Mock Exam 2023 #2 First Session Ethical and Professional Standards

Level I of the CFA® Exam
Mock Questions with Answers - Mock Exam 2023 #2 - First

Session (Ethical and Professional Standards, Quantitative
Methods, Economics & Financial Statement Analysis)
Offered by AnalystPrep
Last Updated: Sep 5, 2023
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Q.1 A country has a real GDP of $4.4 trillion and a nominal GDP of $4.84 trillion. T he unemployment
rate is 6.5%. T he GDP deflator is closest to:
A. 90.1
B. 110.0
C. 117.6
T he correct answer is B.
T he GDP deflator is also called implicit price deflator for GDP. It is simply the ratio of Nominal GDP
to Real GDP and is expressed as:
Nominal GDP 4.84

GDP deflator = × 100 = × 100 = 110.0
Real GDP 4.4
A i s i ncorrect. T he GDP Deflator has been obtained using the wrong formula, i.e., dividing the real
GDP by the nominal GDP instead of the nominal GDP by the real GDP.
C i s i ncorrect. B has been wrongly obtained by taking 6.5% of the real GDP then subtracting the
answer from real GDP before proceeding with the correct GDP Deflator formula. T he
unemployment rate does not affect GDP Deflator calculations.
CFA Level 1, Vol ume 2, Readi ng 10 – Aggregate Output, Pri ces, and Economi c Growth,
LOS 10c: compare nomi nal and real GDP and cal cul ate and i nterpret the GDP defl ator.
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© 2014-2023 AnalystPrep.
Q.2 A market survey was conducted to estimate the proportion of customers who could recognize a
certain brand by only looking at their logo. Of the 1,000 customers surveyed, 620 were able to
identify the brand. Using a 99% confidence interval, the proportion of the population that can
identify the brand lies between:(Use this Normal Table.)
A. 0.5899 and 0.6500.
B. 0.5804 and 0.6596.
C. 0.61939 and 0.6206.
T he implication here is that we have a binomial distribution.
Confidence Interval = p ± Z0. 01×s p
Where Sp is the standard deviation and p is the mean
p(1 − p)
sp = √
n
620
Here we have n = 1, 000, p = 1,000 = 0.620 and z = 2.58( for 99%).
T herefore:
0.620(1 − 0.620)
0.620 ± 2.58 × √ = 0.620 ± 0.0396 = (0.5804, 0.6596)
1, 000
You may use the following standard normal table:
CFA Level 1, Vol ume 1, Readi ng 4 – Common Probabi l i ty Di stri buti on, LOS 4k : Defi ne
shortfal l ri sk , cal cul ate the safety-fi rst rati o, and i denti fy an opti mal portfol i o usi ng
Roy’s safety-fi rst cri teri on.
3
Q.3 Over five years, portfolio A obtained an average return of 9% with a variance of 0.035. During
the same period, portfolio B obtained an average return of 11% with a variance of 0.050. Given that
the covariance of the two investments is 0.010, the correlation coefficient between those returns is
closest to:
A. 0.239
B. 4.183
C. 5.714
T he correct answer is A.
Correlation is a ratio of the covariance between two random variables and the product of their
standard deviations. It measures the strength of the linear relationship between two variables and
takes values between -1 and 1. A value of -1(1) indicates a perfect negative (positive) relationship
between two variables, i.e., a unit change in one variable means that the other variable will have a
unit change in the opposite (same) direction.
Cov (A, B) 0.010

Correlation coefficient = = = 0.2390
σAσB √0.035√0.0500
B i s i ncorrect. It has been incorrectly obtained by interchanging the formula, as shown below.
σAσB √0.035√0.0500 0.04183

= = = 4.183
Cov(A, B) 0.010 0.010
C i s i ncorrect. It has been incorrectly obtained by using the variances of the two portfolios in
place of their standard deviation, as shown below.
CFA Level 1, Vol ume 1, Readi ng 3 – Probabi l i ty Concepts, LOS 3k : Cal cul ate and
i nterpret the expected val ue, vari ance, standard devi ati on, covari ances, and
correl ati ons of portfol i o returns.
4
Q.4 Assume that 4% of the stocks meeting a specific set of selection criteria are classified as
technology stocks and that dividend-paying stocks constitute 2% of the total number of stocks
meeting the same criteria. Based on this information, the probability that a stock is dividend-paying,
given that it is a technology stock that has met the selection criteria, is closest t?
A. 0.02
B. 0.04
C. 0.08
Conditional probability is the probability that an event occurs, given another event has already
occurred.
It is given by the general formular:
P (B and A)
P (B/A) =
P (A)
T herefore, the probability that a stock is dividend-paying given that it is a technology stock that has
met the selection criteria is given below.
P(stock is div. paying and tech stock meeting criteria)

P(stock is div. paying | tech stock that meets criteria) =
P(tech stock meeting criteria)
0.02 × 0.04
= = 0.02
0.04
CFA Level 1, Vol ume 1, Readi ng 3 – Probabi l i ty Concepts, LOS 3d: Cal cul ate and
Interpret Condi ti onal Probabi l i ti es.
5
Q.5 Aggregate demand is:
A. the potential output level of each labor force.
B. the demand for the gross domestic product of an economy.
C. the total supply of goods all firms plan on selling during a period of time.
Aggregate demand is the demand for final goods and services in an economy during a given period of
time. It can also be described as the demand for an economy’s GDP. Aggregate demand equals gross
domestic product (GDP), at least in purely quantitative terms, because they share the same equation.
As a matter of accounting, it must always be the case the aggregate demand and GDP increase or
decrease together.
A i s i ncorrect. T he production capacity of an economy is known as potential output.
C i s i ncorrect. T he total supply of goods in a market at a particular time is known as aggregate
supply.
LOS 10f: Expl ai n how the aggregate demand curve i s generated.
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Q.6 T he 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. 4.68%
C. 4.70%
Recall that the effective annual rate is the rate of return earned by an investor in a year, taking into
account compounding effects.
Effective Annual Rate = (1 + Periodic Interest Rate)m– 1
T hus,
52
N ominal Annual Rate
4.76% = (1 + ) −1
52
52
1.0476 = (1 + )
52
1 N ominal Annual Rate
1.0476 52 = (1 + )
52
1.00089 = (1 + )
52
52.04652 = 52 + Nominal Annual Rate
Nominal Annual Rate = 4.65%
B i s i ncorrect. 4.68% is the nominal annual interest rate on the loan compounded quarterly.
C i s i ncorrect. 4.70% is the nominal annual interest rate on the loan compounded semi-annually.
CFA Level 1, Vol ume 1, Readi ng 1: The Ti me Val ue of Money, LOS 1c: cal cul ate and
i nterpret the effecti ve annual rate, gi ven the stated annual i nterest rate and the
frequency of compoundi ng
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Q.7 Andrew Zilemann would like to rent a car for the next four 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 annual
interest rate of 6% compounded monthly, and the cost of the rental is $340 a month. Zilemann would
most likely need:
A. $5,321
B. $14,477
C. . $18,393
We can use the financial calculator to work out this question as outlined in the steps below.
I
N = 48; = 0.5; PMT = −340; FV = 0;
Y
CPT – >; PV = 14, 477
Note: T he minus sign before the PV shows that the value is a present value, not necessarily that the
initial amount is negative.
A i s i ncorrect. A has been incorrectly obtained by assuming that the 6% is already the monthly
rate. T he correct way is to first obtain the monthly rate by dividing the given rate by 12.
C i s i ncorrect. C is the future value and not the present value as asked by the question.
CFA Level 1, Vol ume 1, Readi ng 1: The Ti me Val ue of Money, LOS 1e: cal cul ate and
i nterpret the future val ue (FV) and present val ue (PV) of a si ngl e sum of money, an
ordi nary annui ty, an annui ty due, a perpetui ty (PV onl y), and a seri es of unequal cash
fl ows.
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Q.8 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%. T he
standard error of the sample mean is closest to:
A. 0.06%
B. 0.46%
C. 0.98%
T he correct answer is C.
T he standard error (SE) of the sample mean refers to the standard deviation of the distribution of the
sample means. Provided the population standard deviation, σ, is known, analysts use the following
formula to estimate the standard error of the sample mean:
σ
x̄ =
√n
0.17
= = 0.009815
√300
A i s i ncorrect. 0.06% has been incorrectly obtained by failing to get the square root of n.
B i s i ncorrect. 0.46% has been incorrectly obtained by dividing the mean return, instead of the
standard deviation of returns, by the square root of n.
CFA Level 1, Vol ume 1, Readi ng 5 – Sampl i ng and Esti mati on, LOS 5e: cal cul ate and
i nterpret the standard error of the sampl e mean.
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Q.9 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. -505
B. -448
C. -768
T he covariance is a measure of the degree of co-movement between two random variables.
Cov (X Y ) = E[(X − E (X)) (Y − E (Y ))]
E(X) = 0.40 × 100 + 0.60 × 180 = 148
E(Y) = 0.40 × 150 + 0.60 × 110 = 126
Cov(X,Y) = 0.40 × (100– 148) × (150– 126) + 0.60 × (180– 148) × (110– 126)
= −460.80 − 307.20
= −768
A and B are i ncorrect. As seen above, the covariance between X and Y is -768.
CFA Level 1, Vol ume 1, Readi ng 3 – Probabi l i ty Concept, LOS 3k : cal cul ate and
i nterpret the expected val ue, vari ance, standard devi ati on, covari ances, and
correl ati ons of portfol i o returns.
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Q.10 Palanela’s stock is currently trading at $53. In one year, analysts predict that the stock will be
trading at $60. Palanela will also pay a dividend of $2 during this period. T he expected holding period
return on Palanela’s stock is closest to:
A. 3.78%
B. 13.21%
C. 16.98%
[Dividend+ (End Price– Begin Price)]

HPR =
Begin Price
[2 + (60– 53)]
HPR = = 16.98%
53
A i s i ncorrect. 3.78% will be obtained by leaving out the difference between the beginning and
ending price in the calculation of HPR. T he correct way is to add dividends to the difference obtained
after subtracting the beginning from the end price before dividing by the beginning price.
B i s i ncorrect. 13.21% will be obtained by leaving out dividends in the calculation of Holding Period
Return. T he correct way is to add dividends to the difference obtained after subtracting the
beginning from the end price before dividing by the beginning price.
CFA Level 1, Vol ume 1, Readi ng 4 – Common Probabi l i ty Di stri buti ons, LOS 4m:
cal cul ate and i nterpret a conti nuousl y compounded rate of return, gi ven a speci fi c
hol di ng peri od return.
Q.11 T he aggregate demand curve shows a:
A. Positive relationship between the price level and aggregate output demanded.
B. Negative relationship between the price level and aggregate output supplied.
C. Negative relationship between the price level and aggregate output demanded.
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T he aggregate demand curve is a negatively sloped curve that depicts the relationship between the
price level and quantity demanded. Since it is a negatively sloped curve, an increase in price level
decreases the demand for goods. A decrease in the price level increases the demand for goods.
A i s i ncorrect. T he aggregate demand curve is a downward-sloping curve. It shows a negative, not
positive, relationship between the price level and aggregate output demanded.
B i s i ncorrect. T he aggregate demand curve shows a negative relationship between the price level
and aggregate output demanded, not supplied.
LOS 10f: Expl ai n how the aggregate demand curve i s generated.
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Q.12 A quantitative analyst has calculated the mean holding period return (HPR) of 1% for 110
European corporate bonds with a standard deviation of 2%. If the analyst wants to test at a 5% level
of significance that the mean HPR on European corporate bonds is different from zero, then the test
statistic is closest to:
A. 0.50
B. 5.24
C. 55.0
A test statistic is a standardized value computed from sample information when testing hypotheses. It
is calculated as shown below. >/p>
Sample mean - Hypothesized value

Test Statistic =
Standard deviation
√Sample size
1% − 0
= 2%
√110
= 5.24
A i s i ncorrect. T he square root of the sample size has been left out in the calculation of the test
statistic.
C i s i ncorrect. T he sample size has been sued as it is. T he correct way is first to get the square
root of the sample size, as shown in the calculation above.
CFA Level 1, Vol ume 1, Readi ng 6 – Hypothesi s Testi ng, LOS 6c: expl ai n a test stati sti c,
Type I and Type II errors, a si gni fi cance l evel , how si gni fi cance l evel s are used i n
hypothesi s testi ng, and the power of a test.
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Q.13 An oil drilling company plans to invest $14.3 million in a project expected to generate $3.7
million per year for the next seven years. If the company’s opportunity cost of capital is 8%, then
the project’s net present value is closest to:
A. 4,343,123
B. 4,963,569
C. 5,672,650
3, 700, 000 × (1 − (1 + 0.08)−7 )

