Question 1 - 100870 DCL Hedge Funds (“DCL”) establishes a collateralized futures position consisting of a 120-day T-bill and 30-day natural gas futures. Assuming there is no change in the natural gas spot price over time, and assuming the market is in backwardation, which of the following statements is the most accurate description of the roll yield and DCL’s cash flow: A) positive roll yield and positive cash flow. B) negative roll yield and positive cash flow. C) negative roll yield and negative cash flow. -------------------------------------------------------------------------------- Question 2 - 104003 A private equity investor is considering making an investment in a venture capital firm. The investor values the firm at $1.5 million following a $300,000 capital investment by the investor. The venture capital firm’s pre-money (PRE) valuation and the investor’s proportional ownership, respectively, are: PRE valuation Ownership proportion A) $1.5 million 25% B) $1.5 million 20% C) $1.2 million 20% -------------------------------------------------------------------------------- Question 3 - 104066 An analyst makes the following statements on the risk and costs of private equity investments: Statement 1: Committed capital is the initial capital in a private equity fund to obtain first round financing. As committed capital is used up, investors are required to make additional commitments to finance firm projects and expansion. Statement 2: The J-Curve refers to the risk pattern in a private equity investment over time. Risk in private equity investments initially typically declines as more capital is drawn down but increases closer to exit since exit timing and values are difficult to predict. With respect to the analyst’s statements: A) both are incorrect. B) both are correct. C) only one is correct. -------------------------------------------------------------------------------- Question 4 - 88744 Which of the following is most accurate in describing the betas of emerging market arbitrage hedge funds? These funds have: A) high betas in up markets and low betas in down markets. B) high betas in both up and down markets. C) low betas in up markets and positive betas in down markets. -------------------------------------------------------------------------------- Question 5 - 104117 A private equity investor calculates a discount rate of 40% for valuing a company. The investor, however, believes that there is a 20% chance that the company will fail in any one year. The most appropriate adjusted discount rate the investor should use is: A) 48.0%. B) 75.0%. C) 50.0%. -------------------------------------------------------------------------------- Question 6 - 88577 Assume that a property that you are evaluating has a gross annual income equal to $230,000, and that comparable properties are selling for 10.5 times gross income. The gross income multiplier approach provides a market value for this property that is closest to: A) $2,587,500. B) $2,415,000. C) $2,190,476. -------------------------------------------------------------------------------- Question 7 - 104129 When calculating the cash flows of a leveraged buyout investment from net income, the effect on cash flows of reinvested depreciation and a decrease in net working capital (NWC), respectively, is: Reinvested depreciation Decrease in NWC A) Decrease Increase B) Decrease Decrease C) Increase Decrease -------------------------------------------------------------------------------- Question 8 - 104113 A private equity firm makes a $10 million investment in a portfolio company and calculates that the firm’s investors should hold 1,000,000 shares at a price of $15.00 per share using the IRR approach. The founders of a portfolio company currently hold 300,000 shares. The appropriate post-money (POST) valuation is: A) $19.5 million. B) $15 million. C) $13 million. -------------------------------------------------------------------------------- Question 9 - 103997 An analyst reads the following comment in the business section of a national newspaper: “Leveraged buyout investments (LBOs) realize their return at exit by terminating the fund. Projecting the terminal value for an LBO can be done either through a multiple of sales or earnings or through discounting free cash flow.” The comment on estimating an LBO’s terminal value from sales or earnings multiples and from discounting free cash flow, respectively, is: Sales or earnings multiple Discounting free cash flow A) Incorrect Correct B) Correct Incorrect C) Correct Correct -------------------------------------------------------------------------------- Question 10 - 88535 A real estate investment is expected to have cash flows after taxes in each of the next four years equal to GBP90,000, GBP55,000, GBP35,000, and GBP25,000, respectively. The initial equity investment in this property is GBP200,000 and the equity reversion after taxes (ERAT) at the end of year-four is estimated to be GBP100,000. Assuming an after tax return on equity of 8.5%, the net present value (NPV) and internal rate of return (IRR) for this investment is closest to: NPV IRR A) GBP45,376 16% B) GBP47,268 18% C) GBP41,399 15% -------------------------------------------------------------------------------- Question 11 - 103995 In a private conversation with his best friend, Harry Veeslay, CFA, makes the following statements: Statement 1: Private equity (PE) firms generally focus on short-term results. For example, they frequently use restructuring of acquired companies in an effort to quickly divest them for a profit. Statement 2: PE firms