Ethical and Professional Standards Review questions Integrated summary: Ethical and Professional Standards Ethics begins with whose duty applies and what information is available. An instrument suitable for a distant goal may fail a near-term withdrawal. Disclose conflicts before recommending, protect independent judgment, and do not trade on material nonpublic information. Deal fairly with suitable accounts and preserve client confidentiality beyond the relationship, checking any applicable disclosure exception. Present performance under a coherent account-inclusion policy rather than selecting winners; one portfolio is not itself GIPS-certified. In a conduct question, identify the fact, duty, and likely harm before deciding. Disclosure alone cannot make an unsuitable product suitable.
Review questions Test your understanding with these questions. Marking and saved results are available with a free account.
Question 1 A client needs to withdraw half the funds in three months. Which proposal best respects suitability? Reserve the withdrawal amount in a liquid vehicle and assess the rest Review the withdrawal need after purchase Lock only half the withdrawal amount Put all funds in cash despite the growth goal Question 2 Two suitable accounts request 60 and 120 shares from a 90-share issue allocated pro rata by request. How many go to the first? 45 shares by splitting the issue equally 60 shares because its full request is suitable 30 20 shares after first dividing equally Question 3 An analyst finds weak demand in a public report and receives confidential next-quarter earnings from an employee. What can be used now? Use leaked earnings after verbal confirmation Wait one day then trade on the message Public information and independent analysis of it Blend the leak into public research without naming it Question 4 Two strategy portfolios begin at 70% and 30% weights and return 10% and −5%. What is the simplified weighted result? 7% because the winning portfolio dominates 10% because it is the best account 2.5% from the simple mean 5.5% Question 5 An asset begins at 80, ends at 84, and pays 4 during the year. What is its holding-period return? 5% 20% 10% 15% Question 6 Default prior is 5%, alert sensitivity 90%, and false-alert rate 10%. Approximate default probability after an alert? 32.1% 5% 90% 50% Question 7 A sample has 64 observations and standard deviation 16 percentage points. What is the mean’s standard error? 16 points 8 points 1 point 2 points Question 8 A fitted line is y=−1+0.8x. What is prediction at x=5? 2 4 5 3 Question 9 A competitive firm sells at 12 with average variable cost 9 at 200 units. What is total contribution margin? 2400 600 1800 200 Question 10 An energy shock lowers output and raises prices. What is its closest description? Aggregate supply expansion Productivity gain Aggregate supply contraction Only demand decline Question 11 A product sells for 80 with imported input cost 20 and other cost 45. A 10% tariff applies only to the input. What is unit margin? 13 15 17 10 Question 12 Spot is 2 local units per dollar; local rate 8% and dollar rate 4% for one year. Approximate covered forward? 1.9269 2.0769 2.1600 2.0000 Question 13 Profit is 50 and operating cash flow 80 partly from receivables falling 20. What does CFO/profit=1.6 establish? Permanent earnings quality No accruals exist Profit was 80 Strong cash conversion this period, with the cause needing review Question 14 A company buys four units at 3 then four at 5 and sells five. What is FIFO cost of sales? 25 17 15 21 Question 15 An asset has carrying value 60, tax base 48, and 30% tax rate. What is assumed deferred tax liability? 3.6 2.4 18 12 Question 16 Profit is 60, depreciation 10, inventory rises 8, and payables rise 6. What is simplified indirect CFO? 56 84 68 72 Question 17 A project costs 90 and pays 35 at each of three year-ends; discount rate 10%. Approximate NPV? −2.96 +2.96 +15.00 −7.05 Question 18 DIO=45, DSO=55, and DPO=35 days. What is the cash conversion cycle? 135 45 100 65 Question 19 Investment 200 pays 120 in one year and 120 in two years; discount rate 10%. Approximate NPV? +20 +8.26 +40 −8.26 Question 20 Capital mix: 30% debt at 7%, 70% equity at 11%, marginal tax 20%. What is WACC? 7.70% 11.00% 9.38% 9.80% Question 21 A fixed-weight index has 60% in a stock returning 8% and 40% in one returning −3%. What is index return? 8.0% 3.6% 5.0% 2.0% Question 22 A 500,000-unit market grows 6%; a firm holds 8% share; price 50 rises 4%. Forecast revenue? 2.2048 million 2.600 million 2.000 million 2.120 million Question 23 D0=3, perpetual growth 2%, required return 8%. What Gordon value? 50.00 37.50 61.20 51.00 Question 24 Share price 36; reported EPS 6 includes a nonrecurring 2. What is adjusted P/E? 18 6 12 9 Question 25 A zero-coupon bond pays 121 in two years at 10% effective annual yield. What is its price? 110 90 121 100 Question 26 Modified duration is 3.5 and yield rises 0.5 percentage point. Approximate price change using duration alone? +1.75% +0.50% −1.75% −3.50% Question 27 Loan exposure 100, default probability 4%, expected recovery 40%. What is simple expected loss? 4.0 2.4 40.0 1.6 Question 28 A zero-coupon bond pays 121 in one year; yield is 5%. Approximate current price? 127.05 121 100 115.24 Question 29 A call has strike 80 and premium 5; expiry stock price is 92. What is profit per unit? 17 5 7 12 Question 30 Commodity spot 80, storage 2 paid now, interest 5% yearly, no convenience benefit. Simplified one-year forward price? 84.00 88.20 82 86.10 Question 31 Stock 50, European call 4, strike 50 in one year, risk-free 5%, no dividends. Approximate put by parity? 1.62 0.00 4.00 6.38 Question 32 A 2 million loan pays reference+1%; a swap pays fixed 4% and receives reference. What is net annual interest cost? 2% of principal 5% of principal Depends entirely on reference 4% of principal Question 33 A private fund commitment is 8 million with 25% called now. What is the first capital call? 3 million 2 million 1 million 6 million Question 34 Property sustainable NOI is 4 and cap rate 5%. What is simplified value? 100 20 200 80 Question 35 A firm is bought at enterprise value 90 with debt 50 and equity 40; sold at EV 100 with debt 45. What is exit equity? 100 45 55 90 Question 36 A fund starts at 100 and reaches 115 before fees; management fee 1 then performance fee 20% of gain above 100. What is net value? 112 114 111.2 110 Question 37 Half a portfolio is in an asset expected to return 8%, the rest in one expected to return 4%. What is expected return? 12% 6% 8% 4% Question 38 Risk-free rate 3%, expected market return 9%, beta 1.2. What CAPM required return? 10.2% 11.2% 12.0% 9.0% Question 39 A client needs 60,000 tuition in a year and 10,000 emergency cash out of 200,000. What initial liquidity reserve follows? 