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

• Question 831:

  The correlation between the capital market returns of Germany and Japan depend on all the following factors EXCEPT:

  A. international trading patterns.

  B. economic growth rate.

  C. fiscal and monetary policy.

  D. geographical separation.

  Correct Answer: D

  Geographical separation has not been identified as a factor that affects correlations. The other three choices impact the capital market returns and correlations of the respective countries.

• Question 832:

  Dhana Urbanek is a new CFA Charterholder and is considering multiple job offers. She is most interested in managing a fund for an institutional client with high liquidity needs and a short time horizon that also must manage tax consequences. Which of the following institutional investors is she most likely to select?

  A. Satori University Endowment Fund.

  B. Northern State Bank.

  C. Caliber Life Insurance.

  D. Inka Point Defined Benefit Pension Plan.

  Correct Answer: B

  Urbanek is most likely to select the bank because it meets all her criteria. Banks have high liquidity needs and short time horizons due to the need to maintain a positive spread and the need to payout deposits and fund loans. In addition, banks are subject to taxation at the state and Federal levels. Endowment funds and pension funds do not meet any of her criteria ?they generally have low liquidity needs, long time-horizons, and are usually tax-exempt. The liquidity needs and time horizons of life insurance companies depend on the specific products offered. However, they generally have lower liquidity needs and longer time horizons than banks, and usually only a portion of income is taxable.

• Question 833:

  Which of the following statements about portfolio management is FALSE?

  A. Interest and dividends are typically taxed at a higher rate than capital gains.

  B. Deferred tax investments may be appropriate for investors with tax concerns.

  C. Mutual funds face two basic constraints: time horizon and liquidity concerns.

  D. The purpose of the investment policy includes imposing discipline on the client.

  Correct Answer: C

  The two constraints faced by mutual funds are: laws created to protect the investors and investment choices as defined in the prospectus. The other statements are true. Interest and dividends are typically taxed at a higher rate than capital gains. Deferred tax investments such as 401(k) plans allow the investor to delay paying taxes until a later date and are an important tool for an invest with current tax concerns. The investment policy imposes discipline on both the client and portfolio manager.

• Question 834:

  According to the fundamental view of risk, an individual's required rate of return is determined at least in part by all of the following factors EXCEPT:

  A. the preference consumers have for current consumption.

  B. relative ease or tightness in the capital markets.

  C. business risk.

  D. beta risk.

  Correct Answer: D

  Beta risk, or the riskiness of the stock as viewed by a well-diversified stockholder, is used in the systematic view of risk. The fundamental view of risk views required return as (1 + real rate)(1 + expected inflation rate)(1 + risk premium) - 1. The risk premium is a function of total risk. (Total risk = business risk + financial risk + liquidity risk + exchange rate risk + country risk.) The preference consumers have for current consumption is a component of the real risk-free rate. The relative ease or tightness in the capital markets is a component of the inflation rate. Both the real-risk free rate and the inflation rate are components of the total return. Under the fundamental view of risk, business risk is part of the risk premium.

• Question 835:

  Which of the following statements about the security market line (SML) is FALSE?

  A. Movement along the SML indicates a change in risk characteristics of the individual investment.

  B. The SML will rotate in response to changes in investor attitude toward risk.

  C. The SML intersects the y-axis at the real risk-free rate.

  D. Changes in market conditions will cause the SML to shift up or down in a parallel manner.

  Correct Answer: C

  The SML intersects the y-axis at the nominal risk-free rate. The other choices are true.

• Question 836:

  You combine three assets (A, B, and C) into a portfolio. What is the expected return and standard deviation of the portfolio? You will put 25% of your funds into Asset A with an expected return of 5% and a standard deviation of zero, 50% of your funds into Asset B with an expected return of 10% and a standard deviation of 5%, and 25% of your funds into Asset C with an expected return of 5% with a standard deviation of zero.

  A. .075 .025

  B. .025 .05

  C. .075 .075

  D. .05 .10

  Correct Answer: A

  Return = (.25)(.05) + (.50)(.10) + (.25)(.05) = .075Trick, the zero standard deviation causes everything to

  go to zero.

  p = [AA+BB+CC+ 2wAwBABAB+ 2wAwCACAC+2wCwBCBCB]

  p = [.2(0+ .5(.05+ .2(0+ 2(.25)(.5)(0)(.05)(?) + 2(.25)(.25)(0)(0)(?) +2(.25)(.5)(0)(.5)(?)]

  p = [5(.05= 50(.05) = .025 with risk free assets in the portfolio the only risk is associated with the portion of

  funds invested in the risky asset.

• Question 837:

  An investor has two stocks, Stock A and Stock B in her portfolio. What is the variance of theportfolio given the following information about the two stocks?

  A. .1472.

  B. .1832.

  C. .0217.

  D. .0096.

  Correct Answer: C

  Variance of two-stock portfolio =[++ 2=[(.7(.2+ (.3(.15+ (2)(.7)(.3)(.2)(.15)(.0032)] = .0217

• Question 838:

  Which one of the following statements about portfolio diversification is false?

  A. As more securities are added to a portfolio total risk falls, but at a decreasing rate.

  B. In a well diversified portfolio of over 25 stocks market risk will account for over 85% of the portfolio's total risk.

  C. The lower the correlation coefficient between the portfolio and a stock, the lower the diversification effect from adding that stock to the portfolio.

  D. International diversification can further reduce the total risk of a portfolio.

  Correct Answer: C

• Question 839:

  Each of the following statements regarding the optimal portfolio is true except:

  A. is the efficient portfolio that has the highest utility for a given investor.

  B. lies at the point of tangency between the efficient frontier and the investor's indifference curve.

  C. is the portfolio that gives the investor the maximum level of return.

  D. will be fully diversified.

  Correct Answer: C

  C is wrong because it does not specify the fact that risk must also be considered.

• Question 840:

  Which of the following statements about portfolio theory is false:

  A. Total risk equals systematic risk plus unsystematic risk.

  B. If a security plots above the SML it is undervalued.

  C. The risk measure associated with the CML is standard deviation (total risk).

  D. If a security plots above the theoretical CML it is undervalued.

  Correct Answer: D

  No security can plot above the theoretical CML. All risky securities must be contained within or lie upon the efficient frontier and the CML is tangent to the efficient frontier.