also want to ensure that the interests of portfolio company managers and of limited partners are aligned. For example, they frequently tie manager compensation to firm performance and include tag-along, drag-along clauses to give management a stake in the firm under certain trigger events. With regard to Veeslay’s statements: A) both are correct. B) only one is correct. C) both are incorrect. -------------------------------------------------------------------------------- Question 12 - 104064 Which of the following lists correctly identifies exit routes in private equity, arranged from lowest to the highest exit values? A) Liquidation, secondary market sale, IPO. B) Initial public offering (IPO), management buyout, secondary market sale. C) Management buyout, liquidation, IPO. -------------------------------------------------------------------------------- Question 13 - 88562 Consider a real estate investment that is 35% debt financed and 65% equity financed. The total mortgage cost for this property is 10% and the cost of equity financing is at a recent high of 13%. The capitalization rate for this investment as determined using the band-of-investments method is closest to: A) 11.80%. B) 11.95%. C) 12.85%. -------------------------------------------------------------------------------- Question 14 - 104088 An analyst is considering the performance of two private equity funds, Delta and Kappa. Performance of private equity fund Delta and Kappa Delta Kappa DPI 2.0 0.0 RVPI 0.0 2.0 TVPI 2.0 2.0 The most appropriate conclusion an analyst can draw from the table is that: A) Delta has yet to turn a profit. B) Kappa may be a younger fund than Delta. C) Kappa has distributed $2.0 for every dollar invested. -------------------------------------------------------------------------------- Question 15 - 88703 Which of the following most accurately describes the risks for fixed income hedge funds? The largest risk factor is: A) interest rate risk, although during the 1990s interest rates were fairly stable. B) a widening of credit spreads, although during the 1990s credit spreads were fairly volatile. C) a widening of credit spreads, although during the 1990s credit spreads were fairly stable. -------------------------------------------------------------------------------- Question 16 - 100879 RSM is an established Canadian biotech firm with a significant equity exposure in its investment portfolio. The firm’s CFO, Eileen Jurczak is looking to diversify RSM’s investments by adding other asset classes to the portfolio mix but is unsure which assets to include. She consults Mike Thompson, CFA, the investment portfolio’s portfolio manager, who recommends adding commodity futures. Jurczak is somewhat familiar with commodity futures as a hedging tool but is unsure why they would be considered an asset class. Thompson responds by making the following statements: Statement 1: The commodities underlying a commodity futures contract are considered assets even though they cannot generate cash flows. Statement 2: Commodity futures, on the other hand, have the potential to generate cash flows, both negative and positive. This is the main reason why they are considered an asset class. With respect to the above statements, Thompson is: A) correct on only one statement. B) correct on both statements. C) incorrect on both statements. -------------------------------------------------------------------------------- Question 17 - 88533 A real estate investment is expected to have cash flows after taxes in each of the next three years equal to CAD70,000, CAD50,000, and CAD65,000, respectively. The initial equity investment in this property is CAD600,000 and the equity reversion after taxes (ERAT) at the end of year-three is estimated to be CAD300,000. Assuming an after tax return on equity of 8 percent, the net present value (NPV) for this investment is closest to: A) -CAD238,150. B) -CAD202,569. C) CAD202,569. -------------------------------------------------------------------------------- Question 18 - 100866 Minnie Adams, CFA, and Cornelia Peters, CFA, are two sell side analysts working for a large London-based investment firm. They are engaged in a discussion on the recent surge in oil prices. Adams states: “Airlines are the unfortunate victims of high oil prices. To mitigate the risk of further price increases, they frequently use commodity futures, driving futures prices above the spot price. I recall that this is referred to as backwardation.” Peters adds: “Airlines are often not the only users of commodity futures. High oil prices attract speculators with long positions in oil futures for their portfolio. This would likely decrease the level of backwardation.” With regard to their statements: A) only Adams’ is correct. B) both are incorrect. C) only Peters’ is correct. -------------------------------------------------------------------------------- Question 19 - 103992 The Jefferson Group is a large private equity firm managing a multi-billion dollar portfolio. Which of the following is the least likely source of value-added the Jefferson Group would provide to its portfolio companies than a public firm would? A) Reengineering the portfolio companies. B) Obtaining cheap credit. C) Aligning the interests between private equity owners and limited partners. -------------------------------------------------------------------------------- Question 20 - 104135 A cash sweep in an LBO transaction is the: A) excess profit paid out to the general partner. B) excess cash used to pay down debt. C) excess profit paid out to the limited partners.
