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Level I of CFA Program

6th Mock Exam

December 2020
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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

FinQuiz.com – 6th Mock Exam 2020 (PM Session)

Questions Topic Minutes

1-18 Ethical and Professional Standards 27
19-30 Quantitative Methods 18
31-42 Economics 18
43-60 Financial Reporting and Analysis 27
61-72 Corporate Finance 18
73-86 Equity Investments 21
87-92 Derivative Investments 9
93-104 Fixed Income Investments 18
105-110 Alternative Investments 9
111-120 Portfolio Management 15
Total 180

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Questions 1 through 18 relate to Ethical & Professional Standards

1. Janice Hart is a research analyst serving Time Associates, an investment banking

firm. She has been asked to write a research report on Blue Inc. Time was the
chief underwriter of Blue Inc.’s stock when it had undertaken an IPO two years
ago. In addition, two of Time’s directors continue to hold a significant proportion
of Blue Inc. shares.

Hart’s best course of action will be to:

A. decline writing the research report due to the presence of a conflict of

interest.
B. write the research report and disclose the special relationship to clients on
a request basis.
C. write the research report and include a disclosure of the special
relationship between Time Associates and Blue Inc.

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS a

In order to comply with the standard relating to disclosure of conflicts Hart’s best
course of action would be to write the research report and disclose the special
relationship between Time Associates and Blue Inc. Being an underwriter in an
IPO represents a relationship that could threaten the independence and objectivity
of the report writer.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

2. Wallace Associates is a sell-side research firm with clients primarily from the
financial services sector. Midland Trust is Wallace Associates’ most recent client.
Sarah Parker, a research analyst has been assigned Midland Trust. Parker is
compensated with a basic research fee and agent options, which allow her to
purchase 2% of her client’s common shares if the stock performs well. After
conducting thorough research using public sources, she determines that a buy
recommendation will be most appropriate. She includes a small footnote at the
end of the report that discloses the volume and expiration date of the options she
is eligible for.

According to the Standards of Practice Handbook, Parker is in:

A. violation because her disclosure is not prominent.

B. compliance because she has disclosed the extent of her participation in the
options.
C. violation because the acceptance of the agency options may impair her
independence and objectivity.

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS b

The standard relating to disclosure of conflicts requires members and candidates

to disclose the volume and expiration date of any agent options received.
Although Parker has complied in this regard, she is in violation because she
should not have accepted options which were contingent on the report’s
recommendation and have the potential to impair her independent and objective
judgment. She should have agreed to a flat fee only.

3. Trisha Jose is a supervisor at a commercial bank. She has been informed that
particular employee has been deliberately delaying sending reminders to clients
whose accounts are overdue.

With respect to the employee, Jose’s best course of action to take is:

A. dismissal.
B. issuing a warning.
C. suspension of responsibilities.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS b

The employee is violating his duty of loyalty to his employer by not performing
his role as employee properly. Therefore, as supervisor, Jose must respond
promptly and conduct a thorough investigation of the activities to determine the
scope of the wrongdoing. Jose must also increase supervision the employee’s
responsibilities pending the outcome of the investigation. Simply warning or
dismissing the employee is not considered the appropriate course of action
according to the Code and Standards.

4. An investment manager notifies clients of a change in recommendation via email.

He then calls three of his oldest clients to discuss the change in greater detail. Not
all his clients receive the recommendation at the same time and are unhappy with
the delay in notification.

Has the investment manager dealt with his clients fairly?

A. Yes, he is only required to ensure each client is fairly dealt with.

B. No, he should have discussed the recommendation in greater detail with
all his clients.
C. No, he should have ensured each client received the recommendation at
the same time.

Correct Answer: A

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS a

Members and candidates are required to deal with clients and prospects fairly and
objectively when making investment recommendations, taking investment action
or engaging in other professional activities. However, the manager is not required
to ensure that each client is dealt with equally because it is not possible to reach
all the clients at the same time. Furthermore, since he has sent the investment
recommendation to all his clients, discussing it in greater detail with a select few
does not constitute a violation.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

5. According to the Standards of Practice Handbook, an investment manager who

learns that his client is engaged in an illegal activity should:

A. seek legal counsel.

B. inform legal authorities.
C. disclose the activity to the CFA Institute.

Correct Answer: A

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS a

An investment manager who learns that his client is engaged in an illegal activity
should inform their supervisor of the activity and together they can work to
remedy the violations. If that does not prove successful, the investment manager
and his supervisor should seek the advice of a legal counsel to determine the
appropriate steps to take.

Disclosing an illegal activity to legal and regulatory authorities is considered a

violation of the Code and Standards unless disclosure is required by law.
Similarly, members and candidates cannot disclose confidential client information
to the CFA Institute unless permissible under the applicable law.

6. Joyce & Monroe (J&M) is an investment bank with its own research division.
Investment banker Ron Howard serves J&M and has recently arranged corporate
financing for its client, Westdale Limited. Westdale will be using the financing to
expand production to Australia. Several weeks later J&M’s chief research analyst
issues a research report on Westdale wherein he recommends, “Westdale’s
decision to expand into Australia is an excellent move because the potential
market for its products should be vast. I am extremely confident that the company
will see a remarkable and positive difference in its earnings over the coming
months. Based on this, I recommend a strong BUY.” According to the Standards
of Practice Handbook, the analyst’s recommendation is most likely in violation
with respect to the standard concerning:

A. misrepresentation; he is guaranteeing investment performance.

B. disclosure of conflicts; he has not disclosed J&M’s relationship with
Westdale.
C. communication with clients and prospects; he has failed to separate
opinion from fact.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Correct Answer: B

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS b

The analyst’s recommendation is not in compliance with the Code and Standards
as he has not disclosed J&M’s relationship with Westdale. By arranging corporate
financing, J&M’s relationship with the manufacturer will be long-term and should
be disclosed on each report sent to clients and prospects. Failing to do so may
give clients the impression that the relationship impairs the analyst’s independent
and objective judgment.

The analyst is not in violation of the standard relating to misrepresentation

because he has not made any attempt to guarantee investment performance. The
statement, ‘I am extremely confident that the company will see a remarkable and
positive difference in its earnings over the coming months.’ provides evidence
that is making a projection with no attempt to make any guarantee.

The analyst is not in violation of the standard relating to communication with

clients and prospects; he has separated opinion from fact. His recommendation is
based on an opinion of the potential market for Westdale’s products; using the
terms ‘should be vast’ provides evidence that he is voicing his opinion.

7. According to the Standards of Practice Handbook, adequate compliance

procedures are least likely those that:

A. meet industry standards.

B. are uniform on a global basis.
C. can be tailored to the circumstances of a firm.

Correct Answer: B

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS a

The Code and standards define adequate compliance procedures as those that
meet industry standards, regulatory requirements, requirements of the Code and
standards, and the circumstances of the firm. Being globally uniform is not a
requirement.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

8. When managing pooled assets to a specific mandate, investment manager (‘s):

A. actions are not governed by the suitability standard.

B. must consider the suitability of an investment for clients.
C. need not consider the suitability of an investment for clients.

