What it is like to take the CFA exam

ANSWER: B

“A security market index represents a given security market, market segment, or asset
class and is normally constructed as portfolios of marketable securities.”

QUESTION: Colin Gifford, CFA, is finalizing a monthly newsletter to his clients, who are primarily individual investors. Many of the clients’ accounts hold the common stock of Capricorn Technologies. In the newsletter, Gifford writes, “Based on the next six months’ earnings of $1.50 per share and a 10% increase in the dividend, the price of Capricorn’s stock will be $22 per share by the end of the year.” Regarding his stock analysis, the least appropriate action Gifford should take to avoid violating any CFA Institute Standards of Professional Conduct would be to:

A) Separate fact from opinion

B) Include earnings estimates

C) Identify limitations of the analysis

ANSWER: B

“Although pro forma analysis may be standard industry practice, it is not required by the Standards of Professional Conduct. Earnings estimates are opinions and must be clearly identified as such. It is also important for investors to be able to identify limitations of analysis when making investment decisions.”

QUESTION: Cost-push inflation is least likely to be affected by an increase in:

A) Employee wages

B) Finished goods prices

C) Commodity prices

ANSWER: B

“Cost-push inflation arises due to increases in costs associated with production: wages and raw materials prices.”

QUESTION: Labor markets are best described as a type of:

A) Capital market

B) Goods market

C) Factor market

ANSWER: C

“Factor markets are markets for the purchase and sale of factors of production. Labor markets are a type of factor market in which households offer to sell their labor services.”

QUESTION: A corporation issues five-year fixed-rate bonds. Its treasurer expects interest rates to decline for all maturities for at least the next year. She enters into a one-year agreement with a bank to receive quarterly fixed-rate payments and to make payments based on floating rates benchmarked on three-month Libor. This agreement is best described as a:

A) Futures contract

B) Forward contract

C) Swap

ANSWER: C

“A swap is a series of forward payments. Specifically, a swap is an agreement between two parties to exchange a series of future cash flows. The corporation receives fixed-interest-rate payments and makes variable-interest-rate payments. Given that the contract is for one year and the floating rate is based on three-month Libor, at least four payments will be made during the year.”

QUESTION: An industry characterized by rising volumes, improving profitability, falling prices, and relatively low competition among companies is most likely in which of the following life-cycle stages?

AP/Jerry Lai

A) Growth

B) Mature

C) Embryonic

ANSWER: A

“An industry in growth stage is characterized by rising volumes, improving profitability, falling prices, and relatively low competition among companies.”

QUESTION: To evaluate the potential effect of an innovative and unique type of business transaction on financial statements, an analyst’s best approach is to:

A) Monitor the actions of standard setters and regulators

B) Gain an understanding of the transaction’s economic purpose

C) Consider the approach taken for “new” transactions that arose in the past

ANSWER: B

“By understanding the economic purpose of a transaction and applying the conceptual framework, an analyst may be able to evaluate the potential effect on financial statements, even in the absence of specific standards.”