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CFA Level I practice questions

207 free questions with answers and explanations.

Practice test
  1. 151.An investor constructs a long straddle by buying a European call and a European put on the same stock, both with a strike price of $50. The call premium is $4 and the put premium is $3. At expiration, the stock price is $65. What is the investor's total profit per share?Derivatives
  2. 152.A mutual fund analyst estimates that in a bull market (probability 0.60), the fund beats its benchmark with probability 0.70. In a bear market (probability 0.40), the fund beats its benchmark with probability 0.30. Using the total probability rule, what is the unconditional probability that the fund beats its benchmark?Quantitative Methods
  3. 153.A convertible bond has a par value of $1,000 and a conversion ratio of 25 shares. The bond currently trades at $1,100, and the underlying common stock trades at $42 per share. The bond's conversion premium, in dollars, is closest to:Fixed Income
  4. 154.A private equity fund's cash flow pattern typically shows negative returns in its early years, followed by increasingly positive returns as the fund matures. This pattern is best described by which concept, and what primarily causes the early negative returns?Alternative Investments
  5. 155.Falkirk Industries sells 100,000 units annually at a price of $50 per unit. Variable cost per unit is $30, and fixed operating costs are $800,000. Based on this operating structure, what is Falkirk's degree of operating leverage (DOL) at this sales level?Corporate Issuers
  6. 156.A company reports cost of goods sold of $900,000 for the year. Beginning inventory was $140,000 and ending inventory was $160,000. Using a 365-day year, what is the company's days of inventory on hand (DOH)?Financial Statement Analysis
  7. 157.An investor sells short 100 shares of a stock at $40 per share. The initial margin requirement is 50%, and the maintenance margin requirement is 30%. At what stock price will the investor first receive a margin call?Equity Investments
  8. 158.An investment analyst is planning to leave her employer to start a competing firm. While still employed, she downloads her firm's confidential proprietary client contact list and internal valuation models to use immediately upon departure. She has not yet resigned. This conduct most likely violates:Ethical and Professional Standards
  9. 159.A portfolio manager pitches her strategy to a prospective institutional client by showing only 3 of her 10 discretionary accounts from the past year, all of which had the highest returns, without disclosing that the other 7 accounts underperformed their benchmark. Which Standard is most directly violated?Ethical and Professional Standards
  10. 160.A preferred stock pays a fixed annual dividend of $4.50 per share in perpetuity, with no expected growth. If investors require a 9% rate of return on this preferred stock, what is its intrinsic value?Equity Investments
  11. 161.The current spot exchange rate is USD/GBP = 1.3000 (1 GBP = 1.30 USD). Expected inflation over the next year is 2% in the United States and 5% in the United Kingdom. Using relative purchasing power parity, what is the expected spot exchange rate in one year?Economics
  12. 162.An economy has a marginal propensity to consume (MPC) of 0.75. If the government increases spending by $50 billion, what is the total change in equilibrium GDP, assuming no crowding-out or leakages beyond savings?Economics
  13. 163.A fixed-income portfolio has a market value of $50,000,000 and a modified duration of 6.2. Using the money duration approach, estimate the portfolio's price value of a basis point (PVBP).Fixed Income
  14. 164.A hedge fund charges a 2% annual management fee (based on beginning-of-year NAV) and a 20% incentive fee on profits after the management fee, with no hurdle rate. At the start of the year, an investor's capital is $10,000,000, and the fund earns a 15% gross return before fees. What is the investor's net dollar profit after all fees?Alternative Investments
  15. 165.A company reports net income of $150,000, depreciation expense of $50,000, interest expense of $40,000, an effective tax rate of 30%, capital expenditures of $80,000, and an increase in working capital of $20,000. What is the company's free cash flow to the firm (FCFF)?Financial Statement Analysis
  16. 166.An analyst needs to estimate the required yield on a newly issued, thinly traded 5-year corporate bond. Two actively traded bonds of similar credit quality are used as benchmarks: a 3-year bond yielding 4.00% and a 7-year bond yielding 5.60%. Using matrix pricing (linear interpolation), the estimated yield on the 5-year bond is closest to:Fixed Income
  17. 167.A private equity fund has called down $80 million of committed capital from its limited partners. To date, it has distributed $50 million back to investors, and the remaining portfolio has a reported net asset value (NAV) of $60 million. What is the fund's Total Value to Paid-In (TVPI) multiple?Alternative Investments
  18. 168.An analyst is valuing a stock using a two-stage dividend discount model with a terminal value based on an exit P/E multiple. The stock just paid a dividend (D0) of $2.00, expected to grow at 10% annually for the next 3 years. At the end of Year 3, the analyst expects the stock to trade at 15 times its Year 4 forecasted EPS, which is projected to be $5.00. The required rate of return on equity is 10%. What is the estimated intrinsic value of the stock today?Equity Investments
