Konvexity CFA level I MOCK EXAM (Answers)konvexity.com/papers-solutions/Solutions to CFA Level I Mock Exam.pdf · Konvexity CFA level I MOCK EXAM (Answers) Questions 1 through 18

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Konvexity CFA level I MOCK EXAM (Answers)

Questions 1 through 18 relate to Ethical and Professional Standards. 1. Answer: B

It would be expected that Markos should inform clients that he is leaving, and it is proper that he should state that he cannot discuss what he is leaving to do.

2. Answer: C

In dealing with clients there is no need to draw specific reference to the fact some work was done by colleagues within the firm. When giving expert evidence to a court a person represents themselves and not the firm and should therefore make clear any work that is not their own.

3. Answer: C Fostering the notion of global self regulation is an objective of GIPS and not a part of its vision statement.

4. Answer: A Firms from any country can come into compliance with the GIPS standards.

5. Answer: A

Carve-outs can be included in single asset class composite returns only if the carve-outs are managed separately with their own cash balances.

6. Answer: B

The composite return is the asset-weighted average of the performance results of all the portfolios in the composite.

7. Answer: A The provisions of GIPS standards apply to all real estate investments irrespective of whether it is producing revenue or not.

8. Answer: B The time period is 12 months and not 24 months i.e. all prospective clients should have received compliant presentation within the previous 12 months.

9. Answer: C The immediate supervisor should be informed in writing. A copy of the Code and Standards would need to be presented only if the employer does not already have one. The existence of other colleagues taking CFA exams does not remove her obligations.

10. Answer: A Written consent of new employer, written notification to existing clients (and prospective clients).


11. Answer: C

It is definitely a breach. Whether the trade would be profitable or not is irrelevant as avoiding the appearance of impropriety is as important as improper profit.

12. Answer: C The opinion of another analyst should not outweigh your own thorough research.

13. Answer: C All compensation from outside sources should be disclosed.

14. Answer: B Expectations of passes are not passes.

15. Answer: B

Rule of thumb: apply the higher of the local rules or the Code and Standards.

16. Answer: B Work from internal sources need not be specifically reference. Models should be referenced, even if tweaked.

17. Answer: B Members have a responsibility to deal with all clients fairly according to Standard III (B). All clients participating in the block trade should receive the same execution price and be charged the same commission.

18. Answer: C

Members should use reasonable care and judgment to maintain independence and objectivity (Standard I (B)). There is no indication of inappropriate behavior in selection of the equity manager or in the acceptance of employment with that manager; both decisions were based on the excellent performance records of the manager and the member, respectively.


Questions 19 through 32 relate to Quantitative Methods 19. Answer: B

The neckline of an inverse head-and-shoulder is formed when it is unable to break that point and thus it acts like resistance. The neckline of head-and-shoulder acts as support and when it is breached, it signals the reversal.

20. Answer: A

z-value = (x - µ) / σ = (8 – 12) / 5 = -0.8. We use the standard error in case we need to calculate z-value for the mean of EPS values.

21. Answer: C SFRatio = [E(RP) – RL] ÷ σP. SFRatios for Portfolio A, B and C are 0.4167, 0.40 and 0.467 respectively. So, Portfolio C has the highest SFRatio.

22. Answer: A

The geometric mean return can be higher than or equal to harmonic mean. Harmonic mean is the least among the arithmetic, geometric, and arithmetic means.

23. Answer: C The expected return = 0.08 = -0.1*0.15 + (-0.04*0.25) + (0.06*0.20) + (Y*0.4/100) =>Y=23.25

24. Answer: B PMT= 10000, N=20, I/Y=10, CPT-> PV By this way we’ll get PV of ordinary annuity. Multiply it by (1+Interest rate) to get the value of annuity due.

25. Answer: C For a negative skewed distribution: mean<median<mode.

26. Answer: C

Holding period yield = [bank discount yield*(n/360)]/ [1-bank discount yield*(n/360)] = (0.045*180/360)/ (1 – 0.045*180/360) = 2.30%

27. Answer: A PV=80,000, I/Y=9/12=0.75, N=30*12=360, CPT->PMT= $643.70. Excess amount needed = $643.7-$500= $143.70

28. Answer: A

The coefficient of variance = Standard deviation/Average value. It increases with increase in standard deviation.

29. Answer: B Confidence interval = sample mean ± reliability factor*standard error. Here, standard error = 12/250.5 = 2.4. Reliability factor*standard error = 6 => Reliability factor = 6/2.4 = 2.5


30. Answer: C The results are most likely to be suffering from look-ahead bias as the prices are available at the end of the year while book values are getting updates after 2 months. So, she needs to look-ahead for the correct values.

