The following 18 questions relate to Ethical and Professional Standards. (27 minutes) 1. York Investment Advisers, which has publicly adopted the CFA Institute. Standards of Professional Conduct, has recently published a new marketing brochure highlighting the accomplishments of its investment professionals. Which of the following statements made in York's marketing brochure is a violation of Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program? A. Roger Langley, Chartered Financial Analyst, has been a portfolio manager with York for ten years and passed all three levels of the CFA examinations on his first attempts. B. Langley is one of three CFAs on staff with York. We expect that two more of our staff members will earn the right to use the designation in the future. C. Paul Yeng has retired from the firm after 25 years of service. Yeng was awarded the CFA charter in 1988. Much of the firm's past successes can be attributed to Yeng's efforts as an analyst and portfolio manager. 2. Hedge Funds Unlimited, a global hedge fund, has publicly acknowledged in writing that it has adopted the CFA Institute Code and Standards as its policies. Which of the following is least likely a violation of the firm's policies? A. An analyst at the firm working overseas uses material nonpublic information as allowed by local law to make investment decisions for discretionary client accounts. B. A junior analyst at the firm uses a subscription to his local newspaper and the opinions of his friends and colleagues to make investment recommendations for discretionary client accounts. C. A CFA candidate at the firm, who is registered for the Level 3 exam, includes reference to participation in the CFA program and her status as a Level 3 candidate in her biographical background. 3. Ralph Malone, CFA, is an investment adviser at a multinational finance corporation. He has many wealthy individuals among his clients, including a trust account that benefits three of his immediate family members. The research department of Malone's firm issues a "buy" recommendation on a stock that would be a suitable investment for several client accounts, including the family trust account. Which of the following would be considered a violation of Standard VI(B) Priority of Transactions? A. After giving clients time to act on the new recommendation, the firm buys 100,000 shares for its own account. B. Malone trades on the family account shortly after his firm's clients have been informed of the buy recommendation. C. Malone waits to trade on the family account until four days after his firm's clients have been informed of the buy recommendation, when his employer's trades are entered. 4. Linda Bryant, CFA, is an employee of Roomkin Investment House, which underwrites equity and debt offerings. She has been approached by SimthCo to consult on a private debt placement. According to CFA Institute Standards of Professional Conduct, before Bryant agrees to accept this job, she is required to: A. obtain written consent from Roomkin after submitting details of the arrangement.

B. talk to her immediate supervisor and get her approval to take this consulting job. C. inform SimthCo in writing that she will accept the job and provide details of the arrangement to Roomkin in writing. 5.To comply with the Code and Standards, analysts who send research recommendations to clients must: A. keep records of all the data and analysis that went into creating the report. B. send recommendations only to those clients for whom the investments are suitable. C. not send recommendations without including the underlying analysis and basic investment characteristics. 6.Marilyn Walters, CFA, supervises a large group of research analysts. Walters has delegated some of her supervisory responsibilities to her assistant, Amy Brooks, who is a CFA candidate. In carrying out her responsibilities, Brooks has discovered that the firm's compliance system is inadequate and that Walters is not very supportive of Brooks's efforts to correct the situation. According to CFA Institute Standards of Professional Conduct, Brooks should: A. resign because her firm is not in compliance with the CFA Institute Standards, leaving her open to legal action. B. decline in writing to accept supervisory responsibilities until a reasonable compliance system is adopted. C. take no action because her efforts to correct the situation have satisfied her obligation under CFA Institute Standards. 7. Jarrett Rogers, CFA, is a registered investment adviser and a principal for Macrovest Broker-Dealer. Rogers is the head of the firm's investment program and recommends certain investment advisers in the program to high net worth individuals looking for separately managed discretionary accounts. Investment advisers in the program pay Macrovest a portion of their investment management fees to participate in the program, some of which is paid to Rogers as compensation for client referrals. When a client inquires with Rogers about criteria for including managers in the Macrovest program, Rogers indicates that managers are selected based only on historical investment performance versus a universe of comparable peer investment managers, but he does not mention fees paid by investment advisers to be included in the program. Which of the following CFA Institute Standards of Professional Conduct has Rogers violated? A. Standard VI(C) Referral Fees. B. Standard I(C) Misrepresentation. C. Standard III(B) Fair Dealing. 8. Ken Toma, a CFA charterholder and securities analyst for the leisure services industry, has just completed an extensive review of the demand for beach vacations in Hawaii and concluded that the demand will far exceed the supply for the foreseeable future. Toma writes a research report stating, "Based on the fact that the demand for Hawaiian beach vacations will exceed the supply of rooms for the foreseeable future, I recommend the purchase of shares of the Hawaiian Fund, a