gotta run to a meeting so will finish that up later… 1) A 2) C 3) A 4) B 5) A (guess between A and C, my formula seems to be off) 6) B 7) C 8) A 9) B 10) B 11) B 12) A 13) 14) B 15) C 16) 17) 18) 19) 20) B
Question 1 - 100870 A) positive roll yield and positive cash flow. Market is in backwardation. So Futures Price < Spot Price. You deposited X money in to your margin account expecting the Futures Price will be the one at settlement. Since the Spot price is lower – you have a positive roll yield. Hence you also have a positive cash flow. -------------------------------------------------------------------------------- Question 2 - 104003 A) $1.5 million 25% PRE=1.5 Million Ownership = 0.3 / (1.5 -0.3) = 25% -------------------------------------------------------------------------------- Question 3 - 104066 C) only one is correct. C) Statement 1 is Incorrect. Statement 2 is Correct -------------------------------------------------------------------------------- Question 4 - 88744 C) low betas in up markets and positive betas in down markets. Guess here… -------------------------------------------------------------------------------- Question 5 - 104117 B) 75.0%. (1+0.4)/(1-0.2) = 1.75 B 75% -------------------------------------------------------------------------------- Question 6 - 88577 B) $2,415,000. -------------------------------------------------------------------------------- Question 7 - 104129 A) Decrease Increase -------------------------------------------------------------------------------- Question 8 - 104113 A) $19.5 million. Total no. of Shares = 1.3 Million * 15 = 19.5 Mill -------------------------------------------------------------------------------- Question 9 - 103997 A) Incorrect Correct -------------------------------------------------------------------------------- Question 10 - 88535 B) GBP47,268 18% -------------------------------------------------------------------------------- Question 11 - 103995 B) only one is correct. Statement 2 is correct. Statement 1 is INCORRECT -------------------------------------------------------------------------------- Question 12 - 104064 A) Liquidation, secondary market sale, IPO. -------------------------------------------------------------------------------- Question 13 - 88562 B) 11.95%. -------------------------------------------------------------------------------- Question 14 - 104088 The most appropriate conclusion an analyst can draw from the table is that: B) Kappa may be a younger fund than Delta. -------------------------------------------------------------------------------- Question 15 - 88703 C) a widening of credit spreads, although during the 1990s credit spreads were fairly stable. -------------------------------------------------------------------------------- Question 16 - 100879 C) incorrect on both statements. -------------------------------------------------------------------------------- Question 17 - 88533 B) -CAD202,569. -------------------------------------------------------------------------------- Question 18 - 100866 C) only Peters’ is correct. -------------------------------------------------------------------------------- Question 19 - 103992 C) Aligning the interests between private equity owners and limited partners. -------------------------------------------------------------------------------- Question 20 - 104135 B) excess cash used to pay down debt.
Q1.A Q2.C Q3.A Q4.C Q5.B Q6.B Q7.A Q8.A Q9.C Q10.B Q11.B Q12.A Q13.B Q14.B Q15.C Q16.A Q17.B Q18.B Q19.C Q20.B
- C 2) A 3) A 4) B 5) C 6) B 7) B 8) B 9) C 10) B 11) B 12) A 13) B 14) A 15) C 16) A 17) B 18) C 19) B 20) A I haven’t got to PE or HF yet
Question 1 - #100870 Your answer: A was correct! We know that the closer a futures contract is to expiration, the more it converges to the spot price. Also, given that the market is in backwardation, long-term futures prices are lower than short-term contract prices. A backwardated price curve produces a positive roll yield since each successive futures contract is refinanced (¡°rolled over¡±) at a lower price than the maturing contract, resulting in a positive cash flow (profit) to DCL. This question tested from Session 13, Reading 49, LOS b. -------------------------------------------------------------------------------- Question 2 - #104003 Your answer: C was correct! The pre-money valuation (PRE) is simply the venture capital firm¡¯s post-money valuation (POST) less the capital investment (INV): PRE = POST − INV = $1.5 million − $300,000 = $1.2 million. The ownership proportion is the investor¡¯s fractional ownership of the firm value after the capital infusion: Ownership proportion = INV/POST = $300,000 / $1.5 million = 0.20 or 20%. This question tested from Session 13, Reading 48, LOS c. -------------------------------------------------------------------------------- Question 3 - #104066 Your answer: A was correct! Both statements are incorrect. Committed capital refers to the amount of funds investors committed to over the life of the private equity fund. Funds from committed capital are drawn down over time as the firm needs more capital. If the firm needs financing beyond investors¡¯ committed capital, it would have to look for additional sources of funds. The J-Curve refers to a pattern in private equity investment return, not risk. The return on investments usually declines initially, then increases as exit nears. This question tested from Session 13, Reading 48, LOS f. -------------------------------------------------------------------------------- Question 4 - #88744 Your answer: C was correct! Examining emerging market arbitrage hedge funds in up and down markets, it has been found that emerging markets arbitrage funds actually have low betas in up markets and positive betas in down markets. This indicates that they don¡¯t fully participate in bull markets while also producing losses in bear markets. Thus, not only are they not market neutral, but their performance pattern is disadvantageous. This question tested from Session 13, Reading 51, LOS a. -------------------------------------------------------------------------------- Question 5 - #104117 Your answer: B was correct! The discount rate adjusted for the probability of failure is calculated as follows: r* = (1 + 0.40) / (1 − 0.20) − 1 = 0.75 or 75% This question tested from Session 13, Reading 48, LOS m. -------------------------------------------------------------------------------- Question 6 - #88577 Your answer: B was correct! Gross income multiplier technique: MV = gross income ¡Á income multiplier. MV = $230,000 ¡Á 10.5 = $2,415,000 This question tested from Session 13, Reading 47, LOS c. -------------------------------------------------------------------------------- Question 7 - #104129 Your answer: A was correct! While depreciation is a non-cash item that is to be added back to net income, reinvested depreciation is a cash outlay and should be subtracted. NWC is current assets less current liabilities. A decrease in NWC is a cash inflow (think cash from the sale of inventory), while