CFA Level 2 Complete Exam Study Guide
with Verified Answers | Guaranteed A+
1. covered interest arbitrage ------- ✔ CORRECT ANSWER ✓✓Risk-free arbitrage is possible
in all forward markets. The term covered interest arbitrage pertains specifically to the
foreign exchange markets. When the forward rate differs from the forward rate implied
by interest rate parity, traders can implement covered interest arbitrage.
2. investment policy statement ------- ✔ CORRECT ANSWER ✓✓Client description, purpose
of the portfolio, and portfolio rebalancing guidelines should all be part of the investment
policy statement
3. Currency swap ------- ✔ CORRECT ANSWER ✓✓The credit risk of a currency swap is
generally greater than that of a similarly sized interest rate swap, due to the fact that the
payments are not netted. The greatest credit risk exposure for a currency swap occurs at
the end of the swap's life, due to the final exchange of notional principal.
4. Random errors ------- ✔ CORRECT ANSWER ✓✓Chance fluctuations are also known as
5. equity beta ------- ✔ CORRECT ANSWER ✓✓Unlevered beta/%equity
6. Moving average ------- ✔ CORRECT ANSWER ✓✓an AR autoregressive model contains b
and a moving average model contains ε. An ARMA model contains both, bε.
7. F- statistic ------- ✔ CORRECT ANSWER ✓✓The significance of a univariate or a
multivariate regression is measured by the F-statistic.
,8. Tracking Portfolios ------- ✔ CORRECT ANSWER ✓✓portfolio that has factor sensitivities
that are matched with those of a
9. designated benchmark portfolio. They are used by managers who believe they have
security
10. selection expertise, and want to deviate from benchmark weights for individual
securities, but
11. at the same time wish to maintain the same factor sensitivities as the benchmark
12. factor portfolio ------- ✔ CORRECT ANSWER ✓✓A factor portfolio is constructed to have a
sensitivity of 1 to a specific factor and a sensitivity of
13. 0 to all other factors in the model. Therefore, it has exposure to only one risk factor and
exactly
14. represents the risk of that factor.
15. Board of directors ------- ✔ CORRECT ANSWER ✓✓effective performance of the board of
directors should be reviewed annually not quarterly
16. Interest rate parity ------- ✔ CORRECT ANSWER ✓✓Interest Rate Parity is used to
calculate forward exchange rates.
17. Total equity ------- ✔ CORRECT ANSWER ✓✓Total equity equals the original equity of
Parent Company plus the market value of equity that was issued to purchase Sub
Company = $10,000 + $2,000 = $12,000.
18. corporate governance ------- ✔ CORRECT ANSWER ✓✓Global best practice recommends
that at least ¾ (75 percent) of the board of directors be independent. Although some
experts argue that all board members should be independent, this is not required.
19. t-stat ------- ✔ CORRECT ANSWER ✓✓Since we have over 30 observations, we can apply
our rule of thumb, that is if the t-statistic is greater than 2, then the coefficient is
statistically significant.
, 20. t-stat ------- ✔ CORRECT ANSWER ✓✓t-statistic = Coefficient / Standard error of the
coefficient
21. Financial leverage ------- ✔ CORRECT ANSWER ✓✓Financial leverage = Assets/Equity
22. basis risk ------- ✔ CORRECT ANSWER ✓✓the risk that her derivatives do not perfectly
match her hedged asset
23. Durbin-Watson ------- ✔ CORRECT ANSWER ✓✓The most widely used test for serial
correlation in a regression model involves calculating the Durbin-Watson statistic.
24. Breusch-Pagan test ------- ✔ CORRECT ANSWER ✓✓The Breusch-Pagan test is used in
testing for conditional heteroskedasticity in a linear regression model.
25. Altman's Z-score ------- ✔ CORRECT ANSWER ✓✓Altman's Z-score refers to a well-known
application of discriminant analysis that predicts whether BANKRUPTCY will take place
based on discriminant analysis of financial ratios
26. Cost leadership strategy ------- ✔ CORRECT ANSWER ✓✓Cost leadership, in basic words,
means the lowest cost of operation in the industry
27. correlation coefficient ------- ✔ CORRECT ANSWER ✓✓correlation coefficient is the
square root of the R-square
28. Temporal method ------- ✔ CORRECT ANSWER ✓✓used to translate financial
29. statements presented in local currency (LC) into amounts expressed in the functional
30. currency (FC).
with Verified Answers | Guaranteed A+
1. covered interest arbitrage ------- ✔ CORRECT ANSWER ✓✓Risk-free arbitrage is possible
in all forward markets. The term covered interest arbitrage pertains specifically to the
foreign exchange markets. When the forward rate differs from the forward rate implied
by interest rate parity, traders can implement covered interest arbitrage.
