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

• Question 761:

  What stage of venture capital investments has provided the highest mean return?

  A. later

  B. seed

  C. balance

  D. early

  E. later and balance are identical

  Correct Answer: A

  The later stage has provided a 17.7% mean return from 1981-1996, followed by the early stage (16.0%), balance stage (13.7%), and seed stage (8.3%).

  Exam Q

• Question 762:

  ________ financing is capital provided for a company that expects to go public within a year or so.

  A. Third-stage

  B. Second-stage

  C. Mezzanine

  D. First-stage

  E. Leveraged-buyout

  Correct Answer: C

  There are three stages of "expansion financing":

  1.

  Second-stage financing. This capital is used for initial expansion of a company that has already been selling a product.

  2.

  Third-stage financing. Capital provided to fund major expansion.

  3.

  Mezzanine (bridge) financing. Capital provided for a company that expects to go public within a year or so.

• Question 763:

  Which best describes venture capital?

  A. Venture capital is typically a secondary form of financing, after bank financing.

  B. Venture capital is in the form of equity.

  C. Venture capital is short-term financing, usually at higher-than-market rates.

  D. Venture capital is financing for privately held companies, typically in the form of equity and/or longterm debt.

  E. Venture capital is equity and debt financing available to privately and publicly held companies.

  Correct Answer: D

  Venture capital becomes available when financing from banks and public debt or equity markets is either unavailable or inappropriate.

• Question 764:

  The ________ of an investment company depends on the company's portfolio of stocks.

  A. bond-rating

  B. liquidity of the shares

  C. none of these answers

  D. value of the shares

  Correct Answer: D

  Share value derives from future dividends and capital gains on each stock within the portfolio. The type, quality and relative quantity of stocks within a portfolio affects the value of the shares of the portfolio.Portfolio composition also affects liquidity and creditworthiness (i.e. bond rating) but much less significantly.

• Question 765:

  Which is a true statement concerning the empirical evidence of mutual fund performance?

  A. more aggressive funds did not outperform more conservative funds

  B. over 50 percent of the funds outperform the DJIA

  C. risk measures increase as fund objectives become more aggressive

  D. successful market forecasting was accomplished overall by fund managers

  E. none of these answers

  F. good performance is associated with high expense ratios

  Correct Answer: C

  There is a positive relationship between stated objectives and measure of risk, with risk measures increasing as objectives become more aggressive.

• Question 766:

  Venture capitalists expect to actually realize their returns

  A. up front, before the firm has any operating profit.

  B. spread out evenly over the length of the investment.

  C. only if the company becomes profitable on a consistent basis.

  D. only when they are able to cash out.

  E. during the first round of financing.

  Correct Answer: D

  The objective of the venture capitalist is to earn a 40%-60% annual return on an investment, net of inflation. Venture capitalists expect to actually realize their returns only when they are able to cash out, which hopefully is less than ten years, and preferably in three to seven.

• Question 767:

  Venture capital can create value to the firm by

  A. venture capitalists figuring out how to manage a firm in a poorly managed sector and then acquiring other firms in the same sector at low prices.

  B. providing current management with new and additional funding.

  C. paying a premium for the firm and then proceeding to sell the firm in "pieces."

  D. investing in additional company assets.

  Correct Answer: A

  The venture capitalist believes that the managements of these acquired firms can be improved by using the same techniques that were used for the first company. The values of the acquired firms will therefore increase because of the improvement in the management.

• Question 768:

  Which type of investment company may charge a load?

  A. both of these answers

  B. none of these answers

  C. closed-end investment company

  D. open-end investment company

  Correct Answer: D

  An open-end investment company (mutual fund) sells shares with or without a sales charge (load) and redeems shares with or without redemption fees.

• Question 769:

  The management fee of an investment management firm typically ranges from ________.

  A. one to two percent of the total value of the fund

  B. none of these answers

  C. one-quarter to one-half percent of the total value of the fund

  D. one-half to one percent of the total value of the fund

  Correct Answer: C

  The management fee of an investment management firm typically ranges from one-quarter to one-half percent of the total value of the fund, with a sliding scale as the size of the fund increases.

• Question 770:

  Which of these funds typically charge a sales fee when the fund is sold?

  I. Funds with contingent, deferred sales loads

  II. Funds under 12b-1 plans

  III. Low-load funds

  IV.

  No-load funds

  V.

  Closed-end funds

  A.

  II only

  B.

  I, II and V

  C.

  I and III

  D.

  I only

  E.

  I, II and III

  F.

  III only

  Correct Answer: D

  Funds with contingent, deferred sales load charges sales fee if the shares are sold before a certain duration, low-funds charge a small sales fee. Not all funds under the 12b-1 plan do necessary charge sales fee. Closed-end funds trade at a discount usually to the NAV.