CFA Investment Foundations Mock Exam Questions &
100% Correct Answers Top Taken A+ Scored
A store owner recently turned down a substantial cash offer for his store and the land on which the
store is located. Although the store owner considered the offer to be fair, he wanted to continue
running the business. This year, his business has incurred costs for merchandise sold; wages paid to
workers, including his own salary; utilities; and property taxes. When determining the business's
accounting profit for the period, he is most likely to correctly exclude which of the following:
His own salary.
Property taxes.
The opportunity cost of the land and store. - ANS ✔ - The opportunity cost of the land and the store
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. - ANS ✔ - 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. - ANS ✔ - Give
rise to choices determined by opportunity costs
The crowding out effect will most likely lead to higher:
Tax revenues.
Interest rates.
private investment. - ANS ✔ - 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 - ANS ✔ - 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. - ANS ✔ - 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. - ANS ✔ - 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). - ANS ✔ - 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. - ANS ✔ - 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. - ANS ✔ - 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. - ANS ✔ - France, England, And Canada
Country X has a comparative advantage for a good over its trading partner, Country Y. This advantage
means that relative to Country Y, Country X:
Is a net importer of the good.
Has imposed a quota on the good.
Produces the good more efficiently. - ANS ✔ - Produces the good more efficiently
To improve the usefulness of ratio analysis, an analyst should calculate ratios and:
Focus on the ratios that have increased from the previous year.
Compare the company's current performance with that of its competitors.
Compare the company's current and prior performance with that of its competitors. - ANS ✔ -
compare the company's current and prior performance w/ that of its competitors.
Unpaid operating expenses, such as the utilities bill for the last month of the year, are included in:
Operating expenses when paid.
Accounts receivable in current assets.
Accrued expenses in current liabilities. - ANS ✔ - Accrued expenses in current liabilities
Which of the following cash outflows on a company's cash flow statement is likely to be considered a
recurring activity? Amounts used to:
Pay wages.
Purchase equipment.
Repay debt principal. - ANS ✔ - Pay Wages
An investor is deciding between two projects, both of which have an initial cost of £5,000. One project
will return £10,000 in three years with a 5% discount rate and the other project will return £9,500
in two years with a 3% discount rate. The investor determines the first project is worth £8,638 today,
, whereas the second project is worth £8,955 today, and he determines to invest in the second project.
In deciding between the projects, the investor is most likely using the:
Future value.
Present value.
Net present value. - ANS ✔ - Present Value
A manager with a $1,000 budget is considering two potential projects with initial cash outflows of
$500 each. Project 1 will pay $1,240 in nine years with a 5% discount rate and has a net present value
(NPV) of $799 - $500 = $299. Project 2 will pay $750 in three years with a 15% discount rate and has
an NPV of $493 - $500 = $-7. The manager should most likely invest in:
Project 1.
Project 2.
Both Projects 1 and 2. - ANS ✔ - Project 1
Considering two normal distributions, the curve with thinner tails most likely represents the:
Same probability of extreme outcomes.
Reduced probability of extreme outcomes.
Increased probability of extreme outcomes. - ANS ✔ - Reduced probability of extreme outcomes
Assume that a deposit into a savings plan earns compound interest. Keeping other factors the same,
the future balance of the deposit will most likely be greater if the interest on the deposit:
Is compounded less often.
Is compounded more often.
Is changed to simple interest. - ANS ✔ - Is compounded more often
During the past four years, the average price of a hamburger from a well-known chain restaurant in
New York City was $1.65. The same hamburger in Los Angeles had an average price of $2.00, for an
average difference of $0.35. From this statement, one can conclude that for this hamburger chain,
hamburgers in Los Angeles were:
Always more expensive than in New York.
Usually more expensive than in New York.
Always $0.35 more expensive than in New York. - ANS ✔ - Usually more expensive than in New York
100% Correct Answers Top Taken A+ Scored
A store owner recently turned down a substantial cash offer for his store and the land on which the
store is located. Although the store owner considered the offer to be fair, he wanted to continue
running the business. This year, his business has incurred costs for merchandise sold; wages paid to
workers, including his own salary; utilities; and property taxes. When determining the business's
accounting profit for the period, he is most likely to correctly exclude which of the following:
His own salary.
Property taxes.
The opportunity cost of the land and store. - ANS ✔ - The opportunity cost of the land and the store
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. - ANS ✔ - 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. - ANS ✔ - Give
rise to choices determined by opportunity costs
The crowding out effect will most likely lead to higher:
Tax revenues.
Interest rates.
private investment. - ANS ✔ - 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 - ANS ✔ - 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. - ANS ✔ - 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. - ANS ✔ - 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). - ANS ✔ - 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. - ANS ✔ - 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. - ANS ✔ - 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. - ANS ✔ - France, England, And Canada
Country X has a comparative advantage for a good over its trading partner, Country Y. This advantage
means that relative to Country Y, Country X:
Is a net importer of the good.
Has imposed a quota on the good.
Produces the good more efficiently. - ANS ✔ - Produces the good more efficiently
To improve the usefulness of ratio analysis, an analyst should calculate ratios and:
Focus on the ratios that have increased from the previous year.
Compare the company's current performance with that of its competitors.
Compare the company's current and prior performance with that of its competitors. - ANS ✔ -
compare the company's current and prior performance w/ that of its competitors.
Unpaid operating expenses, such as the utilities bill for the last month of the year, are included in:
Operating expenses when paid.
Accounts receivable in current assets.
Accrued expenses in current liabilities. - ANS ✔ - Accrued expenses in current liabilities
Which of the following cash outflows on a company's cash flow statement is likely to be considered a
recurring activity? Amounts used to:
Pay wages.
Purchase equipment.
Repay debt principal. - ANS ✔ - Pay Wages
An investor is deciding between two projects, both of which have an initial cost of £5,000. One project
will return £10,000 in three years with a 5% discount rate and the other project will return £9,500
in two years with a 3% discount rate. The investor determines the first project is worth £8,638 today,
, whereas the second project is worth £8,955 today, and he determines to invest in the second project.
In deciding between the projects, the investor is most likely using the:
Future value.
Present value.
Net present value. - ANS ✔ - Present Value
A manager with a $1,000 budget is considering two potential projects with initial cash outflows of
$500 each. Project 1 will pay $1,240 in nine years with a 5% discount rate and has a net present value
(NPV) of $799 - $500 = $299. Project 2 will pay $750 in three years with a 15% discount rate and has
an NPV of $493 - $500 = $-7. The manager should most likely invest in:
Project 1.
Project 2.
Both Projects 1 and 2. - ANS ✔ - Project 1
Considering two normal distributions, the curve with thinner tails most likely represents the:
Same probability of extreme outcomes.
Reduced probability of extreme outcomes.
Increased probability of extreme outcomes. - ANS ✔ - Reduced probability of extreme outcomes
Assume that a deposit into a savings plan earns compound interest. Keeping other factors the same,
the future balance of the deposit will most likely be greater if the interest on the deposit:
Is compounded less often.
Is compounded more often.
Is changed to simple interest. - ANS ✔ - Is compounded more often
During the past four years, the average price of a hamburger from a well-known chain restaurant in
New York City was $1.65. The same hamburger in Los Angeles had an average price of $2.00, for an
average difference of $0.35. From this statement, one can conclude that for this hamburger chain,
hamburgers in Los Angeles were:
Always more expensive than in New York.
Usually more expensive than in New York.
Always $0.35 more expensive than in New York. - ANS ✔ - Usually more expensive than in New York