130,000 70,000 200,000 10,000 Question 40 Portfolio return 8%, risk-free 2%, standard deviation 12%. What is Sharpe ratio? 1.00 0.25 0.75 0.50 Question 41 A manager accepts a large gift before reporting on Al-Hadi Co. What is the nearest ethical risk? Change the recommendation without explaining the gift Compromised independence and objectivity Treat it as harmless after verbal manager consent Accept and disclose the gift only after publishing Question 42 An unauthenticated caller requests a former client’s trading history for a third party. Which response is sound? Send only recent history as less sensitive Send after the caller merely asserts authorization Send once the caller states the correct client name Verify authorization and applicable law before disclosure Question 43 An analyst owns shares of the company she recommends. What should the reader receive? Hide holdings if below a regulatory threshold Clear disclosure of the relevant personal interest Disclose only to manager, not report readers Sell after publication to erase the prior conflict Question 44 An advertisement displays only the best portfolio and omits a similar losing account. What is the issue? Show only the best account with a generic caveat Call the best account return the composite return Misleading performance selection Exclude the loser using a threshold set after the period Question 45 Returns are +20% and then −20% in successive years. What is cumulative return? 0% +4% −4% −20% Question 46 A portfolio has equal weights in assets expected to return 4% and 10%. What is expected return? 7% 10% 4% 14% Question 47 A sample mean differs from the null by 3 points with standard error 2. What is the test statistic? 1.5 6.0 2.0 0.67 Question 48 In regression, SST=50 and SSE=20. What is R²? 150% 70% 40% 60% Question 49 In the short run, price is below ATC but above AVC. What does that usually imply? There is no fixed cost Production may cover part of fixed cost Economic profit is positive Immediate shutdown is mandatory Question 50 Cutting the policy rate to support demand after a negative supply shock creates what trade-off? Immediately lowers all prices Directly restores energy supply May support activity while adding price pressure Automatically raises potential supply Question 51 A tariff protects a domestic producer but raises input cost for another local manufacturer. What follows? Imports always vanish Benefits and costs differ across the value chain Everyone necessarily gains No margin changes Question 52 In local units per dollar, forward exceeds spot. Which currency trades at a forward discount under this quote? Comparison impossible Local currency Dollar Both at a premium Question 53 Two firms use different revenue recognition policies. What precedes a margin comparison? Add their margins Understand policies and adjust comparability where possible Ignore notes Use only the higher margin Question 54 A company buys four units at 3 then four at 5 and sells five. What is LIFO ending inventory? 9 13 11 15 Question 55 Recognizing a lease liability and right-of-use asset usually changes what at inception? No asset or liability appears Financial analysis is unaffected An asset and liability are recognized under the measurement All payments become dividends Question 56 For the same case, equipment purchases are 20. What is CFO less equipment purchases? 88 48 60 40 Question 57 A manager paid for capital spending proposes a negative-NPV project. What conflict exists? Governance becomes unnecessary Capital cost must fall Owner value maximization Spending incentive may override project value Question 58 If DSO falls ten days while DIO=45 and DPO=35 stay fixed from DSO=55, what is the new cycle? 45 75 65 55 Question 59 A project can be delayed one year until demand is clearer. What may the delay option provide? Guaranteed return Ability to avoid a poor project at the cost of waiting An obligation to invest regardless Removal of opportunity cost Question 60 Why can high leverage raise the cost of equity? It removes financial risk It guarantees equity return Equity becomes more exposed to distress and residual variability It erases interest expense Question 61 An investor places a limit buy order. What trade-off does it create? A higher dividend right No bid–ask spread Guaranteed execution at any price A price cap with possible nonexecution Question 62 A firm grows revenue while margin falls during expansion. What forecast check matters most? Fix historical margin Omit growth costs Assume 100% market share Separate price, volume, and customer-acquisition costs Question 63 In the Gordon model, growth g approaches required return r from below. What happens to value? Is unaffected Approaches zero Stays at current dividend Rises sharply and becomes highly input-sensitive Question 64 One firm has P/E 8, another 12. Why is the first not automatically better value? Multiples are unusable Growth, risk, and earnings quality may differ EPS is always equal Price alone defines value Question 65 If required yield rises for a fixed-cash-flow bond, what generally happens to price? Falls Rises Always unchanged Turns into a coupon Question 66 Modified duration 3.5, convexity 30, yield rise 0.5 point. Approximate change with both terms? −1.7125% −1.7500% +1.7125% −2.125% Question 67 Why is average loan loss insufficient to price a junior securitization tranche? All tranches rank equally Loss waterfall and default correlation shape its loss distribution It has no exposure Interest is fixed Question 68 An investor bought a zero for 100 and sold it a year later at 115.24. What is holding return? 5% 15.24% 21% 10% Question 69 A call has strike 80 and premium 5; stock expires at 75. What is the buyer’s loss? 5 75 Zero 10 Question 70 A no-income asset forward price materially exceeds spot plus financing and storage. Which theoretical arbitrage fits? Only buy a put Short spot without access Borrow, buy spot, and sell forward Only buy forward Question 71 Why need an at-the-money call not be worth zero before expiry? The share has no price Exercise is certain Time value from possible favorable movements Premium is refunded Question 72 Reference rises from 3% to 6% under the same matching swap. What happens to simplified net cost? Remains 5% Becomes 1% Falls to 2% Becomes 8% Question 73 An investor has 3 million cash, a 2 million call now, and a certain 2 million need in a year. What is the simple gap without other inflows? 1 million 3 million No gap 2 million Question 74 NOI stays 4 but cap rate rises to 6%. Approximate new value? 66.67 60 80 100 Question 75 A deal starts at enterprise value 90, debt 50, and equity 40; exit is EV 100 with debt 45. What is equity MOIC before fees and distributions? 1.00× 2.50× 2.25× 1.375× Question 76 A long/short fund holds 120% long and 80% short exposure. What is net exposure? 40% 200% 120% 0% Question 77 Equal weights have volatilities 20% and 10% with zero correlation. Approximate portfolio standard deviation? 