CFA ®
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Question 1

Amanda Blue, CFA®, is explaining to a group of students the difference between ethical conduct and legal requirements. Which of the following statements would Blue most likely make to the students:

• A. There is no difference between ethical conduct and legal requirements

• B. Ethical conduct sets a higher standard of behavior than laws and regulations

• C. All legal actions are ethical

Solution:

B is correct because new rules and regulations often result from recent instances of what is considered as unethical behavior. Ethical standards are beyond the requirement of laws and regulations.

A is incorrect because there are many differences between ethical and legal standards.

C is incorrect because some legal actions might be unethical. For example, recommending an investment in a relative’s firm without disclosure might be legal in some countries, but it is always unethical.

Study Session 1
Reading 1: Ethics and Trust in the Investment Profession

Question 2

Fill in the gap. ___________ possesses specialized skills and knowledge, a pledge to serve others in society, and a common code of standards and ethics.

• A. An occupation.

• B. A vocation.

• C. A profession.

Solution:

C is correct. A profession has several characteristics that distinguish it from an occupation or vocation, such as specialized knowledge and skills, service to others, and a code of ethics shared by its members.

Study Session 1
Reading 1: Ethics and Trust in the Investment Profession

Question 3

Since inception, a fund has realized returns of 4%, 8%, 6%, 9%, and -2%. The arithmetic return of the fund over the five-year period is closest to:

• A. 5.00%

• B. 4.92%

• C. -5.10%

Solution:

A is correct. The arithmetic return is calculated as the mean of the five returns, which is (4%+8%+6%+9%-2%)/5=5%.

B is incorrect because it is the geometric return, which is calculated by [(1+4%) *(1+8%) *(1+6%) *(1+9%) *(1-2%)] ^ (1/5)-1=4.92%.

C is incorrect because it is the solution to: [4%*8%*6%*9%*(-2%)] ^ (1/5) = -5.10%.

Study Session 2
Reading 7: Statistical Concepts and Market Returns

Question 4

Which of the following statements is most likely correct?

• A. The first decile exceeds the first quartile

• B. The 50th percentile is equal to the median

• C. The first quartile is no different than the 75th percentile

Solution:

B is correct. The median is always at the middle of any data set and the 50th percentile is also the mid-point of a data set. Therefore, the median is the 50th percentile.

A is incorrect. The first decile (10th percentile) can not exceed the first quartile (25th percentile).

C is incorrect. The first quartile (25th percentile) is different than 3rd quartile (75th percentile).

Study Session 2
Reading 7: Statistical Concepts and Market Returns

Question 5

How many 3 letter words you can make with 8 letters?

• A. 56

• B. 336

• C. 20

Solution:

B is correct because this is a permutation problem (order matters) So, nPr = 8! /(8-3)! = 336

A is incorrect because it is calculated as combination (order does not matter), so 8!/ [(8-3)! 3!] = 56

C is incorrect because it is calculated as (8-3)!/3! = 20

Study Session 2
Reading 8: Probability Concepts

Question 6

Event B can only happen if Event A happens first, therefore, the two events are most likely:

• A. Dependent

• B. Mutually Exclusive

• C. Independent

Solution:

A is correct. Events are considered dependent if the occurrence of one event impacts the probability of the other event.

B is incorrect. Events that are Mutually Exclusive cannot occur at the same time and it is unclear if Events A and B can occur at the same time, therefore dependent is a better answer choice.

C is incorrect. Events are considered independent if the occurrence of one event does not impact the probability of the other event.

Study Session 2
Reading 8: Probability Concepts

Question 7

An analyst randomly chooses 150 companies and collects each company’s sales data for 2017. This data is best characterized as:

• A. Longitudinal data

• B. Time-series data

• C. Cross-sectional data

Solution:

A is incorrect because longitudinal data tracks the same sample at different points in time, where the data here comes from one point in time.

B is incorrect because time-series data is collected at discrete and equally spaced time intervals, where the data here comes from one point in time.

C is correct because cross-sectional data comes from a single point in time with observations across different individuals or groups.

Study Session 3
Reading 10: Sampling and Estimation

Question 8

When the price of coffee increased by 10%, the demand for tea increased by 5%. Which of the following best describes the relationship between coffee and tea?

• A. inferior goods

• B. substitutes

• C. complements

Solution:

B is correct. When the demand for tea increased, it was in response to the increased price of coffee. If we calculate the cross-price elasticity of demand for these goods, we would get a positive number, and therefore can conclude that the two goods, are in fact substitutes.

A is incorrect. Inferior goods relate to the income elasticity of demand rather than the cross-price elasticity.

C is incorrect. For coffee and tea to be complements, the increased price of coffee would lead to a decreased demand for tea. This is because the goods are thought to be consumed in conjunction.

Study Session 4
Reading 12: Topics in Demand and Supply

Question 9

Which of the following best describes a monopoly market?

• A. Standardized products and very low barriers to entry.

• B. Many sellers in the market with low barriers to entry.

• C. Considerable pricing power and very high barriers to entry.

Solution:

C is correct. With a monopoly, typically one firm has considerable pricing power and the market has very high barriers to entry.

A is incorrect. It describes perfect competition.

B is incorrect. It is the case under monopolistic competition.C is incorrect. For coffee and tea to be complements, the increased price of coffee would lead to a decreased demand for tea. This is because the goods are thought to be consumed in conjunction.

Study Session 4
Reading 13: The Firm and Market Structures

Question 10

Which of the following is least likely a function of a central bank? A central bank -

• A. is the banker to the government and other banks

• B. is the lender of last resort

• C. conducts fiscal policy

Solution:

C is correct. Central banks conduct monetary policy and controls the money supply in the economy. They do not conduct fiscal policy.

B is incorrect. Central banks act as the lender of the last resort whenever any financial institution is under distress.

A is incorrect. Central banks provide banking services to the government as well as other banks.

Study Session 5
Reading 16: Monetary and Fiscal Policy

Question 11

Which of the following is the equation of a balance sheet?

• A. Assets – Liabilities = Owners’ Equity

• B. Assets + Revenues = Owners’ Equity

• C. Liabilities + Assets = Owners’ Equity

Solution:

A is correct because a firm’s assets should always be financed by liabilities and owners’ equity.

Question 12

If you invested $5,000 in a fund at 5% annual rate, how many years will it take to double your money?

• A. 12.4 years

• B. 14.2 years

• C. 18.2 years

Solution:

B is correct. We can either use a formula or the financial calculator. Using a formula: 5,000 x (1.05)n = 10,000. Solving for n gives us 14.2 years.

Using financial calculator, Texas Instrument BA 2+: I/Y = 5, PV = -5000, PMT = 0, FV = 10,000 CPT N = 14.2