CFA Level 1 - Quantitative Methods
Exam Questions with Complete
Solutions
Cash Flow Additivity Principle - Answer-Present value of any stream of cash flow equals
the sum of the present values of the cash flows.
Ex: Cash flows of $100 for 4 Years & a $300 payment that occurs in year 3. Calculate
the PV of both and add them together.
(Use the Unequal Cash flow method.)
NPV - Answer-Present Value of expected cash inflows minus the present value of the
expected outflows, discounted at the appropriate rate.
Use the Calculator (Cash Flow):
Set CF0 = 0 (for profit)
Set CF0 = Initial negative outflow (for total NPV)
IRR - Answer-Discount rate that makes NPV equal to zero
Use Calculator (Cash Flows):
1.CF0 = Initial Cash Outlay
2.CF1.....CFn
3.Compute IRR
Capital Budgeting - Answer-The allocation of funds to relatively long range projects or
investments
Capital Structure - Answer-The choice of long-term financial for the investments the
company wants to make
Working Capital Management - Answer-The management of the company's short-term
assets (such as inventory) and short term liabilities (such as money owed to suppliers).
NPV Decision Rule - Answer-If the investments NPV is positive - Accept Project
If the investments NPV is negative - Decline Project
If the investor has 2 (Mutually Exclusive) projects - Accept the Higher NPV
IRR Decision Rule - Answer-IRR is greater than the required rate of return - Accept
IRR is less that the required rate of return - Reject
(Required rate also called hurdle rate)
, IRR vs. NPV (Mutually Exclusive) - Answer-Always accept the project with the greatest
NPV when the IRR and NPV rules are conflicting.
Holding Period Return - Answer-
Money-Weighted Return - Answer-Takes into account all time and cash inflows/outflows
Calculate Using IRR Calculation:
1. Set CF0 - Initial Cash Outlay
2. CF1.......CFn (adding dividends into each period)
3. Compute IRR
Time-Weighted Return - Answer-Measures compound growth. Is not affected by cash
inflows/outflows
To Calculate:
1. Figure each seperate periods individual holding period return
2. Use formula to calculate
Yield Conversion - Answer-
Statistics (Defined) - Answer-Statistics - Refering to Data and methods that we use to
analze data.
Descriptive Statistics - The study of how data can be summarized effictively to describe
important aspects of large data sets.
Inference Statistics - Involves making forcasts, estimates, or judgements about a larger
group from a smaller group actually observed.
Measurement Scales - Answer-Nominal Scale - Contains the least information. Counted
with no particular order. Ex: Municipal Bond Fund 1, Corporate Bond Fund 1, etc
Ordinal Scale - Observation is assigned to one of several categories, then ordered with
respect to a characteristic. Ex: Assigning 1 to first 100, 2 to second 100, etc
Interval Scale - Provide relative ranking and differences between scale values are
equal, but 0 doesn;t required absence. Ex: Temperature
Ratio Scales - Ranking and qual differences between scale values. Also have true 0.
Ex: Money.
Population and Samples - Answer-Population - All members of a specfic group
Parameter - Descriptive measure of the population
Exam Questions with Complete
Solutions
Cash Flow Additivity Principle - Answer-Present value of any stream of cash flow equals
the sum of the present values of the cash flows.
Ex: Cash flows of $100 for 4 Years & a $300 payment that occurs in year 3. Calculate
the PV of both and add them together.
(Use the Unequal Cash flow method.)
NPV - Answer-Present Value of expected cash inflows minus the present value of the
expected outflows, discounted at the appropriate rate.
Use the Calculator (Cash Flow):
Set CF0 = 0 (for profit)
Set CF0 = Initial negative outflow (for total NPV)
IRR - Answer-Discount rate that makes NPV equal to zero
Use Calculator (Cash Flows):
1.CF0 = Initial Cash Outlay
2.CF1.....CFn
3.Compute IRR
Capital Budgeting - Answer-The allocation of funds to relatively long range projects or
investments
Capital Structure - Answer-The choice of long-term financial for the investments the
company wants to make
Working Capital Management - Answer-The management of the company's short-term
assets (such as inventory) and short term liabilities (such as money owed to suppliers).
NPV Decision Rule - Answer-If the investments NPV is positive - Accept Project
If the investments NPV is negative - Decline Project
If the investor has 2 (Mutually Exclusive) projects - Accept the Higher NPV
IRR Decision Rule - Answer-IRR is greater than the required rate of return - Accept
IRR is less that the required rate of return - Reject
(Required rate also called hurdle rate)
, IRR vs. NPV (Mutually Exclusive) - Answer-Always accept the project with the greatest
NPV when the IRR and NPV rules are conflicting.
Holding Period Return - Answer-
Money-Weighted Return - Answer-Takes into account all time and cash inflows/outflows
Calculate Using IRR Calculation:
1. Set CF0 - Initial Cash Outlay
2. CF1.......CFn (adding dividends into each period)
3. Compute IRR
Time-Weighted Return - Answer-Measures compound growth. Is not affected by cash
inflows/outflows
To Calculate:
1. Figure each seperate periods individual holding period return
2. Use formula to calculate
Yield Conversion - Answer-
Statistics (Defined) - Answer-Statistics - Refering to Data and methods that we use to
analze data.
Descriptive Statistics - The study of how data can be summarized effictively to describe
important aspects of large data sets.
Inference Statistics - Involves making forcasts, estimates, or judgements about a larger
group from a smaller group actually observed.
Measurement Scales - Answer-Nominal Scale - Contains the least information. Counted
with no particular order. Ex: Municipal Bond Fund 1, Corporate Bond Fund 1, etc
Ordinal Scale - Observation is assigned to one of several categories, then ordered with
respect to a characteristic. Ex: Assigning 1 to first 100, 2 to second 100, etc
Interval Scale - Provide relative ranking and differences between scale values are
equal, but 0 doesn;t required absence. Ex: Temperature
Ratio Scales - Ranking and qual differences between scale values. Also have true 0.
Ex: Money.
Population and Samples - Answer-Population - All members of a specfic group
Parameter - Descriptive measure of the population