11.18% 20% 10% 15% Question 78 Risk-free 3%, market 9%, beta 1.2, stock forecast 11%. What is expected alpha? +0.8 point +1.2 point +6 points −0.8 point Question 79 An investor can financially absorb loss but strongly rejects volatility. What IPS distinction matters? Willingness guarantees return Capacity equals willingness Age alone decides Risk capacity and willingness differ; respect the lower tolerance Question 80 Portfolio return 8%, beta 0.9, risk-free 2%, market 7%. What is period Jensen alpha? 1.5 points 2.0 points 6.0 points 0.5 point Question 81 A portfolio starts at 100 and reaches 110 after year one. The client adds 90, raising the balance to 200, and it ends year two at 180. Which pair gives the two-year time-weighted return and approximate annual money-weighted return? 0% and −10% −1% and about −0.5% −1% and about −3.5% −3.5% and −1% Question 82 An asset earns an 8% effective annual return. What is the approximately equivalent continuously compounded annual return? 8.33% 8.00% 7.70% 4.00% Question 83 If nominal return is 8% and inflation is 3% over the same period, what is the approximate exact real return? 11.00% 5.00% 7.77% 4.85% Question 84 A zero-coupon bond costs 100 today and pays 121 in two years if the issuer performs. What is its implied effective annual yield? 10.5% 21% 17.36% 10% Question 85 A zero-coupon claim paying one unit in one year costs 0.95 and a two-year claim paying one unit costs 0.90. What is the approximate one-year forward rate from year one to year two under no arbitrage? 5.00% 10.00% −5.26% 5.56% Question 86 A strong state has 60% prior probability and cash flow 120; a weak state has 40% probability and cash flow 80. A positive signal occurs in 80% of strong states and 25% of weak states. What is approximate expected cash flow after a positive signal? 104.0 113.1 120.0 96.0 Question 87 Asset A returns ±10% and B returns ±8%. Joint-state probabilities for (+,+), (+,−), (−,+), and (−,−) are 0.4, 0.1, 0.1, and 0.4. Both means are zero. What is covariance in squared decimal-return units? 0.6000 0.0065 0.0048 0.0080 Question 88 Five annual returns are −40%, 4%, 5%, 6%, and 7%. Which median and explanation are correct? 5%; it is the middle ordered return and is not pulled by the extreme year 7%; it is the best return in the sample 4%; it is the first positive return −3.6%; it aggregates every year Question 89 The minimum acceptable return is 2%. Portfolio A expects 6% with 10% volatility; B expects 8% with 20% volatility. Which ranks higher by Roy’s safety-first ratio? A; its ratio is 0.40 versus B’s 0.30 They tie because both exceed the 2% floor B; its higher volatility raises the ratio B; its expected return is higher Question 90 An analyst has ten observed annual returns and wants an empirical sampling distribution for their mean without specifying a new parametric distribution. Which procedure is a basic bootstrap? Draw normal returns from assumed mean and variance instead of observed years Sort years from best to worst and retain only the top five Draw ten returns with replacement from the observed years and repeatedly compute the mean Delete each year once and use the remaining nine only Question 91 An analyst estimates returns of equity and bond funds and wants both fund types represented in known proportions in the sample. Which sampling plan is most suitable? Select the highest-returning funds in each type A convenience sample of funds recommended by friends Choose one management office and take all of its funds Stratify by equity and bond funds, then sample randomly within each stratum Question 92 A test set at 5% rejects a null hypothesis that is actually true. What error occurred, and what does the 5% level mean? Type I error; under the model and rule, the probability of rejecting a true null Selection bias; fraction of excluded observations Power; probability of proving the alternative without error Type II error; probability of accepting a true alternative Question 93 In two groups of 50 borrowers, five default in the first and 15 in the second. Under independence, each group expects ten defaults and 40 nondefaults. What is the approximate chi-square statistic? 3.13 10.00 6.25 2.50 Question 94 A simple regression has n=12, Sxx=20, SSE=40, and fitted slope 1.5. What is the approximate t statistic for testing a zero slope? 3.35 0.447 11.25 1.50 Question 95 A model has y-hat=2+1.5x, n=12, mean x=3, Sxx=20, and SSE=40. At x=4 with critical t=2.228, which is the approximate prediction interval for one new outcome? [6.37,9.63] [7.55,8.45] [8.00,12.74] [3.26,12.74] Question 96 A model forecasts sales before announcements, but its training features include filing text published after each forecast date. What is the most important check before accepting its accuracy? Keep future filing text because it is official Rebuild features by actual availability date and validate on a later period Only increase the number of training epochs Randomly mix past and future dates to balance classes Question 97 For 20 paired observations Pearson r=0.50. Testing zero population correlation gives t≈2.45 on 18 degrees of freedom; the approximate two-sided 5% critical value is 2.10. What decision follows if assumptions hold? Switch to a one-sided test after seeing the result Prove one variable causes the other Reject zero correlation but do not infer causation Do not reject because 0.50 is below 2.10 Question 98 An asset price is 100 and its modeled one-period continuously compounded return is +0.10. What approximate price follows? 90.48 101.00 110.00 110.52 Question 99 An investor builds an approximate required rate from 2% real risk-free return, 3% expected inflation, 1% default premium, 0.5% liquidity premium, and 0.5% term premium. What is the approximate total and its role in valuing cash flows? 6%; it omits term and liquidity premia 7%; it can serve as a discount rate if its premia match cash-flow risk 7%; it guarantees future cash flows 5%; it includes only the real rate and inflation Question 100 A sample contains returns −10%, 0%, and 20%. What is its approximate sample standard deviation in percentage points? 15.28 30.00 12.47 3.33 Question 101 A return distribution has a long loss-side tail and more extreme tails than a reference distribution. Which interpretation is most accurate? Higher kurtosis means mean return must be positive Negative skew proves every return is negative Positive skew and lower kurtosis, so large loss is impossible Negative skew and higher kurtosis flag distribution shape without alone giving a specific loss probability Question 102 In an illustrative simulation model, one-year return is normal with mean 5% and standard deviation 10%. Using 1.645 standard deviations below the mean, what is the approximate fifth-percentile ending value of a portfolio starting at 100? 