NP V = −14, 300, 000 + = 4, 963, 569
0.08
or
−14, 300, 000 + 3, 700, 000 × (1.08)−1 + 3, 700, 000 × (1.08)−2 + … + 3, 700, 000 × (1.08)−7 = 4, 963,
We can also use the financial calculator to arrive at the above answer, as shown below.
CFO=-14.3, C01=3.7, F01=7
T hen press “CPT ” “NPV” input “I” as eight, then press “CPT ’ to get the NPV as 4.963569 million
CFA Level 1, Vol ume 1, Readi ng 1 – The Ti me Val ue of Money, LOS 1e: cal cul ate and
i nterpret the future val ue (FV) and present val ue (PV) of a si ngl e sum of money, an
ordi nary annui ty, an annui ty due, a perpetui ty (PV onl y), and a seri es of unequal cash
fl ows.
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Q.14 ABC stock is trading at $75. Every year, it has a 60% probability of increasing by 1.1 and a 40%
1
probability of decreasing by a factor of 10 . T he probability that the stock will have risen in value
after two years is closest to:
A. 36%
B. 60%
C. 66%
T he only way the stock can rise in value after 2 years is that it moves up the first year and then up
again the second year. I.e. T he increase in year one would be independent from the increase in year
two. T hus, (0.6) × (0.6) = 36%
B i s i ncorrect. 60% is the probability of the stock’s value increasing by 1.1 after one and not two
years.
C i s i ncorrect. 66% has been incorrectly obtained by multiplying the probability of an increase in
value by the amount the value increases.
CFA Level 1, Vol ume 1, Readi ng 3 – Probabi l i ty Concepts, LOS 3j : i nterpret a
probabi l i ty tree and demonstrate i ts appl i cati on to i nvestment probl ems.
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Q.15 Which of the following is least likely a reason why a country may want to cooperate with
others?
A. National security.
B. Economic interest.
C. Political self-determination.
Political self-determination is a reason why a country may be non-cooperative. Countries whose
political self-determination is more important than the benefits of any cooperation take a non-
cooperative stance.
A i s i ncorrect. National security is a motivation for cooperation. It involves protecting a country
from external threats such as military attacks, cyber-security, and natural disasters.
B i s i ncorrect. Economic interest is another motivation for cooperation. Countries choose to
cooperate to secure essential resources through trade or to level the playing field for their
companies or industries.
CFA Level 1, Vol ume 2, Readi ng 13 – Introducti on to Geopol i ti cs, LOS 13a: Descri be
geopol i ti cs from a cooperati on versus competi ti on perspecti ve.
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Q.16 You are given the following exchange rates:
EUR/USD 0.6288
CHF/USD 0.8833
JPY/CHF 120.3211
JPY/CAD 99.0001
GBP/CAD 0.5556
T he GBP/EUR exchange rate is closest to:
A. 0.5857
B. 0.9486
C. 1.0542
We will use all the given exchange rates, eliminating along the way until we get to EUR/GBP. T hen
we will get an inverse of EUR/GBP, which will be the GBP/EUR exchange rate.
USD/EUR × CHF/USD × JPY/CHF × CAD/JPY × GBP/CAD = GBP/EUR
From the table above,
1
USD/EUR = = 1.5903
0.6288
CHF/USD = 0.8833
JPY/CHF = 120.3211
1
CAD/JPY = = 0.010101
99.0001
GBP/CAD = 0.5556
T hus,
GBP/EUR = 1.5903 × 0.8833 × 120.3211 × 0.0101 × 0.5556 = 0.9486
A i s i ncorrect. 0.5857 is the EUR/JPY exchange rate.
C i s i ncorrect. 1.0542 is the EUR/GBP exchange rate.
CFA Level 1, Vol ume 2, Readi ng 15 – Currency Exchange Rates, LOS 15d - Cal cul ate and
i nterpret currency cross-rates.
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Q.17 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.
Disinflation is a reduction in the rate of inflation. It occurs when the rate at which the prices are
rising is diminishing. It is important to understand that it does not signal the slowing down of the
economy’s growth but a slowing down in the inflation rate.
A i s i ncorrect. An economy in hyperinflation is an economy with an extreme case of inflation.
Such an economy’s inflation rate is above 100%. Hyperinflation occurs when an economy’s money
supply is rising but not supported by economic growth.
C i s i ncorrect. An economy with a consistently negative inflation rate is an economy in deflation.
CFA Level 1, Vol ume 2, Readi ng 11 – Understandi ng Busi ness Cycl es, LOS 11g: Expl ai n
i nfl ati on, hyperi nfl ati on, di si nfl ati on, and defl ati on.
18
Q.18 According to the Fisher effect, a decrease in expected inflation will most likely decrease:
A. T he real interest rate.
B. T he nominal interest rate.
C. T he real interest rate and the nominal interest rate.
T he Fisher effect states that the real interest rate is stable in an economy and that nominal interest
rate changes result from changes in expected inflation.
Since changes in nominal interest rates result from changes in inflation, a decrease in expected
inflation will decrease the nominal interest rate.
A i s i ncorrect. A decrease in expected inflation will lead to an increase and not a decrease in the
real interest rate.
C i s i ncorrect. A decrease in expected inflation will decrease the nominal interest rate but
increase the real interest rate.
CFA Level 1, Vol ume 2, Readi ng 12 – Monetary and Fi scal Pol i cy, LOS 12e: descri be the
Fi sher effect
Q.19 Tom Jones, CFA calculates the P/E ratios of the seven stocks that are in his personal portfolio
as shown below.
Stoc P/E
Stock 1 12.45
Stock 2 9.80
Stock 3 18.24
Stock 4 16.40
Stock 5 8.60
Stock 6 8.90
Stock 7 11.20
From the table above the harmonic mean is closest to?
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A. 11.3636
B. 11.8029
C. 12.2271
Inverse of the P/E

Stock P /E (X i)
(1/X i)
Stock 1 12.45 0.0803
Stock 2 9.8 0.1020
Stock 3 18.24 0.0548
Stock 4 16.4 0.0609
Stock 5 8.6 0.1163
Stock 6 8.9 0.1124
Stock 7 11.2 0.0893
∑ 1 = 0.616
Xi
7
Harmonic Mean = = 11.3636
0.616
B i s i ncorrect. 11.8029 is the geometric mean.
1
Geometric mean = [(1 + X 1 ) (1 + X 2 ) (1 + X 3) … (1 + X n )]n − 1
1
= (1 + 12.45) (1 + 9.8) (1 + 18.24) (1 + 16.4) (1 + 8.6) (1 + 8.9) (1 + 11.2) 7 − 1
= 11.8029
C i s i ncorrect. 12.2271 is the arithmetic mean.
12.45 + 9.8 + 18.24 + 16.4 + 8.6 + 8.9 + 11.2

= 12.2271
7
CFA Level 1, Vol ume 1, Readi ng 2: Organi zi ng, Vi sual i zi ng, and Descri bi ng Data, LOS
2g: cal cul ate and i nterpret measures of central tendency
20
Q.20 Frank Lee, the Chief Investment Officer of Cornerstone Investment Managers has created a
contingency table of the number of companies in the Cornerstone’s portfolio by sector in two
countries.
Sector South Africa Australia

Real Estate 32 24
Financial services 36 22
Health Care 19 28
Energy 13 21
Utilities 11 41
From the data above, the marginal frequency of the financial services sector is closest to:
A. 36
B. 56
C. 58
T he marginal frequencies of the financial services sector in the portfolio is the sum of the
frequencies of the companies in the financial sector in the two countries.
= 36 + 22 = 58
A i s i ncorrect. 36 is the joint frequencies for financial services companies in South Africa.
B i s i ncorrect. 56 is the marginal frequency of the real estate sector.
CFA Level 1, Vol ume 1, Readi ng 2 – Organi zi ng, Vi sual i zi ng, and Descri bi ng Data, LOS
2d: Interpret a conti ngency tabl e.
21
Q.21 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 a total cost amounting to $2.5 million, comprised
of T FC of $1 million and T VC of $1.5 million. T he 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. Minimize operations to cut total variable costs (T VC).
B. Shut down operations since the business is already making losses.
C. Continue operations but attempt to borrow funds for the short term.
From the financials given, the firm can cover all the T VC but can cover only about half of T FC ($1
million). If the business were to decide to shut down operations, its loss would be equal to the
amount of T FC ($1 million). However, if it chooses to continue operating, the net loss would be
minimized at $500,000. T he business should attempt to secure credit from financiers to navigate the
current profitability problems in the short term. T he fact that it has previously reported profits
means chances of successfully negotiating such an agreement would be quite high.
A i s i ncorrect. T he company should continue operating as before. Instead of minimizing
operations, it should borrow funds for the short term.
B i s i ncorrect. T he management will incur a net loss of $1,000,000 if it decides to shut down
operations. T he loss is more than a net loss of $500,000 if it decides to continue operating but
borrow funds for the short-term.
CFA Level 1, Vol ume 2, Readi ng 8 – Topi cs i n Demand and Suppl y Anal ysi s, LOS 8e:
determi ne and i nterpret break even and shutdown poi nts of producti on.
22
Q.22 Which one of these is more likely to create a demand curve shift of a product?
A. Unitary cost increases.
B. Government tax policies.
C. A change in consumers’ income.
Aggregate demand and supply curves address economic issues like expansion and contraction of the
economy, causes of inflation, and changes in unemployment levels.
Movements along the aggregate demand and supply curves are caused by a change in price, while
shifts along these curves happen when another variable (other than price) affects the demand for
goods and services.
Shifts along the aggregate demand curve will be caused by changes in factors that influence the level
of expenditure by households, governments, firms, and foreigners. Such factors include household
wealth/ change in consumer’s income, consumer and business expectations, capacity utilization,
monetary and fiscal policies, global economic growth, and exchange rate changes.
On the other hand, shifts along the supply curve are caused by factors that influence the cost of
production. Such factors include changes in nominal wages, input prices / unitary cost changes, taxes
and subsidies/ government tax policies, productivity and technology, labor supply, natural resources
supply, human capital supply, and physical capital supply.
As seen above, a change in consumers’ income will cause shifts along the aggregate demand curve.
On the other hand, unitary cost increases and government tax policies will cause shifts along the
aggregate supply curve.
A i s i ncorrect. Unitary cost increases will cause a supply curve and not a demand curve shift.
B i s i ncorrect. Government tax policies will cause a supply curve and not a demand curve shift.
CFA Level 1, Vol ume 2, Readi ng 10 – Aggregate output, pri ces, and economi c growth,
LOS 10h: Expl ai n causes of movements al ong and shi fts i n aggregate demand and
suppl y curves.
23
Q.23 T he price of a good has gone up from $41 to $45.As a result, its demand 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. T he good has unitary elasticity.
Elasticity measures the sensitivity or responsiveness of one variable to another. Elasticity is
measured in percentage changes in each of the variables.
%ΔQ
Elasticity =
%ΔP
14,000,000−15,000,000
15,000,000
= 45−41
41
41
=− = −0.683
60
Since -0.683 < 1, demand is inelastic. Inelastic demand means that the quantity demanded changes by
a smaller proportion than the price.
A i s i ncorrect. Demand is elastic if the price elasticity of demand is greater than one. Elastic
demand means that the quantity demanded changes by a larger proportion than the price.
C i s i ncorrect. Demand is unitary elastic if the price elasticity of demand is one. Unitary elastic
demand implies that the change in demand is equal to the change in supply.
CFA Level 1, Vol ume 2, Readi ng 8 – Topi cs i n Demand and Suppl y Anal ysi s, LOS 8a:
cal cul ate and i nterpret pri ce, i ncome, and cross-pri ce el asti ci ti es of demand and
descri be factors that affect each measure.
24
Q.24 A country has the following characteristics:
Exports of goods and sevices &14, 000, 000

Investment income received from foreigners $ 3, 200, 000
Imports of goods and services $ 11, 430, 000
Investment Income payments made to foreigners $ 1, 600, 000
What is the country's account balance?
A. $ 2,570,000
B. $ 4,170,000
C. $ 7,370,000
Current Account Balance + Current Account = (Exports - Imports) + Net Income from Abroad
$14, 000, 000 + $3, 200, 000 − $11, 430, 000 − $1, 600, 000
= 4,170,000
A i s i ncorrect. $ 2,570,000 is the country’s net exports.
C i s i ncorrect. $ 7,370,000 has been incorrectly obtained by adding instead of subtracting the
investment income payment made to foreigners.
CFA Level 1, Vol ume 2, Readi ng 14 – Internati onal Trade and Capi tal Fl ows, LOS 14h:
descri be the bal ance of payments accounts i ncl udi ng thei r components.
25
Q.25 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. Cheaper for Americans.
B. More expensive for Americans.
C. T he same price as before for Americans.
Since the Canadian dollar is now more expensive in terms of US dollars, Americans will be paying
more to get the same amount of Canadian dollars.
A i s i ncorrect. T he goods will be more expensive for Americans.
C i s i ncorrect. T he goods will be more expensive for Americans.
CFA Level 1, Vol ume 2, Readi ng 15 – Currency Exchange Rates, LOS 15a: defi ne an
exchange rate and di sti ngui sh between nomi nal and real exchange rates and spot and
forward exchange rates.
26
Q.26 A European company has recently received a payment of CAD 760,000 (Canadian dollars). T he
spot rate for CAD/USD is 0.8831, and the spot rate for EUR/USD is 1.2341. T he amounts the
European company will receive in Euros is closest:
A. 697,370
B. 828,724
C. 1,062,100
We are given
CAD/U SD = 0.8831
And,
EU R/U SD = 1.2341
We need, EUR/CAD. Intuitively, we need the cross-rate:
EU R/CAD = EU R/CAD × (CAD/U SD)−1

