CFA Level I Mock Exam B: Afternoon
Session Questions And Answer Verified
Solutions 100% Correct!!!
In order to provide investors with a more comprehensive view of a firm's
performance, the current GIPS standards includes new provisions related to: -
ANSWER✔✔various measure of risk
Over the past four years, a portfolio experienced returns of −8%, 4%, 17%, and
−12%. The geometric mean return of the portfolio over the four-year period is
closest to: - ANSWER✔✔Add one to each of the given returns, then multiply them
together and take the fourth root of the resulting product. 0.92 × 1.04 × 1.17 × 0.88
= 0.985121; 0.985121 raised to the 0.25 power is 0.996259. Subtracting one and
multiplying by 100 gives the correct geometric mean return: [(0.92 × 1.04 × 1.17 ×
0.88)0.25 − 1] × 100 = −0.37%.
An analyst has established the following prior probabilities regarding a company's
next quarter's earnings per share (EPS) exceeding, equaling, or being below the
consensus estimate
Prior Probabilities
EPS exceed consensus 25%
EPS equal consensus 55%
EPS are less than consensus 20%
Probabilities the Company Cuts Dividends, Conditional on EPS
Exceeding/Equaling/Falling below Consensus
P(Cut div|EPS exceed) 5%
P(Cut div|EPS equal) 10%
,P(Cut div|EPS below) 85% - ANSWER✔✔Updated probability of event given the
new information
=Probability of the new information given eventUnconditional probability of the
new information×Prior probability of event
where
Updated probability of event given the new information: P(EPS below|Cut div);
Probability of the new information given event: P(Cut div|EPS below) = 85%;
Unconditional probably of the new information: P(Cut div) = 23.75%;
Prior probability of event: P(EPS below) = 20%.
Therefore, the probability of EPS falling below the consensus is updated as:
P(EPS below|Cut div) = [P(Cut div|EPS below)/P(Cut div)] × P(EPS below)
= (0.85/0.2375) × 0.20 = 0.71579 ~ 72%
Consider the investment in the following table:
Start of Year 1 One share purchased at $100
End of Year 1 $5.00 dividend/share paid and one additional share purchased at
$125
, End of Year 2 $5.00 dividend/share paid and both shares sold for $140 per share
Assuming dividends are not reinvested, compared with the time-weighted return,
the money-weighted return is: - ANSWER✔✔Year Contribution Start-of-Year
Value after Contribution End-of-Year Dividend End-of-Year Value after Dividend
1 1 × $100 1 × $100 = $100 1 × $5 = $5 $125
2 1 × $125 2 × $125 = $250 2 × $5 = $10 (2 × 140) + 10 = $290
The time-weighted rate of return (TWR) on this investment is found by taking the
geometric mean of the two holding period returns (HPRs):
TWR = [(1 + HPRYear 1) × (1 + HPRYear 2)]1/2 − 1
where
HPRYear 1 = ($125 − $100 + $5)/$100 = 30.0%
HPRYear 2 = ($280 − $250 + $10)/$250 = 16.0%
TWR = [(1 + 0.30) × (1 + 0.16)]1/2 − 1 = 22.80%
The money-weighted rate of return (MWR) is the internal rate of return (IRR) of
the cash flows associated with the investment:
0=−100+(−125+5)(1+r1)+(280+10)(1+r2), where r = MWR.
Using the cash flow (CF) function of a financial calculator:
Session Questions And Answer Verified
Solutions 100% Correct!!!
In order to provide investors with a more comprehensive view of a firm's
performance, the current GIPS standards includes new provisions related to: -
ANSWER✔✔various measure of risk
Over the past four years, a portfolio experienced returns of −8%, 4%, 17%, and
−12%. The geometric mean return of the portfolio over the four-year period is
closest to: - ANSWER✔✔Add one to each of the given returns, then multiply them
together and take the fourth root of the resulting product. 0.92 × 1.04 × 1.17 × 0.88
= 0.985121; 0.985121 raised to the 0.25 power is 0.996259. Subtracting one and
multiplying by 100 gives the correct geometric mean return: [(0.92 × 1.04 × 1.17 ×
0.88)0.25 − 1] × 100 = −0.37%.
An analyst has established the following prior probabilities regarding a company's
next quarter's earnings per share (EPS) exceeding, equaling, or being below the
consensus estimate
Prior Probabilities
EPS exceed consensus 25%
EPS equal consensus 55%
EPS are less than consensus 20%
Probabilities the Company Cuts Dividends, Conditional on EPS
Exceeding/Equaling/Falling below Consensus
P(Cut div|EPS exceed) 5%
P(Cut div|EPS equal) 10%
,P(Cut div|EPS below) 85% - ANSWER✔✔Updated probability of event given the
new information
=Probability of the new information given eventUnconditional probability of the
new information×Prior probability of event
where
Updated probability of event given the new information: P(EPS below|Cut div);
Probability of the new information given event: P(Cut div|EPS below) = 85%;
Unconditional probably of the new information: P(Cut div) = 23.75%;
Prior probability of event: P(EPS below) = 20%.
Therefore, the probability of EPS falling below the consensus is updated as:
P(EPS below|Cut div) = [P(Cut div|EPS below)/P(Cut div)] × P(EPS below)
= (0.85/0.2375) × 0.20 = 0.71579 ~ 72%
Consider the investment in the following table:
Start of Year 1 One share purchased at $100
End of Year 1 $5.00 dividend/share paid and one additional share purchased at
$125
, End of Year 2 $5.00 dividend/share paid and both shares sold for $140 per share
Assuming dividends are not reinvested, compared with the time-weighted return,
the money-weighted return is: - ANSWER✔✔Year Contribution Start-of-Year
Value after Contribution End-of-Year Dividend End-of-Year Value after Dividend
1 1 × $100 1 × $100 = $100 1 × $5 = $5 $125
2 1 × $125 2 × $125 = $250 2 × $5 = $10 (2 × 140) + 10 = $290
The time-weighted rate of return (TWR) on this investment is found by taking the
geometric mean of the two holding period returns (HPRs):
TWR = [(1 + HPRYear 1) × (1 + HPRYear 2)]1/2 − 1
where
HPRYear 1 = ($125 − $100 + $5)/$100 = 30.0%
HPRYear 2 = ($280 − $250 + $10)/$250 = 16.0%
TWR = [(1 + 0.30) × (1 + 0.16)]1/2 − 1 = 22.80%
The money-weighted rate of return (MWR) is the internal rate of return (IRR) of
the cash flows associated with the investment:
0=−100+(−125+5)(1+r1)+(280+10)(1+r2), where r = MWR.
Using the cash flow (CF) function of a financial calculator:
