Exam #3 | Answers

Weighting Topic Questions

15% Ethical and Professional Standards 1-18

10% Quantitative Methods 19-30
10% Economics 31-42
15% Financial Reporting and Analysis 43-60
10% Corporate Finance 61-72
11% Equity Investments 73-86
11% Fixed Income Investments 87-99
6% Derivatives 100-106
6% Alternative Investments 107-113
6% Portfolio Management 114-120

180 minutes 120 questions

Exam #3 | Answer Sheet

Ethics QM Econ FRA Corpo Equity Fixed I Der. Alt. Inv. Port.
1. 19. 31. 43. 61. 73. 87. 100. 107. 114.
2. 20. 32. 44. 62. 74. 88. 101. 108. 115.
3. 21. 33. 45. 63. 75. 89. 102. 109. 116.
4. 22. 34. 46. 64. 76. 90. 103. 110. 117.
5. 23. 35. 47. 65. 77. 91. 104. 111. 118.
6. 24. 36. 48. 66. 78. 92. 105. 112. 119.
7. 25. 37. 49. 67. 79. 93. 106. 113. 120.
8. 26. 38. 50. 68. 80. 94.
9. 27. 39. 51. 69. 81. 95.
10. 28. 40. 52. 70. 82. 96.
11. 29. 41. 53 71. 83. 97.
12. 30. 42. 54. 72. 84. 98.
13. 55. 85. 99.
14. 56. 86.
15. 57.
16. 58.
17. 59.
18. 60.
Total /18 /12 /12 /18 /12 /14 /13 /7 /7 /7 /120
%

2
Ethical and Professional Standards 1-18

1. John Richards, a market analyst, is working on a regression model to establish valuations of

stocks in the banking industry. Without even finishing his model, Richards sees a stock that
seems to be undervalued and sends his recommendation to buy this stock. Which of the
following standards has Richards violated?

A. Standard III(A) – Loyalty, Prudence, and Care

B. Standard I(B) – Independence and Objectivity
C. Standard V(A) – Diligence and Reasonable Basis

2. The Bazov Investment Company, located in Split, Croatia, is in the process of adopting the
Global Investment Performance Standards for the current fiscal year. One of the GIPS standards
is in direct conflict with Croatian investment reporting regulations. In order to be in full
compliance with the GIPS, the Bazov Investment Company must:

A. Comply with the local regulation and make full disclosure of the conflict.
B. Comply with the GIPS standard and make full disclosure of the conflict.
C. Choose either the GIPS standard or the local regulation, whichever is the more
conservative approach, and make full disclosure of the conflict.

3. Jonathan Brooks, CFA, is a stockbroker in Hong Kong. Yi, his neighbor and well-known
financial blogger, tells him that he is about to publish information about a firm that is under a
lot of pressure from its creditor. Brooks should most likely:

A. Sell the stock, given this information.

B. Buy the stock, since this information is soon to be published.
C. Not trade the stock before the release of this information.

3
4. Which of the following statements is most likely true?

A. Members cannot pursue a competing independent practice that could result in

compensation or other benefits.
B. Members and candidates are required to disclose any compensation arrangement to
their employers that involves performing competing tasks or services that their
employers can charge for, only if they occur during work hours.
C. Members can pursue a competing independent practice that could result in
compensation or other benefits as long as they have the written consent of their
employer.

5. Robert Zane, CFA, was retained by Alpha Beta Management (ABM) to manage their
corporate pension plan. ABM has approached Zane and requested that Zane invests 50% of the
entire plan in ABM stocks. Since the country in which Zane practices does not regulate the
investments of company retirement plans, Zane may:

A. Invest 50% of all of the retirement plan assets in ABM stock in line with the
management's request only if he can document that the investment is more prudent than
any other investment opportunity he might find.
B. Invest a portion of the retirement plan in ABM stock if the investment is prudent and if
he keeps the overall portfolio properly diversified.
C. Disregard the management’s request and fail to invest any funds in ABM stock,
regardless of the stock's prospects.

6. Which of the following is least likely accurate?

A. It is not the supervisor's responsibility to ensure that investment reports of a research

effort are compliant with the Code and Standards.
B. A violation of ethical standards reflects not only the conduct of an employee but also
that of their supervisor.
C. Reasonable supervision is typically determined as a function of the number of
employees supervised and the specific jobs being done.

4
7. Which one of the following statements is most likely incorrect in the context of survivorship
bias?

A. Many losing funds are closed and merged into other funds to hide poor performance.
B. Survivorship bias results in an overestimation of past returns of mutual funds.
C. Survivorship bias is not an important issue to take into account when analyzing past
performance.