83.55 95.00 88.55 105.00 Question 103 For five pairs x=[1,2,3,4,10] and y=[5,4,3,2,20], Pearson correlation is about 0.891 while Spearman correlation is zero. Which methodological interpretation is strongest? High Pearson correlation proves a consistently increasing relation across all pairs Always delete the last pair to make the rank test pass Zero Spearman correlation proves population independence The last pair has strong leverage on linear correlation; inspect the plot and question before choosing linear or rank tests Question 104 A regression residual plot shows errors spreading wider as x increases, without obvious curvature. Which model condition needs review first? The arithmetic mean of x must be zero The model cannot contain an intercept Constant residual variance The slope must be positive Question 105 A simple regression includes an intercept, has n=12, and residual sum of squares SSE=40. What is the approximate standard error of estimate? 40.00 6.32 2.00 3.33 Question 106 A semilog model is ln(y)=ln(2)+0.10x. What does one additional x unit do to y in this model? Multiplies y by e^0.10≈1.105, an increase near 10.5% Reduces y by about 10% Adds a fixed 0.10 unit to y Doubles y Question 107 A project uses images and filing text to forecast sales. Which description distinguishes the terms accurately? Computer vision never uses machine learning Machine learning is a subset of AI that learns from examples; big data describes scale, variety, and velocity challenges All big data is machine learning even without a model Artificial intelligence is limited to large databases Question 108 A differentiated store faces P=20−Q and constant marginal cost 4. With MR=20−2Q, which output and price satisfy the interior profit condition? Q=4 and P=16 Q=8 and P=4 Q=16 and P=4 Q=8 and P=12 Question 109 Two firms face P=30−Q1−Q2 and marginal cost 6 each. Each best response is Qi=(24−Qj)/2. What symmetric output per firm and market price follow? 9 per firm and price 12 6 per firm and price 18 12 per firm and price 6 8 per firm and price 14 Question 110 Four firms have shares 40%, 30%, 20%, and 10%. If the last two combine into a 30% share, what are the new HHI and its change? 3200; increase of 200 3000; no change 3400; decrease of 400 3400; increase of 400 Question 111 A real-output index moves from 100 to 104 to 102. What is growth in the latest period relative to 104? +2.00% +4.00% Exactly −2.00% About −1.92% Question 112 Credit and property prices grow rapidly as lending standards loosen while employment remains strong. Which risk deserves monitoring? Lending standards cannot affect bond spreads Credit-cycle fragility may build before output activity weakens Strong employment proves credit risk has disappeared Property growth makes all bank loans safe Question 113 GDP is 1,000, government revenue 280, and spending 300. Recession lowers revenue to 260 without a new spending or tax law. What is the new deficit and interpretation of its rise? 40; the increase may be an automatic cyclical effect 20; deficit cannot change when spending is fixed 40; it proves new discretionary project spending 60; accumulated debt is added to the deficit Question 114 Demand has fallen today. A household transfer can arrive this quarter while an equal-size infrastructure project starts in 18 months. Which initial trade-off is most accurate? Equal amounts imply identical timing and effect The project’s direct cash effect necessarily starts at announcement A transfer cannot affect spending regardless of household conditions The transfer may support demand sooner; the delayed project may add later productive capacity Question 115 Inflation is 4% above a 2% target after a fuel shortage depresses output. Which statement best describes the central bank’s role and rate-tool limit? Exchange rates cannot respond to interest-rate changes A rate cut directly produces the missing fuel A rate rise may restrain demand and expectations with a lag but cannot remove the supply shortage An inflation target immediately guarantees zero inflation Question 116 A monetary authority defends a fixed currency peg while considering an independent rate cut during capital outflows. What is the main constraint? Operational independence makes exchange and inflation targets identical in all states A rate cut certainly stops capital outflows Defending the peg may require rates or reserves that limit independent easing A peg eliminates any need for reserves or rates Question 117 Two firms import a mineral from a state that may restrict exports. Which comparison best distinguishes geopolitical cooperation and rivalry for their risk? Every agreement makes the mineral free Rivalry cannot affect international supply chains A multilateral supply arrangement may ease disruption while an export restriction can raise cost and redirect flows Cooperation removes all FX and funding risk Question 118 A company faces a trade dispute, conversion constraints, and an underfunded development project. Which institutional-role mapping is closest? WTO addresses trade rules and disputes, IMF balance-of-payments problems, World Bank development finance World Bank resolves every trade dispute while WTO finances the project WTO lends for balance-of-payments gaps while IMF sets product prices IMF always guarantees the company bond unconditionally Question 119 A hypothetical mineral export restriction delays a battery maker’s inputs and raises its short-term funding need. Which investment-risk chain is most disciplined? The restriction automatically lowers mineral cost in every market Trade restrictions cannot affect company funding risk Input delays may pressure margins and liquidity and widen bond spreads, subject to contracts and alternatives The bond spread certainly falls because the firm imports Question 120 Regional integration deepens from a free-trade area to a customs union and then a common market. Which additional feature especially distinguishes a common market? Only a common external tariff Restoration of internal tariffs on every good Immediate abolition of all member currencies Easier movement of production factors among members beyond internal tariff removal and a common external tariff Question 121 One country defends a fixed exchange rate amid capital outflows, while another permits broader floating. Which comparison is most accurate? A peg removes all effects of capital flows The pegging country never intervenes while the floater always does Floating guarantees stable exchange prices for importers The peg may require rates or reserves for defense; floating allows price movement but does not rule out intervention Question 122 A state imposes temporary capital-conversion controls after reserve pressure. What is the most accurate implication for a foreign investor? Controls may seek funding stability but raise the risk of delayed conversion and repatriation Controls remove the need to verify the restriction and effective date Controls force real and nominal exchange rates to coincide Controls guarantee higher return at no cost Question 123 If EUR/USD=1.20 dollars per euro and GBP/USD=1.50 dollars per pound, what is EUR/GBP in euros per pound? 