CFA Investment Foundations Mock
Exam Questions and correct Answers
A company is in the large shipbuilding industry with most of its operating costs fixed. The company has
not used any debt to finance its operations. The operating leverage for such a firm is most likely:
low.
high.
zero.
High
The notion of scarce economic resources:
applies only to undeveloped nations.
gives rise to choices determined by opportunity costs.
applies when the amount of freely available goods exceeds the amount people desire.
Give rise to choices determined by opportunity costs
The crowding out effect will most likely lead to higher:
tax revenues.
interest rates.
private investment.
Interest rates
Which of the following actions taken by a central bank is best described as expansionary?
Increasing its policy rate
Purchasing government bonds
Increasing the reserve requirement
Purchasing government bonds
A government implements a policy that encourages consumers and businesses to increase spending and
investment. Those who benefit from this additional spending, in turn, increase their own spending. The
mechanism by which the initial increase in spending increases total spending by a greater amount is
known as the:
multiplier effect.
inflationary effect.
financial contagion effect.
Multiplier effect
,An obstacle to the alignment of international business cycles is the existence of international:
policy forums.
free trade zone agreements.
restrictions on capital flows.
Restrictions on capital flows
The broadest-based measure of a nation's inflation rate is provided by the:
implicit GDP deflator.
consumer price index (CPI).
producer price index (PPI).
Implicit GDP deflator
The US dollar is currently the world's most dominant reserve currency. If the US dollar was not a reserve
currency, the competitive position of US exporters would most likely be:
weaker.
stronger.
unaffected.
Stronger
The theory of purchasing power parity states that the exchange rate between any two countries will
adjust to reflect:
the price levels between them.
their current account balances.
any arbitrage opportunities between their exchange rates.
The Price levels between them
A US merchant purchases wine from a vineyard outside of Paris. The wine is transported to the United
States on a Canadian ship. The Canadian ship is insured by an insurance company incorporated in
England. An export would be reported by:
France only.
France, England, and Canada.
United States, France, England, and Canada.
France, England, And Canada
Proprietary trading is most likely carried out by:
,dealers.
brokers.
settlement agents.
Dealers,
Dealers act as principals, so they are deemed proprietary traders. Dealers trade on behalf of their own
accounts and use their own capital to make markets. B is incorrect. Brokers arrange deals between the
buyers and the sellers. They do not trade for their own accounts. C is incorrect. Settlement agents
provide services to clear and settle deals after they have been negotiated.
Q. Globalisation in the investment industry is associated with the growing tendency of investors:
to look outside their local market for investment opportunities.
to prefer to hedge the risks of foreign investment, such as currency risk.
in smaller countries to compete more effectively with those in larger countries
to look outside their local market for investment opportunities.
A is correct. Globalisation occurs as investors develop a growing tendency to look outside their local
markets for better portfolio diversification and higher returns. B is incorrect. The decision to hedge
various risks will depend on the individual investor's needs and beliefs, not the extent of globalisation.
C is incorrect. Globalisation gives all investors more opportunities but does not favour one group over
another.
The goal of all economic systems is to:
efficiently allocate scarce resources to their most productive uses.
produce enough goods and services to satisfy the desires of all consumers.
support government spending on public services, such as education, defence, and infrastructure.
efficiently allocate scarce resources to their most productive uses
The goal of all economic systems is the efficient allocation of scarce resources to their most productive
uses. People have an unlimited desire for goods and services, but resources are limited. Economic
systems must address three questions: (1) What should be produced? (2) How should it be produced?
(3) Who should receive what is produced? The goal is to answer these questions in a way that best
satisfies consumers' needs
An individual who helps buyers and sellers find and trade with one another is a(n):
broker.
dealer.
auditor.
Broker
Securities regulations are created by:
legislative bodies.
, individual investors.
government agencies.
Government Agencies
The CFA Institute Code of Ethics requires members to:
protect clients' interests at all times and in all situations.
encourage competitors to increase their levels of competence.
ensure investment recommendations are similar across an industry.
encourage competitors to increase their levels of competence.
An employee is assigned a complicated task by her supervisor but believes she does not have the
technical skills to carry it out. The employee should:
refuse to carry out the assignment.
carry out the work as best as she can.
get a co-worker to do it and take credit for the work.
Refuse to carry out the assignment
Investment advisers have an ethical obligation to:
protect their own interests.
exercise independent judgment.
sell products with the highest fees.
Exercise independent judgment
Based on the CFA Institute Standards of Practice, investment advisers should manage a client's
investment portfolio the same way they would manage:
their own assets.
other client accounts.
the account if managed by a competitor.
Their own assets
During a job interview, a potential employer described the CFA Institute Code of Ethics as "a set of
principles establishing rules governing ethical behaviour required of investment professionals toward
their clients and employers". Does this description fully capture the Code of Ethics' requirement to act in
an ethical manner?