8. Which of the following statement regarding the GIPS is least likely accurate?

A. Firms must meet all requirements in order to claim compliance with the GIPS standards.
B. Firms must meet all recommendations in order to claim compliance with the GIPS
standards.
C. Firms must encourage compliance to recommendations.

9. Marco Rubio is a CFA member working as an equity analyst at Bright Stock Brokers. After
thorough analysis, he has concluded that the stock of M & M is overpriced at its current level.
However, he is aware that the investment banking division of his firm is in talks with M & M to
underwrite a rights issue, and is concerned that a negative research report might hurt the good
relationship between the two entities and possibly scuttle the underwriting plans. Rubio needs
to write a report right away. Which of the following outlines the best course of action for Mr.
Rubio?

A. Write a favorable report that excludes his findings but make an effort to disclose them
privately to the CEO of his firm
B. Write a report outlining his findings based solely on company fundamentals
C. Write a report honestly outlining his findings but only after consulting with a fellow
CFA member who happens to be a minor shareholder at M & M

5
10. Which of the following is most likely incorrect?

A. A standard of fairness and loyalty to clients requires IPO distributions to the most
important clients or the people providing the firm with the most revenue.
B. Discriminating against non-email clients violates the standard on fair dealing.
C. Given a new recommendation, the firm should not trade until all clients have a fair
chance to receive the new recommendation.

11. Which of the following is most likely incorrect?

A. "Firewall" is a common term applied to the barriers created to prevent sensitive

information from being disseminated between departments of a firm.
B. A compliance program is incomplete if all it does is create awareness of the definition of
insider trading and the fines and jail sentences to which the employee could be liable.
C. Material Public Information may consist of discussions with management that may
reveal information that isn't obviously material, but that may give valuable clues.

12. Josianne Feng, CFA, is a new fund manager charged with the management of 50 stocks.
What should be her policy for proxy voting?

A. The manager should never vote since the manager’s votes don’t always represent the
opinion of the clients.
B. The manager has a responsibility to investors to vote the shares to the benefit of the
investors but can skip routine votes that would require too much time on a cost-benefit
basis.
C. The manager has the responsibility to always vote but not to disclose the proxy voting
policy to all the clients, since that’s part of confidential information.

6
13. Rob Harrington, a stock broker, works for a large New York bank. His long term friend, and
also stock trader at the same bank, calls him one evening to ask him if there are any clients
interested in stock PTLN. Since there are no policies or procedures to discourage employees
from sharing information, Harrington should most likely:

A. Disclose the information.

B. Advise his firm to develop firewalls to allow the different departments to function
independently.
C. Advise regulators of the potential conflict of interest and seek legal counsel.

14. A stock broker learns through his son, working at ACIA Corp, that his firm is altering its
accounting records. He decides to advise his clients to sell the stock of ACIA Corp. Is this a
violation of the Code and Standards? Why?

A. Yes, it constitutes the use of material non-public information.

B. Yes, it constitutes the use of material public information.
C. No, it constitutes the use of material public information.

15. In the context of Global Investment Performance Standards, composites refer to:

A. The aggregate of portfolios managed with the same investment mandate.

B. The combined fees of portfolios managed with the same investment mandate.
C. The verification standards that apply to portfolios managed with the same investment
mandate.

16. Jared Blain is a Los Angeles stockbroker and analyst. He recently used a discounted cash
flow (DCF) model to analyze stocks in the semiconductor industry. After publishing his results
on his blog, he calls one of his best clients and tells him to buy YYU since it is undervalued by
50% without mentioning the model he used. Blain has most likely violated the Standards
because:

A. He does not distinguish between opinion and fact.

B. His model is probably wrong.
C. He cannot work as a stock broker and analyst at the same time.

7
17. Chris Heinz works for a brokerage company. On Tuesday, one of his analysts mails all
investors a recommendation to buy the stock of AERD. The following day, Heinz receives a call
from one of his clients to sell AERD at market price. What should he most likely do?

A. Accept the sell order.

B. Not accept the order, because it’s contrary to the firm’s recommendation.
C. Advise the customer of the change in recommendation before accepting the order.