31. Answer: B

The power of a test is the probability of correctly rejecting the null hypothesis. The probability of Type II error is the probability of not rejecting the null hypothesis when it is false which equals (1-Power of test) i.e. 1-0.90 = 0.10.

32. Answer: C The F-test should be used by him for testing the equality of variances of two samples.

Questions 33 through 44 relate to Economics

33. Answer: C The demand curve and supply curve cuts the Y-axis at 3 and 1.2 respectively. The quantities demanded/supplied at equilibrium price of 2 are 4. The total surplus = (1/2)*4*(3-1.2) = 3.6.

34. Answer: A Input price is likely to cause a shift in the short-run aggregate supply curve but not in the long-run aggregate supply curve.

35. Answer: C The Austrian school states that the business cycles are caused by the government intervention in the economy.

36. Answer: C The fiscal multiplier = 1/[1-MPC(1-t)] = 1/[1-0.6*0.6] = 1/0.64 = 1.5625. So, $1000 government spending has a potential to increase aggregate demand by 1.5625*$1,000 = $1,562.50.

37. Answer: C The forward rate will be 52.65 + 7.35*10-4 = 52.650735

38. Answer: B X-M = private savings + government savings – investment. Lower level of private savings, larger government deficits and higher rate of domestic investments all lead to an increase in a current account deficit.

39. Answer: C

For a kinked demand curve model, the graph above the kinked price is more elastic and the graph below the kinked price is less elastic.

40. Answer: A

The minimum point on the ATC curve represents the lowest cost per unit. It is not necessarily the profit maximizing point.


41. Answer: B

Oligopoly has high barriers to entry and fewer firms. In perfect competition, the competition is mainly on price. All the points holds true for monopolistic competition.

42. Answer: C

The negative income effect outweighs the positive substitution effect in case of Giffen goods. 43. Answer: C

Suppliers will bear a higher tax burden if supply curve is less elastic that the demand curve.

44. Answer: A The indifference curves for two goods slope downwards. The curves are convex towards the

origin and the slope of an indifference curve at any point is referred to as the marginal rate of

substitution (MRS).

Questions 45 through 68 relate to Financial Statement Analysis 45. Answer: C

Weighted average shares = 12,500 + 2,000*9/12 = 14,000. EPS = $25,000/14,000 = $1.786 46. Answer: B

With stock options, the treasury stock method must be used. Under that method, the company would receive $50,000 (5,000*$10) and would repurchase 2,500 shares ($50,000/$20). The shares for the denominator would be: Shares outstanding = 500,000 Options exercised = 5,000 Treasury stock purchased = (2,500) Denominator = 502,500

47. Answer: B

Diluted EPS is calculated using the if-converted method for convertible securities and the treasury stock method for options

48. Answer: C

Last in, first out (LIFO) is not permitted under IFRS. 49. Answer: A

Cash ratio gives the most conservative estimate about the company’s liquidity position as it counts only cash and marketable securities in the numerator.

50. Answer: B

Deferred tax is a part of non-current liabilities. 51. Answer: A


For trading securities, the unrealized gains (losses) are included into the income statement.

52. Answer: C Under IFRS, interest expense can be classified as either operating or financing cash flows. Under U.S. GAAP, it can be classified as operating expense only.

53. Answer: A Cost of goods sold plus increase in inventory equals purchases from the suppliers i.e. $350,000. As there is no change in accounts payable, the company paid $350,000 in cash.

54. Answer: B

The dividends paid can be classified as operating or financing cash flow under IFRS.

55. Answer: C Dividends are paid after the FCFE. It impacts neither FCFF nor FCFE.

56. Answer: B

Inventory expense includes costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. It does not include storage costs not required as part of production.

57. Answer: A

LIFO method will lower the COGS in case of declining prices and the reported profit will tend to be highest.

58. Answer: C ROE = Net Profit Margin x Sales/Total Assets x Total Assets/Equity = 6.0 x 1/0.35 x 1/0.60 = 28.57%.

59. Answer: B DDB depreciation = (2/useful life of the asset) * (asset cost – accumulated depreciation). In first year, depreciation= (2/10)*(50,000-0) =$10,000. In second year, depreciation = (2/10)*(50,000-10,000) = $8,000

60. Answer: C Debt to equity ratio is higher for a finance lease as in that case an equal lease asset and lease liability is added on the balance sheet which increases the debt to equity ratio. No changes in balance sheet entries are done in case of an operating lease.

