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GWI CFA Mock Exam Q&A with Verified
Solutions
Proprietary trading is most likely carried out by: - ANSWER✔✔dealers Globalisation in the investment industry is associated with the growing tendency of investors: - ANSWER✔✔to look outside their local market for investment opportunities. The goal of all economic systems is to: - ANSWER✔✔efficiently allocate scarce resources to their most productive uses. An individual who helps buyers and sellers find and trade with one another is a(n):
- ANSWER✔✔broker Securities regulations are created by: - ANSWER✔✔government agencies The CFA Institute Code of Ethics requires members to: - ANSWER✔✔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: - ANSWER✔✔refuse to carry out the assignment. Investment advisers have an ethical obligation to: - ANSWER✔✔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: - ANSWER✔✔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? A. Yes B. No, the Code of Ethics also requires ethical behaviour when dealing with potential clients C. No, the Code of Ethics also requires ethical interaction with all capital market participants - ANSWER✔✔C. No, the Code of Ethics also requires ethical interaction with all capital market participants Regulators often seek public consultation prior to the implementation of new regulations in order to: - ANSWER✔✔improve the final rules by undertaking a cost-benefit analysis. Regulations prohibiting front running are types of: - ANSWER✔✔trading rules Regulators help capital markets do all of the following except: A. reduce investment risk. B. allocate capital to productive use.
The notion of scarce economic resources: - ANSWER✔✔gives rise to choices determined by opportunity costs. The crowding out effect will most likely lead to higher: - ANSWER✔✔interest rates. Which of the following actions taken by a central bank is best described as expansionary? - ANSWER✔✔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 - ANSWER✔✔multiplier effect. An obstacle to the alignment of international business cycles is the existence of international: - ANSWER✔✔restrictions on capital flows. The broadest-based measure of a nation's inflation rate is provided by the: - ANSWER✔✔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: - ANSWER✔✔stronger. As a reserve currency, the US dollar is held in significant quantities by many governments and financial institutions as part of their foreign exchange reserves. The US dollar also acts as the pricing currency for many international transactions, which means demand for US financial assets and US dollars is higher than it would
be based on its macroeconomic outlook alone. This higher demand for US dollars is detrimental to the competitive position of US exporters because it makes their goods more expensive to foreigners than they would be otherwise. The theory of purchasing power parity states that the exchange rate between any two countries will adjust to reflect: - ANSWER✔✔the price levels between them. The basic idea underlying purchasing power parity is that a basket of goods in two different countries should cost the same after taking into account the exchange rate between the two countries' currencies. 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: - ANSWER✔✔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: - ANSWER✔✔produces the good more efficiently. To improve the usefulness of ratio analysis, an analyst should calculate ratios and:
- ANSWER✔✔compare the company's current and prior performance with that of its competitors. Unpaid operating expenses, such as the utilities bill for the last month of the year, are included in: - ANSWER✔✔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: - ANSWER✔✔pay wages.
A bond whose coupon rate is linked to a reference rate, such as the London Interbank Offered Rate (Libor), is most likely a: - ANSWER✔✔floating-rate bond. Call risk in a falling rate environment would be a risk for: - ANSWER✔✔fixed- rate bond investors. The valuation of fixed-rate bonds and zero-coupon bonds: - ANSWER✔✔uses the same discount methodology. Which of these statements describes zero-coupon bonds most accurately? Zero- coupon bonds: - ANSWER✔✔can have prices that vary between issuance and maturity because of changes in market rates. An example of a corporate action that increases the number of shares outstanding is a: - ANSWER✔✔seasoned equity offering. If a company is liquidated, proceeds from asset sales are most likely distributed to common shareholders: - ANSWER✔✔after secured debt investor and preferred shareholder claims are paid. Generally, when compared with purchasing equity in a foreign company, the benefit of purchasing global depositary receipts (GDRs) is: - ANSWER✔✔lower transaction costs. An example of a common stock valuation method that relies on forecasted dividends is: - ANSWER✔✔discounted cash flow valuation.