18. To comply with the Global Investment Performance Standards, verification is:

A. Voluntary and must be performed by a third party.

B. Obligatory and must be performed by a third party.
C. Obligatory and must not be performed by a third party.

8
Quantitative methods 19-30

19. The effective annual rate of a loan is 4.76%. If the loan is compounded weekly, the nominal
annual interest rate on the loan is closest to:

A. 4.65%
B. 4.87%
C. 4.71%

20. A distribution has a high peak and fat tails. If its kurtosis is 4, this distribution is
characterized as:

A. Mesokurtic
B. Platykurtic
C. Leptokurtic

21. Andrew Zilemann would like to rent a car for the next 4 years and wants to know how
much money he would need in his account now to cover all the payments. His bank account has
an interest rate of 6% compounded monthly, and the cost of the rental is $340 a month.
Zilemann would most likely need:

A. $14,522
B. $14,447
C. $16,320

22. The following 8 observations are a sample drawn from a normal distribution:

Observation 1 2 3 4 5 6 7 8
Value 4 10 -11 2 -5 8 1 -4

The sample standard deviation is closest to:

A. 7.01
B. 6.56
C. 6.18

9
23. Palanela’s stock is currently trading at $53. In one year, analysts predict the stock will be
trading at $60. Palanela will also pay a dividend of $2 during this period. What is the expected
holding period return on Palanela’s stock?

A. 9.43%
B. 16.98%
C. 13.21%

24. Andrew Shaw needs your help to decide whether to invest his money into portfolio A or
portfolio B. Both portfolios have an expected return of 7%. Portfolio A has a Sharpe ratio of 1.4
and portfolio B has a Sharpe ratio of 1.6. Which portfolio should Shaw most likely choose?

A. Portfolio B
B. Portfolio A
C. Portfolio A or B

25. Using Chebyshev’s inequality, what percentage of a distribution should fall within plus or
minus 2.1 standard deviations of the mean?

A. 70%
B. 77%
C. 66%

26. John works at Delta Bank and has been assigned to review a sample of 300 portfolios. He
found that these 300 portfolios have a mean return of 8% and a standard deviation of returns of
17%. The standard error of the sample mean is closest to:

A. 0.9815%
B. 0.4618%
C. 0.0567%

10
27. Relate to the following information:

P(A) = (X = 100, Y = 150) = 0.40

P(B) = (X = 180, Y = 110) = 0.60

What is the covariance between X and Y?

A. -50.25
B. -44.78
C. -768

28. What is the probability that event A and event B occur, given that:

P(A) = 30%

P(B) = 40%

P(A or B) = 60%

A. 10%
B. 100%
C. 70%

29. A Type 1 error is made when:

A. The null hypothesis is rejected when it shouldn’t be rejected.

B. The alternative hypothesis is accepted when it should be rejected.
C. The null hypothesis is accepted when it should be rejected.

11
30. What is the covariance of returns between portfolios A and B, given the following
information?

Portfolio A’s variance of return: 45

Portfolio B’s variance of return: 42

Correlation of returns: 0.48

A. 90.57
B. 20.87
C. 907.02

12
Economics 31-42

31. A look at the financial statements of a business based in Qatar reveals that for the most
recent reporting period, revenue stood at $2 million. It had total cost amounting to $2.5 million,
which was comprised of TFC of $1 million and TVC of $1.5 million. The reported net loss on the
income statement stood at $500,000, disregarding tax obligations. In prior periods, the business
had consistently reported profits on its operations.

What decision should the management take regarding operations for the next few months?

A. Shut down operations since the business is already making losses

B. Minimize operations to cut TVC
C. Continue operations but attempt to borrow funds for the short term

32. Which one of these is more likely to create a demand curve shift in product B?

A. Unitary cost increases

B. Government tax policies
C. A change in consumers’ income

33. The price of a good has gone up from $41 to $45.As a result, the demand for the same good
has gone down from 15,000,000 units to 14,000,000 units. How would you best describe
elasticity in demand for this good?

A. Elastic
B. Inelastic
C. The good has unitary elasticity

34. Aggregate demand is:

A. The potential output level of each labor force.

B. The total supply of goods all firms plan on selling during a period of time.
C. The demand for the gross domestic product of an economy.

13
35. An economy in disinflation is:

A. An economy in hyperinflation.
B. An economy where inflation decreases over time.
C. An economy with a consistently negative inflation growth.

36. According to the Fisher effect, a decrease in expected inflation will most likely decrease:

A. The real interest rate.

B. The nominal interest rate.
C. The real interest rate and the nominal interest rate.

37. A country has the following characteristics:

Exports of goods and services $14,000,000

Investment income received from foreigners $3,200,000
Imports of goods and services $11,430,000
Investment income payment made to foreigners $1,600,000

What is this country’s account balance?