an increase in NWC is a cash outflow. This question tested from Session 13, Reading 48, LOS n. -------------------------------------------------------------------------------- Question 8 - #104113 Your answer: A was correct! Since we have no information on exit value or the IRR rate, but the share price and number shares held by each party is given, the post-money valuation (POST) is calculated as: POST = shares price x total number of shares = $15 ¡Á (1,000,000 + 300,000) = $19.5 million. This question tested from Session 13, Reading 48, LOS l. -------------------------------------------------------------------------------- Question 9 - #103997 Your answer: C was correct! The newspaper comment is correct with respect to both sales or earnings multiples and discounting free cash flow to project the terminal value of an LBO. Earnings multiples can include multiples of EBIT or net income, generally under a range of scenarios (e.g., conservative, likely, and aggressive). This question tested from Session 13, Reading 48, LOS p. -------------------------------------------------------------------------------- Question 10 - #88535 Your answer: B was correct! Using your TI BAII Plus: [CF] [2nd] [CLR WORK] -200,000 [+/¨C] [ENTER] [¡ý] 90,000 [ENTER] [¡ý] [¡ý] 55,000 [ENTER] [¡ý] [¡ý] 35,000 [ENTER] [¡ý] [¡ý] 125,000 (note: CF3 = 25,000 + 100,000) [NPV] {8.5} [ENTER] [¡ý] [CPT] = GBP 47,267.91 [IRR] [CPT] = 18.39% This question tested from Session 13, Reading 46, LOS b. -------------------------------------------------------------------------------- Question 11 - #103995 Your answer: B was correct! Statement 1 is incorrect. PE firms tend to have a long-term, rather than short-term focus in their investment strategies, which often exceeds 10 years. Restructuring is generally a lengthy process and requires a long-term perspective. Statement 2 is correct with regard to both manager compensation and the use of tag-along, drag-along clauses. This question tested from Session 13, Reading 48, LOS b. -------------------------------------------------------------------------------- Question 12 - #104064 Your answer: A was correct! Liquidation is a sale of last resort for bankrupt or insolvent firms and generally results in low exit values. The value realized on the sale to management in a management buyout typically varies, but lags behind values from a secondary market sale or an IPO. A secondary market sale is analogous to a private sale of the firm to another firm. Secondary market sales use large amounts of debt financing and could result in the second highest valuation after an IPO. An IPO is a sale of the entire firm or part of the firm (e.g. a division) to the public. As a result of the increased post-IPO liquidity, transparency and access to capital, the private equity firm can realize the highest exit value of a firm through the IPO process. This question tested from Session 13, Reading 48, LOS e. -------------------------------------------------------------------------------- Question 13 - #88562 Your answer: B was correct! The band-of-investments method recognizes the relative costs of debt and equity. Under this method, the capitalization rate, C0, is represented as: C0 = (mortgage weight ¡Á mortgage cost) + (equity weight ¡Á equity cost). In this case, the capitalization rate is: (0.35)(10) + (0.65)(13) = 11.95%. This question tested from Session 13, Reading 47, LOS b. -------------------------------------------------------------------------------- Question 14 - #104088 Your answer: B was correct! Delta¡¯s distributed to paid-in capital (DPI) ratio of 2.0 indicates that investors in the fund realized a profit of $2.0 for every dollar invested and that this profit has already been paid out. Kappa¡¯s multiples indicate that the fund has yet to pay out profits to its investors. The residual value to paid-in capital (RVPI) of 2.0 implies that all returns are still unrealized and will be paid out in future years. One likely explanation for Kappa¡¯s multiples is that the fund is younger than Delta. This question tested from Session 13, Reading 48, LOS h. -------------------------------------------------------------------------------- Question 15 - #88703 Your answer: C was correct! For fixed income hedge funds, it has been found that the largest risk factor is a widening of credit spreads. During the 1990s, which represents the largest span of data available for hedge funds, credit spreads were fairly stable. So the risk of fixed income hedge funds may be greater in the future. The widening of credit spreads can persist for several periods. This question tested from Session 13, Reading 51, LOS a. -------------------------------------------------------------------------------- Question 16 - #100879 Your answer: A was correct! Thompson is correct on Statement 1 but incorrect on Statement 2. Although commodities do not generate cash flows, they are assets since they are valuable as a store of value and as inputs in a production process. Commodity futures, however, are generally considered an asset class only if they can generate positive cash flow (positive roll yield or return). This question tested from Session 13, Reading 49, LOS c. -------------------------------------------------------------------------------- Question 17 - #88533 Your answer: B was correct! NPV = -600,000 + 64,814.81 + 42,866.94 + 51,599.09 + 238,149.67 = -CAD202,569.48 Or, using your TI BAII Plus: [CF] [2nd] [CLR WORK] 600,000 [+/¨C] [ENTER] [¡ý] 70,000 [ENTER] [¡ý] [¡ý] 50,000 [ENTER] [¡ý] [¡ý] 365,000 [ENTER] [¡ý[¡ý] (note: CF3 = 65,000 + 300,000) [NPV] {8} [ENTER] [¡ý] [CPT] = -CAD202,569.48 This question tested from Session 13, Reading 46, LOS b. -------------------------------------------------------------------------------- Question 18 - #100866 Your answer: B was incorrect. The correct answer was C) only Peters’ is correct. Adams¡¯ statement is incorrect, since when consumers¡¯ demand for commodity futures drive futures prices above the spot price, this is referred to as contango. Peters¡¯ statement is correct. Speculators with long positions in futures drive futures prices up, reducing backwardation and increasing contango. This question tested from Session 13, Reading 49, LOS a. -------------------------------------------------------------------------------- Question 19 - #103992 Your answer: C was correct! The three sources of value-added a private equity firm provides over public firms are: reengineering the portfolio firms, obtaining debt on favourable terms (cheap credit), and aligning the interests between private equity owners (the limited partners) and portfolio managers. This question tested from Session 13, Reading 48, LOS a. -------------------------------------------------------------------------------- Question 20 - #104135 Your answer: B was correct! A cash sweep refers to the excess cash from an LBO that is used to pay down debt. Typically senior debt is paid down first, followed by junior debt based on seniority. This question tested from Session 13, Reading 48, LOS o.