Which of the following corporate actions will affect the number of outstanding common shares of a company? - ANSWER✔✔Issuing a stock dividend Seasoned equity offerings (SEOs): - ANSWER✔✔could dilute the ownership stake of existing stockholders. Settlement in a derivatives contract is a reference to the: - ANSWER✔✔manner in which the contract is satisfied at expiration. For futures contracts, the process of marking to market means that profits and losses are settled: - ANSWER✔✔daily. A company that wants to convert fixed-rate interest payments on an outstanding loan to floating-rate interest payments will most likely enter into which of the following interest rate swaps? - ANSWER✔✔Pay floating-rate interest and receive fixed-rate interest. By entering into a pay floating, receive fixed interest rate swap, the company can convert its fixed-rate interest obligation to a floating-rate interest payment. The fixed rate received on the swap can be used to make the fixed-rate interest payment on the outstanding loan. The net effect is that the company now makes a floating- rate interest payment. An investor in a stock option contract that gives her the right to deliver the stock at the exercise price is: - ANSWER✔✔buying a put option. The investor is buying a put option on the stock. An investor who owns a put option on a stock has the right to deliver or sell the stock at the exercise price to the seller of the put option.
Individuals at sell-side firms who assist buy-side customers with transactions are: - ANSWER✔✔sales traders. Sales traders at sell-side firms assist buy-side customers with their trades. A stock market index: - ANSWER✔✔can be used by an investor to assess how a particular market performed during a given period. Compared with direct investments, indirect investments allow individual investors to: - ANSWER✔✔obtain the services of professional managers that they could not otherwise afford. Which of the following statements about funds of funds is correct? Funds of funds typically: - ANSWER✔✔result in very high management fees for investors. One advantage of commingled accounts over separate accounts is that: - ANSWER✔✔all investors earn equal returns. In most countries, investors will pay taxes on the capital gains arising from owning shares: - ANSWER✔✔when the shares are sold. Which of the following pooled investment vehicles would have the lowest level of fees and costs? - ANSWER✔✔Passively managed open-end mutual funds Which type of investment has the following characteristics?
- Available to only a few select investors
- Locks up investors' capital for fixed periods
- Pays managers based on their performance - ANSWER✔✔Hedge funds When a company is "going public", it means that the company is selling its shares to the public: - ANSWER✔✔for the first time in the primary market. Sales of assets that are unique, such as real estate, are normally sold in which type of market? - ANSWER✔✔Brokered markets Which trading locations or mechanisms are also known as dark pools? - ANSWER✔✔Alternative trading systems Which of the following orders instructs a broker to obtain the best price and immediately execute the client's request? - ANSWER✔✔Market order If an investor fully pays for the purchase of shares with cash from his savings account and then holds the shares in an investment account, he is said to have a: - ANSWER✔✔long position. A company seeking to raise additional capital following its initial public offering will most likely issue securities in the: - ANSWER✔✔primary market. A transaction in which a large block of securities is traded between two investors will most likely occur in a(n): - ANSWER✔✔broker-driven market. Market impact is a transaction cost related to: - ANSWER✔✔price concessions. The most numerous type of investors are: - ANSWER✔✔retail investors.
A risk response strategy that involves taking a risk that is well understood and might create value is categorised as a: - ANSWER✔✔tolerate strategy. Key controls to protect systems and business information include: - ANSWER✔✔establishing and communicating policies. From a compliance perspective, which tax management practice is considered an acceptable risk? - ANSWER✔✔Tax avoidance The risk that an organisation fails to follow all applicable laws and regulations and faces sanctions as a result is the definition of: - ANSWER✔✔compliance risk. Which of the following is a step in the process of performance evaluation? - ANSWER✔✔Attributing performance An investor who views risk as the variability of returns around the mean return will most likely measure risk by using: - ANSWER✔✔standard deviation. What is subtracted from a portfolio's return when calculating the Sharpe ratio? - ANSWER✔✔The risk-free return The Sharpe ratio is found by subtracting the risk-free return from the return on the portfolio and dividing the result by the standard deviation of portfolio returns. If the securities contained within a benchmark meet an investor's stated risk and return needs, the benchmark has met which of the following criteria? - ANSWER✔✔Compatibility
A portfolio manager's skill can be measured by the fund's: - ANSWER✔✔alpha. Which of the following sources of a portfolio's return should even out over the long term? - ANSWER✔✔Luck Attribution analysis requires knowledge of the proportion of each asset found in the: - ANSWER✔✔benchmark portfolio. A document that provides the precise instructions for the actions necessary to achieve a desired outcome is most likely a: - ANSWER✔✔process document. A document that states that a company is in favour of fair employment practices is most likely a: - ANSWER✔✔policy document. Documents facilitating a regular review process that contain obligations, past actions, and future or outstanding requirements are called: - ANSWER✔✔registers. Which of the following is an example of an ad hoc document? - ANSWER✔✔Memos and e-mails from the supervisor Which of the following documents are required to be held in their original and physical form? - ANSWER✔✔Trust deeds and contracts A financial market is competitive when: - ANSWER✔✔no single participant has too much influence on supply or demand of securities.
