CFA Level 1 Practice Exam Questions
with Complete Answers
harmonic mean - Answer-used to find the mean of fractions/rates / ratios
use of harmonic mean when calculating three P/Es - Answer-P/E1= 45 PE2= 15 PE3=
15
(1/45)+(1/15)+(1/15)= .1556
n(or 3) /.1556 = 19.285
Cost averaging - Answer-The periodic investment of a fixed amount of money.
example of cost averaging and the harmonic mean - Answer-investor pays
$1000/month for two months. prices were $10 and $15 at each time. what did he pay on
average?
2/((1/10)+(1/15)=12
when to use arithmetic mean - Answer-when the sample includes all values including
outliers
when to use geometric mean - Answer-when the sample is compounding
when to use harmonic, trimmed, or winsorized mean - Answer-when the sample
inclsudes extreme outliers
Money Weighted Return - Answer-the IRR of a portfolio based on all cash flows
IRR - Answer-discount rate at which the sum of present values of cash values will equal
zero
positive cash flow - Answer-money flows TO the investor
negative cash flow - Answer-money flows away from investor
time-weighted rate of return - Answer-The compound rate of growth of one unit of
currency invested in a portfolio during a stated measurement period; a measure of
investment performance that is not sensitive to the timing and amount of withdrawals or
additions to the portfolio.
Three steps to computing time-weighted returns - Answer-1) price the portfolio
immediately prior to any significant addition or withdrawal of funds
2) calculate the holding period return on the portfolio for each subperiod
,3) Link or compound holding period returns to obtain an annual rate or return for the
year
how to find time-weighted return - Answer-TWR= (Gmean P1)(Gmean P2)^1/2 - 1
dividend discount model formula - Answer-rate= (dividend/price) + growth
Dividend Discount Model with pe ratio - Answer-p/e=dividend payout / (rate - growth)
Ethics:
The ______________ of the CFA BoD has overall the Professional Conduct Program
and enforcement of the Code and Standards
Several circumstances can prompt an inquiry from the ________________ (through the
Professional Conduct staff), such as: (4 things).
The Officer may decide one of 3 decides upon investigation. - Answer-Disciplinary
Review Committee
CFA Institute Designated Officer
*SWPP*
-*Self* Disclosure by members / candidates on their professional Conduct Statements of
involvement in a civil / criminal complaint.
-*Written* Complaints about a member or candidate's professional conduct received by
the staff
-Evidence of misconduct received through *public* sources (media)
-CFA exam *proctor* report of a violation
i) that no disciplinary sanctions are appropriate,
ii) to issue a cautionary letter, or
iii) to discipline the member or candidate
Code of Ethics - 6 pillars - Answer-*A PUPPI*
■ *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.
■ *Place* the integrity of the investment profession and the interests of clients above
their own personal interests.
■ *Use* reasonable care and exercise independent professional judgment when
conducting investment analysis, making investment recommendations, taking
investment actions, and engaging in other professional activities.
■ *Practice* and encourage others to practice in a professional and ethical manner that
will reflect credit on themselves and the profession.
,■ *Promote* the integrity of and uphold the rules governing capital markets.
■ Maintain and *improve* their professional competence and strive to maintain and
improve the competence of other investment professionals.
Standards of Professional Conduct - Answer-*PC DESIRE*
- *P*rofessionalism.
- Integrity of *C*apital Markets.
- *D*uties to Clients.
- Duties to *E*mployers.
- Investment Analysi*S*, Recommendations, and Action.
- Conflicts of *I*nterest.
- *Re*sponsibilities as a CFA Institute Member or CFA Candidate.
*P*rofessionalism. - Answer-*KIMM*el
a. Knowledge of the Law / Code. Members understand and comply with all laws -
KVIOA
i. Know laws in *all countries* in which they trade securities.
ii. Responsible for violations in which they *knowingly* participate.
iii. If *illegal* actions of client, customer or personal Code Violation - Must dissociate.
iv. If violation of Code by fellow member - strongly encourage to report. No requirement
to report unless law.
v. When going with the 'applicable law' - Code vs country of residence vs. country of
business... go with the strictest! But if 'law of locality' is stated, then go with that. (Ie.
Member resides in MS (more strict than Code) country, does business in LS (less strict
than Code) country; MS law applies, but can state that law of locality where business is
conducted governs.) Member must adhere to the Code and Standards. Not the MS
laws.
b. Independence and Objectivity. (GSBPT)
i. Modest gifts and entertainment are acceptable. Must be disclosed. If from client, must
be disclosed to employer (if contingent of future perform.. see ACA need consent too)
ii. Sell side analysts. Need effective firewalls bw investment banking. No buy side
influence allowed (if they have position in the security and try to convince you to issue
favorable report).
iii. Fund Manager Relationships (Secondary Fund Managers giving gifts for hiring, etc)
iv. Public Companies - can't engage in retaliatory practices by restricting access to
managers / conference calls, etc...
v. Travel Funding - use commercial travel options when talking to executives, unless
have to use charter
c. Misrepresentation.