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS a

When managing pooled funds to a stated mandate, investment managers need not
consider the suitability of the investment for those investing in the fund. The
responsibility of determining the suitability of an investment for a client lies on
those members and candidates who have an advisory relationship with clients.

However, the actions of members and candidates as investment managers

continue to be governed by the suitability standard. They are required to “make
investment decisions and take investment actions that are consistent with the
stated objectives and constraints of the portfolio”.

9. Which of the following is most likely to be the key feature of GIPS standards?
GIPS standards:

A. rely on the integrity of input data.

B. address every aspect of performance measurement.
C. have evolved over time to focus primarily on returns.

Correct Answer: A

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 5, LOS a

One of the key features of GIPS standards include that the GIPS rely on the
integrity of the input data.

The GIPS standards do not address every aspect of performance measurement.

Historically the GIPS standards focus primarily on returns but the standards
evolved overtime to address additional areas of investment performance.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

10. Nelson Won, CFA, is a tax advisor at a financial services firm. His recent article,
on how tax minimization strategies can be effectively implemented for client
portfolios with high tax brackets, has increased his popularity in the industry.
Won is offered to deliver a lecture on tax minimization strategies to employees of
an investment management firm in New Zealand. The firm offers to pay for his
travel expenses and hotel accommodation. Won accepts the offer, informs his
employer, and travels to New Zealand with the trip fully paid by his employer. At
the conclusion of the lecture, Won is invited to a game of golf at an exclusive club
by the senior investment manager. He accepts the offer and informs his supervisor
of the invitation upon his return. According to the Standards of Practice
Handbook, Won is most likely:

A. in violation; he should have paid for the New Zealand trip out of his own
pocket.
B. in violation; he did not seek written permission prior to accepting the golf
game offer.
C. in compliance; details of the golf game were not available to him before
departing for New Zealand.

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS a

By asking his employer to pay for his trip and declining the investment
management firm’s offer, Won has taken the necessary steps to avoid the
appearance of any potential conflicts of interest.

Details of the golf game were not available to Won before his departure to New
Zealand and so disclosing the details after his return is the most appropriate
course of action. Won’s actions are in compliance with the Code and Standards
with regard to both his decisions.

11. Conduct that constitutes a violation of the CFA Institute Standards of Professional
Conduct concerning ‘Conduct as Members and Candidates in the CFA Program’
includes:

A. cheating on an MBA exam.

B. soliciting employer clients prior to departing.
C. not following security measures implemented for the CFA exam.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS b

Out of the three options presented, option C corresponds to conduct that violates
the standard in question.

Option A is incorrect. Conduct that constitutes violation includes cheating or

assisting others to cheat on a CFA exam or any other CFA Institute exam; the
standard does not address cheating on exams other than the aforementioned.

Option B highlights conducts that represents a violation of the standard

concerning loyalty to employer.

12. Fredric Hart has shifted to Trust Management from Rightway Investments, both
of which are brokerage firms providing asset advisory services. At Trust
Management Hart prepares a brief introduction letter where he highlights the type
of accounts and asset classes he managed as well as the performance results
achieved at Rightway. Hart’s first client at Trust Management is Denver Sports
Inc. He will be responsible for managing the client’s pension plan. After
conducting a suitability analysis, Hart determines that direct real estate is a
suitable asset class and makes an allocation basing his decision on the following
three reasons: 1) Denver has low liquidity needs, 2) Denver has a long-time
horizon and 3) Denver is in a low capital gains tax bracket.

According to the Standards of Practice of Handbook, Hart is most likely in

violation of the standard concerning:

A. loyalty to employer; he has divulged confidential past employer

information.
B. loyalty, prudence and care; he has not acted in the best interests of his
clients.
C. client confidentiality; information concerning account types is considered
confidential information.

Correct Answer: B

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS b

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Hart is in violation of the standard concerning loyalty, prudence and care by

failing to consider whether the real estate allocation is suitable for the plan
participants. His ultimate clients are the plan participants and not Denver Sports.

Hart is not in violation of the standard concerning employer loyalty. He can

present his past performance at Rightway Investments to the employees of Trust
Management as long as he clearly discloses that he achieved the performance at
his former employer. Information concerning past performance track record is not
considered confidential.

Hart is not in violation of the standard concerning client confidentiality as

information concerning account type and asset classes is general information
related to the skills of the manager.

13. Marie Thatcher serves the CFA Institute Board of Governors, which is
responsible for the oversight and responsibility for the Professional Conduct
Program. She also manages the investment portfolios of several friends and
family members. In a discussion with one of her clients, Thatcher states, “As a
board member, I will take additional steps to ensure that your interests are looked
after and violations of the Code and Standards are avoided at all costs.
Furthermore, as your portfolio manager I will be kept up-to-date with the latest
developments of and revisions in the Code and Standards.”

Thatcher’s statement is most likely:

A. in violation; she is guaranteeing client account performance.

B. in compliance with the CFA Institute Standards of Professional Conduct.
C. in violation; she is using her association with the CFA Institute to further
professional goals.

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS b

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Thatcher’s statement is in violation of the standard concerning Conduct as

Members and Candidates of the CFA Program as she is implying that as a
member of the CFA Institute Board of governors she in a unique and superior
position when ensuring compliance with ethical standards.

Thatcher is not attempting to guarantee client account performance. In fact, her

position allows her to stay abreast the latest developments in the Code and
Standards, which she can apply when managing client portfolios.

14. Two investment managers engaged in a debate that quickly turned into a conflict
disrupting the working environment of their fellow co-workers.

Which of the following has most likely been violated?

A. Code of Ethics only.

B. Standards of Professional Conduct only.
C. Both Code of Ethics and Standards of Professional Conduct.

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 2, LOS c

Both the Code of Ethics and Standards of Professional Conduct are being
violated. The Code of Ethics is being violated as the investment managers are not
acting in a respectful manager towards each other and their colleagues as well as
their employer; disrupting the concentration of the work environment is an act of
disrespect. Furthermore, the two managers are in violation of the standard
concerning misconduct as engaging in a conflict and disturbing colleagues will
adversely reflect on their professional reputation.

15. To comply with the CFA Institute Code of Ethics, members and candidates must:

A. promote the integrity of the legal system.

B. maintain their duty of loyalty towards clients, prospects and employers.
C. place the integrity of the investment profession above their own personal
interests.

Correct Answer: C

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 2, LOS b

In order to comply with the CFA Institute Code of Ethics, members and
candidates must, amongst other actions:

• place the integrity of the investment profession above their own personal
interests and
• promote the integrity of and uphold the rules governing capital markets.

The duty to maintain loyalty towards clients, prospects and employers falls under
the Standards of Professional Conduct.

16. Which of the following statements least likely highlights a benefit of claiming
compliance with GIPS standards?

A. GIPS standards eliminate the need for the investor to conduct in-depth due
diligence.
B. Investment managers can assure clients that the reported historical track
record is complete.
C. Prospective clients can easily compare the performance of their
investment managers across different firms.

Correct Answer: A

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 4, LOS a

Compliance with the GIPS standards does not eliminate the need for the investor
to conduct in-depth due diligence.

