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

• Question 771:

  Studies have found that mutual fund managers tend to have

  A. great market timing ability.

  B. ignored the potential of market timing.

  C. moderate market timing ability.

  D. little market timing ability.

  Correct Answer: D

  Most studies in this area have found that funds could not consistently generate superior returns through attempts at market timing. In fact, many have found that mutual funds cannot outperform passive investment strategies.

• Question 772:

  The primary mechanism for motivating venture capitalists is

  A. allowing a high ownership stake in the venture.

  B. permitting certain types of self-dealing.

  C. to have finite life funds.

  D. the carried interest paid to them.

  Correct Answer: D

  Carried interest is calculated over and above some assumed base level of return to investors and the amount paid is usually approximately 20 percent of the portfolio gains.

• Question 773:

  The per-share value of an investment company is called ________.

  A. the net share price

  B. the net start-up cost

  C. the net asset value

  D. the net unit portfolio investment

  Correct Answer: C

  The per-share value of an investment company is called the Net Asset Value or NAV.

• Question 774:

  ________ financing is used to restructure a financially troubled company.

  A. None of these answers

  B. Leveraged-buyout

  C. Bridge

  D. Management-buyout

  E. Turnaround

  Correct Answer: E

  Turnaround financing is capital is used to restructure a troubled company that is at a more established stage of development.

• Question 775:

  The venture capital industry now funds investments such as

  A. companies seeking leveraged buyouts.

  B. none of these answers.

  C. hedged funds.

  D. companies in the mature stage of their life cycle.

  E. all of these answers are correct.

  F. companies emerging from bankruptcy.

  Correct Answer: ADF

  Recently, the venture capital industry has begun to cover a broader range of investments including funding for:

  1.

  Established businesses that are in the process of expanding, just prior to the IPO stage.

  2.

  Companies in "turnaround" situations.

  3.

  Management seeking LBOs, also referred to MBOs of their companies.

• Question 776:

  ________ financing is an example of expansion financing.

  A. Turnaround

  B. Leveraged-buyout

  C. Third-stage

  D. First-stage

  E. Start-up

  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 777:

  Name the type of fee charged by a fund when it is sold if is held for less than a specified time period?

  A. 12b-1

  B. no-load

  C. deferred sales load

  D. management fees

  E. commissions

  F. low-load

  Correct Answer: C

  Also known as back-end charges when the fund is sold as opposed to front-end charges when the fund is purchased.

• Question 778:

  ________ permits funds to deduct as much as 1.25 percent of average net assets per year to cover distribution costs.

  A. The 12b-1 Act

  B. Rule 144a

  C. The New Funds plan

  D. The 12b-1 plan

  Correct Answer: D

  The 12b-1 plan permits funds to deduct as much as 1.25 percent of average net assets per year to cover distribution costs.

• Question 779:

  What is not a characteristic of an investment company?

  A. per share value is the NAV

  B. invests in a pool of funds

  C. investment management company is voted and approved by the individual investors

  D. can be classified as closed-end or open-end

  E. an investment management company is hired by a board of directors

  Correct Answer: C

  An investment advisory firm starts an investment company and selects a board of directors for the fund. Subsequently this board of directors hires the investment advisory firm as the fund's portfolio manager.

• Question 780:

  The majority of empirical evidence indicates that

  A. the gross returns on mutual funds tend to as good as or slightly better than those on buy-and-hold strategies, while the net returns on mutual funds tend to be slightly lower than those on buy-and-hold strategies.

  B. the gross returns on mutual funds tend to as good as or slightly worse than those on buy-and-hold strategies, while the net returns on mutual funds tend to be significantly lower than those on buy-andhold strategies.

  C. the gross returns on mutual funds tend to be significantly better than those on buy-and-hold strategies, while the net returns on mutual funds tend to be about equal to those on buy-and-hold strategies.

  D. the gross and net returns on mutual funds tend to be significantly higher than those on buy-and-hold strategies.

  E. the gross and net returns on mutual funds tend to be significantly lower than those on buy-and-hold strategies.

  Correct Answer: E

  Net returns (which take account for research and trading costs) have been about 1% lower on mutual funds than on buy-and-hold strategies. Because of these studies, index funds have grown in popularity. Because index funds only imitate a broad market index, they have no research costs and minimal trading expenses.