A. $4,170,000
B. ($970,000)
C. $970,000

38. All else being equal, if the Canadian dollar goes from USD 0.7 to USD 0.8, goods produced
in Canada and consumed in the United States will usually be:

A. The same price as before for Americans

B. More expensive for Americans
C. Cheaper for Americans

14
39. A European company has recently received a payment of CAD 760,000 (Canadian dollars).
The spot rate for CAD/USD is 0.8831 and the spot rate for EUR/USD is 1.2341. What is the
amount the European company will receive in Euros?

A. $697,370
B. $828,724
C. $1,062,100

40. The market demand function for item A is a function of its price, income and the price of
item B.

Own-price elasticity of demand for item A -0.5

Income elasticity of demand for item A 0.4

Cross-price elasticity of demand for item A with respect 0.8

to the price of item B

Given this information, which of the following statements is most accurate?

A. Demand for item A is elastic

B. Item A is an inferior good
C. Items A and B are substitutes

15
41. Company A has developed a new product and acquired a patent for the next 20 years. It
faces the following demand and cost schedules:

Output (units) Price/unit ($) Cost (total $)

10 5,000 60,000
20 4,700 100,000
30 4,400 130,000
40 4,300 160,000
50 4,200 190,000
60 3,910 220,000

Company A’s optimal output level is closest to:

A. 50 units
B. 40 units
C. 60 units

42. An analyst gathered the following information about a country:

Total population 1,000,000

Working age population 920,000
Labor force 870,000
Underemployed 100,000
Unemployed 53,000
Discouraged workers 45,000
Frictionally unemployed 15,000
Voluntarily unemployed 10,000

The economist would estimate the unemployment rate to be closest to:

A. 17.58%
B. 6.10%
C. 5.76%

16
Financial Reporting and Analysis 43-60

43. Payment of dividends under US GAAP is an example of which type of business activity?

A. Operating activities
B. Financing activities
C. Investing activities

44. A company has reported the following for the year 2014:

Revenues $410,000
Expenses $240,000
Dividends paid $150,000
Gains from available-for-sale securities $25,000
Loss on foreign currency transactions $2,500

What is the company’s total comprehensive income?

A. $192,500
B. $342,500
C. $42,500

45. AVGI is an American company reporting under IFRS. Its inventory has been bought for $16
million and is predicted to be sold for $31 million. If the net realizable value is $18 million,
inventories should be shown on the balance sheet at:

A. $18 million
B. $16 million
C. $15 million

17
46. An analyst has gathered the following information about a specific company:

Cash $400,000
Accounts receivable $250,000
Inventory $990,000
Accounts payable $200,000
Taxes payable $300,000

If the industry has a current ratio of 3.4, we can most likely conclude that:

A. This company is more liquid compared to its industry.

B. This company is less liquid compared to its industry.
C. This company is as liquid as its industry.

47. One year ago, Unisoft bought a corporate bond for $1,000 and classified it as available-for-
sale. It collected $70 in coupons, and the bond is now worth $1,030. What should Unisoft report
for this bond on its balance sheet?

A. $1,030
B. $1,000
C. $1,100

48. Minority interests represent the minority interests of owners of shares in subsidiary
companies when they are consolidated under the balance sheet of the parent/controlling
company. Under IFRS, minority interests should be shown in the:

A. Assets section
B. Equity section
C. Liabilities section

49. Which of the following most likely has an impact on revenue recognition?
A. A change in payment terms with customers
B. A change in delivery terms
C. A change in credit limits

18
50. A firm reported the following:

Net income $2,000,000

Non-cash charges $70,000
Interest expense $200,000
Capital expenditures $150,000
Tax rate 45%

The company’s free cash flow to firm (FCFF) is closest to:

A. $2,330,000
B. $2,120,000
C. $2,030,000

51. An analyst gathered the following information about Yeezny:

Income tax expense $120,000

Change in deferred tax assets $1,500
Change in deferred tax liabilities $5,000

Yeezny’s income tax payable is closest to:

A. $120,000
B. $116,500
C. $123,500

52. A company engaged in organizing corporate parties acquired another company engaged in
the supply of electrical fittings. The company acquired assets having a carrying value of $4
million but recorded them at their fair value of $5 million.

Would a differed tax be created under IFRS? What would be the treatment under US GAAP?
Assume that the tax base of the assets was not revalued.

A. A deferred tax will be created under IFRS but not under US GAAP.
B. A deferred tax will be created under IFRS as well as under US GAAP.
C. A deferred tax will neither be created under IFRS nor under US GAAP.