= 1.2342 × (0.8831)−1
= 1.3975
EUR/CAD = 1.3975 implies that 1CAD=1.3975EUR. T herefore, for CAD 760,000, we have:
760, 000 × 1.3975 = EUR 1, 062, 100
CFA Level 1, Vol ume 2, Readi ng 19 – Currency Exchange Rates, LOS 19d: Cal cul ate and
i nterpret currency cross- rates
27
Q.27 Tom Zion, an equity research analyst uses ABA Bank’s historical dividends payments to estimate
its dividend payments for the next five years. T hese dividends estimates would most likely be
classified as:
A. ordinal data.
B. discrete data.
C. continuous data.
Continuous data is data that can take any numerical value in a specified range of values. T he
estimated dividends could take on a range of values depending on growth rate and dividend payouts.
A i s i ncorrect. Ordinal data are categorical values that can be logically ordered or ranked. T hey
may also involve numbers to identify categories. An example would be to assign the number 1 to the
top performing 20% of hedge funds while number 2 to the next best performing 20% of hedge funds.
B i s i ncorrect. Discrete data are numerical values that result from a counting process. T his limits
the data to a finite number of values. An example would be the number of bond coupon payments.
2a: Identi fy and compare data types.
28
Q.28 T he daily closing prices of particular stock recorded for a given month most likely constitute
what type of data?
A. Panel data.
B. T ime-series data.
C. Cross-sectional data.
T ime series data is a succession of observations for a single observational unit of a given variable
recorded over time and at distinct and normally uniformly spaced intervals of time such as daily,
weekly, monthly, or annually. An example is the daily closing prices of a stock recorded for a given
month.
A i s i ncorrect. Panel data is a mix of both time-series and cross-sectional data that is often used in
financial analysis and modelling. Panel data are observations on one or more variables over time for
numerous observational units.
C i s i ncorrect. Cross-sectional data is a list of observations of a certain variable from several
observational units at a given point in time. For example, January inflation rates for each of the G-20
countries for a given year.
2a: Identi fy and compare data types.
29
Q.29 Which of these would least likely be an objective of monetary policy?
A. Ensuring price stability.
B. Ensuring economic growth.
C. Ensuring general trust in the currency.
Monetary and fiscal policies are government policies and tools used to control macroeconomic
variables and financial markets. Whenever the economy slows down, these tools are used to
accelerate growth. T hey are also used to moderate inflation whenever the economy starts to
overheat. Monetary policy is generally concerned with managing interest rates and the stability of a
country’s currency, including money in circulation. On the other hand, fiscal policy is primarily
concerned with governments' tax policies and spending habits.
T hus, ensuring economic growth would be an objective of fiscal policy. Ensuring price stability and
ensuring general trust in the currency are both objectives of monetary policy.
A and C are i ncorrect. T hey are objectives of monetary policy.
CFA Level 1, Vol ume 2, Study Sessi on 4, Readi ng 12 – Monetary and Fi scal Pol i cy, LOS
12a: Compare monetary and Fi scal Pol i cy.
30
Q.30 Which of the following statements is least likely accurate?
A. T he employment rate is the percentage of the labor force that is employed.
B. T he labor force comprises all of the members of a particular population who can work.
C. T he unemployment rate will increase if the participation ratio declines and the number of
people employed remains unchanged.
T he participation ratio represents the active portion of an economy’s labor force. I.e. the number of
people already employed and those actively looking for work.
T he unemployment rate will decrease if the labor force participation ratio declines and the number
of people employed remains unchanged. T here would be fewer people willing to work, which would
result in a decrease in unemployment, even if the decrease itself is not attributable to an improved
economy. T he participation ratio usually declines when people get discouraged (and possibly
frustrated) and stop seeking employment.
A i s i ncorrect. T he percentage of the labor force that is employed is known as the employment
rate.
B i s i ncorrect. T he labor force comprises members of a particular population who can work.
CFA Level 1, Vol ume 2, Readi ng 11 – Understandi ng Busi ness Cycl es, LOS 11f: descri be
types of unempl oyment, and compare measures of unempl oyment.
31
Q.31 A graph can be confusing if the data is incorrectly presented, or the graph is badly designed.
Which of the following is least likely a typical pitfall that analysts should avoid?
A. Selecting an improper chart type to present data.
B. Plotting in a truncated graph that has an x-axis that does not start at zero
C. Selectively plotting data in favor of the conclusion the analyst intends to draw
Plotting a truncated graph that has an x-axis that does not start at zero is the least likely pitfall that
analysts should avoid. T he four typical pitfalls that analysts should avoid are:
i. Selecting an improper chart type to present data which hinders the accurate interpretation
of data. Example, plotting two data series that one is trying to examine a relationship
between on two different line graphs
ii. Plotting data in favor of a conclusion an analyst intends to draw. When data is presented for a
brief period of time, it may be misconstrued for a trend that does not exist.
iii. Plotting data in a truncated graph that has a y-axis that does not start at zero. T he truncated
graph can give the mistaken appearance of big differences when there are only minor
variations in some cases.
iv. Improperly scaling of axes. Setting a greater than necessary maximum on the y-axis on a line
chart tends to compress the graph into a region near the x-axis.
2f: Descri be how to sel ect among vi sual i zati on types.
32
Q.32 T he following table shows the returns of share indexes of the counntries A and B.
Year 1 Year 2 Year 3

Country A 5.2% 9.8% −1.2%
Country B 3.5% 10.2% 7.6%
T he arithmetic mean returns of country A and geometric mean return of country B of the share
indexes over the three years in the table below is closest to:
A. 7.1% and 6.46%
B. 4.6% and 7.06%
C. 7.1% and 3.93%
Country A’s arithmetic mean is the sum of the values of the observations divided by the number of
observations:
∑ni=1 X i (5.2% + 9.8% − 1.2%) 13.8

X̄ = = = = 4.6%
n 3 3
Country B’s geometric mean is:
1
T T
R G = [∏ (1 + R t)] −1
t=1
1
= (1.035 × 1.102 × 1.076) 3 − 1 = 7.06%
2g: Cal cul ate and i nterpret measures of central tendency.
33
Q.33 What is the third quintile of the following distribution?
4.1%; 1.8%;7.2%; 8.6%; 12.1%;2.5%; 4.3%; 2.3%
A. 5.40%
B. 5.46%
C. 5.75%
We are looking for the third quintile = 60%
n = 8(observations)
y = 60(%)
y
Ly = (n + 1)
100
60
= ×9
100
= 5.4
5th number : 4.3%
6th number : 7.2%
We then interpolate as:
Interpolated value = X 1 + (L 60 − 5) × (X 2 − X 1)
= 0.043 + (5.4 − 5) × (0.072 − 0.043)
= 0.0546 or 5.46%
2i : cal cul ate quanti l es and i nterpret rel ated vi sual i zati ons.
34
Q.34 T he demand and supply curves for a bag of rice are: D = 6 - 1P , S = 3 + 0.5P Where P is the
price of a bag of rice. T he quantity of bags of rice bought and sold at equilibrium is closest to:
A. 2
B. 4
C. 8
First, we’ll set supply equal to demand:
6 − 1P = 3 + 0.5P
3 = 1.5P
P=2
Now that we know the equilibrium price, we can solve for the equilibrium quantity by simply
substituting P = 2 into the supply or the demand equation:
S = 6−1×2 = 4
T hus, the equilibrium price is 2, and the equilibrium quantity is 4.
A i s i ncorrect. 2 is the equilibrium price as seen above. To get the equilibrium quantity, we have
to substitute two into one of the given equations.
C i s i ncorrect. As seen above, the equilibrium quantity is 4. 8 is obtained by incorrectly adding the
answers obtained by substituting two into the demand and supply functions.
35
Q.35 T he accompanying table shows the prices and yearly quantities sold of souvenir T-shirts in the
town of Springfield.
Price of T-shirt Quantity of T-shirts demanded

$4 3 , 000
$5 2 , 400
$6 1 , 600
$7 800
T he price elasticity of demand, when the price of a T-shirt rises from $5 to $6, is closest to:
A. 1.13
B. 1.56
C. 1.67
Price elasticity of demand is calculated by dividing the percentage change in quantity demanded by
the percentage change in price.
%Change in Quantity Demanded

|Price Elasticity of Demand| =
%Change in Price
(1600−2400)
2400
PED = = −1.67
(6−5)
5
36
Q.36 A number of workers at an airplane manufacturing plant in Montreal, Canada, are laid off
because of a financial crisis. T he manufacturer isn’t sure when the plant will need to rehire. What
type of unemployment describes the workers’ situation?
A. Cyclical unemployment.
B. Frictional unemployment.
C. Structural unemployment.
Economists describe cyclical unemployment as unemployment dependent on cycles that occur
because of economic growth or decline. For example, if an economy goes into recession, a lot of
people will be laid off. T he scenario described in the question is also an example of cyclical
unemployment. Workers are getting fired as a result of a financial crisis. T he financial crisis might
mean that an economy is in recession.
B i s i ncorrect. Frictional unemployment occurs when workers change jobs or are transitioning
between jobs. T he mismatch may be due to location, skills, or payment. It is a voluntary kind of
unemployment. It is based on the value a worker accords their work and salary.
C i s i ncorrect. Structural unemployment occurs when there is no demand for a particular type of
worker. It can be attributed to a mismatch between the expertise of individuals and what employers
want. Technological advancements may also cause this type of unemployment.
CFA Level 1, Vol ume 2, Readi ng 11 – Understandi ng Busi ness Cycl es, LOS 11f: descri be
types of unempl oyment, and compare measures of unempl oyment.
Q.37 A company uses the US GAAP to prepare its financial statements. Which of the items listed
below is least likely going to be reported as an operating activity?
A. Interest paid.
B. Dividends paid.
C. Interest received.
37
Several differences exist between how the cash flow statement is prepared under IFRS and US
GAAP. T he most significant difference lies in the fact that IFRS gives companies more flexibility
regarding how interest paid or received, and dividends paid or received are reported and how income
tax expense is classified.
T he table below differentiates the financial reporting of various items under IFRS and US GAAP.
Item IFRS US GAAP

Classified as either an
Classified as an operating
Interest received operating or investing
activity
activity
Interest paid operating or financing
activity
activity
Dividends received operating or investing
activity
activity
Classified as a financing
Dividends paid operating or financing
activity
activity
Generally classified as an
operating activity.
However, a portion may e
allocated to either Classified as an operating
Income tax expense
investing or financing activity
activities if it is
specifically related to
those activities.
A and C are i ncorrect. Firms that use the US GAAP to report their financial statements classify
interest paid and received as operating activities.
CFA Level 1, Vol ume 3, Readi ng 20 – Understandi ng Cash Fl ow Statements, LOS 20c:
contrast cash fl ow statements prepared under Internati onal Fi nanci al Reporti ng
Standards (IFRS) and US general l y accepted accounti ng pri nci pl es (US GAAP)
38
Q.38 T he standard yield loss in the production of a drug is 10%. Due to technical issues, the yield loss
was 15% during the year. If the company follows the standard cost method when valuing its
inventory, should it include the cost incurred on the additional raw materials used in the cost of
finished goods?
A. Yes, it is directly related to production.
B. Yes, identifiable abnormal costs are charged to the inventory.
C. No, variations will be charged to the income statement as an expense.
Under the standard costing method, the inventory is valued at the standard cost. Any variations in the
actual cost are charged as expenses in the income statement.
A and B are i ncorrect. T he standard cost method only recognizes the standard yield loss.
Variations are charged as expenses on the income statement.
CFA Level 1, Vol ume 3, Readi ng 22 – Inventori es, LOS 22l : anal yze and compare the
fi nanci al statements of compani es, i ncl udi ng compani es that use di fferent i nventory
methods.
Q.39 T he following financial information is available at the end of the year for Terexa Inc.
Shared Information
Security Authorized Issued Other features
outstanding
Common stock 1, 000, 000 500, 000 Currently pays a dividend
of $1.15 per share
Preferred stock, series A 100, 000 20, 000 Nonconvertible, cumulative
pays a dividend of $3 per
share
Preferred stock, series B 150, 000 50, 000 Convertible pays a dividend
of $5.50 per share. Each share
is convertible into 3 common
shares
Addi ti onal Informati on Retained earnings at start of year = $10,000,000 Reported income for
the year = $2,000,000 Terexa’s diluted EPS is closest to:
39
A. $2.85
B. $2.98
C. $3.33
Basic EPS Diluted EPS