The benefits of claiming compliance with the GIPS standards include:

• Investment managers claiming compliance can assure clients that the

reported historical track record is complete and fairly presented.
• Investors have more confidence in the integrity of a performance
presentation as prospective clients can compare the performance
presentations from different investment management firms.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

17. Hollard Associates manages two funds, a diversified fund and a fixed-income
fund. The diversified fund is three years old while the fixed-income fund is as old
as the firm (five years old). The performance records of both funds are GIPS-
compliant. The firm is now considering claiming compliance to the GIPS
standards. Which of the following statements most accurately highlights what
Hollard Associates should do in order to claim compliance?

Hollard Associates should:

A. wait for at least two years to claim compliance.

B. only claim compliance for the fixed-income fund.
C. can claim compliance by presenting performance since both composites’
creation dates.

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 5, LOS b

Hollard Associates can claim compliance by presenting GIPS compliant

performance since the composites’ inception dates, three years for the diversified
fund and five years for the fixed income fund. The GIPS standards require firms
to initially present five years of annual investment performance that is compliant
with the GIPS standards. Should the firm or composite be in existence for less
than five years, the firm must present performance since the firm’s inception or
composite’s inception date.

Hollard Associates cannot partially claim compliance by claiming compliance for

the fixed-income fund.

18. Which of the following is not a section of the Global Investment Performance
Standards?

A. Hedge funds
B. Private equity
C. Wrap fee portfolios

Correct Answer: A

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 5, LOS d

Out of the three options listed, ‘hedge funds’ is not one of the sections found
within the provisions of the Global Investment Performance Standards.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Questions 19 through 30 relate to Quantitative Methods

19. A fund manager manages a fixed-income fund and would like the fund to
replicate a benchmark by applying a stratified sampling approach. The manager
first divides the bonds into Government bonds and Corporate bonds. For each of
these sets, the manager then separates the bonds into three maturity intervals 1-5
years, 5-10 years and above 10 years. He then further separates the bonds into
either coupon-paying bond or non-coupon paying bond. The minimum number of
bonds, the fund can have is:

A. 7
B. 8
C. 12

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 2, Reading 10, LOS c

If each stratum includes only one bond (minimum issue), the fund must include at
least 12 bonds, which represents the minimum number of bonds the fund can
have.

20. Expected returns and standard deviation of three portfolios are given below.

Portfolio Expected Standard

Return Deviation
1 28% 34%
2 32% 46%
3 26% 23%

An investor, hoping to earn at least 6% on his investment every year, will most
likely choose portfolio:

A. 1.
B. 2.
C. 3.

Correct Answer: C

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Reference:
CFA Level I, Volume 1, Study Session 2, Reading 9, LOS c

The most appropriate choice using Roy’s safety-first criterion is portfolio 3

SFRatio = [E(RP)-RL]/𝜎"

Portfolio 1: [28-6]/34 = 0.6471

Portfolio 2: [32-6]/46 = 0.5652
Portfolio 3: [26-6]/23 = 0.8696

21. A desirable property of an estimator includes:

A. consistency.
B. universality.
C. independence.

Correct Answer: A

Reference:
CFA Level I, Volume 1, Study Session 3, Reading 10, LOS g

Desirable properties of estimators include unbiasedness, efficiency, and

consistency.

22. Mona Patel has invested a portion of her savings in a fund with a stated annual
rate of 4%, which is compounded quarterly.

If Patel’s fund was continuously compounded, the fund’s stated annual rate of
return would have been closest to:

A. 3.98%.
B. 4.00%.
C. 4.06%.

Correct Answer: A

Reference:
CFA Level I, Volume 1, Study Session 2, Reading 6, LOS c

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

A stated annual rate of 4% is equivalent to an EAR of 4.06%

To convert to continuously compounded rate of return: LN (1+4.06%) = 3.98%

23. Sarah is a clinical analyst at Alpha Health Technologies. For the past several
months she has been developing an electronic health record app in her spare time.
Sarah is confident that she will be able to sell the app in two years for around
$600,000. If things go as planned and she invest the money in a saving account
with an estimated 6% per annum rate of return, what will be the future value of
that investment 10 years from now.

A. $956,309
B. $1,074,509
C. $1,207,319

Correct Answer: A

Reference:
CFA Level I, Volume 1, Study Session 2, Reading 6, LOS 3

The present value of initial investment $600,000 is $85,734

FV = 600,000
i = 6%
n= 2 years
PV = 533,998

The future value of $533,998 in 10 years will be

PV = 533,998
i = 6%
n = 10 years
FV = 956,309

24. The nominal (quoted) annual interest rate on a loan is 12%. If the frequency of
compounding periods per year for the loan is weekly, the effective annual rate of
the loan is closest to:

A. 11.47%
B. 12.55%.
C. 12.73%.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 2, Reading 6, LOS d

For weekly compounding: (1+0.12/52)52 – 1 = 12.73%

25. A sample of 500 portfolios has a mean annual return of 0.18 and standard
deviation of returns of 0.27. The estimate of the standard error of the sample mean
is closest to:

A. 0.0005
B. 0.0121.
C. 0.6670

Correct Answer: B

Reference:
CFA Level I, Volume 1, Study Session 3, Reading 10, LOS c

# &.()
Standard error of the mean for sample is s= = = 0.0121
√% √*&&

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

26. A portfolio is fully invested in an index fund tracking the S&P500. The returns
earned by the index over the past three years are highlighted in the exhibit below:

S&P 500 Equity Index (%)

Year 1: Return 18.5
Year 2: Return 15.1
Year 3: Return 22.2
Mean Return 18.6
Sample variance 3.6

The portfolio’s coefficient of variation is closest to:

A. 0.10.
B. 0.19.
C. 5.17.

Correct Answer: A

Reference:
CFA Level I, Volume 1, Study Session 2, Reading 7, LOS i

Coefficient of variation = s R = 1.897 / 18.6 = 0.101989

27. All of the following are the properties of lognormal distribution except:

A. Lognormal distribution has a long right tail.

B. Lognormal distribution is bounded below by 1.
C. Lognormal distribution has thinner tails than normal distribution.

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 3, Reading 9, LOS n

Two properties of lognormal distribution are: “Lognormal distribution is bounded

below by 1 and it is skewed to the right i.e. it has long right tail.”

A distribution that has thinner tails than the normal distribution is called
platykurtic.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

28. Which of the following correlation coefficient between two variables exhibits
strong linearity:

A. 0.10.
B. 0.39.
C. -0.57.

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 3, Reading 8, LOS k

Option C exhibits the stronger negative linear relation. The closer the correlation
to 1 or -1 the stronger the correlation between two variables (stronger the
linearity). The closer the correlation to 0, the weaker the linear relation between
two variables.

