CFA Level 1 Test Questions with verified ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
detailed answers ||\\//||
Allen Jabber invested $400 at the beginning of the last 12 months in the shares of a mutual
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fund that paid no dividends. Which Method will he correctly choose to calculate his average
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
price per share from the monthly share prices?
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
a) Arithmetic Mean
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b) Harmonic Mean
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c) Geometric Mean - correct answer✔✔Harmonic Mean - The harmonic mean of the 12
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purchase prices will be his average price paid per share. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Colonia has 2 political parties, the Wigs and the Wags. If the Wags are elected there is a 32%
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probability of a tax increase over the next 4 years. If the Wigs are elected there is a 60%
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probability of a tax increase. There is a 20% probability the that the Wags will be elected. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
The sum of the (unconditional) probability of a tax increase and the joint probability that
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the wigs will be elected and there will be no tax increase is closest to:
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
a) 55% ||\\//||
b) 70% ||\\//||
c) 85% - correct answer✔✔86.4% = C
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The unconditional probability of a tax increase is: 0.2(0.32) + 0.8(0.6) = 54.4%.
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The joint probability that the Wigs will be elected and there will be no tax increase is:
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
0.8(0.4) = 32%. The sum is: 54.4 + 32 = 86.4%. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
An analyst who wants to display the relationship between two variables graphically is most
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
likely to use: ||\\//|| ||\\//||
,a) a histogram
||\\//|| ||\\//||
b) a scatterplot
||\\//|| ||\\//||
c) a frequency polygon - correct answer✔✔B = Scatterplot
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Scatterplots illustrate the relationship between two variables. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Histograms and frequency polygons show the distribution of observations for a single ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
variable.
Ralph will retire 15 years from today and has saved $121,000 in his investment account for
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
retirement. He believes he will need 37,000 at the beginning of each year for 25 Years of ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
retirement, with the first withdrawal on the day he retires. Ralph assumes his account will ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
earn 8%. The amount he needs to deposit at the beginning of this year and each of the
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
following 14 Years (15 in all) is closest to: ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
a) 1350
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b) 1450
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c) 1550 - correct answer✔✔B = 1450
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Step 1: ||\\//|| ||\\//||
Calculate the amount needed at retirement at t = 15, with your calculator in BGN mode. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
N = 25, FV = 0, I/Y = 8, PMT = 37,000, CPT PV = -426,564
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Step 2: ||\\//|| ||\\//||
Calculate the required deposits at t = 0,1,....,14 to result in a time 15 value of 426,564, with ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
your calculator still in BGN mode. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
PV = -121,000, N = 15, I/Y = 8, FV = 426,564, CPT PMT = -$1,457.21
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, The current price of Bosto shares is $50. Over the coming year, there is a 40% probability
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that share returns will be 10%, 40% probability returns will be 12.5%, and a 20% probability
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share returns will be 30%. Bostos expected return and standard deviation of returns for the
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coming year are closest to: ||\\//|| ||\\//|| ||\\//|| ||\\//||
a) E(R) = 15% Standard Dev = 7.58%
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b) E(R) = 17.5% Standard Dev = 5.75%
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a) E(R) = 17.5% Standard Dev = 7.58% - correct answer✔✔A
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E[R] = (0.4)(10) + (0.4)(12.5) + (0.2)(30) = 15%
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Variance = (0.4)(10 − 15)2 + (0.4)(12.5 − 15)2 + (0.2)(30 − 15)2 = 57.5 ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Standard deviation=√57.5=7.58% ||\\//||
Nikki Ali and Donald Ankard borrowed $15,000 to finance their wedding and reception.
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
The fully amortizing loan at 11% requires equal payments at the end of each of the next
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seven years. The principle portion of the first payment is closest to:
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
A) 1500 ||\\//||
B) 1530||\\//||
C) 1560 - correct answer✔✔B
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The interest portion of the first payment is simply principal × interest rate = (15,000 ×
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
0.11) = 1,650. ||\\//|| ||\\//||
Using a financial calculator: PV = 15,000, FV = 0, I/Y = 11, N = 7, CPT PMT= $3,183
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detailed answers ||\\//||
Allen Jabber invested $400 at the beginning of the last 12 months in the shares of a mutual
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fund that paid no dividends. Which Method will he correctly choose to calculate his average
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
price per share from the monthly share prices?