Net Income 2 , 000 , 000 2 , 000 , 000
Pref Div, Series A (60 , 000) (60 , 000) 20,000 sh × $3/sh
Pref Div, Series B (275 , 000) 0 50 , 000 sh × $ 5.50/sh
Earnings available to 1 , 665 , 000 1 , 940 , 000
Wei ghted Average Number of Common Shares (WACS)
Shares 500 , 000 500 , 000

If converted 150 , 000 3 com/pf × 50,000 pf
WACS 500 , 000 650 , 000
EPS = (Earnings
available to Common
Shareholders)/(WACS) 3.33 2.98
A i s i ncorrect. As seen above, the diluted EPS is 2.98.
C i s i ncorrect. 3.33 is the basic EPS.
CFA Level 1, Vol ume 3 , Readi ng 18 – Understandi ng Income Statements, LOS 18g:
descri be how earni ngs per share i s cal cul ated and cal cul ate and i nterpret a company’s
earni ngs per share (both basi c and di l uted earni ngs per share) for both si mpl e and
compl ex capi tal structures
Q.40 Simon Belfast, an equity analyst, is analyzing two market leaders (Sun Corp. & Moon Inc.) in the
automotive industry.
40
Sun Corp. Moon Inc.
Cash 250 , 000 410 , 000
Marketable Securities 380 , 000 240 , 000
Inventory 220 , 000 550 , 000
PPE 650 , 000 1 , 300 , 0000
Short-term liabilities 300 , 000 300 , 000
Long-term liabilities 700 , 000 400 , 000
Common Equity 500 , 000 1 , 800 , 000
Using the data given in the table, Sun Corp’s cash ratio is closest to:
A. 2.1
B. 2.2
C. 2.8
A cash ratio is a liquidity ratio that tests a company’s ability to meet its short-term obligations using
extremely liquid assets.
(Cash + Marketable securities)

Cash ratio =
Current liabilities
(250,000 + 380,000)
= = 2.1
300, 000
Note: T he cash ratio looks at the most liquid short-term assets of the company, which are those that
can be most easily used to pay off current obligations.
B i s i ncorrect. 2.2 is the cash ratio of Moon Inc., as shown below.
410, 000 + 240, 000

Cash Ratio for Moon Inc. = = 2.1667
300, 000
which can be rounded off to 2.2.
C i s i ncorrect. 2.8 is the current ratio of Sun Corp. Current ratio is obtained by dividing current
assets by current liabilities. In this case,
250, 000 + 380, 000 + 220, 000

= 2.8
300, 000
41
CFA Level 1, Vol ume 3, Readi ng 19 – Understandi ng Bal ance Sheets, LOS 19h: cal cul ate
and i nterpret l i qui di ty and sol vency rati os.
Q.41 A firm reported the following:
Cash flow from operations $ 1 , 000 , 000

Interest expense $ 150 , 000
Capital Expenditure $ 250 , 000
Tax rate 33 %
What is the company’s free cash flow to the firm (FCFF)?
A. $649,000
B. $850,500
C. $900,000
Generally, free cash flow refers to the excess of operating cash flow over capital expenditures.
Free cash flow to the firm (FCFF) is the cash flow available to a company’s debt and equity capital
suppliers after paying all its operating expenses and making the required investments in fixed and
working capital.
It is obtained using the formula:
FCFF=Net Income+Non cash charges+Interest expense (1-Tax rateright)-Capital expenditures-Working capital e
It can also be obtained using the formula:
FCFF=CFO+Interest expense(1-tax rate)-Capital expenditure
Where CFO is the cash flow obtained from operating activities in the case where interest expense is
included as an operating activity.
FCFF = CFO + Interest × (1 − Tax Rate) − Capital Expenditures

= 1, 000,000 + 150,000 × (1 − 33) − 250,000 = 850, 500
42
A i s i ncorrect. T he interest expense has been wrongly subtracted from the CFO to obtain answer
choice A. T he interest expense should be reduced by the tax rate then added to the CFO. Only the
capital expenditure should be subtracted from the CFO.
C i s i ncorrect. C has been incorrectly obtained by failing to reduce the interest expense by the tax
rate.
CFA Level , Vol ume 3, Readi ng 20 – Understandi ng Cash Fl ow Satatements, LOS 20i :
cal cul ate and i nterpret free cash fl ow to the fi rm, free cash fl ow to equi ty, and
performance and coverage cash fl ow rati os.
43
Q.42 John Smith sold a property to Jessica Goyen for $5.3 million. Smith had bought the property for
$4.2 million. Smith received a down payment of $500,000 from Goyen, with the remainder of the sale
price to be spread over a period of 7 years. However, Goyen is single and has recently lost her job,
so there is significant doubt about fulfilling all payments. Using the installment method, how much
would Smith recognize in profits attributed to the down payment?
A. $103,774
B. $500,000
C. $1,100,000
Cash collected× Expected Profit

Profit =
Sales
500, 000 × ($5, 300, 000 − $4, 200, 000)
=
$5, 300,000
= $103, 774
B i s i ncorrect. 500,000 is the down payment made by Jessica Goyen for the property.
C i s i ncorrect. C is the profit to be realized (since John Smith has not been fully paid for yet) by
selling his property.
CFA Level 1, Vol ume 3, Readi ng 18 – Understandi ng Income Statements, LOS 18c:
cal cul ate revenue gi ven i nformati on that mi ght i nfl uence the choi ce of revenue
recogni ti on method.
44
Q.43 Pinto Cruz bought an asset for $15,000. T he asset's estimated residual value is $8,000, and it has
7 years of useful life. Cruz is using the straight-line depreciation method. What is the annual
estimated expense Cruz could write down on the asset?
A. $0
B. $1,000
C. $2,000
1
Straight line Method = × (Asset Total Cost-Residual Value)
Useful Life
1
= × ($15, 000 − $8, 000) = $1, 000
7
A i s i ncorrect. T he asset has to be depreciated. $0 means that the asset is not depreciating, which
is not true.
C i s i ncorrect. $2,000 would have been the asset’s annual estimated expense if Cruz used the
double-declining balance depreciation method. T he double-declining balance depreciation method is
obtained by multiplying the straight-line depreciation rate by two.
1
× 2 × ($15, 000 − $8, 000) = 2, 000
7
CFA Level 1, Vol ume 3, Readi ng 23 – Long-Li ved Assets, LOS 23d: descri be the di fferent
depreci ati on methods for property, pl ant, and equi pment and cal cul ate depreci ati on
expense.
Q.44 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:
45
A. T his company is as liquid as its industry.
B. T his company is less liquid compared to its industry.
C. T his company is more liquid compared to its industry.
Using the information given in the table above, we first have to determine the industry’s current
ratio and then compare it to the given company’s current ratio.
Current Assets
Current ratio =
Current liabiities
A higher current ratio indicates a higher level of liquidity, hence a greater ability to meet short term
obligations. T he converse is true.
Current Assets Current liabilities

Cash = $400,0000 Account Payable = $200,000
Account receivable = $250,000 Taxes payable = $300,000
Inventory = $990,000
Total = $1,640,000 Total = $ 500,000
1, 640, 000
Current ratio = = 3.28
500, 000
Since the industry’s current ratio is 3.4, and that of the company 3.28, it is less liquid than its
industry.
A i s i ncorrect. T he company’s current ratio is more than the industry’s current ratio. T herefore,
the company is less liquid as compared to its industry.
C i s i ncorrect. T he company is not as liquid as its industry as its current ratio is different from the
industry’s current ratio.
46
Q.45 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. $1,000.
B. $1,030.
C. $1,100.
Securities available for sale should be shown at their fair market value on the balance sheet. Only
securities classified as held-to-maturity should be shown at amortized costs on the balance sheet. Fair
value is the amount at which an asset could be exchanged or a liability settled in a transaction
between knowledgeable and willing parties. On the other hand, the amortized cost is the historical
cost of an asset after adjustments for amortization and impairment have been made.
A and C are i ncorrect. Assets available for sale should be shown at fair value, which in this case is
$1030.
CFA Level 1, Vol ume 3, Readi ng 19- Understandi ng Bal ance Sheets, LOS 19e: descri be
di fferent types of assets and l i abi l i ti es and the measurement bases of each.
47
Q.46 Minority interests represent the minority interests of owners of shares in subsidiary
companies when they are consolidated under the parent/controlling company's balance sheet. Under
IFRS, minority interests should be shown in the:
A. Assets.
B. Equity section.
C. Liabilities section.
Under IFRS, minority interests should be shown in the equity section.
A and C are i ncorrect. Minority interest should be shown in the equities section.
CFA Level 1, Vol ume 3, Readi ng 19 – Understandi ng Bal ance Sheets, LOS 19f: Descri be
the components of sharehol ders’ equi ty.
48
Q.47 A company engaged in organizing corporate parties acquired another company engaged in the
supply of electrical fittings. T he company acquired assets having a carrying value of $4 million but
recorded them at their fair value of $5 million. Would a deferred 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 neither be created under IFRS nor US GAAP.
B. A deferred tax will be created under IFRS but not under US GAAP.
C. A deferred tax will be created under IFRS as well as under US GAAP.
Under IFRS and US GAAP, deferred tax assets or liabilities are created when temporal differences
exist between book tax and actual income tax. In this case, there is a $1 million difference that
creates a deferred tax.
A i s i ncorrect. T he temporal difference in the book and actual tax will lead to the creation of a
deferred tax.
B i s i ncorrect. T he deferred tax will be created regardless of whether a firm uses the IFRS or the
US GAAP to report its financial statements. T he only difference between the IFRS and US GAAP
concerning deferred taxes is that the IFRS permits reversal if future economic benefits are not
expected to be realized from the deferred taxes, as at the current balance sheet date. On the other
hand, under the same circumstances, the US GAAP establishes a valuation allowance.
CFA Level 1, Vol ume 3, Readi ng 24 – Income Taxes, LOS 24b: expl ai n how deferred tax
l i abi l i ti es and assets are created and the factors that determi ne how a company’s
deferred tax l i abi l i ti es and assets shoul d be treated for the purposes of fi nanci al
anal ysi s.
Q.48 Given the following information about Alcany (in millions USD):
49
2014 2015
Short term borrowings 2 , 000 3 , 000
Long-term interest bearing debt 15 , 000 16 , 000
Current position of long-term interest-bearing debt 4 , 000 4 , 200
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. T he solvency of Alcany improved in 2015 because the debt-to-equity ratio increased.
B. T he solvency of Alcany improved in 2015 because the debt-to-equity ratio decreased.
C. T he solvency of Alcany deteriorated in 2015 because the debt-to-equity ratio increased.
Debt-to-equity is a solvency ratio obtained by dividing total debt by total equity.
Total debt 15, 000 + 4, 000 + 2, 000

quity ratio2014 = = = 1.1053
Equity 19, 000
Total debt 16, 000 + 4, 200 + 3, 000

equity ratio2015 = = = 0.9667
Equity 24, 000
A lower debt to equity ratio indicates that the firm’s solvency has strengthened.
A i s i ncorrect. T he debt-to-equity ratio of Alcany decreased, not increased, from 1.1053 to 0.9667.
C i s i ncorrect. T he solvency of Alcany improved, not deteriorated because its debt-to-equity ratio
decreased. A lower debt-to-equity ratio implies that the firm’s solvency has improved.
50
Q.49 You are given the following 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. 0.68 and 0.88.
B. 0.88 and 0.88.
C. 0.88 and 0.68.
Tax burden shows the proportion of earnings before taxes (EBT ) left after the income tax charge. It
is obtained by dividing a company’s net income by earnings before taxes.
On the other hand, the interest burden shows the percentage of Earning before Interest and Taxes
(EBIT ) left over after deducting interest expense. It is obtained by dividing EBT by EBIT.
Net Income 634, 000

Tax Burden Ratio = = = 0.88
EBT 723,000
EBT 723, 000

Interest burden ratio = = = 0.68
EBIT 1, 064, 000
A i s i ncorrect. 0.68 is the interest burden ratio, and 0.88 is the tax burden ratio.
B i s i ncorrect. As seen above, the interest burden ratio is 0.68, not 0.88.
CCFA Level 1, Vol ume 3, Readi ng 21 – Fi nanci al Anal ysi s Techni ques, LOS 21d:
demonstrate the appl i cati on of DuPont anal ysi s of return on equi ty and cal cul ate and
i nterpret effects of changes i n i ts components.
51
Q.50 Payment of dividends under US GAAP is an example of which type of business activity?
A. Operating activity.
B. Financing activity.
C. Investing activity.
Payment of dividends under US GAAP is an example of financing activity. T he table below outlines
different cash flows and how they are classified under IFRS and US GAAP
Activity IFRS classification US GAAP classification

