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

• Question 781:

  Low-load open-end funds

  A. never charge sales or redemption fees.

  B. never charge sales fees.

  C. charge sales fees of about 0.5 to 1% of NAV.

  D. charge sales fees of about 3% of NAV.

  E. charge sales fees of about 5 to 6% of NAV

  Correct Answer: D

  Low-load open-end funds typically charge front-end sales fees in the 3% range (rather than 7 to 8%) when the fund is bought. These funds typically are used for bond funds or equity funds offered by management companies that also offer no- load funds.

• Question 782:

  Most mutual funds compared to the (Dow Jones Industrial Average) DJIA _______.

  A. are less risky

  B. achieved lower net returns

  C. show similar returns

  D. achieved greater net returns

  Correct Answer: B

  Most mutual funds compared to the (Dow Jones Industrial Average) DJIA achieved lower net returns, after deducting operating expenses.

• Question 783:

  Which of the following is categorized under speculative property and not income property?

  A. Land

  B. Office buildings

  C. Factories

  D. Single family properties

  E. Multi-family properties

  F. Warehouses

  Correct Answer: A

  Income property includes single and multi-family properties, office buildings, factories, and warehouses. Speculative property includes raw land.

• Question 784:

  Which type of investment company may charge a redemption fee?

  A. none of these answers

  B. both of these answers

  C. open-end investment company

  D. closed-end investment company

  Correct Answer: C

  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 785:

  Money market funds

  A. are typically load funds.

  B. attempt to provide significant capital gains.

  C. tend to be illiquid.

  D. invest in short-term securities.

  E. tend to impose a penalty for early withdrawal.

  Correct Answer: D

  Money market funds attempt to provide current income, liquidity, and principal safety though investing in short-term securities such as T-bills, banker certificates of deposits, and commercial paper. They generally allow holders to write checks against their accounts.

• Question 786:

  The variability among venture capital investments is exhibited by the fact that

  A. approximately 75 percent of investments lose money.

  B. about 50 percent of all gains come from about 7 percent of the investments.

  C. about 75 percent of all gains come from about 5 percent of the investments.

  D. about one-third of the investments are responsible for half of all gains.

  Correct Answer: B

  The returns of venture capital are not uniformly realized across investments, i.e., about 1 in 15 investments is responsible for half of all gains. Approximately one-third of investments lose money.

• Question 787:

  Open-end funds

  A. have shares that trade on secondary exchanges.

  B. never charge redemption fees for share redemptions.

  C. sometimes charge sales fees for share sales.

  D. never charge sales fees for share sales.

  Correct Answer: C

  Open-end funds (also known as mutual funds) continue to sell and repurchase shares at their NAVs after their initial public offerings. Some funds (load funds) charge a sales fee for share sales that is typically 7.5 to 8% of the NAV. Load funds generally do not charge a redemption fee, but some noload funds do charge a small one of about half a percent of NAV.

• Question 788:

  While studying abroad, United States citizen David Rees purchases a foreign bond with an annual coupon

  of 8.0 percent for 94.0. He holds the bond for one year and then sells it for 93.0 before he leaves. During

  the year, foreign currency appreciated 5.0% relative to the U.S. dollar.

  Which of the following is closest to Rees's Total Dollar Return?

  A. 2.074%.

  B. 7.447%.

  C. 3.883%.

  D. 12.819%.

  Correct Answer: D

  TheTotal Dollar Returnis calculated as follows:Step 1: Calculate the value change in the foreign currency:The foreign currencyappreciatedby 0.05, or 5.0%.

  Step 2: Use the Total Dollar return formula to calculate the return:

  R$= { [ 1+($coupon + VEND- VBEG)/ VBEG] * (1 + g) } - 1,

  WhereR$=Total dollar return,VEND= Bond value at end of period,VBEG =Bond value at end of period,

  andg= % change in thedollarvalue of the foreign currency.

  Here,R$= { [ 1+(8.0 + 93.0 ?94.0)/94.0 ] * (1 + 0.05) } - 1

  = { [1.074468 ] * (1.05) } - 1

  = 0.12819, or12.819%

• Question 789:

  Which of the following statements about Beta is TRUE?

  A. In the characteristic line, the termEResidualsequals the portion of the asset's returns that are correlated to the market portfolio's returns.

  B. The calculation of Beta assumes that future variability will equal past variability.

  C. Beta <1, ERstock>ERmarket.

  D. Beta and standard deviation differ as risk measures in that beta measures only systematic risk, whereas standard deviation measures only unsystematic risk.

  Correct Answer: B

  Standard deviation measures total risk. When Beta < 1, ERstock< ERmarket. The characteristic line is the equation for Beta. The error term, EResiduals, equals the portion of the asset's returns that areuncorrelatedto the market portfolio's returns, or unsystematic risk. This error term has an expected value of 0 and the standard deviation is called the residual standard error.

• Question 790:

  Jeret Behr is a member of a Level 1 CFA Study Group. Last week, he was assigned the reading on asset pricing models and is to prepare a "tough" question on the capital market line (CML). He constructs the following graphical representation of the CML and drafts the following four statements about the graph. The letters W, X Y, and Z represent risky portfolios. Portfolio M is the market portfolio. The linesRfXandRfYrepresent the combination of the risk-free asset and the risky portfolio.

  Which of the following statements about the above graph did Behr make TRUE?

  A. Investors are not compensated for the risk represented by the area to the left of point S.

  B. The correct label for the x-axis is beta risk.

  C. Portfolio Z was created by borrowing at the risk free rate.

  D. Portfolio Y is inefficient.

  Correct Answer: D

  This selection is true (or not false). By definition, all portfolios below the CML are inefficient in that they do not give enough return for their risk. Investors could do better by combining the risk-free asset with the portfolio. The area to the left of point S represents systematic or undiversifiable risk. Investors are compensated for this risk. The correct label for the x-axis is total risk, or standard deviation. The CML plots total risk (systematic plus unsystematic risk) versus expected return; the security market line (SML) plots beta (or systematic risk) versus expected return. Portfolio Z is created by lending at the risk-free rate and holding less than 100% of Portfolio M. Investors in portfolios to the left of the market portfolio, M, are invested in less than 100% of M.