diversified portfolio of Hawaiian beachfront resorts." If Toma presents this report to his clients, he will have violated the CFA Institute Standards: A. because he did not distinguish between fact and opinion. B. by failing to have a reasonable and adequate basis for his recommendation. C. because he did not consider the suitability of the investment for his clients. 9. Derek Stevens, CFA, manages the pension plan assets of Colors, Inc. When voting proxies on plan equities, Stevens owes a fiduciary duty to: A. the plan trustees who hired him. B. the plan participants and beneficiaries. C. the managers, stockholders, and bondholders of Colors, Inc. equally 10. Dawn Shields, CFA, decides to change her recommendation on TelSky from "buy" to "sell." In the morning, she mails the revision to all her clients with a known interest in TelSky. That afternoon, one of these clients calls in an order to buy 15,000 shares of TelSky. According to Standard III(B) Fair Dealing, Shields: A. must accept the order without mentioning the change because the Standard requires her to inform all clients of the change in recommendation simultaneously. B. should advise her customer of the change in her recommendation before accepting the order. C. must not accept the order until the customer has had time to receive and read the new report. 11. Which of the following is one of the eight major sections of the GIPS A. Venture capital. B. Private equity. C. Sub-advisers. 12. Patrick Wilcox was recently hired by SafeTrust Investments as afixed-income portfolio manager. Wilcox is informed by the head of the fixed income desk that all security analysis done by SafeTrust employees must be generated through the SafeTrust model that was developed in-house. Wilcox has reviewed reports that are based upon the model and appear to be thoroughly and accurately researched, but since he does not know first-hand the assumptions that the SafeTrust model is based on, he would prefer to use the services of an outside vendor that he has used for years. If Wilcox uses the in-house model as instructed, he will: A. not violate Standard V(A) Diligence and Reasonable Basis because the firm has deemed the model reliable. B. violate Standard IV(A) Loyalty because he may cause harm to his employer by using a potentially unreliable model. C. violate Standard V(A) Diligence and Reasonable Basis because he does not have personal knowledge of the model's reliability. 13. Greg Hoffman, a Level I CFA candidate, works as an independent securities research consultant. Hoffman has been hired by managers of Hill Manufacturing, Inc. (HMI) to write a research report on their company. Iloffman performs a thorough analysis of the firm's financials, the industry in which it operates, and the overall market and economy. After conducting his due

diligence, Hoffman writes a report on HMI with a strong "Buy" recommendation. Hoffman posts the report for purchase on a web site he created to support his consulting business but does not state either on the web site or in the report that HMI paid for the research. According to Standard 1(B) Independence and Objectivity and Standard VI(A) Disclosure of Conflicts, Iloffman has violated: A. both of these Standards. B. neither of these Standards. C. only one of these Standards. 14. Rhonda Morrow, CFA, is an analyst for Waller & Madison, a brokerage and investment banking firm. Waller & Madison is a market maker for CorpEast, and Tim Waller, a principal in the firm, sits on CorpEast's board. Morrow has been asked to write a research report on CorpEast. According to Standard VI(A) Disclosure of Conflicts, Morrow: A. may write the report without disclosure of Waller's seat on CorpEast's board since he is not writing the report, but she must disclose that Waller & Madison is a market maker in CorpEast shares. B. must not write the report and must request that Waller & Madison put CorpEast on their restricted list. C. may write the report only if she discloses that Waller & Madison is a market maker in CorpEast shares and that Waller sits on the CorpEast board. 15. John Farr, CFA, has accumulated several pieces of nonpublic information about Cattle Corp. of Omaha from his contacts with the company. Although none of this information is material by itself, when Farr combines it with his own analysis, it leads him to conclude that Cattle Corp. will have an unexpectedly low earnings report this year. Cattle Corp. has not announced this information, and although Farr has contacted the company, it will not confirm his finding. According to CFA Institute Standards of Professional Conduct, Farr. A. can use the information to make investment recommendations and decisions. B. cannot legally invest, divest, or make recommendations based on this information. C. may use the information, but only if his company's compliance officer is able to verify with Cattle Corp. that the material he used was indeed nonmaterial. 16. According to the DIPS standards, which of the following is least likely correct? A. Firms are not required to obtain verification for a claim of LIPS compliance. B. Written documentation of policies and procedures used to establish and maintain compliance with LIPS must be maintained. C. To initially claim compliance with GIPS, a company must present a minimum of ten years (or since the firm's inception if less than ten years) of GIPS-compliant performance data. 17. Geno Hanson is a portfolio manager at Bigtime Investments. James Ward, an old friend of Hanson's, is an executive recruiter in the same city. Ward refers to Hanson's firm any high-level executives that Ward places locally. In return, Hanson allows Ward to play a round of golf at Hanson's country club for each new client referred. According to Standard VI(C) Referral Fees, Hanson is required to disclose the arrangement with Ward to:

A. his employer, all clients, and all prospective clients. B. prospective clients referred by Ward. C. his employer and to prospective clients referred by Ward. 18. Yvettc Michaelson, a junior analyst for Torborg Investments, covers healthcare and consumer discretionary stocks alongside a senior analyst at the firm. Michaelson inadvertently overhears a conversation between two executives regarding Collective Healthcare's proposed tender offer for Network Healthcare at a 12% premium, which will be announced next week. Michaelson has followed both companies extensively and feels consolidation would be very beneficial for both companies. She calls her senior analyst to recommend a 15% increase in Torborg's current position in Network. According to Standard 11(A) Material Nonpublic Information, Michaelson's actions are: A. in violation of the Standard since she is acting on material nonpublic information. B. not in violation of the Standard since she is acting on an unofficial conversation between two executives who have not breached any duty in discussing the information. C. not in violation of the Standard under the mosaic theory since she has followed both companies extensively, and the tender offer information substantiates her beliefs about the benefits of consolidation. The following 14 questions relate to Quantitative Methods. (21 minutes) 19. The odds for an event occurring arc calculated by dividing: A. one by the probability that the event occurs. B. the probability that the event does not occur by the probability that an event occurs. C. the probability that the event occurs by the probability that the event does not occur. 20. A successful investor has decided to set up a scholarship fund for deserving students at her alma mater. Her plan is for the fund to be capable of awarding $25,000 annually in perpetuity. The first scholarship is to be awarded and paid out exactly four years from today. The funds will be deposited into an account immediately and will grow at a rate of 4%, compounded semiannually, for the foreseeable future. How much money must the investor donate today to fund the scholarship? A. $528,150. B. $549,487. C. $574,253. 21.Which of the following statements about return distributions is least likely correct? A. With positive skewness, the mean is greater than the median. B. If skewness is positive, the average magnitude of positive deviations from the mean is larger than the average magnitude of negative deviations from the mean. C. If a return distribution has positive excess kurtosis and the analyst uses statistical models that do not account for the fatter tails, the analyst will overestimate the likelihood of very bad or very good outcomes.

22. Excerpt from the cumulative z-table: Z 0.00 2.3 0.9893 2.4 0.9918 2.5 0.9938 An analyst collects figures for the attendance at each of his college's hockey games over the last five years. The minimum percentage of the distribution that lies within plus or minus 2.4 standard deviations of the mean is closest to: A. 82.60%. B. 98.36%. C. 99.18%. 23.Which of the following statements about covariance and the correlation coefficient is least accurate? A. Covariance is a measure of how the returns of two assets tend to move together over time. B. The correlation coefficient is computed by dividing the covariance of returns on two assets by the individual variances of returns for the two assets. C. The covariance of returns between two assets is equal to correlation between the returns of the two assets product of their standard deviations of returns. qua] to the multiplied by the 24. Greg Goldman, research analyst in the fixed-income area of an investment bank, needs to determine the average duration of a sample of twenty 15- year fixed-coupon investment grade bonds. Goldman first categorizes the bonds by risk class and then randomly selects bonds from each class. After combining the bonds selected (bond ratings and other information taken as of March 31 of the current year), he calculates a sample mean duration of 10.5 years. Assuming that the actual population mean duration is 9.7 years, which of the following statements about Goldman's sampling process and sample is least accurate? A. Goldman is using time-series data. B. The sample mean is a random variable. C. The sampling error is 0.8 years. 25. Which of the following is least likely an assumption underlying technical analysis? A. Stock prices move in trends that persist for long periods of time. B. Shifts in supply and demand can be observed in market price behavior. C. Supply is driven by the rational behavior of firms offering their shares, while demand is driven by the irrational behavior of investors. 26. if Stock X has a standard deviation of returns of 18.9% and Stock Y has a standard deviation of returns equal to 14.73% and returns on the stocks are perfectly positively correlated, the standard deviation of an equally weighted portfolio of the two is: A. 10.25%. B. 14.67%. C. 16.82%.

27. Over a sample period, an investor gathers the following data about three mutual funds.

Based solely on the Sharpe measure, an investor would prefer mutual fund: A. P. B. Q C. R 28. An investment manager wants to select three analysts from a group of six analysts to receive first-, second-, and third-place awards for outstanding performance. In how many ways can the investment manager make the three awards? A. 20 ways. B. 54 ways. C. 120 ways. 29. Which of the following statements about the central limit theorem is lease likely correct? The: A. standard deviation of the sample mean is called the standard error of the sample mean. B. standard error of the sample mean can be estimated by dividing the population standard deviation by n − 1 . C. sample means for large sample sizes will have an approximately normal distribution regardless of the distribution of the underlying population. 30.An investment analyst takes a random sample of 100 aggressive equity funds and calculates the average beta as 1.7. The sample betas have a standard deviation of 0.4. Using a 95% confidence interval and a z-statistic, which of the following statements about the confidence interval and its interpretation is most accurate? The analyst can be confident at the 95% level that the interval: A. 1.580 to 1.820 includes the mean of the population beta. B. 1.622 to 1.778 includes the mean of the population beta. C. 1.634 to 1.766 includes the mean of the population beta. 31. Which is the correct test statistic for a test of the null hypothesis