Interest Received Operating or Investing Operating
Interest Paid Operating or Financing Operating
Dividends Received Operating or Investing Operating
Dividends Paid Operating or Financing Financing
A and C are i ncorrect. As seen in the table above, payment of dividends is classified as a financing
activity under US GAAP.
CFA Level 1, Vol ume 3, Readi ng 20 – Understandi ng Cash Fl ow Statements, LOS 20a:
compare cash fl ows from operati ng, i nvesti ng, and fi nanci ng acti vi ti es and cl assi fy
cash fl ow i tems as rel ati ng to one of those three categori es gi ven a descri pti on of the
i tems.
Q.51 A company has reported the following for the year 2014:
Revenue $ 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
52
B. $197,500
C. $342,500
IFRS describes total comprehensive income as the change in equity during a period resulting from
transactions and other events, other than those changes resulting from transactions with owners in
their capacity as owners.
US GAAP describes total comprehensive income as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances from non-owner
sources.
Despite the slight variation in definition, comprehensive income includes similar items under both
IFRS and US GAAP. T he similar items are net income and other revenue and expense items excluded
from the net income calculation, i.e., “other comprehensive income.”
Total comprehensive income = Net income + Other comprehensive income
Net income = Revenues– Expenses = $410, 000 − $240, 000 = $170, 000
Other comprehensive income = $25, 000 − $2, 500 = $22, 500
Total comprehensive income = $170, 000 + $22, 500 = $192, 500
Note: We do not factor in dividend payments.
B i s i ncorrect. Loss on foreign currency transactions has been incorrectly added to “other
comprehensive income.” Since it’s a loss, it should be subtracted from other comprehensive income
before adding the result to net income.
C i s i ncorrect. Dividends paid have been incorrectly added to the total comprehensive income.
Dividends are neither part of net income nor other comprehensive income.
CFA Level 1, Vol ume 3, Readi ng 18 – Understandi ng Income Statements, LOS 18k :
descri be, cal cul ate, and i nterpret comprehensi ve i ncome.
53
Q.52 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. $16 million
B. $18 milion
C. $31 million
T he correct answer is A .
Even though AVGI is an American company, it is stated that the firm reports under IFRS. IFRS
requires measuring a company’s inventory at the lowest of cost or net reliable value (NRV). In this
case, the cost of the inventory is $16 million.
Note that, even under US GAAP, the firm would have still reported a cost of inventory of $16 million.
US GAAP requires firms to value inventory at the lower of cost or market value.
Cost is the cost of inventory, in this case, $16 million.
Market value is the value of an asset in an open market, in this case, $31 million.
Net realizable value is the selling price of inventory minus the cost of their sale or disposal, in this
case, $ 18 million.
B i s i ncorrect. $18 million is the net realizable value. T he inventory cost ($16 million) is lower
than the net realizable value. IFRS requires that a firm reports at the lower of cost or net realizable
value. T he lower value in this case, as seen above, is $ 16 million.
C i s i ncorrect. $31 million is the inventory’s market value. Inventory market value is insignificant
when a company reports its inventory using IFRS. Under IFRS, inventory is reported at the lower of
cost or net realizable value.
CCFA Level 1, Vol um e3, Readi ng 22 – Inventori es, LOS 22g: descri be the measurement
of i nventory at the l ower of cost and net real i sabl e val ue.
54
Q.53 Which of the following most likely has an impact on revenue recognition?
A. A change in credit limits.
B. A change in delivery terms.
C. A change in payment terms with customers.
According to IFRS, revenue is recognized when;
1. T he company has transferred significant risks and rewards of ownership of the goods to the
buyer.
2. T he company neither retains effective control over the goods sold nor continues to
exercise management over the goods to the same degree associated with ownership.
3. Revenue can be reliably measured.
4. T he economic benefits associated with the transaction will probably flow to the company.
5. T ransaction costs incurred or to be incurred can be reliably measured.
According to US GAAP, revenue is recognized when it is realized or realizable and earned. T he US
GAAP considers revenue as realized or realizable and earned when;
1. Evidence exists of an arrangement between the buyer and the seller.

2. A product has been delivered or a service rendered.
3. Price is determined or determinable.
4. T here is reasonable assurance that the seller will collect money.
A change in delivery terms impacts the stage at which ownership is transferred and, thus, impacts
the time of revenue recognition.
A i s i ncorrect. A change in credit limits does not have an impact on revenue recognition.
C i s i ncorrect. A change in payment terms with customers does not have an impact on revenue
recognition. T he payments can still be reliably measured even if the terms change, and the revenue
will still probably flow to the company even if the terms change.
55
CFA Level 1, Vol ume 3, Readi ng 18 – Understandi ng Income Statements, LOS18b:
descri be general pri nci pl es of revenue recogni ti on and accounti ng standards for
revenue recogni ti on.
Q.54 A firm reported the following:
Net Income $ 2 , 000 , 000

Non-cash charges $ 70 , 000
Interest Expense $ 200 , 000
Capital Expenditure $ 150 , 000
Tax Rate 45 %
T he company’s free cash flow to the firm (FCFF) is closest to:
A. $2,030,000
B. $2,120,000
C. $2,330,000
Generally, free cash flow refers to the excess of operating cash flow over capital expenditures.
Free cash flow to the firm (FCFF) is the cash flow available to a company’s debt and equity capital
suppliers after paying all its operating expenses and making the required investments in fixed and
working capital.
It is obtained using the formula;
FCFF=Net Income+Non cash charges+Interest expense (1-Tax rate)-Capital expenditures-Working capital expen
It can also be obtained using the formula;
FCFF=CFO+Interest expense (1-tax rate)-Capital expenditure
Where CFO is the cash flow obtained from operating activities in the case where interest expense is
included as an operating activity.
56
T he table given above includes items included in the first formulae. So, we will use the first formulae
to calculate the FCFF, as shown below.
FCFF = NI + NCC + Int × (1– t)– FCInv– WCInv FCFF

= 2, 000, 000 + 70, 000 + 200, 000(1 – 45%)– 150, 000
= 2, 030, 000
B i s i ncorrect. $2,120,000 is obtained by wrongfully leaving out the tax rate.
C i s i ncorrect. $2,330,000 is obtained by wrongfully adding the capital expenditure. Capital and
working capital expenditures should be subtracted from the FCFF calculation.
CFA Level 1, Vol ume 3, Readi ng 20- Understandi ng Cash Fl ow Statements, LOS 20i :
performance and coverage cash fl ow rati os.
57
Q.55 An analyst gathered the following information about Yeezny:
Income tax expense $ 120, 000

Change in the deferred tax assets $ 1, 500
Change in the deferred tax liabilities $ 5, 000
Yeezny’s income tax payable is closest to:
A. $116,500
B. $120,000
C. $123,500
Income Tax Expense = Income Tax Payable + Change in Deferred Tax Liabilities– Change in Deferred Tax Assets
$120, 000 = IT P + $5, 000 − $1, 500
⇒ IT P = $116, 500
B i s i ncorrect. $120,000 is the income tax expense, not the income tax payable.
C i s i ncorrect. $123,500 is wrongly obtained by subtracting deferred tax assets and adding deferred
tax liabilities to the income tax payable. T he correct way of doing it is by adding deferred tax assets
and subtracting deferred tax liabilities from the income tax expense.
CFA Level 1, Vol ume 3, Readi ng 24 – Income Taxes, LOS 24a: descri be the di fferences
between accounti ng profi t and taxabl e i ncome and defi ne k ey terms, i ncl udi ng deferred
tax assets, deferred tax l i abi l i ti es, val uati on al l owance, taxes payabl e, and i ncome tax
expense.
58
Q.56 An analyst gathered the following information about a company.
Cash $ 120, 000

Accounts receivable $ 920, 000
Inventories $ 1, 002, 000
Accounts payable $ 720, 000
Sales $ 2, 934, 000
Cost of goods sold $ 2, 542, 000
T he company’s cash conversion cycle is closest to:
A. 144 days.
B. 155 days.
C. 258 days.
Cash conversion cycle=Number of days of inventory+Number of days of receivables-Number of days of payables
Where:
365 × Inventory 365 × 1,002, 000

Number of days of inventory hand = = = 143.87
Cost of goods 2, 542,000
365 × Accounts receivable365 × 920, 000

Number of days of receivables = = = 114.45
Sales 2, 934, 000
365 × Accounts payable 365 × 720, 500

Number of days of payables = = = 103.45
Cost of goods sold 2, 542, 000
⇒ Cash conversion cycle = 143.87 + 114.45 − 103.45 = 154
CFA Level 1, Vol ume 3, Readi ng 22 – Inventori es, LOS 22k : cal cul ate and compare
rati os of compani es, i ncl udi ng compani es that use di fferent i nventory methods.
59
Q.57 Dynasty Corporation reported for 2016 current liabilities of $312 million and ending balance of
$35 million in cash, account receivables of $12 million, and marketable securities of $1.3 million.
Dynasty Corporation’s cash ratio is closest to:
A. 0.11
B. 0.12
C. 0.15
Cash ratio is a liquidity ratio used to determine a company’s liquidity by using a company’s most liquid
assets, i.e., cash and cash equivalents.
Cash + Marketable securities35M + 1.3M

Cash ratio = = = 0.1163
Current liabilities 312M
A i s i ncorrect. 0.11 is incorrectly obtained by dividing cash and leaving out marketable securities
by current liabilities. T he correct way to calculate the cash ratio is by dividing the sum of cash and
marketable securities by current liabilities.
C i s i ncorrect. 0.15 is the company’s quick and not cash ratio.
Cash+Marketable securities + Accounts receivables

35 + 1.3 + 12
Quick Ratio = = = 0.15
Current liabilities 312
CFA Level 1, Vol ume 3, Readi ng 21 – Fi nanci al Anal ysi s Techni ques, LOS 21b: Identi fy,
cal cul ate, and i nterpret acti vi ty, l i qui di ty, sol vency, profi tabi l i ty, and val uati on
rati os.
60
Q.58 In 2014, Nova Inc. reported $12.5 million in free cash flow to the firm (FCFF), $1.5 million in
interests, and $3.5 mill ion in net borrowing. If its corporate tax rate was 22%, its free cash flow to
equity (FCFE) was closest to:
A. $7.83 million
B. $14.50 million
C. $14.80 million
Free cash flow to equity refers to the cash flow available to a company’s common stockholders after
paying all its operating expenses and borrowing costs and making the required investments in
working and fixed capital. It is obtained as shown below.
FCFE = FCFF − [Interest × (1 − Tax Rate)] + Net Borrowing

= 12, 500, 000 − [1, 500, 000 × (1 − 22) ] + 3, 500, 000
= 14, 830, 000
A i s i ncorrect. Net borrowing has been incorrectly subtracted from FCFF. T he net borrowing is
given as a positive number and should, therefore, be added to FCFF. If the net borrowing were a
negative number, it would have been okay to subtract it from FCFF.
B i s i ncorrect. T he tax rate has not been factored in the calculation of FCFE. We have to reduce
the interest by the tax rate before subtracting it from the FCFF.
CFA Level 1, Vol ume 3, Readi ng 20 – Understandi ng Cash Fl ow Statements, LOS 20i :
performance and coverage cash fl ow rati os
Q.59 A company has reported the following for the year 2015:
Revenue $ 500, 000

