CFA Level I Mock Exam B: Afternoon
Session questions and answers 2025\2026 A+
Grade
In order to provide investors with a more comprehensive view of a firm's performance, the current GIPS
standards includes new provisions related to:
- correct 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:
- correct 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%
- correct 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:
- correct 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:
CF0 = −100, CF1 = (−125 + 5), CF2 = (280 + 10), and solving for IRR: MWR or IRR = 20.55%.
The difference between the TWR and MWR of this investment = 22.80% − 20.55% = 2.25%, or 225 bps,
with MWR being lower than TWR.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
Session questions and answers 2025\2026 A+
Grade
In order to provide investors with a more comprehensive view of a firm's performance, the current GIPS
standards includes new provisions related to:
- correct 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:
- correct 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%
- correct 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:
- correct 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:
CF0 = −100, CF1 = (−125 + 5), CF2 = (280 + 10), and solving for IRR: MWR or IRR = 20.55%.
The difference between the TWR and MWR of this investment = 22.80% − 20.55% = 2.25%, or 225 bps,
with MWR being lower than TWR.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