, i. Investing through outside managers - must disclose their intended use of external
managers and must not represent those managers' investment practices as their own.
ii. Guarantees are misleading bc there is some risk.
Integrity of Capital Markets - Answer-*M&M*
a. Material Nonpublic Information - illegal - all rest is good. Have to wait a little bit until
trading. **** ONLY APPLIES TO NON-PUBLIC INFO ABOUT THE ISSUER (ie analyst
that is influential can trade on own name). **** failing to prevent transfer of info is a
violation.
i. Mosiac Theory - analysts get their information from a wide variety of sources - public /
non-public.
b. Market Manipulation
i. No Spreading false rumors. No non-fact based report during quiet period.
ii. Transaction-Based Manipulation. Trading a position between intercompany positions
to create the illusion of a price rise.
Duties to Clients - Answer-*PRoSPECt*
a. Loyalty, *P*rudence, and Care.
i. Follow IMAs / Govering Docs. COST BENEFIT FOR VOTING PROXIES. ALSO VOTE
IN BEST INTEREST FOR BENEFICIARIES NOT SPONSOR
ii. Recommend submitting at least quarterly statement.
iii. Disclose conflicts of interest - ie you use a broker that pays your utility bill in
exchange for using them.
b. Fai*R* Dealing
i. Not necessary equal treatment of clients but should not advantage / disadvantage any
clients against another client. Make premium levels of service available. MUST
DISTRIBUTE 'HOT' SHARES ON A WEIGHTED / PRO RATA BASIS.
ii. Investment Recommendations - Advise clients of changes in recommendations.
Shorten timeframe from decision to dissemination. IF ORDER COMES IN INFORM
THAT CHANGE MADE EVEN IF IT IS BEFORE OTHERS.. IE MAILED OUT.
iii. No participation in OVERSUBSCRIBED equity IPO
c. *S*uitability
i. Reasonable inquiry into client's investment experience.
ii. Determine that an investment is suitable to the client's financial situation / context of
the client's total portfolio. UPDATE INFO REGULARLY. IF EXECUTING UNSUITABLE
INV. FOR CLIENT, GET AFFIRMATIVE STATEMENT
iii. Management capacity - make sure investments made in line with objectives /
constraints.
d. *Pe*rformance Presentation - *Past misleading gross terminator eliminated*
with Complete Answers
harmonic mean - Answer-used to find the mean of fractions/rates / ratios
use of harmonic mean when calculating three P/Es - Answer-P/E1= 45 PE2= 15 PE3=
15
(1/45)+(1/15)+(1/15)= .1556
n(or 3) /.1556 = 19.285
Cost averaging - Answer-The periodic investment of a fixed amount of money.
example of cost averaging and the harmonic mean - Answer-investor pays
$1000/month for two months. prices were $10 and $15 at each time. what did he pay on
average?
2/((1/10)+(1/15)=12
when to use arithmetic mean - Answer-when the sample includes all values including
outliers
when to use geometric mean - Answer-when the sample is compounding
when to use harmonic, trimmed, or winsorized mean - Answer-when the sample
inclsudes extreme outliers
Money Weighted Return - Answer-the IRR of a portfolio based on all cash flows
IRR - Answer-discount rate at which the sum of present values of cash values will equal
zero
positive cash flow - Answer-money flows TO the investor
negative cash flow - Answer-money flows away from investor
time-weighted rate of return - Answer-The compound rate of growth of one unit of
currency invested in a portfolio during a stated measurement period; a measure of
investment performance that is not sensitive to the timing and amount of withdrawals or
additions to the portfolio.
Three steps to computing time-weighted returns - Answer-1) price the portfolio
immediately prior to any significant addition or withdrawal of funds
2) calculate the holding period return on the portfolio for each subperiod
,3) Link or compound holding period returns to obtain an annual rate or return for the
year
how to find time-weighted return - Answer-TWR= (Gmean P1)(Gmean P2)^1/2 - 1
dividend discount model formula - Answer-rate= (dividend/price) + growth
Dividend Discount Model with pe ratio - Answer-p/e=dividend payout / (rate - growth)
Ethics:
The ______________ of the CFA BoD has overall the Professional Conduct Program
and enforcement of the Code and Standards
Several circumstances can prompt an inquiry from the ________________ (through the
Professional Conduct staff), such as: (4 things).
The Officer may decide one of 3 decides upon investigation. - Answer-Disciplinary
Review Committee
CFA Institute Designated Officer
*SWPP*
-*Self* Disclosure by members / candidates on their professional Conduct Statements of
involvement in a civil / criminal complaint.