A regulator introduces new regulations requiring extensive changes in the way asset managers do business. A small firm that is no longer profitable as a result of higher operational costs decides to ignore the new regulations, with the exception of requiring participation in continuing education. Management justifies this move because it has not received a client complaint in 20 years. Which of the CFA Institute Code of Ethics principles is being violated by the firm? - ANSWER✔✔Promotion of integrity One of the consequences of a regulatory failure is a possible increase in: - ANSWER✔✔market inefficiency. Which of the following is a benefit of dispute resolution, as a step in the regulatory process in place of a formal legal process? - ANSWER✔✔Faster resolution Information barriers within a financial services firm are required to control which of the following? - ANSWER✔✔Conflicts of interest Regulation helps to reduce the risk of systemic financial market failure caused by:
- ANSWER✔✔increasing levels of debt funding and interconnectivity among industry participants. A proposed new regulation to combat unethical market behaviour might not be implemented by a regulator because of the: - ANSWER✔✔associated opportunity costs. A person ate three chocolate bars during his lunch break. Afterward, he stated that although the first chocolate bar was most enjoyable, he found the second one less so, and the third was the least enjoyable of them all. This progressive loss of
satisfaction with additional consumption is referred to in economics as the law of: - ANSWER✔✔diminishing marginal utility. The following table shows the effect of increasing the amount of fertilizer used in various fields at an agricultural test centre and the resulting pounds of tomatoes produced. The effect of increasing the use of fertilizer on output levels is an example of: - ANSWER✔✔the law of diminishing returns. Brian owns a restaurant and makes decisions about the wages that he offers his employees based on the local supply and demand of labour. Brenda, a policy analyst for the federal government, recommends changes in tax laws that will reduce the unemployment rate across the country. Microeconomic decision making is the primary focus of: - ANSWER✔✔Brian only. A natural monopoly is most likely characterised by: - ANSWER✔✔little freedom in setting prices. Natural monopolies are usually highly regulated and have little freedom in setting prices. Compared with GDP calculated using the expenditure approach, gross domestic income will most likely be: - ANSWER✔✔the same. Calculating GDP by using the expenditure approach involves summing expenditures on goods and services by consumers, businesses, governments, and net exports (i.e., exports minus imports). Gross domestic income is the term given to the estimation of total output (GDP) found by summing all incomes—that is, the
In 2011, Germany had the second largest current account surplus in the world. Some of the countries with the largest current account deficits at that time were the United Kingdom, France, and Spain. The currency for the United Kingdom is the British pound; the currency for France, Spain, and Germany is the euro, along with 15 other European countries. The country that was most likely to experience a self- adjusting change in its exchange rate to correct its current account deficit was: - ANSWER✔✔the United Kingdom. In a year in which there has been strong economic growth worldwide, the overall sum of the balance of payments accounts for all countries is: - ANSWER✔✔zero. Regardless of the economic outcome for each country, the sum of its current account and its capital and financial accounts must equal zero. Therefore, when adding across all countries, the sum must also equal zero. Previously, the exchange rate between euros and US dollars was €0.75/$1. Now, the exchange rate is €0.80/$1. This difference means that: - ANSWER✔✔previously $1 could be exchanged for €0.75. An increase in international trade results in: - ANSWER✔✔access to resources that are in limited supply. When a company sells a product on credit, the day the merchandise is shipped to the customer, the company will most likely report an increase in: - ANSWER✔✔profit but not cash flow. Which of the following activities would be classified as a cash outflow from investing activities? - ANSWER✔✔Purchase of equipment
The following information is available about the return on assets (ROA) for a company and the industry in which it operates: Net profit margin(Net income/Revenues)
- Company: 10%
- Industry: 12% Asset turnover(Revenues/Total assets)
- Company: 1.5 times
- Industry: 1.2 times ROA
- Company: 15%
- Industry: 14.4% An investor can conclude that compared with the industry, the company: - ANSWER✔✔uses it assets more effectively. Three parents are discussing the allowances that they give to their 10-year-old sons. Although each child receives a total of $520 per year, the manner in which the payments are made differs:
- Jack gives his son $10 per week.
- Bill gives his son $400 on January 1 and the remaining $120 on December 31.
- Brian gives his son half ($260) on January 1 and the other half on July 1.
