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

• Question 841:

  A(n) _____________ return requirements must be balanced between the need for current income and the need for the long-term protection of capital.

  A. pension fund's

  B. life insurance company's

  C. endowment fund's

  D. investment company's

  Correct Answer: C

• Question 842:

  Cavanaugh Inc. has a beta of 1.2. Next year you project the market will earn 12% and the risk free rate will be 5%. If you buy Cavanaugh you project your return will be 13%. Thus you think:

  A. Cavanaugh will underperformed the market on a risk-adjusted basis.

  B. Cavanaugh's performance will just matched the market return on a risk-adjusted basis.

  C. Cavanaugh will outperform the market on a risk-adjusted basis.

  D. Cavanaugh's performance has nothing to do with the market return.

  Correct Answer: A

  Rs = Rf + B(Rm - Rf)Rs = .05 + 1.2(.12-.05)Rs = .134 or 13.4%You project Cavanaugh will out perform the market.

• Question 843:

  The covariance of the market's returns with the stock's returns is .008. The standard deviation of the market's returns is .1 and the standard deviation of the stock's returns is .2. What is the correlation coefficient between the stock and market returns?

  A. .4

  B. .91

  C. 1.0

  D. 1.25

  Correct Answer: A

  Covariance = (standard deviation 1)(standard deviation 2)(correlation coefficient 1,2) Correlation coefficient = cov/(st'd1)(st'd2) = .008/(.1)(.2) = .4

• Question 844:

  When assets in a defined-benefit plan are worth less than the present value of the promised benefits,the fund is considered to be:

  A. underfunded.

  B. unfunded.

  C. overfunded.

  D. fully funded.

  Correct Answer: A

• Question 845:

  You currently own Cavanaugh Inc. and are thinking of adding either Coe Co. or Firm Co. to your holdings. All three stocks offer the same expected return and total risk. The covariance of returns between Cavanaugh and Coe is +0.5 and the covariance between Cavanaugh and Firm Co. is ?0.5. Portfolio's risk would:

  A. decline more if you bought Coe Co.

  B. decline more if you bought Firm Co.

  C. decrease if you bought Coe Co. but increase if you bought Firm Co.

  D. would decrease most if you put half your money in Coe Co. and half in Firm Co.

  Correct Answer: B

  In portfolio composition questions return and standard deviation are the key variables. Here you are told that both returns and standard deviations are equal. Thus, you just want to pick the companies with the lowest covariance, because that would mean you picked the ones with the lowest correlation coefficient.= [++ 2where==so you want to pick the lowest covariance which is between Cavanaugh and Firm.

• Question 846:

  A portfolio manager for Klein Capital Management has been slowly increasing the number of stocks in his portfolio randomly over the last five years. Currently, the portfolio contains 20 stocks. Over time, what has most likely happened to the risk of the portfolio if macroeconomic variables have remained steady?

  A. Unsystematic risk has been decreasing.

  B. Systematic risk has been decreasing.

  C. Both systematic and unsystematic risk remain at average levels.

  Correct Answer: A

• Question 847:

  Patrick Manning owns stock in Lumber Providers with a return variance equal to 16%. Manning is considering the addition of Smithson Homebuilders to his portfolio. The variance of returns for Smithson Homebuilders equals 25%, and its correlation of returns with Lumber Providers equals -0.60. The covariance of returns between Lumber Providers and Smithson Homebuilders is closest to:

  A. -15.0.

  B. -0.024

  C. -0.120

  Correct Answer: C

• Question 848:

  Martin Philips evaluates stocks using the security market line while also considering the transaction costs of each buy and sell decision. Philips assumes that both high and low beta stocks incur the same positive percentage transactions costs on all stock trades. Which of the following is least likely an effect of Philips' assumptions?

  A. The intercept of the security market line will increase for buy signals.

  B. The intercept of the security market line will decrease for sell signals.

  C. The slope of the security market line will increase for both buy and sell signals.

  Correct Answer: C

• Question 849:

  Juliet Kaufman manages a large portfolio of risky assets for a family of investors- The portfolio consists primarily of stocks but also includes a small allocation of fixed-income investments. Currently, the expected return and standard deviation of the portfolio are 14.0% and 12.0%, respectively. Kaufman is considering adding one of three stocks to the portfolio. Data on each stock's expected return, beta, standard deviation, and covariance with the existing portfolio are presented below. Which stock should Kaufman add to the portfolio?

  A. Stock A

  B. Stock B

  C. Stock C

  Correct Answer: A

• Question 850:

  MNB Capital manages money for high net worth individuals located within the United States. MNB's disciplined investment approach selects a small number of domestic equities selling at significant discounts to book value. If MNB wanted to implement the capital asset pricing theory to evaluate equity investments, which of the following is least appropriate as an input to construct the market portfolio?

  A. U.S. Treasury bills.

  B. Noninvestment grade bonds.

  C. Collectible art work sold in Europe.

  Correct Answer: A