61. Answer: C Capitalization of interest costs incurred during construction is permitted under both U.S. GAAP and IFRS.

62. Answer: B


The deferred tax liability should be excluded from both debt and equity when both the amounts and timing of tax payments resulting from the reversals of temporary differences are uncertain.

63. Answer: A On conversion the debt will reduce to $140 million and equity will rise to $460 million. So, debt to equity ratio = 140/460 = 0.30

64. Answer: A

When a lease is classified as an operating lease, the underlying asset remains on the lessor’s balance sheet. The lessor will record a depreciation expense that reduces the assets value over time.

65. Answer: B The auditor performs independent review and statements are prepared in accordance with GAAP or IASB and not GARP.

66. Answer: A Transparency, comprehensiveness and consistency are the characteristics of a coherent financial reporting framework.

67. Answer: C MD&A contains information about discontinued operations.

68. Answer: B

Salaries (wages) payable is accrued expense for the employer.

Questions 69 through 78 relate to Corporate Finance

69. Answer: C The cross even rate is the IRR of the cash flows which we will get by subtracting the cash flows of two projects. CF0=-10,000, CF1=$4,500, CF2=$5,500, CF3=$6,500 =>IRR = 27.82%.

70. Answer: B Payback period doesn’t’ take into account the tie value of money.

71. Answer: A Present value of perpetuity = 500/0.08 = $6,250. NPV = $6,250 - $4,500 = $1,750

72. Answer: A The increase in tax rate will most likely lead to more usage of debt by the firm as the tax savings will be more on the interest.

73. Answer: B As the capital structure for both the companies are same and also the tax rate applicable is same, they would have the same equity beta.


74. Answer: C

Country equity premium = Sovereign yield spread*(annualized standard deviation of equity index of country/annualized standard deviation of the sovereign bond market in terms of the developed market currency) = (8.5-3.0)*(35/22) = 8.75%

75. Answer: A

If the buyback market price is greater than the book value per share then the new book value per share will decline.

76. Answer: C DTL = (Revenue – Variable Cost) ÷ Net Income = ($ 750,000 - $ 350,000) ÷ $ 150,000 = 2.67

77. Answer: A

Obsolete inventory is a drag on liquidity and not a pill on liquidity. 78. Answer: B

Operating cycle = Number of days of inventory + Number of days of receivables. Cash conversion cycle = Number of days of inventory + Number of days of receivables – Number of days of payables. So, the difference between operating cycle and cash conversion cycle will change only with a change in number of days of payables.

Questions 79 through 90 relate to Equity Investments 79. Answer: C

A short position on a call option is equivalent to a short position on the underlying instrument.

80. Answer: C She is clearly witnessing iceberg orders where some parts of order is visible and rest is hidden from the traders. Remember, tip of the iceberg!!!

81. Answer: C Reconstitution means the replacement of securities in the index. When there is a replacement in the index, then automatically there will be a rebalancing in the index as the weight to the new security earlier was zero and now it will have some value other than zero.

82. Answer: A The total investment at the beginning was $62,000. The difference between the price and total return will be equal to dividend yield in this case which equals 980/62,000 = 1.58%.

83. Answer: C

In a strong form efficient market, one cannot earn an excess return even after using private information as that information has already been a constituent of security prices.


84. Answer: C

In conservatism bias, investors tend to be slow to react to the changes.

85. Answer: A By cumulative voting, you can select at least 16*0.3=4.8 i.e. 4 directors of your choice.

86. Answer: B Level I and Rule 144A have low listing fees. Level II and level III have comparatively higher listing fees.

87. Answer: A FMCG companies cater to the basic needs of consumers which is not going to be affected much from the business environment.

88. Answer: A Slowed growth and intense competition are characteristics of shakeout stage. The shakeout stage is followed by growth stage.

89. Answer: C The dividend growth rate must be less than the required rate of return and not may be.

90. Answer: C

The price according to Gordon model = 1.5*1.06/ (0.10-0.06) = $39.75. The stock is trading at

$38.50 and thus it is undervalued.


Questions 91 through 96 relate to Derivative Investments. 91. Answer: B

The payoff for a long position in FRA = notional principal*(underlying rate at expiration – forward contract rate)*(days in underlying rate/360)/{1+underlying rate at expiration*(days in underlying rate/360)} = 100,000*(0.048-0.046)*(120/360)/{1+0.048*120/360} = $65.62

92. Answer: B A position trader generally holds positions open overnight. A day trader square off position within a day and a scalper squares off position within few moments.

93. Answer: B A put option having spot price greater than strike price is in-the-money.

94. Answer: A She has to pay for the loan. She won’t want her payment to exceed a certain level of interest. So, she would like to go long on interest rate cap and to fund that long option on cap she would be selling the interest rate floor.

95. Answer: B Return on equity index = (1,200-1,250)/1,250 = -4%. So, total loss = 7% - (-4%) = 11% = 0.11*1,000,000 = $110,000

96. Answer: B C+PV (bond) = S+P; PV (bond) is a constant with respect to movement in stock price, so we

can say that C = S+P. S+P is protective put. So, the payoff graph of a long call option is similar

to payoff graph of protective put strategy.

Questions 97 through 108 relate to Fixed Income Investments.

97. Answer: B It is a simple case of floating rate bond where floating coupon rate = reference rate + 1.5%

98. Answer: B An accelerated sinking fund provision gives the issuer an option to retire more than the sinking fund requirement. It is beneficial to issuer and not to bondholder.

99. Answer: B The value of bond will approach towards the par value with decrease in years to maturity.

100. Answer: B

The deferred coupon bond is most likely to have the least reinvestment risk among the given choices because coupons are deferred for few years and we don’t have to face reinvestment risk for those initial years.


101. Answer: A The value of the bond will fall because of the downgrade in its rating and the short position in it will gain because of this.

102. Answer: B The volatility risk in callable bonds occur due to an increase in expected yield volatility while in putable bonds, it occurs due to a decrease in expected yield volatility.

103. Answer: B The issuer default rate is referred as the number of issuers defaulted divided by the total number of issuers at the beginning of the year. The dollar default rate is referred as the par value of all bonds that defaulted in a given calendar year divided by the total par value of all bonds outstanding during the year. There is no term like ‘book value default rate’.

104. Answer: C As we can see that the coupon rate becomes zero whenever reference rate exceeds 6%. So, it is most likely an example of a range note for which the coupon rate is equal to the reference rate if it is within a particular range and is equal to zero once it is outside the range.

105. Answer: C The yields of preferred segments like 1 year, 5 years and 10 years are comparatively low which is explained by the market segmentation theory.

106. Answer: C Spread for life = {100*(Par value – price)/Maturity + Quoted margin}*(100/price) = {100*(100-99.2)/5 + 70}*(100/99.2) = 86.69 basis points

107. Answer: B Modified duration = Macaulay duration / (1+yield/k) = 6.5/(1+0.056/4) = 6.41

108. Answer: B Cash flows of the mortgage-backed securities are dependent upon the path interest rate

follows. So, they cannot be valued from models like binomial which uses backward induction.

They are valued by Monte Carlo simulation model.

Questions 109 through 114 relate to Alternative Investments. 109. Answer: B

The prices of ETFs are updates on a continuous basis and not on interval basis.

110. Answer: C Market risk is the major risk for ETFs as a change in market value of securities can adversely affect the returns of ETFs. Currency risk is also there for ETFs based on foreign equity markets. Credit risk is usually not present. Credit risk arises only when there are forwards on ETFs and are not exchange regulated.


111. Answer: B Using the income approach: ($1,900,000 – $1,500,000)/0.125 = $3,200,000.

112. Answer: B Venture capital investments provided for the preparation for the step of going public are a part of mezzanine financing.

113. Answer: C

The probability of survival at the end of 4 years = (1-0.3)*(1-0.2)*(1-0.15)*(1-0.1) =0.7*0.8*0.85*0.9 = 42.84%

114. Answer: B Roll yield is positive in backwardation when the futures or forward price is lower than the spot

price. So while rolling the contract, the trader/hedger gains in rolling the contract as he sells

at a higher price and buys back at a lower price.

Questions 115 through 120 relate to Portfolio Management.

115. Answer: B Ankeet follows long/short strategy. Unlike equity market neutral strategy, this strategy attempts to profit from market movements, not just from identified overvalued and undervalued equities.

116. Answer: A

Defined benefit pension plans typically have high risk tolerance and low liquidity needs.

117. Answer: C The indifference curves of risk-neutral investors are horizontal.

118. Answer: A

U = E(r) – 0.5*A*σ2 = 0.15 – 0.5*4*0.252 = 0.025

119. Answer: C The selection of optimal portfolio comes under the investment decision. Financing decision only decided the weight given to the optimal portfolio and the risk-free rate.

120. Answer: A Airplane crash is an example of unsystematic risk. Interest rates and political uncertainly are

example of systematic risk.

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Konvexity CFA level I MOCK EXAM (Answers)konvexity.com/papers-solutions/Solutions to CFA Level I Mock Exam.pdf · Konvexity CFA level I MOCK EXAM (Answers) Questions 1 through 18