29. Discrete uniform probability distribution of one day profits for a trader is given
below:

Profit Cumulative Distribution Function

$20 0.2
$30 0.4
$40 0.6
$50 0.8
$60 1.0

The probability that a trader will earn profit greater than or equal to $30 and less
than or equal to $50 is closest to:

A. 0.40
B. 0.60
C. 0.80
Correct Answer: A

Reference:
CFA Level I, Volume 1, Study Session 2, Reading 9, LOS d

The probability (difference between two values of the cumulative distribution

function) is:

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

F($50) = P(𝑋 ≤ $50) = 0.8 & F($30) = P(𝑋 ≥ $30= 0.4)

P($30 ≤ 𝑋 ≥ $50) = 0.8- 0.4 = 0.4

Since the population mean and standard deviation are known, a z-test will be used
to conduct hypothesis testing.

Using a 10% significance level, the upper and lower rejection points are + 1.645
and – 1.645. The null hypothesis is rejected if it declines below – 1.645 and
Thomas will conclude that the inventory slowdown is statistically significant.

The z-test statistic is calculated as follows:

X - µ0 130 - 140
z= = = -0.0365
s/ n 50 30

Since – 0.0365 is greater than – 1.645, the null hypothesis is not rejected and
Thomas will conclude that the slowdown in inventory turnover is not statistically
significant.

30. A financial analyst is evaluating the liquidity position of a manufacturing concern.

For the purposes of analysis, he has compiled various financial measures such as
the cash, quick and current ratios and cash operating cycles over a ten-year
period. The data used by the analyst can most likely be classified as:

A. panel.
B. time-series.
C. longitudinal.

Correct Answer: C

Reference:
CFA Level I, Volume 1, Study Session 3, Reading 10, LOS d

The analyst is using longitudinal data; all his observations are measures of
liquidity and are related to the same manufacturing concern. Longitudinal data
consist of observation (s) of the same observational unit through time.

Panel data consist of observations through time on a single characteristic of

multiple observational units.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Questions 31 through 42 relate to Economics

31. An analyst is evaluating the following spot rates quoted by a dealer:

Spot rate
USD/EUR 1.120
CAD/EUR 1.470
CAD/JPY 0.013

Based on the data presented, the value of one EUR in terms of JPY is:

A. 0.019.
B. 86.154.
C. 113.080.

Correct Answer: C

Reference:
CFA Level 1, Volume 1, Study Session 5, Reading 18, LOS d

JPY CAD JPY 1

= ´ = 1.470 ´ = 113.080
EUR EUR CAD 0.013

32. All of the following are exceptions to the law of demand except:

A. Giffen goods.
B. Veblen goods.
C. Normal goods.

Correct Answer: C

Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 12, LOS h

Two exceptions to the law of demand are Giffen goods and Veblen goods.
Normal goods follow the law of demand.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

33. Which of the following competitive market structures is most likely characterized
by a large number of potential buyers and sellers, low barriers to entry, and firms
with pricing power?

A. Oligopoly
B. Perfectly competitive
C. Monopolistically competitive

Correct Answer: C

Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 13, LOS a

When markets are monopolistically competitive, there are a large number of

potential sellers and buyers, the market has low barriers to entry, and all firms
have some pricing power. In perfectly competitive markets sellers have no pricing
power. Oligopoly market structures are characterized by high barriers to entry and
exit.

34. The economic activity in a developing country has started to accelerate resulting
in higher domestic inflation. In order to maintain its exchange rate target, the
government’s actions will most likely lead to a (n):

A. increase in domestic money supply.

B. decrease in foreign currency reserves.
C. decrease in the cost of short-term borrowing.

Correct Answer: B

Reference:
CFA Level 1, Volume 2, Study Session 5, Reading 16, LOS k

In trying to maintain the exchange rate target, the government will need to sell
foreign currency reserves, thereby decreasing reserves, and buy domestic
currency. This will have the effect of reducing domestic money supply and raising
short-term interest rates (cost of borrowing).

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

35. A South African company undertook the following transactions, translated into
the South African Rand (ZAR), in the financial year 2013:

• Borrowed ZAR 50 million from a U.S. bank

• Purchased machinery worth ZAR 1.4 million from Japan
• Received ZAR 2.5 million interest income on Dutch fixed income
investments
• Issued ZAR 0.5 million worth of its corporate bonds to an investor in
Brazil.
• Acquired financial leases worth ZAR 1.1 million during the year.
• Total sales proceeds received on foreign sales amounted to ZAR 48.8
million.

The total value of the transactions reflected in the current account is closest to (in
ZAR millions):

A. 51.3.
B. 51.8.
C. 99.3.

Correct Answer: A

Reference:
CFA Level 1, Volume 2, Study Session 5, Reading 17, LOS g

The value of the transactions reflected in the current account balance is ZAR 51.8
million ZAR (2.5 + 48.8) million.

Foreign borrowing, debt issues, and purchase of machinery are all transactions
reflected in the financial account while the acquisition of leases is reflected in the
capital account.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

36. Grace Singh is a research analyst based in Australia. She is attempting to forecast
exchange rate movements using data collected in the exhibit:

Expected Spot Rate

Spot rate in One Year
AUD/GBP 1.8255 1.8010
GBP/EUR 0.8141 0.8350
GBP/MXN 0.0460 0.0602

Based on the data in the exhibit, the expected appreciation in the EUR against the
MXN over the next year is closest to:

A. – 21.63%.
B. + 2.57%.
C. + 34.23%.

Correct Answer: A

Reference:
CFA Level 1, Volume 2, Study Session 5, Reading 18, LOS d

MXN/EUR (Spot) = 0.8141 × (1/0.0460) = 17.6978

MXN/EUR (Expected) = 0.8350 × (1/0.0602) = 13.8704
Percentage change in MXN/EUR = (13.8704/17.6978 – 1) = - 21.63%

37. Firms operating in perfectly competitive markets will maximize profits if:

A. total revenues at least cover total costs.

B. marginal revenues exceed marginal costs.
C. total revenues at least cover variable costs.

Correct Answer: A

Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 12, LOS h

A firm operating in a perfectly competitive market will maximize profits if total

revenue is greater or equal to total costs, that is, both fixed and variable costs are
covered and marginal revenues equal to marginal costs.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

38. A-Tech is the sole software developer in its country’s market. The total revenue,
marginal revenue and cost functions of the developer are as follows:

Total revenue = 1,500QD – 12.5Q2D

Marginal revenue = 1,500 – 25QD
Marginal cost = 650 + 10QD

A-Tech’s profit will be maximized if its level of output equals:

A. 2 units.
B. 24 units.
C. 57 units.

Correct Answer: B

Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 13, LOS d

Profit will be maximized when marginal revenue equals marginal cost. This will
occur when the level of output is equal to 24 units (see below).

1,500 – 25QD = 650 + 10QD

850 = 35QD
QD = 24.2857 units or approximately 24 units

39. The manager of a small firm gathers the following information about the firm’s
labor utilization and production.

Labor (L) Total Product (Ql)

1 220
2 350
3 490
4 640
5 760
6 870

At an employment level of 4 labor hours, MPL is:

A. 37.5 units
B. 150 units.
C. 160 units

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Correct Answer: B

Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 12, LOS i

(34&546&)
At an employment level of 4 labor hours, MPL = 458
= 150 𝑢𝑛𝑖𝑡𝑠

40. Which of the following factors will most likely influence the success of a
collusive agreement?

A. Degree of regulation
B. Severity of retaliation
C. Availability of substitutes

Correct Answer: B

Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 13, LOS f

Among the listed factors, only the strength of retaliation has the potential to
influence the success of a collusive agreement; oligopolists will be less likely to
break the agreement if the threat of retaliation by other firms in the market is
severe.