Expenses $ 250, 000
Dividends Paid $ 40, 000
Gains from Available-for-sale securities $ 24, 000
Loss on Foreign Currency Transactions $ 2, 100
61
T he company’s total comprehensive income for the year 2015 is closest to:
A. $231,900
B. $271,900
C. $311,900
Total comprehensive income = Net income + Other comprehensive income
Net income = Revenues − Expenses = $500, 000 − $250, 000 = $250, 000
Other comprehensive income = $24, 000 − $2, 100 = $21900
Total comprehensive income = $250, 000 + $21900 = $271900
Note: We don't take into account dividends.
IFRS describes total comprehensive income as the change in equity during a period resulting from
transactions and other events, other than those changes resulting from transactions with owners in
their capacity as owners.
US GAAP describes total comprehensive income as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances from non-owner
sources.
Despite the variations in definitions, both IFRS and US GAAP calculate total comprehensive income
using similar items, i.e., net income and other revenue and expense items that are excluded from the
net income calculation, i.e., “other comprehensive income.
A i s i ncorrect. Dividends have been wrongly subtracted from the calculation of total
comprehensive income.
C i s i ncorrect. Dividends have been wrongly added to the calculation of total comprehensive
income.
CFA Level 1, Vol ume, Readi ng 18 – Understandi ng Income Statements, LOS 18k :
62
Descri be, cal cul ate, and i nterpret comprehensi ve i ncome.
Q.60 Compared to the same period last year, Wind Corporation’s tax rate has increased from 22% to
25%. T herefore, Wind Corporation’s:
A. Deferred tax asset has increased.
B. Deferred tax liability has increased.
C. Deferred tax assets and liability have both increased.
When a company’s tax rate increases, its deferred tax liability (DT L) and deferred tax asset (DTA)
both increase.
A and B are i ncorrect. Both deferred tax assets and liability will increase with an increase in a
company’s tax rate.
CFA Level 1, Vol ume 3, Readi ng 24 – Income Taxes, LOS 24a: descri be the di fferences
between accounti ng profi t and taxabl e i ncome and defi ne k ey terms, i ncl udi ng deferred
tax assets, deferred tax l i abi l i ti es, val uati on al l owance, taxes payabl e, and i ncome tax
expense;
63
Q.61 Dycorp reported in 2014 a net income of $1.2 million, total assets and debt of $8.5 million and
$1.5 million, respectively. Assuming that total debt equals total liabilities, Dycorp’s debt to capital
ratio is closest to:
A. 0.08
B. 0.18
C. 0.81
T he debt-to-capital ratio is a leverage ratio that measures the percentage of a company’s total capital
(debt plus equity) financed through debt. It is obtained as shown below.
First, we have to calculate equity using the information given.
Equity = Total Assets − Total Liabilities

= 8, 500, 000 − 1, 500, 000 = 7, 000, 000
T hen we can substitute the values into the debt capital ratio, as has been done below.
Total Debt $1.5M

Debt Capital Ratio = = = 0.18
Total Debt + Total Shareholders Equity $8.5M
A and C are i ncorrect. As seen above, the debt to capital ratio is 0.18.
CFA Level 1, Vol ume 3, Readi ng 25 – Non-Current (Long-Term) Li abi l i ti es, LOS 25j :
cal cul ate and i nterpret l everage and coverage rati os.
64
Q.62 Consider the following information about Zenga Company:
Year 2014
Net Profit €145, 000
Asset turnover 0.40
Return on assets 0.09
Return on equity 0.06
In 2014, the net profit margin for Zenga Company is closest to:
A. 6%
B. 9%
C. 22%
Recall that ROE can be written as:
Return on equity 2014 = Net Profit Margin × Asset turnover × Financial Leverage
We need to find the Financial Leverage,
Total Assets ROE 0.06

Financial Leverage2014 = = = = 0.67
Total Equity ROA 0.09
T herefore, from the first equation,
0.06
Net Profit Margin = = 0.22 or 22%
0.40 × 0.67
A i s i ncorrect. 6% is the return on equity.
B i s i ncorrect. 9% is the return on assets.
CFA Level 1, Vol ume 3, Readi ng 21 – Fi nanci al Anal ysi s Techni ques, LOS 21e: Cal cul ate
and i nterpret rati os used i n equi ty anal ysi s and credi t anal ysi s.
65
Q.63 John Richards, a market analyst, is working on a regression model to establish stock's valuations
in the banking industry. Without even finishing his model, Richards sees a stock that seems to be
undervalued and sends his recommendation to buy it. Which of the following standards has Richards
violated?
A. Standard I(B) – Independence and Objectivity.
B. Standard III(A) – Loyalty, Prudence, and Care.
C. Standard V(A) – Diligence and Reasonable Basis.
Standard V(A)-Diligence and reasonable basis require members and candidates to be diligent,
independent, and thorough in their investment recommendations and actions and to have a reasonable
and adequate basis, supported by appropriate research and investigation, for any investment
recommendation, analysis, or action.
Richard has violated the above standard by using an unfinished model to give an investment
recommendation. He has failed to exercise diligence, thoroughness, and a reasonable basis in giving
out his investment recommendation.
A i s i ncorrect. Standard 1(B) – Independence and objectivity require members and candidates to be
independent and objective in their professional activities. It forbids members and candidates from
offering or soliciting for any gift, benefit, compensation, or consideration that could reasonably
compromise their own or another's independence and objectivity. T he information given in the
question does not in any way suggest the breach of this standard.
B i s i ncorrect. Standard III(A) – Loyalty, prudence, and care require members and candidates to be
loyal to their clients, act on behalf of their clients, and place their clients' interests above their
employers' interests and their own. It also requires them to act with reasonable care and exercise
prudent judgment. T he information given in the question does not suggest the breach of this standard.
CFA Level 1, Vol ume 6, Readi ng 71 – Gui dance for Standards I-VII, LOS 71a:
Demonstrate the appl i cati on of the Code of Ethi cs and Standards of Professi onal
Conduct to si tuati ons i nvol vi ng i ssues of professi onal i ntegri ty.
66
Q.64 Tom Jones, CFA is an independent research analyst with a huge social media following across
multiple social media platforms. Unicorn Capital is underwriting AXA Bank’s IPO. Tom Jones has
been contacted by Unicorn Capital to issue a favorable report on AXA Bank shares for a cash
compensation. To be in compliance with the CFA Code and Standards, Tom Jones should most likely ?
A. Issue the report as per Unicorn Capital’s request.
B. Decline Unicorn’s cash offer to issue a favorable report.
C. Issue a favorable report but decline the cash compensation from Unicorn Capital.
As per the CFA Code and Standards, Tom Jones should not guarantee Unicorn Capital a favorable
investment analysis on AXA Bank. He can accept compensation to give an investment analysis on
AXA Bank, but the analysis should be independent and objective. Conclusions must be reasonable and
adequate, and they must be backed up by relevant research.
A i s i ncorrect. By issuing a favorable investment analysis report as per Unicorn’s request, Tom
Jones has violated Standard I(B) of the CFA Code and Standards. Members and Candidates are
prohibited from offering, soliciting, or accepting any gift, benefit remuneration, or other
consideration that could reasonably be considered to jeopardize their or another's independence and
objectivity.
C i s i ncorrect. Issuer paid research is acceptable however researcher should not guarantee a
favorable report to the research sponsor. A guaranteed favorable research report is a violation of
Standard I (B) on Professionalism – Independence and Objectivity.
67
Q.65 Jonathan Brooks, CFA, is a stockbroker in Hong Kong. Yi, his neighbor and a 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.
Standard II(A) – Material nonpublic information forbids members and candidates from using or sharing
material nonpublic information that might affect the value of an investment. Material, non-public
information is any knowledge that is not readily available to the general public, and which has the
potential to rattle the market and affect the value of an investment.
T he information given to Jonathan Brooks is material nonpublic. To avoid going against Standard II(A),
John Brooks should not act on the information until it is public. T rading based on the information
given will be unfair to other investors.
A i s i ncorrect. John Brooks should not act on the information given until it is made public to avoid
violating Standard II(A).
B i s i ncorrect. John Brooks should wait until the information has been published before taking any
investment actions.
68
Q.66 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 their employer's written consent.
According to Standard IV(A) – Loyalty states that members and candidates must act for the benefit of
their employers and not deprive them of their skills and knowledge. T he standard prohibits members
and candidates from divulging confidential information or otherwise cause harm to their employers.
T he standard allows members and candidates to pursue a competing independent practice that could
result in compensation or other benefits on the condition that they first receive written consent
from their employer.
A i s i ncorrect. As long as members and candidates obtain permission from their employers, they
can pursue a competing independent practice resulting in compensation or other benefits.
B i s i ncorrect. Members and candidates should disclose any compensation arrangement to their
employers, regardless of whether it occurs during or out of work hours.
CFA Level 1, Vol ume 6, Study Sessi on 19, Readi ng 58 – Gui dance for Standards I-VII,
LOS 58c: Recommend practi ces and procedures desi gned to prevent vi ol ati ons of the
Code of Ethi cs and Standards of Professi onal Conduct
69
Q.67 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.
Standard III(A) – Loyalty, Prudence, and Care compels CFA members and candidates to act for the
benefit of their clients and put the interest of their clients before their employers or their own. As
the retirement plan manager, Zane owes his fiduciary duty to the plan participants, not to the
company's management sponsoring the plan. T he fiduciary duty includes the obligation to diversify
the plan's investments, regardless of the sponsoring company's stock quality. It's, however,
important to note that investing in the company's stock is not prohibited.
A i s i ncorrect. Investing 50% in one company's stock is too risky for a retirement plan. By
investing 50% into ABM stock, Robert Zane will be violating his fiduciary duty to the plan
participants, thereby going against Standard III(A).
C i s i ncorrect. Robert Zane should analyze ABM stocks then invest a part of the plan in the stocks
if he finds that the stock has good prospects.
70
Q.68 Which of the following is least likely accurate?
A. A violation of ethical standards reflects not only an employee's conduct but also that of
their supervisor.
B. It is not the supervisor’s responsibility to ensure that investment reports are compliant
with the Code and Standards.
C. Reasonable supervision is typically determined as a function of the number of employees

supervised and the specific jobs being done.
Standard IV(C) – Responsibilities of Supervisors require members and candidates to ensure that
people under their supervision comply with applicable rules, laws, regulations, and the Code and
standards. It is, therefore, a supervisor's responsibility to ensure that investment reports are
compliant with the Code and standards.
A i s i ncorrect. It is a true statement. A violation of ethical standards reflects both an employee's
and a supervisor's conduct.
C i s i ncorrect. Reasonable supervision is determined by the number of employees supervised and
the specific jobs being done. Members and candidates responsible for a large number of employees
may delegate their supervisory roles to subordinates. However, the members and candidates should
instruct those delegates about methods to promote compliance.
71
Q.69 Which one of the following statements is most likely incorrect in the context of survivorship
bias?
A. Survivorship bias results in an overestimation of past returns of mutual funds.
B. Many losing funds are closed and merged into other funds to hide poor performance.
C. Survivorship bias is not an important issue to take into account when analyzing past
performance.
Survivorship bias refers to the logical error of concentrating only on entities that made it past some
given phenomena and ignoring/excluding those that did not. It is an important issue to take into
account when analyzing past performance since many losing funds are closed and merged into other
funds to hide poor performance. T his often results in an overestimation of the past returns of mutual
funds.
A and B are i ncorrect. As seen above, A and B are true statements. Survivorship bias leads to
overestimating past returns of mutual funds. It is important to consider survivorship bias as many
losing funds are closed and merged into others to hide their poor performance, leading to
overestimating the mutual fund's past returns.
CFA Level 1, Vol ume 6, Readi ng 72 – Introducti on to the Gl obal Investment Performance
Standards (GIPS), LOS 72a: Expl ai n why the GIPS Standards were created, what
parti es the GIPS Standards appl y to, and who i s benefi ted by the Standards.
72
Q.70 Which of the following statement regarding the GIPS is least likely accurate?
A. Firms must encourage compliance with recommendations.
B. Firms must meet all requirements in order to claim compliance with the GIPS standards.
C. Firms must meet all recommendations in order to claim compliance with the GIPS
standards.
Firms must encourage compliance to recommendations, but they are not required to meet all
recommendations to claim compliance with the GIPS.
A and B are i ncorrect. T hey are true statements regarding the GIPS.
Stanadards (GIPS), LOS 72e: Expl ai n the concept of i ndependent veri fi cati on.
73
Q.71 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 his firm’s investment division 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 report outlining his findings based solely on company fundamentals.
B. Write a favorable report that excludes his findings but makes an effort to disclose them
privately to the CEO of his firm.
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.
T he correct answer is A
Standard V(A) – Diligence and reasonable basis requires members and candidates to be diligent,
independent, and thorough when analyzing investments, making recommendations, or taking
investment actions. It also requires members and candidates to have a reasonable and adequate basis
for any investment analysis, recommendation, or action, supported by appropriate research and
investigation. Rubio's analysis of M & M must be objective, independent, and based solely on
established company fundamentals. It would be inappropriate to succumb to pressure from other
divisions of his firm and issue favorable ratings. Marco Rubio should, therefore, write an independent
report that does not consider the other divisions.
B i s i ncorrect. Writing a favorable report that excludes his findings will be violating standard V(A).
C i s i ncorrect. Marco Rubia does not need to consult with anyone. He needs to write an
independent report free from the influence of any other person.
74
Q.72 Which of the following is most likely incorrect?
A. Discriminating against non-email clients violates the standard of fair dealing.
B. Given a new recommendation, the firm should not trade until all clients have a fair chance
to receive the new recommendation.
C. 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.
Standard III(B) – Fair dealing requires members and candidates to deal with all clients fairly and
objectively when making investment recommendations, providing investment analysis, taking
investment actions, or engaging in other professional activities.
When issuing investment recommendations, members and candidates should treat all clients fairly and
not favor any client over another. Discriminating against non-email clients is treating non-email
clients unfairly and favoring email clients over them and is, therefore, a violation of this standard.
According to this standard, members and candidates must not trade until all their clients have had a
fair chance to receive a new recommendation. When issuing investment recommendations, the
standard of fairness and loyalty to clients requires IPO distributions to be made to all clients without
favoring some clients over others. However, special treatment can be given to clients paying for the
special treatment after all clients have had a chance to see the recommendations. Answer choice C
is, therefore, the most likely incorrect statement.
A and B are i ncorrect. As seen above, answer choices A and B are correct choices.
75
Q.73 Which of the following is most likely incorrect?
A. Material Public Information may consist of discussions with management that may reveal
information that isn’t material but may give valuable clues.
B. “Firewall” is a common term applied to the barriers created to prevent sensitive