0.80 1.80 1.25 1.20 Question 124 Dollars cost two local units initially and 2.10 later; local and foreign price indexes move from 100 to 110 and 105. Under q=E×P_foreign/P_local, how did the local currency change approximately? Nominal depreciation 0.23% and real depreciation 5% Neither nominal nor real rate changed Nominal depreciation 5% and real depreciation about 0.23% under this definition Nominal appreciation 5% and real depreciation 5% Question 125 A family venture needs broad financing and tradable shares and can bear higher disclosure and governance costs. Which public-versus-private issuer trade-off is closest? A public offering eliminates principal-agent conflict Sole ownership universally separates business debt from owner assets Private ownership always gives more liquid shares than public ownership A public issuer may broaden capital access and share trading at higher disclosure and governance cost Question 126 A risky project may lift common equity value if successful but threaten debt service if it fails. What is the clearest difference between claims? Neither party is affected by project risk Lenders have contractual priority according to terms; common equity has a residual claim Common shareholders have a fixed contractual claim ahead of lenders Lenders take every upside dollar after debt repayment Question 127 A factory has repeated safety incidents; shutdown and labor disputes could pressure cash flow. Which governance response connects stakeholder and ESG concerns to financial risk? Treat only workers as stakeholders and ignore creditors Suppress incident reports to protect reputation Use independent safety review, corrective incentives, and monitor shutdown impact on cash and debt service Market a sustainability slogan without measuring production stoppage Question 128 Company A has current assets 200, current liabilities 100, and inventory 120; B has 150, 100, and 20. Which initial liquidity comparison is most accurate? A is certainly stronger because current ratio is 2.0 versus 1.5 B has quick ratio 1.3 versus A’s 0.8, subject to checking collectibility A and B have the same quick ratio Inventory is always immediate cash, making the quick ratio meaningless Question 129 A company classifies three expenditures: replacing an old machine, building a plant for more capacity, and a small pilot preserving a later expansion choice. Which classification fits? Replacement; expansion; pilot with real-option flexibility All are fixed expansion with no options The old machine is a delay option and the pilot a compliance project All are operating expenses rather than capital decisions Question 130 In a no-tax, no-distress Modigliani–Miller model, unlevered asset return is 10%, debt costs 5%, and D/E=0.5. What required equity return follows with leverage? 15.0% 12.5% 10.0% 7.5% Question 131 An issuer raises debt weight from 20% to 50%; in the case, debt cost rises from 5% to 8% and equity cost from 10% to 14%, with 25% tax. What follows from the computed weighted financing costs? WACC rises from 8.75% to 10% in this case; that does not prove a universal target ratio New WACC is 14% because debt must be ignored WACC falls from 10% to 8.75%, so higher leverage is universally optimal WACC stays at 8.75% because debt is always cheap Question 132 A sole owner wants to admit investors and ordinarily separate their personal assets from routine entity claims, accepting more formal governance. Which form fits best, subject to guarantees and local law? Unchanged sole proprietorship A general partnership guaranteeing every partner full liability separation everywhere A limited-liability entity under its law and contracts A limited partnership in which the owner remains a general partner Question 133 A marketplace does not own goods, facilitates 1,000 of purchases, charges a 10% fee, and incurs variable cost 30. A retailer owns goods sold for 1,000 with goods cost 700. Which simplified operating comparison is sound? Retailer revenue is 100 because it pays for goods Marketplace revenue is 100 and contribution 70; retailer revenue is 1,000 and gross profit 300 with inventory risk Both models are identical because transaction value is 1,000 Marketplace revenue is 1,000 and contribution 970 Question 134 Sales 500, receivables rise 20, cost of sales 300, inventory rises 10, payables rise five, cash wages 80, cash interest ten, and cash tax 15. With interest classified as operating, what is direct CFO? 70 55 80 100 Question 135 A firm classifies interest paid within operating cash flow. CFO is 70, cash interest ten, capital expenditure 30, and marginal tax rate 25%. What simplified FCFF is consistent with this presentation? 47.5 40 45 50 Question 136 In a linked statement forecast, opening cash is ten, CFO 21.25, capital expenditure eight, and dividends five, with no other financing. What is ending cash? 8.25 23.25 18.25 31.25 Question 137 Net margin is 5%, asset turnover 1.5, and assets-to-equity multiplier two. What is ROE by DuPont decomposition? 15% 30% 3.75% 7.5% Question 138 A company excludes share compensation every year from adjusted profit and provides an arithmetically correct reconciliation. What is the strongest analytical inference? Examine recurring cost and dilution before relying on adjusted profit Every non-GAAP measure proves fraud The reconciliation proves adjusted profit is sustainable Compensation has no cost because grant uses no cash Question 139 A defined-benefit plan has present obligation 120 and plan assets 90. Which initial reading is most sound, subject to note review? There is no obligation because cash contributions were made Deficit 120 because plan assets never enter analysis Economic surplus 30 Simplified economic deficit 30, with assumptions and presentation to inspect Question 140 A company collects 120 at inception for a two-year service subscription delivered evenly, with no other conditions. What is first-year revenue in this simplified case? 120 with receivables 60 120 because cash collection determines revenue Zero because cash preceded service 60 with 60 remaining as a performance obligation Question 141 Income available to common holders is 120, weighted-average shares 40, and options on ten shares have strike eight against average market price 20. Under the simplified treasury-stock method, what is diluted EPS? 3.00 About 2.61 2.40 About 3.33 Question 142 A company buys a business for 100 while fair value of identifiable net assets is 80. What is simplified initial goodwill, and why is it not a separately identifiable intangible? 