41. The sustainable growth rate of potential GDP is calculated as the sum of the
growth rates in labor, capital and:

A. real GDP.
B. technology.
C. natural resources.

Correct Answer: B

Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 14, LOS l

The sustainable growth rate of potential GDP is equal to the sum of growth rates
in technology, labor, and capital.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

42. In December 2011 the value of the Fisher and Paasche index was 115.6 and 125.1
respectively. The value of the price index when the consumption basket is held
constant was closest to:

A. 106.82.
B. 120.26.
C. 135.38.

Correct Answer: A

Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 15, LOS g

The price index when the components of the consumption basket are held
constant is known as the Laspeyres’ index (IL).
Fisher index = I p ´ IL
IL = (115.6)2 ÷ 125.1 = 106.82

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Questions 43 through 60 relate to Financial Reporting and Analysis

43. An equity investor is utilizing the following metrics to screen stock investments:

• P/BV < 0.69.

• Dividend yield ≥ 3.5%
• NI/Sales ≥15%

Given the screening criteria, the equity investor is most likely a:

A. Value investor.
B. Growth investor.
C. Market-oriented investor.

Correct Answer: A

Reference:
CFA Level I, Volume 3, Study Session 9, Reading 30, LOS g

A low P/BV ratio and a high dividend yield is an indication of value investing.

44. TS Associates issues $1,000,000 face value of ten-year bonds dated January 1,
2010. The total interest expense on the bonds for the ten-year period is $653,123
while the annual coupon rate is 6%. Using the straight-line method, the interest
expense for the fiscal year 2012 is closest to:

A. $54,877.
B. $60,000.
C. $65,312.

Correct Answer: C

Reference:
CFA Level I, Volume 3, Study Session 8, Reading 28, LOS b

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Total interest payments = $1,000,000 × 6% × 10 = $600,000

Given that total interest expense exceeds interest payments, the bonds are issued
at a discount of $53,123 ($653,123 – $600,000). The discount would be amortized
by $5,312 ($53,123/10) each year under the straight line method. Annual interest
expense is thus equal to $65,312 ($60,000 + $5,312).

45. Which of the following ratios will least likely be affected by a company’s choice
of the fair value over cost model for reporting long-lived assets (assuming fair
value is always higher than carrying value) over the long-term?

A. Debt-to-equity
B. Interest coverage
C. Cash flow to revenue

Correct Answer: C

Reference:
CFA Level I, Volume 3, Study Session 8, Reading 26, LOS g

A company’s decision to choose one reporting model over the other in the case of
long-lived assets will affect the debt-to-equity ratio and return on assets ratio but
not the cash flow to revenue ratio. Revaluation gains or losses and the associated
depreciation charges do not impact cash flows or revenues.

Interest coverage ratio will be higher if the cost model is used provided fair value
always exceeds carrying value and consecutively increases; this is because
depreciation charges will be lower for the latter. A lower depreciation charge
translates into higher operating profit and interest coverage ratio. The debt-to-
equity ratio will be affected as all revaluations will be recorded as part of the
revaluation surplus in equity.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

46. On January 1, 2012 TRX Associates purchased a component. Tim Rubin, TRX
Associates’ chief financial analyst, is of the option that the component’s balance
sheet value may need to be reduced. Rubin collects relevant financial information
in the exhibit below:

Exhibit: Relevant Financial Information for the Component

Carrying amount £423,000
Undiscounted expected future cash flows £420,000
Present value of expected future cash flows £415,000
Fair value £455,000
Costs to sell £28,000

If TRX prepares and presents its financial statements in accordance with IFRS,
Rubin is most likely:

A. Incorrect.
B. correct; the component will be valued at £415,000.
C. correct; the component will be valued at £420,000.

Correct Answer: A

Reference:
CFA Level I, Volume 3, Study Session 8, Reading 26, LOS h

Under IFRS, an asset is impaired if the carrying amount of the asset exceeds its
recoverable amount with the latter equal to the higher of fair value less costs to
sell and value in use (present value of expected future cash flows).

Fair value less costs to sell = £455,000 – £28,000 = £427,000

Given that fair value less costs to sell is higher than present value of expected
future cash flows, value in use will equal to £427,000. The component is not
considered impaired because the value in use is greater than the carrying amount
of £423,000. Therefore, the component’s value will not be reduced.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

47. A US GAAP reporting lessor leases an equipment to the lessee. The lease does
not meet the requirements of ownership transfer criteria, but the lease contract
provides guarantee from a 3rd party for the residual value of the asset to the lessor.
Based on the information provided, the lessor can classify the lease as:

A. sales-type lease.
B. direct-finance lease only.
C. either direct finance lease or operating lease.

Correct Answer: C

Reference:
CFA Level I, Volume 3, Study Session 8, Reading 28, LOS h

Based on the information provided, the lessor can classify the lease as either
direct-finance lease or operating lease. The categorization of lease depends on
some additional information that whether the future lease payment + guaranteed
residual value is greater than or equal to fair value of the leased asset or not. If the
future lease payment + guaranteed residual value is greater than or equal to fair
value of the leased asset, the lessor will classify the lease as direct-finance lease,
otherwise the lease will be classified as operating lease.

Under US GAAP, lessor classifies the lease under one of the following three
categories.
a) Sales type lease
b) Direct finance lease
c) Operating lease

a) Sales-type lease

Lessor applies ownership-transfer criteria to determine whether benefits

and risks of owing the asset has been transferred to the lessee, assuming
collection of future lease payments is probable. If any of the requirements
are met, lessor categorizes the lease as sales-type lease.

If above criteria are not met i.e. benefits and risks of owing the asset has
not been transferred to the lessee or collection of future lease payments is
not probable, the lessor will categorize the lease as either operating lease
or direct financing lease.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

b) Direct-finance lease

A lessor will classify the lease as direct-finance lease when all the
following conditions will be met:

1. The ownership transfer criteria are not met

2. Lease contract provides guarantee from 3rd party for the residual
value of the asset
3. Future leased payments + guaranteed residual value should be ≥
Fair value of leased asset

c) Operating lease

Operating lease applies when a lease does not meet criteria to be

considered as sales-type lease or direct-finance lease.

48. An analyst has collected information for two companies in the paint
manufacturing industry, Violet and Technard.

Exhibit: Selective Financial Information for

Violet and Technard
Violet Technard
ROE 14.5% 13.3%
Asset turnover 1.6 1.8
EBIT margin 7.7% 6.1%

Which of the following reasons most likely justifies why Violet has a higher
ROE? Higher:

A. efficiency.
B. return on assets.
C. financial leverage.

Correct Answer: C

Reference:
CFA Level I, Volume 3, Study Session 9, Reading 26, LOS d

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Technard reports higher financial leverage (see below) and so Violet’s higher
ROE cannot be attributed to this measure.