information from being disseminated between a firm's departments.
C. 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.
Standard II(A) – Material Non-Public Information forbids members and candidates from acting or
causing others to act on material nonpublic information. Information is material if its disclosure will
affect an investment's value or if reasonable investors would wish to know about the information
before investing.
Relying on information that is not material but may give valuable clues is not a violation of this
standard. Rather, it is mosaic theory, and members and candidates can use it to arrive at an
investment decision. Members and candidates use mosaic theory when they analyze information
obtained from both public and nonmaterial nonpublic sources, as is in this case, to come up with an
investment recommendation. .
76
Q.74 Josianne Feng, CFA, is a new fund manager charged with the management of 50 stocks. What
should be her policy for proxy voting?
A. T he manager should never vote since the manager’s votes don’t always represent the
clients' opinions.
B. T he manager has a responsibility to investors to vote the shares to the investors' benefit
but can skip routine votes that would require too much time on a cost-benefit basis.
C. T he manager is always responsible for voting but not disclosing the proxy voting policy to
all the clients since that's part of confidential information.
According to Standard III(A) – Loyalty, Prudence, and Care, members and candidates must act with
reasonable care and exercise reasonable judgment. T hey should place their client's interests above
their own and work for their clients' benefit. Failing to vote, voting blindly, or failing to consider the
impact of the question is considered a violation of this standard.
Members and candidates are exempted from proxy voting if a cost-benefit analysis shows that clients
may not benefit from the proxy voting. T he standard equally requires members and candidates to
disclose their proxy voting policies to their clients and prospective clients.
A i s i ncorrect. Failing to vote is a violation of standard III(A).
C i s i ncorrect.Managers must disclose to their clients and prospective clients their proxy voting
policies.
77
Q.75 Rob Harrington, a stockbroker, works for a large New York bank. His long-term friend and a
stock trader at the same bank calls him one evening to ask him if there are any clients interested in
stock PT LN. Since there are no policies or procedures to discourage employees from sharing
information, Harrington should most likely :
A. Disclose the information.
B. Advise regulators of the potential conflict of interest and seek legal counsel.
C. Advise his firm to develop firewalls to allow the different departments to function
independently.
Standard II(A) – Material nonpublic information forbids members and candidates from acting or
causing others to act on material nonpublic information that could affect the value of an investment.
Information is material if its disclosure would probably impact an investment's value or if reasonable
investors would wish to know about it before investing. Information is nonpublic if it is not yet
available to the general public. Members and candidates are required to encourage their firms to
adopt information barriers, known as firewalls, between departments to prevent violation of standard
II(A) within a firm.
Firewalls restrict the flow of confidential information to those who need to know the information to
perform their jobs effectively. Rob Harrington should advise the bank to develop firewalls and
protections to allow the different departments to function independently.
A i s i ncorrect. Rob Harrington will be violating standard II(A) if he discloses the information.
B i s i ncorrect. T he most appropriate course for action for Rob Harrington will be to advise his
firms to enact firewalls.
78
Q.76 T hrough his son, who works at ACIA Corp., a stockbroker learns that ACIA Corp. 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. No, it constitutes the use of material public information.
B. Yes, it constitutes the use of material public information.
C. Yes, it constitutes the use of material non-public information.
Standard II(A) – Material nonpublic information forbids members and candidates from acting or
causing others to act on material nonpublic information that could affect the value of an investment.
Information is material if its disclosure would probably impact an investment's value or if reasonable
investors would wish to know about it before investing. Information is nonpublic if it is not yet
available to the general public. T he stockbroker acts on material nonpublic information and has,
therefore, violated standard II(A).
A i s i ncorrect. T he stockbroker has violated Standard II(A) by acting on material nonpublic
information.
B i s i ncorrect. T he information was nonpublic. If it were public information, the stockbroker
would not have violated any standard by acting on it.
79
Q.77 In the context of Global Investment Performance Standards, composites refer to:
A. T he aggregate of portfolios managed with the same investment mandate.
B. T he combined fees of portfolios managed with the same investment mandate.
C. T he verification standards that apply to portfolios managed with the same investment
mandate.
Composites are the aggregate of portfolios managed with the same investment mandate, objective, or
strategy. Composites are the primary vehicle for presenting business performance to all prospective
clients. T herefore, if a firm presents its record for a particular equity classification, all portfolios
meeting pre-established criteria for that class must be represented.
B i s i ncorrect. Composites are aggregate portfolios and not combined fees, managed with the same
investment mandate, objective, or strategy.
C i s i ncorrect. Composites are aggregate portfolios and not verification standards that apply to
portfolios, managed with the same investment mandate, objective, or strategy.
Standards (GIPS), LOS 72c: Expl ai n the purpose of composi tes i n performance
reporti ng.
Q.78 Billy Perignon is scheduled to have dinner with a client whose portfolio he manages. Perignon
plans to advise the client to add 5000 shares to his current EER position. Before the meeting, and
under Standard (V) – Investment Analysis, Recommendations, and Actions, Perignon should:
A. Exercise diligence, independence, and thoroughness in analyzing the investment.
B. Plan to document the details of the conversation with the client with regard to his
investment recommendation.
C. Identify other clients for whom EER may be a suitable investment and notify them
immediately of his recommendation.
80
According to standard V (A) – Diligence and reasonable basis, members and candidates should be
diligent, thorough, and independent when making an investment recommendation, analysis, or taking
action. T hey should also have a reasonable and adequate basis that has been supported by appropriate
research and investigation for any investment recommendation, analysis, or action.
Before the meeting and to avoid violating standard V(A), Billy Perignon should exercise diligence,
independence, and thoroughness in analyzing the investment. T he recommendation he is about to
make should be supported by appropriate and adequate research. He should explain to the client why
adding the 5000 shares to the existing position is a reasonable move.
B i s i ncorrect. Perignon should plan to document the details of the conversation with the client
concerning the investment recommendation and the investment analysis and action. However, this is
under Standard V(C) and not under Standard V(A). Standard V(C)- Record retention requires members
and candidates to develop and maintain appropriate records to support their recommendation,
analysis, action, and all investment-related communications with their clients and prospective clients.
C i s i ncorrect. Billy Perignon can identify other clients EER may be a suitable investment and
notify them immediately of his recommendation. However, in doing so, Billy Perignon will avoid
violating standard III(C) and not standard V(A). Standard III(C) requires members and candidates;
1. When in advisory relationship with clients and prospective clients to;
a. Reasonably inquire about their investment experience, risk and return objectives, and
financial constraints before taking any investment step, and regularly update this
information.
b. Determine the suitability of an investment to a client's financial situation and ensure that it is
consistent with the client's written objectives before making an investment
recommendation, or analysis, or taking investment action.
c. Judge the suitability of an investment in the context of a client's whole portfolio.
2. When managing a portfolio to a specific mandate to make only changes that are consistent with
that mandate.
81
Q.79 A CFA® charter holder gathers the opening prices of stock ABC from a widely read publication.
T he CFA® charter holder uses the data as part of a report he is preparing but fails to disclose the
data source in the report. T he charter holder’s actions are most likely ?
A. A violation of Standard I(C) – Misrepresentation.
B. Not a violation of Standard I(C) – Misrepresentation - if the data can be gathered from
several public sources.
C. Not a violation of Standard I(C) – Misrepresentation - if the data cannot be gathered from
several public sources.
Standard I(C) – Misrepresentation forbids members and candidates from knowingly making any
misrepresentations relating to investment analysis, recommendation, action, or other professional
activities. Regarding the plagiarism, this standard requires members and candidates not to
misrepresent their abilities, their expertise, or the extent of their work in a way that will mislead
clients and prospective clients. Members and candidates are required to disclose whether their
research comes from another source.
By failing to disclose that data used as part of the report has been outsourced, the CFA charter holder
has violated standard 1(C) – Misrepresentation.
B and C are i ncorrect. Whether the data can or cannot be gathered from several public sources, a
member or candidate should disclose any outsourced data to avoid violating this standard.
82
Q.80 According to the Code of Ethics, a member reflects credit on the profession when he/she:
A. places the clients first.
B. practices in a professional and ethical manner.
C. consults with other members on a regular basis.
T he six components of the Code of ethics are:
1. Act with integrity, competence, diligence, respect, and in an ethical manner with the public,
clients, prospective clients, employers, employees, colleagues in the investment profession,
and other participants in the global capital markets.
2. Place the integrity of the investment profession and the interests of clients above their own.
3. Use reasonable care and exercise independent professional judgment when conducting
investment analysis, making investment recommendations, taking actions, and engaging in
other professional activities.
4. Practice and encourage others to practice professionally and ethically in a way that will
reflect credit on themselves and the profession.
5. Promote the integrity of, and uphold the rules governing, capital market.
6. Maintain and improve their professional competence and strive to maintain and improve the
competence of other investment professionals.
Component four of the Code of Ethics says that a member shall "Practice and encourage others to
practice professionally and ethically to reflect credit on members and the profession." T he Code of
ethics implies neither of the other choices.
A i s i ncorrect. T he Code requires members and candidates to place the integrity of the investment
profession and the interests of their clients above their interests and not necessarily place their
clients first.
C i s i ncorrect. As seen above, answer choice C is not among the six components of the Code of
ethics.
CFA Level 1, Vol ume 6, Readi ng 69 – Ethi cs and Trust i n the Investment Professi on, LOS
69a: Expl ai n ethi cs
83
Q.81 According to the CFA Institute Code of Ethics, CFA Institute Members and Candidates must do
all of the following, except:
A. Act with integrity and dignity.
B. Exercise independent judgment.
C. Not knowingly violate the securities acts and laws.
Code of ethics is codified beliefs about the acceptable and unacceptable conduct/ general conduct to
how members should behave.
T he six components of the Code of Ethics are:
1. Act with integrity, competence, diligence, respect, and in an ethical manner with the public,
clients, prospective clients, employers, employees, colleagues in the investment profession,
and other participants in the global capital markets.
2. Place the integrity of the investment profession and the interests of clients above their
3. Use reasonable care and exercise independent professional judgment when conducting
investment analysis, making investment recommendations, taking action, and engaging in
other professionals
4. Practice and encourage others to practice professionally and ethically to reflect credit on
themselves and the
5. Promote the integrity of and uphold the rules governing capital
6. Maintain and improve their professional competence and strive to maintain and improve the
competence of other investment
Not knowingly violating the law is part of the Standards of Professional Conduct but not part of the
Code of Ethics.
A and B are i ncorrect. As seen above, exercising independent judgment and acting with integrity
and dignity form part of the six components of the Code of ethics that members of the CFA Institute
must follow.
CFA Level 1, Vol ume 6, Readi ng 69 – Ethi cs and Trust i n the Investment Professi on, LOS
69a: Expl ai n ethi cs.
84
Q.82 Which of the following is not a possible disciplinary sanction with respect to the CFA Institute's
enforcement of the Code and Standards?
A. Private censure.
B. Payment of a fine.
C. Suspension of a candidate from further participation in the CFA program.
T he CFA Institute does not impose fines. If a member violates the codes and standards, they are
subject to censure, suspension, or revocation of membership. Candidates can also be penalized by
revocation of the right to sit for CFA examinations, thereby rendering them ineligible for
membership.
A and C are i ncorrect. T hese are possible disciplinary sanctions concerning the CFA Institute's
enforcement of the Code and standards.
CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal , LOS
70a: descri be the structure of the CFA Insti tute Professi onal Conduct Program and the
process for the enforcement of the Code and Standards.
85
Q.83 T im Peters, CFA is a Senior Investment Manager at Staples Asset Managers. He will be leaving
the company at the end of the month to join Grey Capital as a Chief Investment Officer where among
his major responsibilities will be to increase the funds under management. During his last day at
Staples Asset Managers, T im contacts two of the clients he brought to Staples and informs them of
the services he would offer them if they moved their accounts to Grey Capital. Under the CFA Code
and Standards, T im Peters most likely ?
A. violated Standard IV(A)– Duties to employers.
B. did not violate Standard IV(A)– Duties to employers because he brought the clients Staples
Asset Managers.
C. did not violate Standard IV(A)– Duties to employers because he had already resigned from
Staples Asset Managers.
T im Peters violated Standard IV(A) – Duties to employers by soliciting Staples Asset Managers for
Grey Capital while still working at Staples Asset Managers. Employees planning to leave their
current employer must continue to act in the employer’s best interest. Until their resignation takes
effect, employees must not engage in any activity that might contradict their responsibilities to their
employers.
B i s i ncorrect. Employers should act in the best interest of their employer until their last day.
Whether he brought the clients or not T im should not solicit the employer’s clients prior to
cessation of employment,
C i s i ncorrect. Prior to leaving his or her current job, a member or candidate who is considering
pursuing new employment must not contact present or potential clients to solicit their business for
the new employer.
86
Q.84 Mark Roberts works as a portfolio analyst at First Community T rust. He is charged with
managing the account of one Sarah Sanders, a client. Ms. Sanders pays First Community T rust a fee
based on the performance of assets in her portfolio. Mr. Robert's employer pays him a salary for
managing Ms. Sanders' account. Sarah Sanders offers Mr. Roberts an all-expenses-paid trip to Las
Vegas, including free accommodation and use of her yacht, provided that she earns at least 20%
yearly pre-tax profit from her portfolio. What should Mr. Roberts do concerning the offer?
A. Immediately inform his employer of the arrangement before accepting it.
B. Accept the offer but only after assessing the likelihood of the proposed level of
performance.
C. Wait until the yearly results are out before accepting the offer, and then inform his
employer of the arrangement only if the results meet Ms. Sanders’ present condition.
Standard IV(B) - Additional Compensation Arrangements states that members and candidates must not
accept gifts, compensation, benefits, or consideration that competes with their employer's interest
unless they obtain written consent from all parties involved.
Ms. Roberts does not receive compensation from Ms. Sanders but is subject to a salary from his
employer. To conform to the Code of ethics, Mr. Roberts should accept the proposal only after his
employer (First Community Bank) has given him written consent.
B i s i ncorrect. Mark Roberts can accept the offer after informing his employer and obtaining his
written permission.
C i s i ncorrect. Mark Roberts should inform his employer about the offer immediately.
87
Q.85 Zeng Yi, CFA, is an analyst at Power Stocks Inc. T he next morning, Power Stocks Inc. will
announce a change in recommendation from a hold to a sell on YYZ stock. Yi happens to be a member
of the team that decided to change the recommendation. Yi's father has an account at Power Stocks
Inc. that contains YYZ stock. According to the Code and Standards, trading on Yi's father’s account
should most likely begin?
A. As soon as the information is disseminated to all clients.
B. Only after the recommendation is announced to the general public.
C. Only after Yi, as a beneficial owner, has given an appropriate amount of time for his
clients and his employer to act.
It could be argued that Yi is a beneficial owner of his father’s account, but the reason why his father
should be treated like any other client is that it does not state that Yi makes the trades for his
father’s account. However, family accounts that are client accounts should be treated like any other
firm account and should neither be given special treatment nor be disadvantaged because of an
existing family relationship with the member or candidate. T hus, trading on Yi’s father’s account can
begin as soon as the information is disseminated to all clients.
B and C are i ncorrect. Since his father’s account is a client account, it should be treated like all
other client accounts. T rading on his father’s account should begin as soon as the information is
disseminated to all clients.
88
Q.86 Which of the following is most likely correct regarding standard 1(B)- Independence and
objectivity?
A. Members and candidates should solicit gifts from their clients only after attaining great
portfolio returns.
B. Members and candidates should issue favorable reports, even if forged, of top companies
upon request.
C. Members and candidates should not accept gifts, benefits, compensations, or

