market value; multiplied by

  B. total market value; divided by

  C. the per-share value; divided by

  D. the per-share value; multiplied by

  Correct Answer: B

  Net Asset Value (NAV) = (Total market value of all assets/Number of outstanding fund shares)

• Question 700:

  In valuing real estate, the most popular income approach is called ________.

  A. retrospective value

  B. the cost approach

  C. none of these answers

  D. direct capitalization

  E. the comparative sales approach

  F. depreciation method

  Correct Answer: D

  The direct capitalization approach =

  Market Value = Annual NOI / Market Capitalization Rate