ROE = ROA × Financial leverage

Financial leverage (Violet) = 14.5%/12.32%* = 1.18
Financial leverage (Technard) = 13.3%/10.98%* = 1.21

Relative to Technard, Violet reports lower efficiency (as measured asset

turnover); therefore, higher return on equity cannot be attributed to this factor.

Violet’s higher return on equity can be attributed to higher return on assets (see
below).
*Return on assets = Asset turnover × EBIT margin
Return on assets (Violet) = 1.6 × 7.7% = 12.32%
Return on assets (Technard) = 1.8 × 6.1% = 10.98%

49. The write-off of a particular account receivable is reflected by reducing:

A. bad debt expense.

B. sales returns and allowances.
C. allowance for doubtful accounts.

Correct Answer: C

Reference:
CFA Level I, Volume 3, Study Session 7, Reading 22, LOS d

The write-off of an accounts receivable is reflected by reducing allowance for

doubtful accounts and accounts receivable by the same amount. The other two
accounts, bad debt expense and sales returns and allowances, are not affected.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

50. TSO Limited reported the following information for the fiscal year 2013:

Exhibit
Beginning retained earnings $45,550
Cash dividends paid $1,200
Equity $85,350
Contributed capital $36,155
Operating income $7,520
Taxes paid $2,140

Based on the information presented, reported net income for 2013 is closest to:

A. $2,445.
B. $4,845.
C. $5,380.

Correct Answer: B

Reference:
CFA Level I, Volume 3, Study Sessions 7, Readings 23, LOS b & d

Ending retained earnings = Assets – Liabilities – Contributed capital or,

Ending retained earnings = Equity – Contributed capital = $85,350 – $36,155 =
$49,195

Cash dividends paid = Beginning retained earnings + Net income – Ending

retained earnings
Net income = $1,200 – $45,550 + $49,195 = $4,845

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

51. GTSW Co, a coffee machine manufacturer, purchases manufacturing equipment

that includes two separately identifiable components- injection molder that wears
out every 8 years and stamping device that has to be replaced every 5 years. The
overall useful life of the whole machine is 8 years.

Component Cost
Injection Molder $600,000
Stamping Device $300,000

Depreciation expense for the first year computed under IFRS will most likely be:

A. $112,500
B. $135,000.
C. $180,000

Correct Answer: B

Reference:
CFA Level I, Volume 3, Study Session 8, Reading 26, LOS d

Under IFRS the company must use the component method of depreciation
expense.

3&&,&&& 8&&,&&&
1st year depreciation expense = B
+ *
= $135,000

52. Which of the following is most likely a characteristic of an effective financial

reporting framework?

A. Liquidity
B. Transparency
C. Comparability

Correct Answer: B

Reference:
CFA Level I, Volume 3, Study Session 6, Reading 20, LOS g

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

B is correct. The characteristics of an effective financial reporting framework are

transparency, consistency and comprehensiveness.

53. Xilta, a surgical equipment manufacturer, is constructing a new building for its
administrative staff. Total construction costs amount to $450,000. Xilta has
acquired a three-year loan at an interest rate of 6% to finance the construction.
Only 5% of the loan proceeds are required for the first few months and so the
company invests the remaining proceeds at an annual interest rate of 5% for eight
months.

Ignoring any compounding effects, the total amount of interest to be capitalized

under:

IFRS? U.S. GAAP?

A. $12,750 $27,000
B. $66,750 $81,000.
C. $81,000 $81,000.

Correct Answer: B

Reference:
CFA Level I, Volume 3, Study Session 8, Reading 26, LOS a

Under IFRS any income earned on temporarily investing the borrowed funds is
deducted from the amount eligible for capitalization. This is not the case for U.S.
GAAP where the full amount of interest expense is capitalized.

Interest income = $450,000 × 0.95 × 5% × 8/12 = $14,250

Amount of interest eligible for capitalization (IFRS) = ($450,000 × 6% × 3) –
$14,250 = $66,750

Amount of interest eligible for capitalization (U.S. GAAP) = ($450,000 × 6% × 3)

= $81,000

54. Which of the following items will most likely be higher if a lease is classified as
operating as opposed to capital under U.S. GAAP?

A. Total asset turnover

B. Financing cash outflows
C. Net income in the later years

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Correct Answer: A

Reference:
CFA Level I, Volume 3, Study Session 8, Reading 28, LOS h

Total asset turnover will be higher if a lease is reported as operating. This is

because, unlike finance leases, the associated leased asset is not reported on the
balance sheet. With a lower total assets balance, this reported measure is higher
when leases are operating in nature.

The net income reported in the later years of a lease term is higher when leases
are financing in nature; this is because the sum of depreciation charges and
interest expenses is lower relative to the rental under operating leases. A major
part of the asset has been depreciated as well as the lease liability reduced due to
lease payments reducing the lease liability reported under finance leases.

Financing cash outflows are higher under finance lease because the portion of the
lease payment that reduces the carrying amount of the lease liability will be
reflected as a financing cash outflow rather than an operating cash outflow. Lease
rentals are reported as operating cash outflows under operating leases.

55. The exhibit below illustrates selective financial information for Hoarce Inc. for
the fiscal years 2012 and 2013.

Exhibit
2013 2012
Total assets $500,000 $615,000
Current assets $120,000 $100,000
Current liabilities $105,250 $95,000
Revenue $45,850 $51,200
Total equity $325,000 $300,000

Based on the information presented above, which of the following statements is

most likely correct? Hoarce Inc.’s:

A. efficiency has improved.

B. solvency position has deteriorated.
C. need for capital to fund current assets has increased.

Correct Answer: A

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Reference:
CFA Level I, Volume 3, Study Session 8, Reading 26, LOS b

Measure Ratio 2013 2012

Total asset $45,850/$500,000 $51,200/$615,000
Efficiency turnover = 9.17 = 8.33
Total debt- ($500,000 – ($615,000 –
Solvency to-equity $325,000)/$325,000 $300,000)/$300,000
= 53.8% = 105.0%

Haorce Inc.’s efficiency and solvency positions have improved as evidenced by

the respective increase in total asset turnover and decline in total debt-to-equity.
A company’s need for capital to fund current assets is measured by the net
operating cycle. There is insufficient data to determine this measure.

56. Income statement effect of using LIFO method compared to other methods, if
purchase prices are increasing, include lower:

A. cost of sales
B. ending inventory
C. income tax expense.

Correct Answer: C

Reference:
CFA Level I, Volume 3, Study Session 7, Reading 24, LOS b

C is correct. The effects on income statement of using LIFO method compared to

other methods when purchase prices are increasing include: Higher cost of sales
and lower income tax expenses.

Lower ending inventory is the effect on balance sheet of using LIFO method
compared to other methods when purchase prices are increasing.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

57. Dale Buchanan is a credit analyst evaluating the debt repaying ability of two
companies in the same industry, Rax Limited and Halt. The exhibit below
includes selective financial information with respect to the two companies.

Exhibit
Rax Limited Halt
Operating earnings 45 30
Interest payments 12 13
Total debt 35 25
Total equity 120 108

Which company demonstrates a greater ability to service debt?