18/20 Nuked - Q17, Q18
-4 --> 2,3, 9 and 16…
just got back. 15/20 --> nuked on 4, 5, 7, 9, 18. sheesh. 1) A 2) C 3) A 4) B 5) A (guess between A and C, my formula seems to be off) 6) B 7) C 8) A 9) B 10) B 11) B 12) A 13) B (guess, formulas not working) 14) B 15) C 16) A 17) B 18) A (haven’t done Derivatives yet) 19) C 20) B
11/20, but i haven’t gotten to PE & Com yet.
what is com?
commodities
12/20 --> :S Only skimmed through Alt Inv. and Deriv. though, but still boooo.
Question 1 - 94582 According to Standard II(A), prohibition against the use of material nonpublic information, which of the following statements is least accurate? Members who possess material nonpublic information related to the value of a security are expected to: A) not trade on the information unless it was arrived at through the “mosaic theory.” B) not trade on the information. C) make reasonable efforts to insure the information’s accuracy before recommending that others trade on the information. -------------------------------------------------------------------------------- Question 2 - 94551 According to the CFA Institute Standards of Professional Conduct, Standard I(A), Knowledge of the Law, members shall not knowingly participate or assist in any violations of laws, rules, or regulations. An analyst: A) is held responsible for participating in illegal acts when the law is evident to anyone knowing the law and is held responsible for violations by others when the analyst is unaware of the facts giving rise to the violation. B) is held responsible for participating in illegal acts when the law is evident to anyone knowing the law and can participate in a violation by having knowledge of the violation and taking no action to stop it or disassociate from it. C) must report all legal violations to the proper regulatory commission and is held responsible for participating in illegal acts when the law is evident to anyone knowing the law. -------------------------------------------------------------------------------- Question 3 - 86566 Pro rata allocation on the basis of an advance indication of interest means each account for which the shares are suitable: A) shall receive m/n shares, where there are m shares available and n such accounts. B) and which has expressed an advance indication of interest, shall receive w*m shares, where w is the account’s proportional value of all such accounts and there are m shares available. C) and which has expressed an advance indication of interest, shall receive m/n shares, where there are m shares available and n such accounts. -------------------------------------------------------------------------------- Question 4 - 86678 Erica Barnes, CFA, is a trustee for a pension fund. Which of the following is an example of Barnes’ failure to follow general fiduciary standards set forth in the new Prudent Investor Rule? She recommends the fund should: A) hire an outside manager when they lack the in-house expertise to manage a small cap portfolio. B) consider the need for future growth while maintaining current income obligations. C) hire her relative to manage a new high yield portfolio. -------------------------------------------------------------------------------- Question 5 - 87083 Consider a sample of 32 observations on variables X and Y in which the correlation is 0.30. If the level of significance is 5%, we: A) conclude that there is significant correlation between X and Y. B) cannot test the significance of the correlation with this information. C) conclude that there is no significant correlation between X and Y. -------------------------------------------------------------------------------- Question 6 - 86545 Which of the following statements regarding seasonality is FALSE? A) Not correcting for seasonality when, in fact, seasonality exists in the time series results in a violation of an assumption of linear regression. B) A time series that is first differenced can be adjusted for seasonality by incorporating the first-differenced value for the previous year’s corresponding period. C) The presence of seasonality makes it impossible to forecast using a time-series model. -------------------------------------------------------------------------------- Question 7 - 86437 An analyst modeled the time series of annual earnings per share in the specialty department store industry as an AR(3) process. Upon examination of the residuals from this model, she found that there is a significant autocorrelation for the residuals of this model. This indicates that she needs to: A) switch models to a moving average model. B) revise the model to include at least another lag of the dependent variable. C) alter the model to an ARCH model. -------------------------------------------------------------------------------- Question 8 - 86471 When constructing a regression model to predict portfolio returns, an analyst runs a regression for the past five year period. After examining the results, she determines that an increase in interest rates two years ago had a significant impact on portfolio results for the time of the increase until the present. By performing a regression over two separate time periods, the analyst would be attempting to prevent which type of misspecification? A) Using a lagged dependent variable as an independent variable. B) Incorrectly pooling data. C) Forecasting the past. -------------------------------------------------------------------------------- Question 9 - 89204 Which of the following would be most likely to