19
53. Given this information about Alcany (in million USD):

2014 2015
Short term borrowings 2,000 3,000
Long-term interest bearing 15,000 16,000
debt
Current position of long-term 4,000 4,200
interest-bearing debt
EBIT 5,000 6,000
Interest payments 1,000 900
Total shareholder’s equity 19,000 24,000

Which of the following statements is most likely correct?

A. The solvency of Alcany improved in 2015 because the debt-to-equity ratio decreased.
B. The solvency of Alcany deteriorated in 2015 because the debt-to-equity ratio increased.
C. The solvency of Alcany improved in 2015 because the debt-to-equity ratio increased.

54. We have this information about DIA Inc.:

Total equity $12,004,000

Total assets $26,035,000
Sales $14,214,000
EBIT $1,064,000
EBT $723,000
Net income $634,000

DIA Inc.’s tax burden ratio and interest burden ratio are respectively closest to:

A. 0.60 and 0.88

B. 0.88 and 0.60
C. 0.88 and 0.68

20
55. An analyst gathered the following information about a company.

Cash $120,000
Accounts receivable $920,000
Inventories $1,002,000
Accounts payable $720,500
Sales $2,934,000
Cost of goods sold $2,542,000

The company’s cash conversion cycle is closest to:

A. 155 days
B. 361 days
C. 258 days

56. The following information has recently been made available about a private company:

Operating profit margin 22%

Net profit margin 15%
Total asset turnover 0.95
Tax burden ratio 1.1
Financial leverage 1.4
Cash conversion cycle 42 days

The company’s ROE is closest to:

A. 20%
B. 29%
C. 16%

21
57. Alphatech started a 3-year construction project and recognizes revenues using the
percentage of completion method. The total revenues and costs of the project are respectively
$5.4 million and $4.2 million.

Year 1 Year 2 Year 3

Cost incurred and paid $1.1 million $2 million $1.1 million
Amount billed and received $1.2 million $2.2 million $2 million

The revenue Alphatech will recognize at year 2 is closest to:

A. $2,571,428
B. $3,985,714
C. $1,800,000

58. We have the following information on Charlie’s Company:

Outstanding shares January 1st, 2015 5,000,000

Stock options outstanding January 1st, 2015 150,000 Exercise price: $10.00
Shares issued March 1st, 2015 450,000
Shares repurchased July 1st, 2015 120,000
Average market price of common shares 42$/shares
Net income (2015) $5,500,000

Charlie’s diluted EPS is closest to:

A. 1.10$
B. $1.00
C. $1.01

59. In 2015, a company increased its deferred tax asset by $1,200,000. The company most likely:

A. Had permanent differences between accounting profit and taxable income.

B. Had a lower accounting profit compared to its taxable income.
C. Became entitled to a $1,200,000 tax refund.

22
60. Given the following information for the year 2016:

Beginning interest payable $120,245

Cash paid for interest $546,021
Ending interest payable $150,277

The interest expense for the year is closest to:

A. $576,053
B. $515,989
C. $546,021

23
Corporate Finance 61-72

61. Turkish Gold is planning a new project. The cost to build the new mine is $1.1 million (paid
at the end of the first year) and the mine should bring cash inflows of $510,000 over the next
four years (year 2 to 5). The cost to close down the mine over the following year is going to be
$220,000.

What should be the minimum price for this land if Turkish Gold wishes to sell it now, given a
12% required rate of return?

A. $289,447
B. $66,559
C. $178,018

62. A project has the following cash flows:

Year 0 -$180,000
Year 1 $110,000
Year 2 $76,000
Year 3 $100,000
Year 4 $56,000

Given a discount rate of 12%, what is the discounted payback period?

A. 3.30 years
B. 2.30 years
C. 1.92 years

24
63. Company A is launching a new product with a large marketing campaign that will cost $2
million. To finance the project, the CEO has received the following information from the finance
department:
Required return on equity 21%
Before-tax required return on debt 9%
Company A’s tax bracket 35%

If the CEO decides to sell 25 million dollars in new debt and to issue 14 million dollars in
common stock, the marginal weighted average cost of capital (WACC) should be closest to:

A. 11.30%
B. 13.43%
C. 13.32%

64. The US 10-year Treasury bond yield is 3.2%, and Mexico’s 10-year government bond yield is
4.9%. You have also been provided the following information:

Annualized standard deviation of the S&P500 15.54%

stock index
Annualized standard deviation of the 21.23%
Mexican IPC stock index
Annualized standard deviation of the 8.13%
Mexican dollar-denominated government
bond

What is Mexico’s risk premium?