A. Halt Limited due to lower financial leverage.

B. Rax Limited due to lower interest payments.
C. Rax Limited due to a higher interest coverage ratio.

Correct Answer: C

Reference:
CFA Level I, Volume 3, Study Session 8, Reading 28, LOS l

All $ figures are in millions

Based on the information presented, the ability of either company to service its
debt is measured by the interest coverage ratio (Operating earnings or
EBIT/interest payments).
Rax Limited (Interest coverage ratio) = $45/$12 = 3.75
Halt (Interest coverage ratio) = $30/$13 = 2.31

Although lower interest payments serve to reduce a company’s interest coverage

ratio, it is not a direct measure of debt repayment capability.

The leverage ratio measures the degree of financial risk in a company’s capital
structure and is not relevant in measuring debt repayment capability.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

58. On its balance sheet, ARC Limited reports a deferred tax asset arising from the
different depreciation methods being used for financial reporting and tax
purposes. After further assessment concerning future recoverability, ARC Limited
reduces the carrying amount of the asset using a valuation allowance.

At the end of the financial year Lindsay Smart reassesses the valuation allowance
and determines that any uncertainty concerning future recoverability has been
alleviated. Smart will most likely reverse the valuation if the firm complies with:

A. IFRS but not U.S. GAAP.

B. U.S. GAAP but not IFRS.
C. neither U.S. GAAP nor IFRS.

Correct Answer: B

Reference:
CFA Level I, Volume 3, Study Session 8, Reading 27, LOS g & j

The recognition of a valuation allowance is only applicable under U.S. GAAP

whereby a deferred tax asset is recognized in full but reduced by a valuation
allowance if all or some of the deferred tax asset will not be realized. Subsequent
to initial recognition, should circumstances change such that the valuation
allowance is reduced, the reversal will increase deferred tax asset and operating
income.

Under IFRS, a deferred tax asset is recognized only if it is probable the sufficient
taxable profit will be available against which the temporary difference can be
utilized; this suggests that a deferred tax asset will be recognized to the extent it is
recoverable.

59. Which of the following is an approximate indicator to determine ‘how many years
of useful life remain for a company’s overall asset base’

DEF ""G
A. HEIJEKLMFLN% EOIE%PE
QRRSTSUVWXY YXZ[XR\VW\]^
B. HEIJEKLMFLN% EOIE%PE
QRRSTSUVWXY YXZ[XR\VW\]^
C. _JNPP ""G

Correct Answer: A

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Reference:
CFA Level I, Volume 3, Study Session 9, Reading 30.

DEF ""G
HEIJEKLMFLN% EOIE%PE
is an approximate indicator to determine how many years of
useful life remain for a company’s overall asset base.

60. An analyst discovered the following differences among three companies Tim
LLC, FFL Inc. and Matt Co.

Abnormal costs Reporting under

incurred as a result of
waste of material
Tim LLC Exclude from IFRS
inventory
FFL Inc. Include in inventory US GAAP
Matt Co. Include in inventory IFRS

Keeping other things constant, compared to:

A. FFL Inc., Matt Co. will overstate inventory value in the balance sheet .
B. Tim LLC, Matt Co. will overstate profitability on the income statement.
C. FFL Inc., Tim LLC will overstate profitability on the income statement
due to the inappropriate deferral of cost recognition.

Correct Answer: B

Reference:
CFA Level I, Volume 3, Study Session 8, Reading 22, LOS d

Keeping other things constant, compared to Tim LLC, both Matt Co. and FFL
Inc. will overstate inventory value in the income statement due to inappropriate
deferral of cost recognition and therefore will overstate inventory value in the
balance sheet. Both IFRS and US GAAP exclude abnormal cost and treat such
costs as expense. Including such costs in inventory will defer their recognition as
an expense in the income statement until the inventory is sold, which will
overstate profitability in the income statement and will overstate inventory value
in the balance sheet.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Questions 61 through 72 relate to Corporate Finance

61. Which of the following statements is most likely correct regarding the NPV
profile?

A. The profile crosses the vertical axis at a rate equal to the project’s IRR.
B. The rate at which the NPV profile crosses the horizontal axis represents
the project’s required rate of return.
C. Crossover rate is the discount rate at which the NPVs of two projects with
different cash flow patterns are equal.

Correct Answer: C

Reference:
CFA Level 1, Volume 4, Study Session 10, Reading 32, LOS e

C is correct. The crossover rate corresponds to the discount rate at which two
projects with different cash flow patterns have the same NPV.

A is incorrect. The point at which the NPV profile intersects the vertical axis
represent the NPV at the which the discount rate is equal to zero.

B is incorrect. The point at which the NPV profile crosses the horizontal axis
represents the IRR (the discount rate which gives a zero NPV).

62. A manufacturer has taken the decision to reduce its stock of inventory in the
current fiscal period. Which of the following financial measures will least likely
be affected as a result of the decision?

A. Quick ratio
B. Current ratio
C. Cash operating cycle

Correct Answer: A

Reference:
CFA Level 1, Volume 4, Study Session 11, Reading 35, LOS b

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

A is correct. A change in inventory balance will not affect the quick ratio which
excludes inventory and is expressed as:

𝐶𝑎𝑠ℎ + 𝑆ℎ𝑜𝑟𝑡 − 𝑡𝑒𝑟𝑚 𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 + 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

B is incorrect. A decrease in inventory balance will reduce the current ratio

(current assets/current liabilities).

C is incorrect. A reduction in the inventory balance will reduce the number of

days of inventory (inventory/average cost of goods sold), which is a component of
the cash operating cycle.

63. The exhibit below presents the accounts receivables figures for two competitors in
the automobile industry.

Exhibit:
Automobile Manufacturers Compared to Industry Average
Accounts
Receivables
Credit Sales Turnover
Company A $145,000 5.2
Company B $210,000 6.5
Industry average $185,000 7.0

Using the data in the Exhibit, compared to the industry average, which company
takes a longer amount of time to collect payments from credit sales?

A. Company A
B. Company B
C. both of the companies

Correct Answer: A

Reference:
CFA Level 1, Volume 4, Study Session 11, Reading 35, LOS b

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

A is correct. Company A takes a longer amount of time to collect payments from

credit sales compared to the industry average based on its number of days of
receivables. Prior to calculating the number of days of receivables, average
receivables needs to determined.

Average receivables = Credit sales/Accounts receivables turnover

Company A’s Average receivables = $145,000/5.2 = $27,884.615
Company B’s Average receivables = $210,000/6.5 = $32,307.692
Industry average’s average receivables = $185,000/7.0 = $26,428.571

Number of days of receivables = Accounts receivable/(Credit Sales/365)

Company A’s number of days of receivables = $27,884.615/($145,000/365) =

70.192 days

Company B’s number of days of receivables = $32,307.692/($210,000/365) =

56.154 days

Industry average’s number of days of receivables = $26,428.571/($185,000/365)

= 52.143 days

64. Which of the following statements accurately highlights the issues which should
be considered by an analyst when evaluating a company’s corporate governance
and stakeholder management system?