  19. 169.A private equity fund's distribution waterfall includes: (1) return of capital, (2) an 8% preferred return to limited partners, (3) a 100% GP catch-up until the GP has received 20% of total profits distributed so far, and (4) an 80/20 LP/GP split thereafter. If total profit available for distribution (after return of capital) is $50 million, and the preferred return paid to LPs is $8 million, what is the total carried interest (GP's total share) once the waterfall is complete?Alternative Investments
  20. 170.The one-year spot rate is 5.00%. A newly issued, annual-pay, 2-year bond with a 6% coupon rate is currently priced at par ($100). Using bootstrapping, calculate the 2-year spot rate.Fixed Income
  21. 171.Vantage Corp is currently unlevered and has a firm value of $80 million. The company is considering issuing $50 million in permanent debt and using the proceeds to repurchase equity. The corporate tax rate is 25%, and Modigliani-Miller's proposition with taxes is assumed to hold (no bankruptcy costs). What will be the value of the levered firm after the recapitalization?Corporate Issuers
  22. 172.An analyst samples 50 bond mutual funds and finds a mean annual return of 6.2%. The population standard deviation of fund returns is known to be 2.5%. What is the 95% confidence interval for the true mean return of all bond funds?Quantitative Methods
  23. 173.An investor enters a 3x9 forward rate agreement (FRA) as the long party with a notional amount of $20 million and an FRA rate of 3.0%. At expiration (3 months from initiation), 6-month LIBOR is observed at 3.5%. Using a 180-day underlying period, what is the approximate payoff to the long party at settlement?Derivatives
  24. 174.A portfolio manager estimates that portfolio returns are normally distributed with an expected annual return of 8% and a standard deviation of 15%. The portfolio's current market value is $10 million. Using a 95% confidence level (z = 1.65), what is the one-year Value at Risk (VaR) in dollar terms?Portfolio Management
  25. 175.A company reports revenue of $600,000 and cost of goods sold of $400,000. Accounts receivable increased from $80,000 to $100,000, inventory increased from $50,000 to $70,000, and accounts payable increased from $40,000 to $55,000 during the year. Cash operating expenses paid were $50,000. Using the direct method, what is cash flow from operations (CFO)?Financial Statement Analysis
  26. 176.A market analyst states that a particular equity market is strong-form efficient. If this claim is correct, which of the following statements is most accurate?Equity Investments
  27. 177.A callable bond currently trades at a price of 100.00. Using a 100 bp yield shock, its price rises to 101.80 when yields fall and falls to 97.90 when yields rise. The bond's effective duration is closest to:Fixed Income
  28. 178.A client, age 45, states during IPS review that she has low risk tolerance and wants to avoid equity volatility. She also states she needs her $200,000 portfolio to grow to $700,000 in 20 years to fund retirement, with no additional contributions planned. The portfolio manager calculates the required annual compound return and finds it is approximately 6.5%. A conservative fixed-income-heavy allocation is expected to return only about 4% annually. What should the portfolio manager do?Ethical and Professional Standards
  29. 179.An equity analyst employed by a large asset management firm is asked by a corporate client of the firm to serve as a paid keynote speaker at the client's annual investor conference, receiving a $15,000 honorarium directly from the client in addition to her regular salary. She does not inform her employer of this arrangement. Which Standard has she most likely violated?Ethical and Professional Standards
  30. 180.Meridian Corp's board of directors consists of nine members: three are independent directors with no material ties to the company, four are affiliated directors (including former executives and a family member of the founder), and two are current company executives, including the CEO who also serves as board chair. Which of the following best characterizes this board structure from a corporate governance perspective?Corporate Issuers
  31. 181.A bond has a 5% annual coupon rate and a face value of $1,000. It is currently trading at a market price of $950. The bond's current yield is closest to:Fixed Income
  32. 182.A 28-year-old client has a stable, high-paying job and substantial savings, giving her a high ability to take risk. However, she expresses strong discomfort with market volatility and insists on a conservative portfolio. According to CFA Institute guidance on constructing an investment policy statement, how should the advisor reconcile this conflict?Portfolio Management
  33. 183.A company purchases an aircraft for $10,000,000, consisting of an engine valued at $2,000,000 with a 5-year useful life and an airframe valued at $8,000,000 with a 20-year useful life. Under IFRS component depreciation requirements, both components are depreciated separately using the straight-line method with no salvage value. What is the total depreciation expense recognized in Year 1?Financial Statement Analysis
  34. 184.A stock's monthly return distribution has a long tail extending toward lower (more negative) returns, while most observations cluster near the higher end. The relationship among the mean, median, and mode is: mean < median < mode. This distribution is best described as:Quantitative Methods