A. 2.32%
B. 4.44%
C. 0.19%

65. Assuming a 365-day year for terms 3/15 net 60, the annual cost of trade credit is closest to:

A. 28%
B. 63%
C. 25%

25
66. Which of these is not a secondary source of liquidity?

A. Filing for bankruptcy

B. Renegotiating debt contracts
C. Secondary equity offering

67. Using Company A’s income statement, its degree of operating leverage is closest to:

Income statement $ millions

Revenues 328
Variable operating costs 223
Fixed operating costs 22
Operating income 83
Interests 6
Taxable income 77
Tax 12
Net Income 65

A. 0.34
B. 1.27
C. 1.11

68. A 60-day $1,000 Treasury bill sells for $956. The discount basis-yield is closest to:

A. 26.40%
B. 4.4%
C. 26.77%

26
69. The table below provides data on the cash flows of Gamma project by Bonardel Inc.

Exhibit 1 – Gamma Project

Year 0 1 2 3 4
Cash flow -5,000 1,500 3,500 4,000 4,000
Cumulative -5,000 -3,500 0 4,000 4,000
cash flow

What would be the discounted payback period assuming a discount rate of 10%?

A. 2 years
B. 2.25 years
C. 2.5 years

70. A company is evaluating a line of credit at 8% (with a ½% commitment fee on the full
amount with no compensating balances) for borrowing $3.5 million for one year. The cost of
credit is closest to:

A. 8.5%
B. 13%
C. 10.5%

71. Which of the following best describes a situation where shareholders sell their interests
directly to a group seeking control of the company?

A. A tender offer
B. A hostile takeover
C. A proxy fight

27
72. Best corporate management practices suggest that:

A. At least 50% of all members on the Board of Directors should be independent.

B. At least 75% of all members on the Board of Directors should be independent.
C. All Board of Directors members should be independent.

28
Equity Investments 73-86

73. An investor buys 150 shares of a stock on margin at $178/share using an initial leverage ratio
of 2. At what stock price will he receive a margin call if the maintenance margin requirement for
the position is 20%?

A. $137.43
B. $35.60
C. $111.25

74. Last year, the S&P 500 has had the following returns: 6% in the first trimester, -8% in the
second trimester, 9% in the third and 2% in the last trimester of the year. What is the S&P 500’s
yearly return?

A. 9.00%
B. 8.42%
C. 9.25%

75. A price-weighted index is composed of 4 stocks. Stock A is trading at $21, stock B at $142,
stock C at $34, and stock D at $602. One year later, stock A is now worth $24, stock B is $210,
stock C is $12, and stock D is $610. The total return for this index is closest to:

A. -8.01%
B. 8.01%
C. 7.14%

76. Which of the following statements is most likely correct regarding the weak-form efficient
market hypothesis?

A. Security prices fully reflect all past market data.

B. Security prices reflect all publicly known and available information.
C. Security prices fully reflect all types of information.

29
77. Low demand for the industry's product and large upstart costs are characteristics of which
industry lifecycle phase?

A. Pioneering phase
B. Growth phase
C. Mature growth phase

78. An analyst calculates that shares of ABC are trading at a lower price than its intrinsic value.
This analyst would most likely conclude that ABC is:

A. Overvalued
B. Undervalued
C. Fairly valued

79. Axis Adventures will not pay dividends until three years from now. Starting in year three
dividends will be $1.50 per share, the retention ratio will be 35% and the return on equity (ROE)
will be 12%. If k = 11%, the value of the stock is closest to:

A. $9.96
B. $15.70
C. 17.59

80. Given this information about Company A:

Par value of preferred stock offered at a 5% dividend rate $120

Company’s sustainable growth rate 5%
Yield on comparable preferred stock issues 7.5%
Investor’s marginal tax rate 45%

The value of the company’s preferred stock is closest to:

A. 80$
B. 100$
C. 44$

30
81. An investor gathered the following data about Company ABC:

EPS (2015) $2.80

Dividend payout ratio (2015) 40%
Dividend growth rate expected during
years 2016 and 2017 50%
Dividend growth rate expected after 2017 10%
Required rate of return 15%

The value per share of this stock in 2015 is closest to:

A. $58.81
B. $45.29
C. $113.21

82. Arbitrage will most likely happen in securities markets:

A. With high information acquisition costs.

B. That are efficient.
C. Without regulations limiting short selling.

83. An investor buys 300 shares of XYZ at the market price of $200 on full margin. The initial
margin requirement is 30%, and the maintenance margin requirement is 20%. If the shares of
stocks are later sold for $250 per share, what is the margin transaction return?