A. F-statistic. B. t-statistic. C. Chi-square statistic.

32. Which of the following regarding technical analysts is least likely correct? Technical analysts: A. do not rely on getting information first. B. depend heavily on accounting information. C. attempt to determine when to buy, not why investors are buying. The following 12 questions relate to Economics. (18 minutes) 33. To benefit from price discrimination, a monopolist least likely needs to have: A. a higher-quality product at a premium price and a lower-quality alternative. B. a way to prevent reselling between types of consumers. C. two identifiable groups of consumers with different price elasticities of demand for the product. 34. Automatic stabilizers are government programs that tend to: A. automatically increase tax collections during a recession. B. reduce interest rates, thus stimulating aggregate demand. C. change the government budget balance in a manner counter-cyclical to economic growth without legislative action. 35. Under monopolistic competition, a firm is expending the optimal amount of resources on innovation if the: A. marginal cost of innovation equals the marginal revenue of additional innovation. B. marginal revenue of additional innovation exceeds the marginal cost of innovation. C. firm's managers believe the amount is optimal, since no quantitative criterion exists. 36. Notasled, Inc., a producer of cafeteria trays, operates in a perfectly competitive market. If the market price of a cafeteria tray is $3.25, Notasled will increase production so long as: A. marginal revenue is positive. B. marginal cost is less than $3.25. C. marginal revenue is greater than $3.25. 37. Utilitarianism, in reference to economic fairness, refers to the idea that: A. the greatest good occurs when wealth is equalized. B. equality of opportunity is an important measure of economic fairness, C. economic efficiency is greatest when the marginal social cost is just equal to the marginal social benefit. 38. Alice Costain operates a convenience store in the financial district of London. If Costain increases the price of an ice cream bar from #1.00 to #1.15, weekly sales decrease from 200 units to 180 units. Which of the following statements is most accurate? A. The price elasticity of demand is -0.66. B. The price increase will lead to an increase in total value of ice cream bars sold. C. Since the price elasticity of demand is less than one, the demand for ice cream bars is elastic.

39. Which of the following is least likely a condition that characterizes monopolistic competition? A. Large number of independent sellers. B. Each produces a differentiated product. C. Producers face horizontal demand curves. 40. The cash price consumers pay for a product is most likely to increase as the result of a: A. government subsidy to product producers. B. new law imposing high penalties for sales of the product. C. new law imposing high penalties for consumption of the product 41. Which of the following events is most likely to increase short-run aggregate supply (shift the curve to the right)? A. Inflation that results in an increase in goods prices. B. High unemployment puts downward pressure on money wages. C. An increase in government spending intended to increase real output. 42. The combination of currency in circulation, banks' reserve deposits at the central bank, and coins issued by the Treasury is referred to as the: A. monetary base. B. M 1 money supply. C. Teal money supply. 43. For which of the following natural resources does the appropriate model indicate that the price is determined by demand rather than by supply? A. Oil. B. Gold. C. Farm land. 44. In the short run, the average product of labor. A. is increasing when the total product of labor is increasing. B. is at a maximum where it intersects the marginal product of labor curve. C. is upward-sloping if the firm is experiencing diminishing marginal returns to labor. The following 24 questions relate to Financial Reporting and Analysis.(36 minutes) 45. When the Rivers Company filed its corporate tax returns for the first quarter of the current year, it owed a total of $6.7 million in corporate taxes. Rivers paid $4.4 million of the tax bill, but still owes $2.3 million. It also received $478,000 in the second quarter as a down payment towards $942,000 in custom-built products to be delivered in the third quarter. Its financial accounts for the second quarter most likely show the $2.3 million and the $478,000 as: $2.3 m illion $478.000 A. Income tax payable Unearned revenue B. Income tax payable Accrued revenue C. Deferred tax liability Accrued revenue

46. Which of the following statements about the appropriate revenue recognition method to use, given the status of completion of the earning process and assurance of payment, is least likely accurate? Use the: A. completed contract method when the firm cannot reliably estimate the outcome of the project. B. percentage-of-completion method when ultimate payment is reasonably assured and revenue and costs can be reliably estimated. C. installment method when collectability of payments for a sale can be reasonably estimated. 47. An analyst gathered the following data about a company: " Collections from customers are $5,000. " Depreciation is $800. " Cash expenses (including taxes) are $2,000. " Tax rate = 30%. " Net cash increased by $1,000. If inventory increases over the period by $800, cash flow from operations equals: A. $1,600. B. $2,400. C. $3,000. 48. Which of the following statements about the indirect method of calculating cash flow from operations is least accurate? A. Depreciation is added back to net income because it is an expense not requiring cash. B. No adjustment is needed to account for changes in accounts receivable because no cash is involved. C. No adjustment is needed for the payment of taxes because the tax payment is already in net income. 49. A company has debt equal to $35 million and total assets of $105 million. This company makes a commitment to acquire raw materials over the next three years by making annual purchases of $5 million that have a present value of $12 million. For purposes of analysis, the best estimate of the debt-to-equity ratio after the appropriate analyst adjustment of the balance sheet is: A. 0.343. B. 0.573. C. 0.671. 50. Which of the following statements about the LIFO and FIFO inventory accounting methods is least accurate? A. For purposes of inventory analysis, FIFO is preferred over LIFO. B. FIFO cost of goods sold= LIFO cost of goods sold-change in LIFO reserve. C. In periods of declining prices, LIFO debt-to-equity ratios are higher than FIFO debt-to-equity ratios. 51. Which of the following is most likely presented on a common-size balance sheet or

common-size income statement? A. Total asset turnover. B. Operating profit margin. C. Return on common equity. 52. An analyst gathers the following data about a company: " The company had 1 million shares of common stock outstanding for the entire year. " The company's beginning stock price was $50, its ending price was S70, and its average price was $60. " The company had 100,000 warrants outstanding for the entire year. Each warrant allows the holder to buy one share of common stock at $50 per share. How many shares of common stock should the company use in computing its diluted earnings pcr share? A. 1,100,000. B. 1,083,333. C. 1,016,667. 53.Under U.S. GAAP, land owned by the firm is most likely to be reported on the balance sheet at: A. historical cost. B. fair market value minus selling costs. C. historical cost less accumulated depreciation. 54. Which of the following items is least likely to contain details about various accruals, adjustments, balances, and management assumptions? A. Income statement. B. Supplementary schedules. C. Discussion and analysis by management. 55. A firm presents the following income statement, which complies with the standards under which it must report: 20,535 Sales Cost of goods sold 14,525 Operating expenses 2,530 Operating income 3,480 1,220 Income taxes Income from continuing operations 2,260 Extraordinary items, net of tax (525) Net income 1,735 Based on the differences between U.S. GAAP and International Financial Reporting Standards, this firm: A. must report any dividends received as operating cash flows. B. is permitted to recognize upward revaluations of long-lived assets. C. cannot have used LIFO as its inventory cost assumption.

56. A permanent difference in pretax and taxable income is least likely to result when: A. tax-exempt interest is received. B. the installment sales method is used. C. premiums are paid on life insurance of key employees. 57. Which of the following statements about the financial implications of capitalization versus expensing is least accurate? A. Capitalizing will result in smoother reported income than expensing, and expensing will result in higher leverage ratios than capitalizing. B. Cash flow from operations is not affected by the capitalizing versus expensing decision, but the investing and financing cash flows depend on the method the firm chooses. C. Total cash flows are the same regardless of whether a firm chooses capitalizing or expensing, but profitability is different depending on the method that the firm chooses. 58.If a company is investing in new assets, using straight-line depreciation instead of accelerated depreciation in the early years of an asset's life will lead to lower: A. assets and higher net income. B. turnover ratios and higher assets. C. return on equity and higher cash flow 59. From the lessee's perspective, compared to an operating lease, a finance lease results in: A. higher asset turnover. B. a higher debt-to-equity ratio. C. lower operating cash flow. 60. A firm needs to adjust the financial statements for a change in the tax rate. Taxable income is $80,000 and pretax income is $100,000. The current tax rate is 50%, and the new tax rate is 40%. The difference in taxes payable between the two rates is closest to: A. $8,000. B. $9,000. C. $10,000. 61. While motive and opportunity both can lead to accounting fraud, a third important contributing factor is: A. poor financial controls. B. a justification of the fraudulent actions. C. pressure to meet earnings expectations. 62. Which of the following items for a financial services company is lease likely to be considered an operating item on the income statement? A. Interest income. B. Financing expenses. C. Income tax expense.

63. Three firms in the same industry show the following ratios for the moss recent year after all proper adjustments have been made for dilutive securities and differences in financial reporting standards:

Based on this information, the better financial performer of these two firms: A. is Company Y because it has the highest earnings per share. B. is Company Z because it generated the most operating cash flow per share. C. cannot be determined because per-share ratios arc not comparable. 64.Granite, Inc. owns a machine salvage value of $2.0 million. with a carrying value of $3.0 million and a The present value of the machine's future cash flows is $1.7 million. The asset is permanently impaired. Granite should: A. immediately write down the machine to its salvage value. B. immediately write down the machine to its present value of future cash flows. C. write down the machine to its present value of future cash flows as soon as it is depreciated down to salvage value. 65. Yamaska Mining issued a 5-year, $50 million face, 6% semiannual bond when market interest rates were 7%. The market yield of the bonds was 8% at the beginning of the next year. What is the initial balance sheet liability, and what is the interest expense that the company should report for the first half of the second year of the bond's life (the third semiannual period)? Initial liability Interest expense, first half of year 2 A. $47,920,849 $1,689,853 B. $4 7,920,849 $1,750,000 C. $5 0,000,000 $1,500,000 66. A company's financial statement reads: Current assets $2,000 Fixed assets 3,000 Debt 3,000 Equity 2,000 The company sold $500 in receivables, but a review of the footnotes to the financial statements reveals that the credit risk was not transferred on the sale. Which of the following adjustments is an analyst reviewing the company least likely to make? A. Decrease equity by $500. B. Increase debt (short-term liabilities) by $500. C. Increase current assets (accounts receivable) by $500.

67. In a period of rising prices and stable or increasing inventory quantities, use of the last-in, first-out inventory cost flow assumption is least likely to result in: A. lower net income than under first-in, first-out. B. higher cash flows than under first-in, first-out. C. higher income taxes than under first-in, first-out. 68. A firm pays accrued wages with cash. Assuming a current ratio greater than one and a quick ratio that is less than one, what will be the impact on the current ratio and the quick ratio? A. Both ratios will remain the same. B. The current ratio will increase and the quick ratio will decrease. C. The current ratio will decrease and the quick ratio will increase. 69. Responsibilities of a board of directors' nominations committee are least likely to include: A. recruiting qualified members to the board. B. selecting an external auditor for the company. C. preparing a succession plan for the company's executive management. 70. The following data applies to LeVeit Company: " LeVeit has a target debt-to-equity ratio of 0.5. " LeVeit's bonds are currently yielding 10%. " LeVeit is a constant growth (5%) firm that just paid a dividend of $3.00. " LeVeit's stock sells for $31.50 per share. " The company's marginal tax rate is 40%. The company's weighted after-tax cost of capital is closest to; A. 10.5%. B. 11.0%. C. 12.0%. 71. Timely Taxis, Ltd. has signed a long-term lease for 20 underground parking spots at $150 each per month for its fleet of taxis. The firm currently has 18 taxis in operation and is performing an NPV analysis on the purchase of a 19th taxi. The cost of parking for the 19th taxi is best described as a(n): A. sunk cost. B. opportunity cost. C. incremental cost. 72. If a firm uses the weighted average cost of capital (WACC) to discount cash flows of higher than average risk projects, which one of the following will most likely occur? A. Project NPVs will be understated. B. The firm will reject profitable projects. C. The overall risk of the firm's investments will rise overtime. 73. Michael Robe, CFA, is a junior analyst for a large financial institution and has been preparing an analysis of United Mines, a coal mining company located in the United States. As part of his

research, he examines the company's proxy voting and rules and practices. Which of the following policies would be considered the most restrictive to shareholders? A. Shareholders of United Mines are allowed to cast confidential votes but must be present to do so. B. Corporate policy prohibits the use of share blocking prior to United Mines' annual meetings. C. United Mines requires shareowner attendance to vote but coordinates the timing of its annual meeting to be held on the same day as other companies in the region. 74. Wreathfield, Inc. is choosing between two mutually exclusive projects.The cash flows for the two projects are below. The firm has a cost of capital of 12%, and the risk of the projects is equivalent to the average risk of the firm.

Wreathfield should accept: A. Project A. B. Project B. C. Neither project A nor project B. 75. To finance a proposed project, Youngham Corporation would need to issue ￡25 million in common equity. Youngham would receive ￡23 million in net proceeds from the equity issuance. When analyzing the project, analysts at Youngham should: A. not consider the flotation cost because it is a sunk cost. B. add the ￡2 million flotation cost to the project's initial cash outflow. C. increase the cost of equity capital to account for the 8% flotation cost. 76. If firms Acme and Butler have the same amount of sales and equal quick ratios, but Acme's receivables turnover is higher, it is most likely that: A. Butler has better liquidity than Acme. B. Butler has a lower cash ratio than Acme. C. Acme's average days of receivables is higher than Butler's. 77. Two projects being considered by a firm are mutually exclusive and have the following projected cash flows:

The crossover rate of the two projects' NPV profiles is 9%. What is the initial cash flow for Project B? A. -$4.22. B. -$4.51. C. -$5.70. 78. A firm's optimal capital budget can be found by moving along its investment opportunity schedule until: A. it exhausts its capital budget. B. average project return is equal to average cost of capital. C. the next project's return is less than the marginal cost of capital. 79. Which of the following equations is least accurate?

A. B. Total risk = unsystematic risk + nondiversifiable risk, C. Two-stock portfolio standard deviation =

80. Which of the following is least likely an implication of risk aversion for the investment process? A. The capital market line (CML) is upward-sloping. B. The promised yield on AAA rated bonds is higher than on A rated bonds. C. A positive relationship exists between expected return and expected risk. 81. Which of the following possible portfolios is least likely to lie on the efficient frontier?

A.Portfolio X B.Portfolio Y. C.Portfolio Z. 82. An investor gathers the following information about two stocks:

If the investor plans to invest $60,000 in Security I and $40,000 in Security 2, the expected return

on the two-asset portfolio is closest to: A.5.8%. B.8.7%. C.12.2% 83. When the underlying assumption of zero transactions costs is relaxed, the CAPRI produces: A. a capital market line that is no longer straight. B. several different security market lines. C. a band of returns instead of a security market line. 84. An analyst gathered the following data about three stocks:

If the risk-free rate is 8%, and the market risk premium is 7%, the analyst is least likely to recommend buying: A. Stock A. B. Stock B. C. Stock C. The following 12 questions relate to Equity Investments. (18 minutes) 85.Which of the following statements regarding primary and secondary capital markets is least accurate? A. An underwriter provides origination, risk-bearing, and distribution services to an issuer. B. The secondary market is where new shares are issued by firms whose shares are already publicly traded. C. In call markets, bids and offers are accumulated and trades take place periodically at prices that clear the market. 86. Martin Johnson, CFA, is a stock analyst at High Mountain Investments. He uses several methods and a variety of ratios to estimate the values of equity securities. Three ratios that he commonly uses are the price- to-book value (P/BV) ratio, the price-to-earnings (P/E) ratio, and the price-to-sales (P/S) ratio. Johnson recognizes that there are drawbacks associated with each of these measures. The two drawbacks that are of most concern to his current analysis are: " Drawback #l: Failure to capture differences in cost structures across companies. " Drawback #2: Inflation and technological change may make this ratio difficult to compare across firms. Which of the following ratios are most susceptible to each of these drawbacks? Drawback #1 Drawback #2 A. P/S ratio P/BV ratio B. P/BV ratio P/E ratio

C. P/E ratio

P/S ratio

87. Which of the following results of event studies about market anomalies would most likely be a reason to reject the semi-strong form of the efficient market hypothesis? Tests showing that: A. stock splits do not result in short-run or long-run impacts on security returns. B. pricing adjustments for initial public offerings occur within one day of the offering. C. abnormal returns can be earned over a period of days after a stock is listed on a national exchange. 88.Which of the following is least likely an advantage of using a price-to-sales (P/S) ratio for valuation purposes? A. Sales growth is the best measure of value creation. B. P/S ratios are more stable than price-to-earnings ratios. C. P/S ratios are positive even when price-to-book and price-to-earnings ratios are not. 89. An analyst gathered the following data about a company: " A historical earnings retention rate of 60% that is projected to continue into the future. " A sustainable return on equity of 10%. " A beta of 1.0. " The nominal risk-free rate is 5%. " The expected market return is 10%. If next year's EPS is $2 per share, what value would be placed on this stock? A. $20.00. B. $30.50. C. $35.45. 90. An analyst makes the following predictions for the coming year: " A stock's earnings per share will be $4. " The dividend payout will be 55%. " Return on equity will be 15%. " The required rate of return on the market will be 12%.Based on these estimates, the value of the stock is closest to: A. $32. B. $37. C. $42. 91. The top-down approach to security selection is least likely to include: A. analysis of the global and national economic environment. B. determination of the suitability of securities for an investor's portfolio based on the investor's requirements and constraints. C. identification of the industry effects of changes in demographics,lifestyles, technology, and politics and regulation. 92.Which of the following is a limitation of arbitrage in correcting anomalies?

A. Arbitrageurs are sophisticated traders, but too few of them exist to contribute significantly to the correction of market anomalies. B. Arbitrage is not always riskless, so trading based on information that a security is undervalued or overvalued does not ensure a profit. C. There is no limitation of arbitrage in correcting anomalies because arbitrageurs will use their capital to pursue any trade that exploits a mispricing. 93. Which of the following statements about short selling is least accurate? A. A short seller is required to set up a margin account. B. A short sale involves securities the investor does not own. C. A short seller loses if the price of the stock sold short decreases. 94. Compared to an index of 100 U.S. exchange-traded stocks, an index of 100 U.S. government and corporate bonds will most likely: A. reflect more timely price data. B. be more difficult to build and maintain. C. have less turnover among the securities in the index. 95. Beth Knight, CFA, and David Royal, CFA, are independently analyzing the value of Bishop, Inc. stock. Bishop paid a dividend of $1 last year. Knight expects the dividend to grow by 10% in each of the next three years, after which it will grow at a constant rate of 4% per year. Royal also expects a temporary growth rate of 10% followed by a constant growth rate of 4%, but he expects the supernormal growth to last for only two years. Knight estimates that the required return on Bishop stock is 9%, but Royal believes the required return is 10%. Royal's valuation of Bishop stock is approximately: A. equal to Knight's valuation. B. $5 less than Knight's valuation. C. $5 greater than Knight's valuation. 96. Which of the following statements regarding growth companies and growth stocks is least accurate? A. A growth stock does not have to be the stock of a growth company. B. Management of a growth company has the ability to consistently choose projects with above-average returns. C. If growth opportunities are already incorporated into its price, a growth company's stock will earn above-average returns. The following 14 questions relate to Fixed income. (21 minutes) 97. Consider the following Treasury spot rates expressed as bond equivalent yields:

If a Treasury note with two years remaining to maturity has a 5% semiannual coupon and is priced at $1,008, the note is: A. overpriced. B. underpriced. C. correctly priced. 98. Which of the following is an advantage of a callable bond (compared to an identical option-free bond) to an investor? A. Less reinvestment risk. B. Higher yield. C. More convexity. 99. An investor is considering the purchase of Security X, which matures in ten years and has a par value of $1,000. During the first five years, X has a 6% coupon with quarterly payments. During the remaining five years, X has an 8% coupon with quarterly payments. The face value is paid at maturity. A second 10-year security, Security Z, has a 6% semiannual coupon and is selling at par. Assuming that X has the same bond equivalent yield as Z, the price of Security X is closest to: A. $943. B. $1,036. C. $1,067. 100. A bond has a yield-to-maturity of 8%. If its effective duration is 7.41 years, a 25 basis point increase in rates will result in an approximate: A. 7.41% decrease in price. B. 1.85% decrease in price. C. 12.85% increase in price. 101. The full price of a bond: A. is the price that includes accrued interest B. is also known as the "clean" price. C. includes commissions and taxes. 102. Which statement regarding sinking funds is least likely correct? A. Sinking fund provisions require the retirement of a portion of a bond issue in specified amounts prior to the maturity date. B. Sinking fund redemption can be accomplished by making cash payment to the trustee who will