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
a) Arithmetic Mean
||\\//|| ||\\//||
b) Harmonic Mean
||\\//|| ||\\//||
c) Geometric Mean - correct answer✔✔Harmonic Mean - The harmonic mean of the 12
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
purchase prices will be his average price paid per share. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Colonia has 2 political parties, the Wigs and the Wags. If the Wags are elected there is a 32%
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
probability of a tax increase over the next 4 years. If the Wigs are elected there is a 60%
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
probability of a tax increase. There is a 20% probability the that the Wags will be elected. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
The sum of the (unconditional) probability of a tax increase and the joint probability that
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
the wigs will be elected and there will be no tax increase is closest to:
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
a) 55% ||\\//||
b) 70% ||\\//||
c) 85% - correct answer✔✔86.4% = C
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The unconditional probability of a tax increase is: 0.2(0.32) + 0.8(0.6) = 54.4%.
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The joint probability that the Wigs will be elected and there will be no tax increase is:
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
0.8(0.4) = 32%. The sum is: 54.4 + 32 = 86.4%. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
An analyst who wants to display the relationship between two variables graphically is most
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
likely to use: ||\\//|| ||\\//||
,a) a histogram
||\\//|| ||\\//||
b) a scatterplot
||\\//|| ||\\//||
c) a frequency polygon - correct answer✔✔B = Scatterplot
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Scatterplots illustrate the relationship between two variables. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Histograms and frequency polygons show the distribution of observations for a single ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
variable.
Ralph will retire 15 years from today and has saved $121,000 in his investment account for
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
retirement. He believes he will need 37,000 at the beginning of each year for 25 Years of ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
retirement, with the first withdrawal on the day he retires. Ralph assumes his account will ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
earn 8%. The amount he needs to deposit at the beginning of this year and each of the
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
following 14 Years (15 in all) is closest to: ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
a) 1350
||\\//||
b) 1450
||\\//||
c) 1550 - correct answer✔✔B = 1450
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Step 1: ||\\//|| ||\\//||
Calculate the amount needed at retirement at t = 15, with your calculator in BGN mode. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
N = 25, FV = 0, I/Y = 8, PMT = 37,000, CPT PV = -426,564
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Step 2: ||\\//|| ||\\//||
Calculate the required deposits at t = 0,1,....,14 to result in a time 15 value of 426,564, with ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
your calculator still in BGN mode. ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
PV = -121,000, N = 15, I/Y = 8, FV = 426,564, CPT PMT = -$1,457.21
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
, The current price of Bosto shares is $50. Over the coming year, there is a 40% probability
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
that share returns will be 10%, 40% probability returns will be 12.5%, and a 20% probability
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
share returns will be 30%. Bostos expected return and standard deviation of returns for the
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
coming year are closest to: ||\\//|| ||\\//|| ||\\//|| ||\\//||
a) E(R) = 15% Standard Dev = 7.58%
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
b) E(R) = 17.5% Standard Dev = 5.75%
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
a) E(R) = 17.5% Standard Dev = 7.58% - correct answer✔✔A
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
E[R] = (0.4)(10) + (0.4)(12.5) + (0.2)(30) = 15%
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Variance = (0.4)(10 − 15)2 + (0.4)(12.5 − 15)2 + (0.2)(30 − 15)2 = 57.5 ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Standard deviation=√57.5=7.58% ||\\//||
Nikki Ali and Donald Ankard borrowed $15,000 to finance their wedding and reception.
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
The fully amortizing loan at 11% requires equal payments at the end of each of the next
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
seven years. The principle portion of the first payment is closest to:
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
A) 1500 ||\\//||
B) 1530||\\//||
C) 1560 - correct answer✔✔B
||\\//|| ||\\//|| ||\\//|| ||\\//||
The interest portion of the first payment is simply principal × interest rate = (15,000 ×
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
0.11) = 1,650. ||\\//|| ||\\//||
Using a financial calculator: PV = 15,000, FV = 0, I/Y = 11, N = 7, CPT PMT= $3,183
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