100; it equals the whole purchase price 20; it is the residual after allocating price to identifiable net assets 80; it equals identifiable net assets 20; it can always be sold apart from the business Question 143 A firm has assets 500, cash 50, receivables 100, and inventory 150. What is inventory as a share of assets in a common-size balance sheet? 30% 20% 10% 50% Question 144 Pretax accounting profit is 100, tax expense 28, cash tax paid 18, and statutory rate 30%. What are statutory, effective, and cash tax rates in that order? 28%, 30%, 18% 30%, 28%, 18% 18%, 28%, 30% 30%, 18%, 28% Question 145 A firm says it complied literally with rules but revised equipment useful life just before an equity issue and omitted earnings sensitivity. What is the strongest analytical response? Test estimate impact, incentives, disclosure, cash flow, and peers Treat literal compliance as conclusive proof of high quality Declare fraud without further evidence Remove depreciation from all comparisons Question 146 An analyst forecasts volume 105 rather than 100 and starting price ten, rising 3% then facing a 2% competitive reduction. What is approximate revenue if final price is 10×1.03×0.98? 1030 1059.87 1050 1000 Question 147 An analyst fixes a five-year forecast despite major regulatory change and tests only one sales growth rate. Which change best reduces forecast bias? Raise growth until the target price fits Ignore competitor evidence because it is not the company’s own statements Use documented scenarios and probabilities and revisit the horizon when evidence changes Keep the horizon and hide the range of outcomes Question 148 Reported operating profit 50 includes a nonrecurring equipment-disposal gain of 20. What is operating profit before the gain for a simplified continuing-performance comparison? 70 20 30 50 Question 149 Which operating metric is more suitable for assessing growth quality at a software subscription firm with negligible physical inventory? Inventory units per store Customer retention and collection or receivables turnover alongside recurring revenue Inventory turnover alone Its inventory compared with a retailer’s goods cost Question 150 A company issues new shares and two investors later trade them with each other. Which statement describes funding accurately? The issuer receives no primary proceeds The issuer receives primary proceeds; secondary trading supports liquidity without directly paying it The issuer receives proceeds from every secondary trade Secondary markets prevent issue price discovery Question 151 Best offer is 60 shares at 50 and next offer 40 at 50.20. A buyer wants 100 immediately; the book is unchanged and there are no fees. What average market-order price results? 50.00 50.40 50.20 50.08 Question 152 An investor buys 100 shares at 50 with own equity 2,500 and a 2,500 loan. Price falls to 40 without interest or fees. What are equity return and current margin ratio? −20% and 50% −40% and 30% −40% and 37.5% +40% and 37.5% Question 153 Stock A has two-thirds of a float-cap index and rises 10%; B has one-third and falls 10%. What is the index period return before distributions? About 3.33% 10% 0% −3.33% Question 154 Which market-efficiency form assumes public information is reflected in price without claiming all private information is incorporated? Strong form No form links prices to information Weak form Semi-strong form Question 155 A company has accounting ROE 12% and required cost of equity 15%. What is the sound initial inference? ROE is below the required return, so value creation needs scrutiny despite positive profit Market equity must always equal book equity Positive accounting profit proves value creation Cost of equity is interest paid on debt Question 156 A market of 1,000 grows 5% while a firm’s share rises from 10% to 11%. What is the firm’s forecast volume in the same market units before price changes? 100 115.5 105 110 Question 157 Current sales are 100, volume grows 5%, price rises 2%, and receivables are 20% of sales. What increase in receivables is forecast from an opening 20? 7.10 1.00 1.42 0.40 Question 158 A noncallable, nonconvertible preferred share pays fixed annual dividend four indefinitely and required return is 8%. What is theoretical value? 0.32 80 50 12.50 Question 159 A firm has market equity 600, net debt 200, and forecast EBITDA 100. What is simplified EV/EBITDA? 6 8 4 10 Question 160 Which pair correctly distinguishes a contractual financial claim from a real asset in market classification? An option contract directly owns its underlying land Currency and property are both common stock A bond is a real asset; property is a derivative liability A bond is a financial claim; real estate is a real asset Question 161 An investor sells a share short at 50 then covers at 40, ignoring borrow fees. Which description is accurate? Price loss ten and limited upside-price risk Price gain ten with potentially very large loss if price rises Gain 50 with no duty to return a share Return always identical to a margin long purchase Question 162 A manager seeks a benchmark of many thinly traded bonds. What specific issue should be checked alongside index membership rules? Stale marks and low liquidity may distort implementable index returns Every bond always has an executable live price Alternative, bond, and equity indexes always share one liquidity rule Bond indexes never reconstitute Question 163 A share trades at 30 against intrinsic-value estimate 35 with a wide uncertainty range. What is the sound professional inference? Book value automatically equals 35 Price is five below the estimate, but investment judgment needs risk range and costs The 35 estimate proves permanent market inefficiency Buying guarantees five of profit Question 164 What is the key distinction when comparing a private-company share with a traded public-company share, with voting rights governed by documents? Private holdings are ordinarily less liquid and rely more on estimates and negotiation Every private share is nonvoting preferred stock Public stock never requires value estimation Private stock is automatically more liquid Question 165 A company declares an ordinary dividend and the share later trades ex-dividend under market rules. Who receives the dividend attached to ownership before the ex-dividend date? The new buyer after ex-dividend trading starts Only the issuing company Anyone holding the share only after payment date The entitled holder under record-date and market rules Question 166 A firm announces a two-for-one stock split with no change in business, cash, or holder rights. What is the immediate mechanical theoretical effect? A cash dividend arises for every share Share count doubles and proportional per-share price roughly halves without value creation by itself A holder’s total value automatically doubles Share count halves and per-share price doubles Question 167 In a repo, a bank sells a security for cash and agrees to repurchase it at a fixed price. What risk remains important to the cash lender despite collateral? Counterparty failure, collateral decline, haircut, and margin risk No risk because collateral eliminates price changes Only common-stock dividend risk There is no repurchase obligation Question 168 Face-100 bond with annual coupon six matures in two years; annual YTM is 8% just after a coupon. What is approximate price? About 92.59 About 103.57 About 96.43 100 Question 169 A corporate bond yields 6.5% and a comparable government bond 4%. What is the simple spread and analytical caveat? 