  35. 185.Using the Capital Asset Pricing Model, calculate the required rate of return for a stock with a beta of 1.3 if the risk-free rate is 4% and the expected market return is 10%.Portfolio Management
  36. 186.Ferrington Ltd. is evaluating two financing plans to raise $5,000,000 in new capital. Plan A: issue 1,000,000 new common shares (all-equity). Plan B: issue $5,000,000 of debt at 8% interest, combined with issuing only 600,000 new common shares. The firm's marginal tax rate is 30%. At what level of EBIT are the earnings per share (EPS) under the two plans equal (the EBIT-EPS indifference point)?Corporate Issuers
  37. 187.An analyst is researching a semiconductor company. Through public filings, industry trade publications, and casual conversations with the company's regional sales managers about routine but non-public order backlog trends (not material on its own), the analyst pieces together a mosaic suggesting next quarter's earnings will beat consensus. She issues a 'buy' recommendation based on this analysis. Under Standard II(A) Material Nonpublic Information, this is:Ethical and Professional Standards
  38. 188.A bond has an 8% annual coupon rate paid semiannually and a face value of $1,000. The bond's clean (flat) price is quoted at 970.00. It has been 45 days since the last coupon payment, and the coupon period has 180 days (30/360 convention). The bond's full (invoice) price is closest to:Fixed Income
  39. 189.A company issues bonds with a yield to maturity of 8%. The company's marginal tax rate is 30%. What is the company's after-tax cost of debt for use in the WACC calculation?Corporate Issuers
  40. 190.An analyst at a hedge fund holds a large short position in a small-cap company. Using an anonymous social media account, she posts a message claiming the company is under active SEC investigation for accounting fraud, a claim she knows to be false. The stock price drops sharply, and she covers her short position at a profit before the rumor is debunked. Which Standard has the analyst most likely violated?Ethical and Professional Standards
  41. 191.A GIPS-compliant firm's composite produced a gross-of-fees return of 12.50% for the year. The composite's weighted-average annual investment management fee is 1.00%, deducted from client assets at year-end. Using the standard method of converting a gross-of-fees return to a net-of-fees return (deducting the actual fee from the ending value), which of the following is closest to the net-of-fees return the firm should present?Ethical and Professional Standards
  42. 192.A portfolio manager employed full-time by a large asset management firm privately manages investment accounts for three family friends on evenings and weekends, charging each a small annual fee. She uses no employer resources, none of the family friends are clients of her firm, and there is no overlap in securities traded. Her firm's code of ethics requires written employer consent before undertaking any independent practice for compensation. She does not seek or obtain this consent. Has she violated the Code and Standards?Ethical and Professional Standards
  43. 193.A real estate property is purchased for $10 million. It generates $800,000 in Net Operating Income (NOI) in its first year. If the property's value appreciates by 5% in the first year and it is sold for $10.5 million at the end of the year, what is the unlevered initial cash-on-cash return for the first year?Alternative Investments
  44. 194.A hedge fund manager uses a long/short equity strategy, holding $100 million in long positions and $60 million in short positions. The fund's beta to the market is 0.5. If the market experiences a 10% decline, what is the expected impact on the fund's net asset value (in millions), assuming all other factors remain constant?Alternative Investments
  45. 195.A private equity fund has a committed capital of $500 million. The fund charges a 2% management fee on committed capital during the investment period, and on net asset value (NAV) during the post-investment period. If the investment period lasts 5 years, and the average NAV during the post-investment period (years 6-10) is $600 million, what is the total management fee collected by the fund over its 10-year life?Alternative Investments
  46. 196.A commodity futures contract has a current spot price of $60 per barrel and a one-year futures price of $63 per barrel. The annual storage cost for the commodity is $1.50 per barrel, and the risk-free rate is 4%. Based on the cost-of-carry model, is the futures contract overvalued, undervalued, or fairly valued?Alternative Investments
  47. 197.Which of the following describes a key characteristic of convertible arbitrage hedge funds?Alternative Investments
  48. 198.A company reports the following for the year: Sales Revenue $1,500,000, Cost of Goods Sold $900,000, Operating Expenses $300,000, Interest Expense $50,000, and Tax Expense $75,000. What is the company's Net Income?Financial Statement Analysis
  49. 199.An investor plans to save for a down payment on a house. They deposit $1,500 at the end of each month into an account earning an annual interest rate of 6%, compounded monthly. How much will the investor have accumulated after 5 years?Quantitative Methods
  50. 200.A company purchases equipment for $500,000. It has an estimated useful life of 10 years and a salvage value of $50,000. Using the straight-line depreciation method, what is the depreciation expense for the third year?Financial Statement Analysis