A. 83.33%
B. 3.33%
C. 25%

31
84. A market index only contains these 3 securities:

Security Price per share Market cap ($ millions)

A $2.50 2,000
B $26.34 234
C $10.20 1,234

Which approach will most likely give Security A the highest weight?

A. Price-weighted
B. Equal-weighted
C. Market capitalization-weighted

85. What is a likely benefit of a corporation issuing new securities in a private placement instead
of an initial public offering?

A. Cheaper offering costs

B. More liquidity for investors
C. Lower cost of capital

32
86. Refer to the following information:

AnaPharma Stock Price (ANAP) – December 14, 2018

Open: $79.74

High: $80.40

Low: $79.41

Close: $79.77

If a trader had submitted a buy order for a single ANAP share at market open, what order
would most likely result in the best one-day return?

A. Limit order at $79.50

B. Limit order at $79.30
C. Market order

33
Fixed Income Investments 87-99

87. Which of these statements is most likely incorrect?

A. In most countries, coupons are taxed at the ordinary income rate.

B. Capital tax is always the same for long-term and short-term investments.
C. An original discount provision is a tax provision related to bonds issued at a discount to
par value.

88. An investor is holding an inverse floating rate note. If interest rates decrease, the periodic
coupons paid to the investor will most likely:

A. Decrease
B. Increase
C. Remain the same

89. A putable bond is a bond that:

A. Gives the issuer the right to redeem all or part of the bond before the maturity date.
B. Gives the bondholder the right to sell the bond back to the issuer at a predetermined
price before maturity.
C. Gives the bondholder the right to exchange the bond for a specific number of common
shares.

90. All else being equal, a callable bond is more beneficial to:

A. The investor
B. The issuer
C. No one

34
91. The bond-equivalent yield (BEY) spot rates for U.S. Treasury yields are as follows:

Period Years Spot Rate

1 0.5 0.80%
2 1.0 1.20%
3 1.5 2.42%
4 2.0 3.20%

On a BEY basis, the 6-month forward rate 18 months from now is closest to:

A. 3.84%.
B. 4.25%.
C. 5.56%.

92. Should an investor buy a 10-year bond priced at $1,085 with a 10% semi-annual coupon if
the comparable bond yield is 9%?

A. No, the bond is overvalued by $85.

B. No, the bond is overvalued by $20.
C. Yes, the bond is undervalued by $54.

93. A 10-year bond was issued at par with a 6% interest rate, paid yearly. Which of the
following is closest to the present value of this bond 5 years later if the required rate of return is
now 5.5%?

A. $1,031
B. $1,021
C. $1,038

35
94. The following forward rates were calculated from a yield curve:

0y1y 0.2%
1y1y 0.4%
2y1y 0.7%
3y1y 0.9%
4y1y 1.3%
5y1y 1.8%

The five-year spot rate is closest to:

A. 0.699%
B. 0.882%
C. 1.06%

95. The current price of a bond is $1054.

When the yield-to-maturity (YTM) increases by 1%, the price of the bond goes down to 1023$.

When the yield-to-maturity (YTM) decreases by 1%, the price of the bond reaches 1084$.

What is the modified duration of the bond?

A. 0.35
B. 5.78
C. 2.89

96. All else being equal, an investor will prefer a bond that is:

A. Less convex
B. More convex
C. Less or more convex depending on the investor’s overall portfolio

36
97. A bond investor has an investment horizon of 6 years. He recently calculated that the
Macaulay duration of his portfolio is 9. What is the duration gap?

A. 3
B. 1.5
C. 0.67

98. Which one of these risks forms part of the three main components of credit risk?

A. Liquidity risk
B. Spread risk
C. Business risk

99. Which of the following would most likely be an example of the I-spread (interpolated
spread)?

A. The difference between the yield on a Treasury bond and the yield on a corporate bond
of the same maturity.
B. The difference between the yield on a bond and the LIBOR.
C. The constant spread that makes the price of a security equal to the present value of its
cash flows when added to the yield at each point on the spot rate Treasury curve.

37
Derivatives Investments 100-106

100. If B.C. Bank buys a swaption, it has:

A. The obligation to enter into a swap if the option is exercised.

B. The right, but not the obligation to enter into a swap if the option is exercised.
C. The obligation to make a payment to the counterparty if the swaption is exercised.

101. AlphaC Fund enters into an equity swap with an investment bank. AlphaC agrees to pay
the return on the Emerging index and receive the return on the North American index. The
swap’s notional principal is $100 million.