cause a nation’s currency to depreciate? A) Domestic real interest rates that are lower than those of other countries. B) Slow growth of income relative to one’s trading partners. C) A rate of inflation that is lower than that of one’s trading partners. -------------------------------------------------------------------------------- Question 10 - 89291 Which of the following statements best defines the foreign currency risk premium? The foreign currency risk premium is the: A) forward premium on foreign currency forward contracts. B) extra cost of hedging foreign currency denominated assets with forward contracts. C) foreign currency risk of holding all foreign currency denominated assets. -------------------------------------------------------------------------------- Question 11 - 88978 Given the following quotes, what must the Euro indirect quote (USD/EUR) be in order to prevent arbitrage opportunities? CAD/USD = 1.3045 CAD/EUR = 1.58588 A) 0.1774. B) 1.2157. C) 0.8226. -------------------------------------------------------------------------------- Question 12 - 89012 The current spot rate quote is 2 USD/GBP. A 180 day forward discount for the GBP of 2% (annualized) would reflect a forward price of: A) 1.98 USD/GBP. B) 2.02 GBP/USD. C) 1.96 USD/GBP. -------------------------------------------------------------------------------- Question 13 - 88914 Which of the following is NOT an assumption necessary to derive the capital asset pricing model (CAPM)? A) Investors only need to know expected returns, variances, and covariances in order create optimal portfolios. B) Transactions costs are small for large investors. C) Investors are price takers whose buy and sell decisions don’t affect asset prices. -------------------------------------------------------------------------------- Question 14 - 88917 According to the capital asset pricing model (CAPM), if the expected return on an asset is too high given its beta, investors will: A) buy the stock until the price rises to the point where the expected return is again equal to that predicted by the security market line. B) sell the stock until the price falls to the point where the expected return is again equal to that predicted by the security market line. C) buy the stock until the price falls to the point where the expected return is again equal to that predicted by the security market line. -------------------------------------------------------------------------------- Question 15 - 89405 An arbitrage pricing theory (APT) model has the following characteristics: The risk free rate is 3.8%. Factor risk premiums are: (7%) (4%) (2%) (10%) Assume Silver Linings Fund has the following sensitivities to the factors: Sensitivity to A is 0.5. Sensitivity to B is 1.2. Sensitivity to C is 2.1. Sensitivity to D is 0.2. The expected return on the Silver Linings Fund is: A) 18.3%. B) 14.5%. C) 20.1%. -------------------------------------------------------------------------------- Question 16 - 89346 The efficient frontier is useful for portfolio management because: A) portfolios on the efficient frontier are useful as factor portfolios. B) it significantly reduces the number of portfolios a manager must consider. C) portfolios on the efficient frontier are optimal: the correlation between each efficient portfolio, and the market portfolio is negative. -------------------------------------------------------------------------------- Question 17 - 88349 Which of the following most accurately explains the “locked-in-rate” interpretation of forward rates? The forward rate allows an investor to lock in: A) a coupon rate for some future period. B) a coupon rate for the current period. C) an interest rate for some future period. -------------------------------------------------------------------------------- Question 18 - 104109 The Nishan private equity fund was established five years ago and currently has a paid-in capital of $300 million and total committed capital of $500 million. The fund paid its first distribution three years ago of $50 million, $100 million the year after and $200 million last year. The fund’s distributed to paid-in capital (DPI) multiple is closest to: A) 1.17. B) 0.67. C) 0.70. -------------------------------------------------------------------------------- Question 19 - 88536 Which of the following best describes an interest rate cap? An interest rate cap is a package or portfolio of interest rate options that provide a positive payoff to the buyer if the: A) T-Bond futures exceeds the strike price. B) reference rate exceeds the strike rate. C) reference rate is below the strike rate. -------------------------------------------------------------------------------- Question 20 - 87676 Which of the following statements relating to factors involved in the choice of an appropriate benchmark is FALSE? A) The mean price-to-earnings (P/E) ratio does not reflect the impact of outliers while the median does. B) The stocks composing the benchmark may or may not be efficiently priced. C) The Fed Model postulates that the market is overvalued when the market’s current earnings yield is less than the 10-year Treasury bond yield.
Q1.C Q2.B Q3.C Q4.C Q5.C [1.72250776<2.457 Fail to reject null] Q6.A [renders the model useless - not violates the assumptions?] Q7.B - use AR(4),AR(5) bla Q8.B (pooling insignificate economic data into 1 model) Q9.A Q10.C Q11.B [1.21569950] Q12 C [2*0.98 USD/GBP] Q13.B Q14.C Q15.A [3.8+3.5+4.8+4.2+2] Q16.B Q17.C Q18.A [350/300 = 1.166666] Q19.C Q20.C (EY > 10yr) ???
- C 2) B 3) A 4) C 5) A 6) C 7) C 8) B 9) A 10) A 11) C 12) A 13) B 14) A 15) A 16) C 17) C 18) A 19) C 20) a Ditch, should of started a new thread so people can see this
Question 1 - 94582 A) not trade on the information unless it was arrived at through the “mosaic theory.” -------------------------------------------------------------------------------- Question 2 - 94551 B) is held responsible for participating in illegal acts when the law is evident to anyone knowing the law and can participate in a violation by having knowledge of the violation and taking no action to stop it or disassociate from it. -------------------------------------------------------------------------------- Question 3 - 86566 C) and which has expressed an advance indication of interest, shall receive m/n shares, where there are m shares available and n such accounts. -------------------------------------------------------------------------------- Question 4 - 86678 C) hire her relative to manage a new high yield portfolio. ------------------------------------------------------------------------------- Question 5 - 87083 C) conclude that there is no significant correlation between X and Y. -------------------------------------------------------------------------------- Question 6 - 86545 A) Not correcting for seasonality when, in fact, seasonality exists in the time series results in a violation of an assumption of linear regression. -------------------------------------------------------------------------------- Question 7 - 86437 A) switch models to a moving average model. -------------------------------------------------------------------------------- Question 8 - 86471 B) Incorrectly pooling data. -------------------------------------------------------------------------------- Question 9 - 89204 A) Domestic real interest rates that are lower than those of other countries. -------------------------------------------------------------------------------- Question 10 - 89291 B) extra cost of hedging foreign currency denominated assets with forward contracts. -------------------------------------------------------------------------------- Question 11 - 88978 B) 1.2157. -------------------------------------------------------------------------------- Question 12 - 89012 C) 1.96 USD/GBP. -------------------------------------------------------------------------------- Question 13 - 88914 B) Transactions costs are small for large investors. -------------------------------------------------------------------------------- Question 14 - 88917 A) buy the stock until the price rises to the point where the expected return is again equal to that predicted by the security market line. -------------------------------------------------------------------------------- Question 15 - 89405 A) 18.3%. -------------------------------------------------------------------------------- Question 16 - 89346 B) it significantly reduces the number of portfolios a manager must consider. -------------------------------------------------------------------------------- Question 17 - 88349 C) an interest rate for some future period. -------------------------------------------------------------------------------- Question 18 - 104109 A) 1.17. -------------------------------------------------------------------------------- Question 19 - 88536 B) reference rate exceeds the strike rate. -------------------------------------------------------------------------------- Question 20 - 87676 A) The mean price-to-earnings (P/E) ratio does not reflect the impact of outliers while the median does.
Question 1 - #94582 Your answer: C was correct! Standard II(A), regarding material nonpublic information, prohibits those possessing material nonpublic information from trading or causing others to trade on that information. Members or candidates should make reasonable efforts to make sure the information is disseminated to the public. Trading based on the mosaic theory is acceptable because this is based on the analysis of public and nonmaterial nonpublic information. This question tested from Session 1, Reading 2-II, LOS A… -------------------------------------------------------------------------------- Question 2 - #94551 Your answer: B was correct! If you suspect someone is planning or engaging in illegal activities, you should: Determine the legality of the activities. Consult your supervisor and legal counsel. Take appropriate action. Disassociate, attempt to persuade the perpetrator to stop. CFA Institute does not require you to report them to the authorities, but the law might. This question tested from Session 1, Reading 2-I, LOS A… -------------------------------------------------------------------------------- Question 3 - #86566 Your answer: A was incorrect. The correct answer was C) and which has expressed an advance indication of interest, shall receive m/n shares, where there are m shares available and n such accounts. Pro rata allocation on the basis of an advance indication of interest means that all accounts that are suitable and that have expressed an interest in the issue shall receive m/n shares, where there are m shares available and n suitable accounts have expressed interest. This question tested from Session 2, Reading 8, LOS b. -------------------------------------------------------------------------------- Question 4 - #86678 Your answer: C was correct! Trustees must exercise care, skill, caution, loyalty, and impartiality. Recommending that the trustees approve her relative as new portfolio manager endangers Barnes’ ability to avoid conflicts of interest and hence her duty of loyalty. This question tested from Session 2, Reading 10, LOS b. -------------------------------------------------------------------------------- Question 5 - #87083 Your answer: A was incorrect. The correct answer was C) conclude that there is no significant correlation between X and Y. The calculated t = (0.30 ~ ã30) / ã(1 − 0.09) = 1.72251 and the critical t values are } 2.042. Therefore, we fail to reject the null hypothesis of no correlation. This question tested from Session 3, Reading 11, LOS c. -------------------------------------------------------------------------------- Question 6 - #86545 Your answer: C was correct! Forecasting is no different in the case of seasonal component in the time-series model than any other forecasting. This question tested from Session 3, Reading 13, LOS k. -------------------------------------------------------------------------------- Question 7 - #86437 Your answer: C was incorrect. The correct answer was B) revise the model to include at least another lag of the dependent variable. She should estimate an AR(4) model, and then re-examine the autocorrelations of the residuals. This question tested from Session 3, Reading 13, LOS d, (Part 3). -------------------------------------------------------------------------------- Question 8 - #86471 Your answer: B was correct! The relationship between returns and the dependent variables can change over time, so it is critical that the data be pooled correctly. Running the regression for multiple sub-periods (in this case two) rather than one time period can produce more accurate results. This question tested from Session 3, Reading 12, LOS i. -------------------------------------------------------------------------------- Question 9 - #89204 Your answer: A was correct! Three major factors cause a countryfs currency to appreciate or depreciate: The growth rate of income relative to trading partners (high growth ¨ depreciation). The rate of inflation relative to trading partners (high inflation ¨ depreciation). Domestic real interest rates relative to those of other countries (low real rates ¨ depreciation). This question tested from Session 4, Reading 19, LOS d. -------------------------------------------------------------------------------- Question 10 - #89291 Your answer: A was incorrect. The correct answer was B) extra cost of hedging foreign currency denominated assets with forward contracts. Some investors with foreign currency assets may be willing to pay more than the expected spot rate to hedge the uncertainty of holding foreign currency assets by taking a short position in the foreign currency. Others will demand more than the expected spot rate to sell the foreign currency forward and bear the uncertainty of the spot rate. That extra amount is the risk premium; think of it as a gcosth of hedging foreign currency-denominated assets with forward contracts. If there were no risk premium, hedging with forward contracts would be costless. This question tested from Session 4, Reading 19, LOS n. -------------------------------------------------------------------------------- Question 11 - #88978 Your answer: C was incorrect. The correct answer was B) 1.2157. Recall that for a no arbitrage opportunity to exist the following relationship must hold: (FC1/DC) ~ (DC/FC2) ~ (FC2/FC1) = 1 If the USD = FC1 and CAD = FC2, then we must first invert CAD/EUR = 1.58588 to arrive at EUR/CAD = 0.630564. Next we solve for: (FC1/DC) ~ 0.630564 ~ 1.3045 = 1 (FC1/DC) = [1/(0.630564 ~ 1.3045)] = 1.2157 Of course, the easiest way to answer this question is to divide CAD/EUR = 1.58588 by CAD/USD = 1.3045 which is equal to USD/EUR or 1.2157. This question tested from Session 4, Reading 18, LOS d. -------------------------------------------------------------------------------- Question 12 - #89012 Your answer: A was correct! The GBP is at a forward discount if the forward rate expressed in USD/GBP is below the spot rate. Since the annualized discount is 2%, the 180 day forward discount is 1% of spot, or USD 0.02. [(1.98 − 2.00) / 2.00](360 / 180) = -2% This question tested from Session 4, Reading 18, LOS g. -------------------------------------------------------------------------------- Question 13 - #88914 Your answer: B was correct! The derivation of the CAPM requires the assumption that transactions costs, and taxes are zero for all investors. Both remaining choices are necessary assumptions. This question tested from Session 18, Reading 66, LOS e. -------------------------------------------------------------------------------- Question 14 - #88917 Your answer: A was correct! The CAPM is an equilibrium model: its predictions result from market forces acting to return the market to equilibrium. If the expected return on an asset is temporarily too high given its beta according to the SML (which means the market price is too low), investors will buy the stock until the price rises to the point where the expected return is again equal to that predicted by the SML. This question tested from Session 18, Reading 66, LOS e. -------------------------------------------------------------------------------- Question 15 - #89405 Your answer: A was correct! E® = 3.8 + (0.5 ~ 7) + (1.2 ~ 4) + (2.1 ~ 2) + (0.2 ~ 10) = 18.3. This question tested from Session 18, Reading 66, LOS l, (Part 1). -------------------------------------------------------------------------------- Question 16 - #89346 Your answer: C was incorrect. The correct answer was B) it significantly reduces the number of portfolios a manager must consider. If we are selecting portfolios from a large number of stocks, say the S&P 500, rather than just two stocks, the number of possible combinations is extremely large. We can restrict our search for possible portfolio combinations by focusing on those portfolios on the efficient frontier. We know they dominate all the other possible choices because they offer higher return for the same level of risk. This question tested from Session 18, Reading 66, LOS b. -------------------------------------------------------------------------------- Question 17 - #88349 Your answer: C was correct! The pure expectations theory can be explained using a glocked-in-rateh line of reasoning, whereby forward rates are interpreted as the rate that can be glocked inh for some future period. This question tested from Session 14, Reading 54, LOS e. -------------------------------------------------------------------------------- Question 18 - #104109 Your answer: A was correct! The DPI multiple is calculated as the cumulative distributions paid by the private equity fund divided by the paid-in capital (the portion of committed capital drawn down). Nishanfs current DPI is: ($50 + $100 + $200) / $300 = 1.17 This question tested from Session 13, Reading 48, LOS j. -------------------------------------------------------------------------------- Question 19 - #88536 Your answer: C was incorrect. The correct answer was B) reference rate exceeds the strike rate. An interest rate cap is a package of European-type call option (called caplets) on a reference interest rate. This question tested from Session 17, Reading 64, LOS a. -------------------------------------------------------------------------------- Question 20 - #87676 Your answer: A was correct! The median P/E does not reflect the impact of outliers, while the mean does. This question tested from Session 12, Reading 43, LOS i.
-4 --> 1, 6, 7 and 12…
-6 —> hate those silly mistakes by quick reading and trying to solve. SG