considerations from their clients or prospective clients.
Standard 1(B) – Independence and objectivity require members and candidates to be reasonable,
independent, and objective in their professional activities. T he standard prohibits members and
candidates from giving, soliciting, or accepting any gift, benefit, compensation, or consideration that
could affect their own or another’s independence and objectivity.
A i s i ncorrect. Members and candidates are forbidden from soliciting gifts of any kind from their
clients and prospective clients regardless of whether they achieve high returns or not.
B i s i ncorrect. Standard I(B) forbids members and candidates from issuing false favorable reports.
89
Q.87 A financial analyst who is a CFA member sends a research report on a company to his
supervisor. T he supervisor approves the report, but the analyst soon discovers that the supervisor
plans to release a version of the report that shows stronger earnings estimates than the original
report, without a reasonable and adequate In response to this, the analyst should most likely :
A. Let the supervisor do as he pleases.
B. Take up the issue with regulatory authorities.
C. Insist that the supervisor changes the earnings forecast or remove their name from the
report.
According to Standard V (A) – Diligence and Reasonable Basis, members and candidates should be
diligent, thorough, and independent when making investment recommendations, analysis, or taking
actions. T hey should also have a reasonable and adequate basis supported by appropriate research
and investigation for any investment recommendation, analysis, or action. Since his supervisor is
dismissing his report, which has been diligently, thoroughly, and independently prepared, the analyst
must insist that the supervisor issues the original version of the report to avoid violating this
standard. If the supervisor cannot do so, the financial analyst must ask that their name be removed
from the report.
A i s i ncorrect. T he analyst will violate standard V(A) if he lets the supervisor publish a version of
the report that shows stronger earnings estimates than the original report.
B i s i ncorrect. T he best course of action for the analyst is to ask that the original report be issued,
or their name removed from the modified version of the original report.
90
Q.88 Jonathan Ingram, CFA, is a research analyst following Mountain Corp. All the information he has
gathered suggests Mountain’s stock should be rated “weak-hold.” During a recent dinner with a
friend, Ingram overheard another experienced analyst saying that the stock should be rated “buy.” He
returns to his office the next day and issues a “buy” recommendation. Ingram:
A. has not violated CFA Institute Standards of Professional Conduct.
B. has violated CFA Institute Standards of Professional Conduct because he used Material
Nonpublic Information.
C. has violated CFA Institute Standards of Professional Conduct because he did not have a
reasonable and adequate basis for making his recommendation.
Standard V(A)- Diligence and reasonable basis require members and candidates to be diligent,
independent, and thorough when analyzing investments, making investment recommendations, or
taking action. It also requires members and candidates to have a reasonable and adequate basis for
any investment analysis, recommendation, or action, supported by appropriate research and
investigation. By changing his recommendation from a “weak-hold” to a “buy,” Jonathan Ingram has
violated the CFA Institute Standards of Professional Conduct because he did not have a reasonable and
adequate basis for making the change. Changing to match the recommendation of an experienced
analyst is going against standard V(A).
A i s i ncorrect. Jonathan Ingram has violated standard V(A) by failing to be diligent, independent, and
thorough in issuing a new investment recommendation
B i s i ncorrect. We do not know whether the experienced analyst issued a “buy” recommendation
based on material nonpublic information.
91
Q.89 If a supervisor makes a reasonable effort to detect violations by their subordinates but fails to
detect a violation that occurs, he:
A. is in compliance with Standard IV(C) – Responsibilities of supervisors.
B. is always in violation of Standard IV(C) – Responsibilities of Supervisors.
C. is only in violation of Standard IV(C) – Responsibilities of Supervisors if the violation that

occurs is punishable by law.
Standard IV(C) – Responsibilities of Supervisors require members to ensure that their subjects
comply with applicable laws, rules, regulations, and the Code and standards. However, as long as
there are measures to discourage employees from violating laws, violations by subordinates do not
necessarily mean that the supervisor has violated this standard.
B i s i ncorrect. T he supervisor has made reasonable efforts to detect violations. It does not
necessarily mean that the supervisor has broken this standard by failing to detect a violation.
Assuming the supervisor had not put measures in place to detect violations, the supervisor would
have violated this Standard.
C i s i ncorrect. Regardless of whether a violation is punishable by law or not, a supervisor will be
violating standard IV(C) – Responsibilities of supervisors if they do not put measures in place to
detect potential violations.
CFA Level 1, Vol ume 6, Study Sessi on 19, Readi ng 58 – Gui dance for Standards I-VII,
LOS 58b: Identi fy conduct that conforms to the Code and Standards and conduct that
vi ol ates the Code and Standards
Q.90 John Rose owns a brokerage firm. He has received an allocation of shares from an IPO. He
intends to allocate the shares across all accounts he manages. One of those accounts is owned by his
cousin. John allocates many shares to his cousin’s account and ultimately fails to allocate several
other eligible clients. Which of the following is most likely true?
A. T he member has not violated any Standards.
B. T he member has violated Standard VI(B) – Priority of transactions.
92
C. T he member has violated Standard V(A) – Diligence and Reasonable Basis.
Standard VI(B) – Priority of transactions requires members and candidates to prioritize their client’s
and employer’s transactions over their own; this is to prevent personal transactions from adversely
affecting the interests of their clients or employers. Personal transactions include transactions made
for the member or candidate’s account, their family (including spouse, children, and immediate family
members account), and accounts in which the member has a direct interest, for example, a pension
fund.
However, family accounts that are clients should be treated as other clients. T hey should neither be
disadvantaged nor favored because of the family relationship.
As seen above, John’s cousin's account is a family account. Family accounts can be considered a
personal transaction, but this should be treated similarly to other clients since the family account is
also a client. It should neither be disadvantaged nor favored over other clients’ accounts.
A i s i ncorrect. John has violated Standard VI(B) – Priority of transactions by favoring his cousin’s
account over other clients’ accounts.
C i s i ncorrect. Standard V(A) – Diligence and reasonable basis requires members to; be diligent,
independent, and thorough when analyzing investments, making recommendations, or taking actions,
and to have a reasonable and independent basis, supported by appropriate research and investigation,
for any investment analysis, recommendation, or action. It does not, in any way, deal with how
clients’ transactions should be handled.
CFA Level 1, Vol ume 6, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: Identi fy
conduct that conforms to the Code and Standards and conduct that vi ol ates the Code
and Standards.
93

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Level I of the CFA® Exam

Mock Questions with Answers - Mock Exam 2023 #2 - First

Last Updated: Sep 5, 2023

prohibited. Infringers will be prosecuted in their local jurisdictions. ”

to Real GDP and is expressed as:

Nominal GDP 4.84

unemployment rate does not affect GDP Deflator calculations.

A. 0.5899 and 0.6500.

B. 0.5804 and 0.6596.

C. 0.61939 and 0.6206.

T he implication here is that we have a binomial distribution.

Confidence Interval = p ± Z0. 01×s p

Where Sp is the standard deviation and p is the mean

You may use the following standard normal table:

Roy’s safety-fi rst cri teri on.

unit change in the opposite (same) direction.

Cov (A, B) 0.010

σAσB √0.035√0.0500 0.04183

place of their standard deviation, as shown below.

correl ati ons of portfol i o returns.

It is given by the general formular:

met the selection criteria is given below.

P(stock is div. paying and tech stock meeting criteria)

Interpret Condi ti onal Probabi l i ti es.

A. the potential output level of each labor force.

B. the demand for the gross domestic product of an economy.

A i s i ncorrect. T he production capacity of an economy is known as potential output.

C i s i ncorrect. T he total supply of goods in a market at a particular time is known as aggregate

LOS 10f: Expl ai n how the aggregate demand curve i s generated.

account compounding effects.

Effective Annual Rate = (1 + Periodic Interest Rate)m– 1

52.04652 = 52 + Nominal Annual Rate

Nominal Annual Rate = 4.65%

CPT – >; PV = 14, 477

initial amount is negative.

formula to estimate the standard error of the sample mean:

standard deviation of returns, by the square root of n.

i nterpret the standard error of the sampl e mean.

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

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

What is the covariance between X and Y?

T he covariance is a measure of the degree of co-movement between two random variables.

Cov (X Y ) = E[(X − E (X)) (Y − E (Y ))]

E(X) = 0.40 × 100 + 0.60 × 180 = 148

E(Y) = 0.40 × 150 + 0.60 × 110 = 126

correl ati ons of portfol i o returns.

[Dividend+ (End Price– Begin Price)]

hol di ng peri od return.

Q.11 T he aggregate demand curve shows a:

A i s i ncorrect. T he aggregate demand curve is a downward-sloping curve. It shows a negative, not

and aggregate output demanded, not supplied.

LOS 10f: Expl ai n how the aggregate demand curve i s generated.

is calculated as shown below. >/p>

Sample mean - Hypothesized value

root of the sample size, as shown in the calculation above.

hypothesi s testi ng, and the power of a test.

3, 700, 000 × (1 − (1 + 0.08)−7 )

CFO=-14.3, C01=3.7, F01=7

two. T hus, (0.6) × (0.6) = 36%

value by the amount the value increases.