250 basis points, potentially including liquidity, tax, and option effects 25 basis points with no liquidity component 2.5 basis points measuring default alone 650 basis points because corporate yield is the spread Question 170 One-year spot rate is 4% and two-year spot rate 5%, both annually compounded. What is the approximate one-year forward rate beginning in one year? 1.00% 6.01% 5.00% 4.00% Question 171 A three-year zero at annual yield 5% costs about 86.38. What are approximate modified duration and PVBP? 1.05 and 0.01 3 and 0.08638 2.857 and 2.468 2.857 and 0.02468 Question 172 A callable bond’s expected cash flows change as yields move. Which sensitivity measure fits when option exercise is repriced? Macaulay duration without assumptions Effective duration with a disclosed option model Only fixed-cash-flow modified duration Average coupon rate Question 173 Credit exposure 100, default probability 3%, and recovery 40%. What is simplified expected loss before cash-flow timing? 3.0 40 1.8 1.2 Question 174 A loan pool of 100 funds senior tranche 80 and junior tranche 20. Principal loss totals 25 without further recovery. How much senior principal remains after junior absorbs losses first? 55 60 75 80 Question 175 For a thinly traded corporate-bond index, which rule reduces the risk of comparing an unimplementable theoretical return? Include every bond with no price or liquidity rule Specify eligibility, liquidity, price source, and stale-price treatment Use equity prices instead of bond marks Freeze members forever even as bonds mature Question 176 A thinly traded bond has no recent execution. What is the accurate interpretation of matrix pricing? An actual execution price for this bond An estimate from comparable yields adjusted for risk, tenor, and liquidity A guarantee the bond sells at par A method that removes collateral differences automatically Question 177 Nominal yield is 6% compounded semiannually. What is effective annual yield approximately? 12.00% 6.09% 3.00% 6.00% Question 178 A floater pays a 3% reference plus 1% contractual margin, but market-required discount margin rises to 1.5%. What follows? Current coupon is 4% and price can move with required discount margin Price cannot move because contractual margin is fixed Current coupon automatically becomes 4.5% Floating rate eliminates credit risk Question 179 A money-market instrument costs 98 and redeems for 100 after half a year. What is holding-period yield on invested cash? 2/100=2% 100/98≈102.04% 2/98≈2.0408% 4.0816% for the half-year period Question 180 Empirical duration from observed price moves differs from analytical duration using fixed modeled flows. What is one possible reason besides arithmetic error? Bond prices never respond to yields Observed prices may reflect spread and liquidity changes alongside benchmark yield Analytical duration is zero for every bond Empirical duration always eliminates data bias Question 181 Debt is 600 and EBITDA 150, with a large near-term debt maturity. What credit reading is sound? Ratio is 0.25 and tenor does not matter The ratio is irrelevant whenever a rating is published Debt/EBITDA is four and liquidity/refinancing needs review A ratio of four guarantees repayment at maturity Question 182 In loan securitization, who ordinarily collects borrower payments and administers accounts for the structure? Borrowers collectively Servicer Always the senior-tranche investor Only the rating agency Question 183 What core claim difference separates a covered bond from an ordinary securitization transferring loans into a separate vehicle? Securitization has no servicer or investors Both must have no recourse to the issuer A covered bond is common equity Covered bond generally remains an issuer claim with cover pool; securitization follows vehicle rights and tranche waterfall Question 184 Rates fall and residential mortgage borrowers refinance faster. What risk faces a mortgage pass-through holder? Reinvestment risk disappears The claim automatically becomes sovereign debt Principal must slow and duration extend Earlier principal return with possible reinvestment at lower rates Question 185 You compare sovereign, sub-sovereign, and quasi-government bonds. Which funding assumption is sound? All are automatically sovereign guaranteed All are equity rather than debt Government classification removes refinancing risk Inspect debt currency, tax capacity, transfers, and explicit guarantees for each issue Question 186 A bond has a high credit rating, but cash flow deteriorated after the rating date. What is the appropriate analytical stance? Rating permanently guarantees payment Review cash, maturities, and scenarios; a rating is an opinion that may lag Treat a price change as proof of actual default Ignore collateral and covenants because the rating is sufficient Question 187 One government issues foreign-currency debt; another issues in its own currency under a different monetary regime. What prevents treating their credit risk as automatically equal? Coupon date alone determines default Foreign-currency bonds are equity, not debt Different ability to obtain payment currency under monetary and tax regimes Government status makes every currency equivalent Question 188 An issuer needs a hedge with a nonstandard date and quantity and accepts counterparty exposure. Which venue and trade-off fit? A purchased call imposing an obligation rather than a right Exchange future that eliminates every margin need Customized OTC contract with flexibility but counterparty and collateral management Common stock that locks a contractual hedge price Question 189 An existing long forward has delivery price 105. After half a year a new matching forward delivery price is 112.72 and remaining-period discount rate 2.47%. What is approximate value of the old long? About 7.53 About 105 Always zero About 112.72 Question 190 Why may a futures price differ from a comparable forward price when contract prices covary with interest rates? Futures have no daily settlement Daily settlement changes cash-flow and reinvestment timing Any difference always gives costless arbitrage Forward price is a certain spot forecast Question 191 S=100, K=100, one-year accumulation 1.05, and a European call costs ten without dividends. By put-call parity, what is the put price? Ten Zero About 4.76 About 5.24 Question 192 One-period stock 100 moves to 120 or 80; strike-100 call and financing factor 1.05. What is option value using the risk-neutral pricing weight? 