-*Written* Complaints about a member or candidate's professional conduct received by
the staff
-Evidence of misconduct received through *public* sources (media)
-CFA exam *proctor* report of a violation
i) that no disciplinary sanctions are appropriate,
ii) to issue a cautionary letter, or
iii) to discipline the member or candidate
Code of Ethics - 6 pillars - Answer-*A PUPPI*
■ *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.
■ *Place* the integrity of the investment profession and the interests of clients above
their own personal interests.
■ *Use* reasonable care and exercise independent professional judgment when
conducting investment analysis, making investment recommendations, taking
investment actions, and engaging in other professional activities.
■ *Practice* and encourage others to practice in a professional and ethical manner that
will reflect credit on themselves and the profession.
,■ *Promote* the integrity of and uphold the rules governing capital markets.
■ Maintain and *improve* their professional competence and strive to maintain and
improve the competence of other investment professionals.
Standards of Professional Conduct - Answer-*PC DESIRE*
- *P*rofessionalism.
- Integrity of *C*apital Markets.
- *D*uties to Clients.
- Duties to *E*mployers.
- Investment Analysi*S*, Recommendations, and Action.
- Conflicts of *I*nterest.
- *Re*sponsibilities as a CFA Institute Member or CFA Candidate.
*P*rofessionalism. - Answer-*KIMM*el
a. Knowledge of the Law / Code. Members understand and comply with all laws -
KVIOA
i. Know laws in *all countries* in which they trade securities.
ii. Responsible for violations in which they *knowingly* participate.
iii. If *illegal* actions of client, customer or personal Code Violation - Must dissociate.
iv. If violation of Code by fellow member - strongly encourage to report. No requirement
to report unless law.
v. When going with the 'applicable law' - Code vs country of residence vs. country of
business... go with the strictest! But if 'law of locality' is stated, then go with that. (Ie.
Member resides in MS (more strict than Code) country, does business in LS (less strict
than Code) country; MS law applies, but can state that law of locality where business is
conducted governs.) Member must adhere to the Code and Standards. Not the MS
laws.
b. Independence and Objectivity. (GSBPT)
i. Modest gifts and entertainment are acceptable. Must be disclosed. If from client, must
be disclosed to employer (if contingent of future perform.. see ACA need consent too)
ii. Sell side analysts. Need effective firewalls bw investment banking. No buy side
influence allowed (if they have position in the security and try to convince you to issue
favorable report).
iii. Fund Manager Relationships (Secondary Fund Managers giving gifts for hiring, etc)
iv. Public Companies - can't engage in retaliatory practices by restricting access to
managers / conference calls, etc...
v. Travel Funding - use commercial travel options when talking to executives, unless
have to use charter
c. Misrepresentation.
, i. Investing through outside managers - must disclose their intended use of external
managers and must not represent those managers' investment practices as their own.
ii. Guarantees are misleading bc there is some risk.
Integrity of Capital Markets - Answer-*M&M*
a. Material Nonpublic Information - illegal - all rest is good. Have to wait a little bit until
trading. **** ONLY APPLIES TO NON-PUBLIC INFO ABOUT THE ISSUER (ie analyst
that is influential can trade on own name). **** failing to prevent transfer of info is a
violation.
i. Mosiac Theory - analysts get their information from a wide variety of sources - public /
non-public.
b. Market Manipulation
i. No Spreading false rumors. No non-fact based report during quiet period.
ii. Transaction-Based Manipulation. Trading a position between intercompany positions
to create the illusion of a price rise.
Duties to Clients - Answer-*PRoSPECt*
a. Loyalty, *P*rudence, and Care.
i. Follow IMAs / Govering Docs. COST BENEFIT FOR VOTING PROXIES. ALSO VOTE
IN BEST INTEREST FOR BENEFICIARIES NOT SPONSOR
ii. Recommend submitting at least quarterly statement.
iii. Disclose conflicts of interest - ie you use a broker that pays your utility bill in
exchange for using them.
b. Fai*R* Dealing
i. Not necessary equal treatment of clients but should not advantage / disadvantage any
clients against another client. Make premium levels of service available. MUST
DISTRIBUTE 'HOT' SHARES ON A WEIGHTED / PRO RATA BASIS.
ii. Investment Recommendations - Advise clients of changes in recommendations.
Shorten timeframe from decision to dissemination. IF ORDER COMES IN INFORM
THAT CHANGE MADE EVEN IF IT IS BEFORE OTHERS.. IE MAILED OUT.
iii. No participation in OVERSUBSCRIBED equity IPO
c. *S*uitability
i. Reasonable inquiry into client's investment experience.
ii. Determine that an investment is suitable to the client's financial situation / context of
the client's total portfolio. UPDATE INFO REGULARLY. IF EXECUTING UNSUITABLE
INV. FOR CLIENT, GET AFFIRMATIVE STATEMENT
iii. Management capacity - make sure investments made in line with objectives /
constraints.
d. *Pe*rformance Presentation - *Past misleading gross terminator eliminated*