Start 3 months
North American index 1500 1432
Emerging index 899 1031

The net amount AlphaC has to pay after 3 months is closest to:

A. $10.15 million
B. $14.68 million
C. $19.21 million

102. Consider an April USD 190 put on the stock of Facebook. If FB is currently worth USD 175,
which of the following statements is most likely correct?

A. The option is currently in the money.

B. The option is currently out of the money.
C. The option is currently at the money.

103. An investor would face the greatest risk of default by buying:

A. A future commodity contract with a physical delivery clause.

B. A cash-settled future contract on a high volatile commodity.
C. A cash-settled forward contract.

38
104. The intrinsic value of an option is always zero:

A. When the option is out of the money

B. At the expiration date
C. When the value of the underlying asset is 0

105. A trader takes a short position in 25 future contracts where the initial margin is $1,000 per
contract, and the maintenance margin is $800 per contract. If the margin account balance is
$19,000 on day 10, the variation margin is closest to:

A. $6,000
B. $1,000
C. $5,000

106. Which of the following statements regarding future contracts is least likely accurate?

A. The value of a futures contract is always derived from its underlying asset.
B. Futures contracts are all cash-settled contracts.
C. Future contracts always trade on regulated markets.

39
Alternative Investments 107-113

107. A hedge fund is taking directional bets on macroeconomic events. What type of a hedge
fund is this?

A. Global macro fund

B. Market-Neutral fund
C. Long-Short fund

108. Which of the following is most likely a type of risk specifically introduced by the use of
derivatives?

A. Liquidity risk
B. Compliance risk
C. Reciprocity risk

109. A Global macro hedge fund invests into:

A. Start-ups and small- and medium-size enterprises with strong growth potential.
B. Stocks with a national reputation for quality, reliability, and the ability to operate
profitably in good times and bad.
C. Various equity, fixed income, currency, and futures markets - primarily on overall
economic and political views of various countries.

110. Which one of these types of funds most likely trades in secondary markets?

A. Unit investment funds

B. Close-end funds
C. Open-end funds

40
111. Historically, commodities have had a high positive correlation with:

A. Inflation
B. Hedge funds
C. Stock returns

112. Adding alternative investments to a diversified portfolio will most likely result in:

A. A higher return and a lower standard deviation.

B. A higher return and a higher standard deviation.
C. A lower return and no effect on standard deviation.

113. Which of the following characteristics will be considered as desirable by a private equity
company seeking a target for an LBO (leveraged buyout)?

A. An average ability to generate cash flows

B. Companies perceived as being “in favor” in the general market
C. Inefficient management

41
Portfolio management 114-120

114. As mandated by regulators worldwide, the global investment industry has undertaken
major steps in stress testing and risk assessment that involve the analysis of vast amounts of
quantitative and qualitative risk data. Which of the following statements is most accurate?

A. There is decreasing interest in monitoring risk in real time because of the advances in
artificial intelligence (AI).
B. Required data include information on the liquidity of the firm, its balance sheet
positions and credit exposures.
C. Big Data cannot help identify weakening market conditions and adverse trends in
advance.

115. Stock A’s expected return is 5%, and its standard deviation is 12%. Stock B’s expected
return is 12%, and its standard deviation is 17%. What is the standard deviation of a portfolio
composed of 40% stock A and 60% stock B given that the correlation between the two stocks is
0.5?

A. 13.27%
B. 1.76%
C. 19.90%

116. Given the CAPM model, Company A is expected to return 10% to its investors. The
expected return of the market is 8%, and the risk-free rate is 3%. Company A’s beta is closest to:

A. 0.88
B. 1.40
C. 0.71

117. Which of these investors is more likely to have a low tolerance for investment risks?

A. Calton University
B. Newtown Car Insurance Inc.
C. UNN Defined Benefit Pension Plan

42
118. Portfolio ABC has a beta of 1.6 and generated a return of 21%. If the risk-free rate is 2% and
the market premium is 10%, Jensen’s alpha for this portfolio is closest to:

A. 5.0%
B. 6.2%
C. 3.0%

119. An analyst has recently read a research paper developed at a renowned university which
says that the prices of derivatives are also sensitive to the changes in interest rates. If the analyst
is interested in measuring such changes, then the best metric he should use is:

A. Rho
B. Gamma
C. Delta

120. An investor is interested in knowing the real return his portfolio has earned over a certain
period. Assuming that the nominal return of his portfolio is 18%, the CPI is 6%, and the tax rate
is 38.9%, then the real return of the portfolio is closest to:

A. 19.08%
B. 11.32%
C. 6.92%

43
Annex A: Z- table

44