then retire the required proportion of the bonds. C. If rates have declined since the bond was issued, companies are likely to choose to retire a proportion of the debt through the delivery of securities. 103. The bank discount yield for a $1,000 face value U.S. Treasury bill (T-bill) trading at $983.10 with 160 days to maturity is closest to: A. 1.69%. B. 1.72%. C. 3.80%. 104. Consider a 25-year, ＄1,000 par semiannual-pay bond with a 7.5% coupon and a 9.25% YTM. Based on a yield change of 50 basis points, the effective duration of the bond is closest to: A. 8.73. B. 10.03. C. 12.50. 105. For a bond currently priced at $1,018 with an effective duration of 7.48, if the market yield moved down 75 basis points, the new price would be approximately: A. $961. B. $1,075. C. $1,094. 106. Consider a $1,000-face value, 12-year, 8%, semiannual coupon bond with a YTM of 10.45%. The change in value for a decrease in yield of 38 basis points is: A. $21.18. B. $22.76. C. $23.06. 107. Which of the following statements about Treasury Inflation Protected Securities (TIPS) is correct? A. Inflation adjustments are made annually. B. Yields on TIPS are effectively real rates of interest. C. The coupon rate adjusts upward for inflation. 108. The minimum amount of data required to calculate the implied forward rate for three years beginning three years from now is: A. the 3-year and 6-year spot rates. B. spot rates at I-year intervals for the 6-year period. C. spot rates at intervals for the 6-year period. 32. Consider three bonds that are identical in all features except those shown in the following table:

The bond most likely to have the largest spread to a comparable Treasury security is: A. Bond A. B. Bond B. C. Bond C. 110. A 3-year, 6% coupon, semiannual-pay note has a yield to maturity of 5.5%. If an investor holds this note to maturity and cams a 4.5% return on reinvested coupon income, his realized yield on the note is closest to: A. 5.46%. B. 5.57%. C. 5.68%. The following 6 questions relate to Derivatives. (9 minutes) 111. Janet Powers writes a covered call on a stock she owns, Billings, Inc. The current price of the stock is $45, and Powers writes the call at a strike price of $50. The call option premium is $3.50. Which of the following statements regarding Powers's covered call strategy is most accurate? A. Powers is trading the stock's upside potential in exchange for current income. B. The price of the stock must rise to at least $50 before Powers will lose money. C. Powers is eliminating downside risk at the same time she is increasing her current income with the covered call strategy. 112. A portfolio manager holds a long position on a forward contract on $20 million face value 80-day T-bills priced at 1.85% on a discount basis.At settlement, 80-day T -bills are priced at 1.95% on a discount basis. If the contract settles in cash, the amount the portfolio manager will pay or receive at settlement is closest to: A. pay $4,500. B. receive $4,500. C. pay $20,000. 113. When comparing the values of two otherwise identical in-the-money options on a stock that pays no dividend, it is most likely that a(n): A. European call with a lower exercise price will have less value than a European call with a higher exercise price. B. American put with a lower exercise price will have more value than an American put with a higher exercise price. C. American call with a shorter time to expiration will have less value than an American call with a longer time to expiration.

114. An analyst determines that a portfolio with a 35% weight in Investment A and a 65% weight in Investment B will have a standard deviation of returns equal to zero. " Investment A has an expected return of 8%. " Investment B has a standard deviation of returns of 7.1% and a covariance with the market of 0.0029. " The risk-free rate is 5% and the market risk premium is 7%. If no arbitrage opportunities are available, the expected rate of return on the combined portfolio is closest to: A. 5% B. 6% C. 7% 115. The time value of an option is most accurately described as: A. being greatest at the option's expiration date. B. the entire premium for an out-of-the-money option. C. the amount by which the intrinsic value exceeds the option premium. 116. An investor long a forward position in a Treasury billconcerned about: is mostlikely to be A. default risk. B. delivery options the short has. C. paying more than expected because the price of the bill rises. The following 4 questions relate to Alternative Investments. (6 minutes) 117. Which of the following similarities between distressed security investing and venture capital investing is least likely correct? Both: A. asset classes are illiquid. B. assets have reasonably short expected investment horizons. C. assets may require significant involvement by investors in order to be successful. 118. An open-end fund has the following holdings at the end of the business day: " 500,000 shares of A valued at $20 each. " 100,000 shares of B valued at $10 each. " 200,000 shares of C valued at $15 each. " $1,000,000 in cash. " The fund currently has one million shares outstanding. The fund's net asset value per share is: A. $13. B. $14. C. $15. 119. An investor buys two gold futures contracts at $350 per ounce. Each gold futures contract is

based on 5,000 ounces of gold. At the same time he collateralizes his position by buying the required amount of Treasury bills yielding 3%. Two months later the price of gold is $347.40 and the T -bills mature. The net gain or loss on the value of the investor's collateralized futures position is closest to: A. $8,500 loss. B. $26,000 loss. C. $34,500 gain. 120. A highly risk-averse investor with a long time horizon who worries about inflation is most likely to invest in: A. long-term corporate bonds. B. market-neutral hedge funds. C. commingled real estate funds.