2. investment policy statement ------- ✔ CORRECT ANSWER ✓✓Client description, purpose
of the portfolio, and portfolio rebalancing guidelines should all be part of the investment
policy statement
3. Currency swap ------- ✔ CORRECT ANSWER ✓✓The credit risk of a currency swap is
generally greater than that of a similarly sized interest rate swap, due to the fact that the
payments are not netted. The greatest credit risk exposure for a currency swap occurs at
the end of the swap's life, due to the final exchange of notional principal.
4. Random errors ------- ✔ CORRECT ANSWER ✓✓Chance fluctuations are also known as
5. equity beta ------- ✔ CORRECT ANSWER ✓✓Unlevered beta/%equity
6. Moving average ------- ✔ CORRECT ANSWER ✓✓an AR autoregressive model contains b
and a moving average model contains ε. An ARMA model contains both, bε.
7. F- statistic ------- ✔ CORRECT ANSWER ✓✓The significance of a univariate or a
multivariate regression is measured by the F-statistic.
,8. Tracking Portfolios ------- ✔ CORRECT ANSWER ✓✓portfolio that has factor sensitivities
that are matched with those of a
9. designated benchmark portfolio. They are used by managers who believe they have
security
10. selection expertise, and want to deviate from benchmark weights for individual
securities, but
11. at the same time wish to maintain the same factor sensitivities as the benchmark
12. factor portfolio ------- ✔ CORRECT ANSWER ✓✓A factor portfolio is constructed to have a
sensitivity of 1 to a specific factor and a sensitivity of
13. 0 to all other factors in the model. Therefore, it has exposure to only one risk factor and
exactly
14. represents the risk of that factor.
15. Board of directors ------- ✔ CORRECT ANSWER ✓✓effective performance of the board of
directors should be reviewed annually not quarterly
16. Interest rate parity ------- ✔ CORRECT ANSWER ✓✓Interest Rate Parity is used to
calculate forward exchange rates.
17. Total equity ------- ✔ CORRECT ANSWER ✓✓Total equity equals the original equity of
Parent Company plus the market value of equity that was issued to purchase Sub
Company = $10,000 + $2,000 = $12,000.
18. corporate governance ------- ✔ CORRECT ANSWER ✓✓Global best practice recommends
that at least ¾ (75 percent) of the board of directors be independent. Although some
experts argue that all board members should be independent, this is not required.
19. t-stat ------- ✔ CORRECT ANSWER ✓✓Since we have over 30 observations, we can apply
our rule of thumb, that is if the t-statistic is greater than 2, then the coefficient is
statistically significant.
, 20. t-stat ------- ✔ CORRECT ANSWER ✓✓t-statistic = Coefficient / Standard error of the
coefficient
21. Financial leverage ------- ✔ CORRECT ANSWER ✓✓Financial leverage = Assets/Equity
22. basis risk ------- ✔ CORRECT ANSWER ✓✓the risk that her derivatives do not perfectly
match her hedged asset
23. Durbin-Watson ------- ✔ CORRECT ANSWER ✓✓The most widely used test for serial
correlation in a regression model involves calculating the Durbin-Watson statistic.
24. Breusch-Pagan test ------- ✔ CORRECT ANSWER ✓✓The Breusch-Pagan test is used in
testing for conditional heteroskedasticity in a linear regression model.
25. Altman's Z-score ------- ✔ CORRECT ANSWER ✓✓Altman's Z-score refers to a well-known
application of discriminant analysis that predicts whether BANKRUPTCY will take place
based on discriminant analysis of financial ratios
26. Cost leadership strategy ------- ✔ CORRECT ANSWER ✓✓Cost leadership, in basic words,
means the lowest cost of operation in the industry
27. correlation coefficient ------- ✔ CORRECT ANSWER ✓✓correlation coefficient is the
square root of the R-square
28. Temporal method ------- ✔ CORRECT ANSWER ✓✓used to translate financial
29. statements presented in local currency (LC) into amounts expressed in the functional
30. currency (FC).