12.50 20 Ten About 11.90 Question 193 On notional ten million, a swap holder pays fixed 4% and receives floating 5% next settlement. What is next net cash flow before discounting, with the right caveat? Receives 100,000; full value needs remaining dates and curve Zero because inception value was zero Pays 100,000 and that is full swap value Receives ten million principal every settlement Question 194 An investor chooses a co-investment in one deal alongside a manager instead of a diversified fund interest. What trade-off is most likely? Direct ownership of every fund deal No manager or counterparty risk Guaranteed diversification and daily redemption More concentration and faster diligence, potentially with a lower fee layer Question 195 Fund value starts at 100 and reaches 115 before fees; management fee two on beginning capital and performance fee 20% on gain after management. What is net investor return before own tax? 12% 15% 13% 10.4% Question 196 Commodity spot price rose, but a held futures strategy faced a large negative contract-roll effect. What is the sound inference about investor return? It must equal spot appreciation Futures require no margin or liquidity It may be below spot change after roll effect and collateral return Commodity pays a fixed bond coupon Question 197 A private equity fund reports low historical equity correlation but marks holdings only quarterly. What caveat matters? Every quarterly mark is an immediate sale price Infrequent marks can suppress observed volatility and correlation without removing economic risk Low correlation guarantees crisis protection Leverage cannot affect equity return Question 198 A digital ledger token has no contractual claim on company cash flows. What must be done before treating it like dividend equity? Ignore key and custody risks Equate token price with accounting book value Verify legal rights, cash flows, custody, and pricing; an equity model may not fit Assume guaranteed dividend because the ledger is distributed Question 199 Risk-free return 2%, risky portfolio expected return 8% and volatility 12%, risk aversion A=4 under simplified quadratic utility. What is approximate unconstrained risky weight? 25% 50% 100% 104.2% Question 200 Stock-market return covariance is 0.018 and market variance 0.015. What is stock beta and what risk does it measure? 0.018 and guaranteed return 1.2 and systematic market sensitivity 0.833 and total risk 1.2 and all firm-specific risk Question 201 Portfolio return 10%, risk-free 2%, volatility 16%, market volatility 12%. What is M² return scaled to market volatility under the stated convention? 6% 12% 10% 8% Question 202 Who ordinarily bears investment outcome in an individual defined-contribution account, compared with a defined-benefit promise? Nobody has obligations under defined benefit Both plans are sovereign bonds The member in defined contribution; the sponsor bears the defined-benefit promise Sponsor guarantees every defined-contribution account balance Question 203 A client refuses to sell a losing share to avoid regret although the business thesis changed. What is a suitable response? Use a precommitted decision rule and contrary-evidence review under the IPS Hide the loss from reporting Add to the position to avoid regret Treat purchase price as the only value benchmark Question 204 A committee sets a 10% single-issuer limit but names no decision owner, data source, or escalation time. What is missing from risk governance? Assign owner, data, monitoring, and escalation so the limit operates The numerical limit alone suffices Eliminate every financial and nonfinancial risk Assume VaR captures every liquidity crisis Question 205 A returns 2%, 4%, 6%; B returns 1%, 5%, 3%. Using sample denominator n−1, what is their correlation? −0.5 Zero 0.5 One Question 206 An investor wants a pooled vehicle trading intraday on an exchange, versus a mutual fund commonly priced at a periodic NAV. Which initial comparison is sound? Every ETF guarantees benchmark return without cost An ETF may fit, but inspect bid-ask spread, liquidity, and fees A mutual fund guarantees real-time exchange execution with no spread Separate account and ETF are one legal vehicle Question 207 A client wants to integrate financially material climate risk into an investment policy. What is the most operational approach? Define financial impact, evidence, portfolio limits, and monitoring under client goals Treat one rating as a complete substitute for diligence Attach an ESG label without data or limits Exclude every asset regardless of impact or cost without asking the client Question 208 Local law permits cherry-picked performance advertising, while applicable professional requirements demand fairer presentation. What is the sound ethical step? Follow the stricter applicable requirement and present a fair documented record Hide weak periods with a small disclaimer Let sales management decide without records Follow the weaker law because the advert is profitable Question 209 A conduct allegation is made against a CFA Institute member. Which description of the institute’s process is accurate before a finding? A multilevel peer-review process under rules precedes violation and sanction decisions Membership guarantees freedom from misconduct No member can be investigated The allegation itself is a violation finding and sanction Question 210 An analyst owns the stock, receives material unpublished earnings, and is offered issuer-paid travel before a recommendation. What is the strongest sequence? Stop using the information, escalate and record it, preserve independence, and disclose conflict in later lawful research Accept travel because it can be disclosed Rush out an unsourced recommendation to avoid delay Trade first and then disclose ownership Question 211 An asset manager claims independent GIPS verification certifies every individual performance report and guarantees future returns. What is the correction? Verification applies only to the winning portfolio Each report is automatically separately certified Verification examines firm-level policies and composite construction; it guarantees neither future returns nor every individual report Firm definition and discretion are irrelevant Question 212 In the seven CFA conduct-standard groups, which group covers conflicts, transaction priority, and referral fees? II Market Integrity III Duties to Clients VI Conflicts of Interest VII Membership and Program Responsibilities Create a free account to mark your answers and save your progress.