Yes
No, the Code of Ethics also requires ethical behaviour when dealing with potential clients
No, the Code of Ethics also requires ethical interaction with all capital market participants
No, the code of ethics also require ethical interaction with all capital market participants
Exam Questions and correct Answers
A company is in the large shipbuilding industry with most of its operating costs fixed. The company has
not used any debt to finance its operations. The operating leverage for such a firm is most likely:
low.
high.
zero.
High
The notion of scarce economic resources:
applies only to undeveloped nations.
gives rise to choices determined by opportunity costs.
applies when the amount of freely available goods exceeds the amount people desire.
Give rise to choices determined by opportunity costs
The crowding out effect will most likely lead to higher:
tax revenues.
interest rates.
private investment.
Interest rates
Which of the following actions taken by a central bank is best described as expansionary?
Increasing its policy rate
Purchasing government bonds
Increasing the reserve requirement
Purchasing government bonds
A government implements a policy that encourages consumers and businesses to increase spending and
investment. Those who benefit from this additional spending, in turn, increase their own spending. The
mechanism by which the initial increase in spending increases total spending by a greater amount is
known as the:
multiplier effect.
inflationary effect.
financial contagion effect.
Multiplier effect
,An obstacle to the alignment of international business cycles is the existence of international:
policy forums.
free trade zone agreements.
restrictions on capital flows.
Restrictions on capital flows
The broadest-based measure of a nation's inflation rate is provided by the:
implicit GDP deflator.
consumer price index (CPI).
producer price index (PPI).
Implicit GDP deflator
The US dollar is currently the world's most dominant reserve currency. If the US dollar was not a reserve
currency, the competitive position of US exporters would most likely be:
weaker.
stronger.
unaffected.
Stronger
The theory of purchasing power parity states that the exchange rate between any two countries will
adjust to reflect:
the price levels between them.
their current account balances.
any arbitrage opportunities between their exchange rates.
The Price levels between them
A US merchant purchases wine from a vineyard outside of Paris. The wine is transported to the United
States on a Canadian ship. The Canadian ship is insured by an insurance company incorporated in
England. An export would be reported by:
France only.
France, England, and Canada.
United States, France, England, and Canada.
France, England, And Canada
Proprietary trading is most likely carried out by:
,dealers.
brokers.
settlement agents.
Dealers,
Dealers act as principals, so they are deemed proprietary traders. Dealers trade on behalf of their own
accounts and use their own capital to make markets. B is incorrect. Brokers arrange deals between the
buyers and the sellers. They do not trade for their own accounts. C is incorrect. Settlement agents
provide services to clear and settle deals after they have been negotiated.
Q. Globalisation in the investment industry is associated with the growing tendency of investors:
to look outside their local market for investment opportunities.
to prefer to hedge the risks of foreign investment, such as currency risk.
in smaller countries to compete more effectively with those in larger countries
to look outside their local market for investment opportunities.
A is correct. Globalisation occurs as investors develop a growing tendency to look outside their local
markets for better portfolio diversification and higher returns. B is incorrect. The decision to hedge
various risks will depend on the individual investor's needs and beliefs, not the extent of globalisation.
C is incorrect. Globalisation gives all investors more opportunities but does not favour one group over
another.
The goal of all economic systems is to:
efficiently allocate scarce resources to their most productive uses.
produce enough goods and services to satisfy the desires of all consumers.
support government spending on public services, such as education, defence, and infrastructure.
efficiently allocate scarce resources to their most productive uses
The goal of all economic systems is the efficient allocation of scarce resources to their most productive
uses. People have an unlimited desire for goods and services, but resources are limited. Economic
systems must address three questions: (1) What should be produced? (2) How should it be produced?
(3) Who should receive what is produced? The goal is to answer these questions in a way that best
satisfies consumers' needs
An individual who helps buyers and sellers find and trade with one another is a(n):
broker.
dealer.
auditor.
Broker
Securities regulations are created by:
legislative bodies.
, individual investors.
government agencies.
Government Agencies
The CFA Institute Code of Ethics requires members to:
protect clients' interests at all times and in all situations.
encourage competitors to increase their levels of competence.
ensure investment recommendations are similar across an industry.
encourage competitors to increase their levels of competence.
An employee is assigned a complicated task by her supervisor but believes she does not have the
technical skills to carry it out. The employee should:
refuse to carry out the assignment.
carry out the work as best as she can.
get a co-worker to do it and take credit for the work.
Refuse to carry out the assignment
Investment advisers have an ethical obligation to:
protect their own interests.
exercise independent judgment.
sell products with the highest fees.
Exercise independent judgment
Based on the CFA Institute Standards of Practice, investment advisers should manage a client's
investment portfolio the same way they would manage:
their own assets.
other client accounts.
the account if managed by a competitor.
Their own assets
During a job interview, a potential employer described the CFA Institute Code of Ethics as "a set of
principles establishing rules governing ethical behaviour required of investment professionals toward
their clients and employers". Does this description fully capture the Code of Ethics' requirement to act in
an ethical manner?
Yes
No, the Code of Ethics also requires ethical behaviour when dealing with potential clients
No, the Code of Ethics also requires ethical interaction with all capital market participants
No, the code of ethics also require ethical interaction with all capital market participants