A. Dual share systems unite voting control and economic ownership.

B. Boards dominated by long-tenured members may have a negative effect
on the board’s diversity.
C. Remuneration plans which offer both a cash-based payout and equity
component misalign the interests of management and shareholders

Correct Answer: B

Reference:
CFA Level 1, Volume 4, Study Session 10, Reading 31, LOS i

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

B is correct. Although directors with long periods of service offer valuable

experience and expertise, if the board is dominated with such long tenured
members, it may have a negative effect on the board’s diversity and adaptability.

A is incorrect. Dual-class structures segregate economic ownership from voting

control. One class of shares will have superior voting rights compared to other(s).

C is incorrect. Remuneration plans which offer both a cash-based payout and

equity component align the interests of management and shareholders.

65. Which of the following statements is most likely correct regarding warehouse
receipts arrangement?

A warehouse receipt arrangement is similar to the:

A. trust receipt arrangement, but there is a third party that supervises the
inventory.
B. trust receipt arrangement but there is no involvement of any third party
that oversees the inventory.
C. inventory blanket lien, in which the lender has a claim on some or all of
the company’s inventory, but the company can sell the inventory in the
ordinary course of business.

Correct Answer: A

Reference:
CFA Level 1, Volume 4, Study Session 11, Reading 35, LOS f

A is correct. A warehouse receipt arrangement is similar to the trust receipts

arrangement, but there is a third party (such as a warehouse company) that
supervises the inventory.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

66. The exhibit below summarizes key financial results for IAO Inc. for the years
2012 and 2013:

Exhibit
2012 2013
Degree of financial leverage 1.8 1.8
Operating income (in millions) $10.6 $11.2
Net revenues (in millions) $25.5 $20.2

Based on the information presented, the percentage change in net income in 2013
is closest to:

A. – 28.0%
B. – 9.6%.
C. + 10.2%.

Correct Answer: C

Reference:
CFA Level I, Volume 4, Study Session 11, Reading 34, LOS b

Degree of financial leverage is measured as the percentage change in net income

relative to the percentage change in operating income.

Percentage change in net income

= DFL × Percentage change in operating income
= 1.8 × (11.2/10.6 – 1)
= 0.101889 or 10.2%

67. A company’s suppliers have modified its credit terms from 2/10 net 30 to 3/10 net
30. The impact of the change in credit policy will most likely:

A. increase the available cash flow.

B. lengthen the net operating cycle.
C. increase the number of days of payables.

Correct Answer: A

Reference:
CFA Level I, Volume 4, Study Session 11, Reading 35, LOS c

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

A higher discount offered will prompt the company to pay off its accounts
payable more quickly. This will lengthen the net operating cycle (number of days
of inventory + number of days of receivables – Number of days of payables),
decrease the number of days of payables, as well as decrease the available cash;
the latter holds true because the company will be making payments to its suppliers
on an earlier date.

68. The exhibit below illustrates selective financial information for a manufacturing
concern for the years 2012 and 2013.

2012 2013
Current ratio 0.8 1.2
Quick ratio* 0.5 0.8
Current liabilities (in millions) $30.5 $32.7
Cost of goods sold (in millions) $15.6 $18.4
*Differs from the current ratio by excluding the inventory balance only.

The company’s number of days of inventory has most likely:

A. shortened by 4 days.
B. shortened by 55 days.
C. lengthened by 45 days.

Correct Answer: C

Reference:
CFA Level I, Volume 4, Study Session 11, Reading 35, LOS b

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

The difference between the current ratio and quick ratio is equal to the inventory
divided by liabilities.

2012:
Inventory/current liabilities = 0.8 – 0.5 = 0.3
Inventory = 0.3 × $30.5 million = $9.15 million
Days of inventory on hand = Inventory/(Cost of goods sold/365) =
$9.15/($15.6/365) = 214.09 days

2013:
Inventory/current liabilities = 1.2 – 0.8 = 0.4
Inventory = 0.4 × $32.7 million = $13.08 million
Days of inventory on hand = $13.08 million/($18.4 million/365) = 259.47 days

The number of days of inventory on hand has increased by approximately 45 days

(259 – 214).

69. Karl Salone is the chief financial officer at T.R. Enterprises. While evaluating the
company’s liquidity position, Salone makes the following observations:

Observation 1: The company routinely pays its vendors prior to the stated due
dates.
Observation 2: Following the recent deterioration in economic conditions,
arranging short-term borrowing is more restrictive in terms of
both availability and cost.
Observation 3: Due to technological advances in the industry, a significant
proportion of T.R. Enterprises’ inventory has become obsolete.

How many of the above observations reflect a drag on liquidity?

A. 1
B. 2
C. 3

Correct Answer: B

Reference:
CFA Level I, Volume 4, Study Session 11, Reading 57, LOS a

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Observation 1 reflects a pull on liquidity while observations 2 and 3 reflect a drag

on liquidity.
By paying vendors prior to the stated due date, T.R. Enterprises will forgo the use
of funds representing a pull on liquidity.

When access to capital becomes scarce, this reflects a drag on liquidity.

Obsolete inventory ties up a company’s funds by increasing storage and other
interest costs; this represents a drag on liquidity.

70. Which of the following statement is most likely correct regarding passive short-
term borrowing strategies?

A. Passive borrowing strategies are suitable when borrowing is restricted, and

borrowers are limited to one or two lenders.
B. With passive borrowing strategies, borrowers are more in control and do
not fall into the rollover trap that is possible with active strategies.
C. Many passive borrowing strategies are matching strategies. These
matching strategies function is a manner similar to matching investment
strategies.

Correct Answer: A

Reference:
CFA Level I, Volume 4, Study Session 11, Reading 35, LOS g

A is correct. Passive strategies are more suitable when borrowing is restricted, and
borrowers are limited to one or two lenders by agreements (such as, in a secured
loan arrangement).

B is incorrect. With active strategies borrowers are more in control and do not fall
into the rollover trap that is possible with passive strategies.

C is incorrect. Many active strategies are matching strategies. Matching

borrowing strategies function in a manner similar to matching investment
strategies.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

71. Bill Somers, an equity analyst, is evaluating the stock of Westmore Associates.
Somers has collected the following data with respect to the Westmore stock and
equity market:

Exhibit:
Data Concerning the Market and Westmore Associates’ Stock
Current dividend per share $3.50
Return on equity 5%
Earnings per share $7.50
Market required rate of return 8%
Risk-free rate 3%
Forecasted next period’s price per share $25.50
Current price per share $22.35

The cost of equity (re) using the discounted dividend model (DDM) is closest to:

A. 16.76%.
B. 18.36%.
C. 18.74%.

Correct Answer: C

Reference:
CFA Level I, Volume 4, Study Session 10, Reading 33, LOS h

The cost of retained earnings (re) is equal to the sum of the dividend yield and
sustainable growth rate.

re = D1/P0 + g

g = ROE × (1 – D/EPS) = 5% × (1 – $3.50/$7.50) = 2.6667%

re = ($3.50 × 1.026667)/$22.35 + 0.026667 = 0.18744 or 18.74%

72. A board of directors does not typically engage in:

A. company’s day-to-day business activities.

B. guiding and approving the company’s strategic direction.
C. selecting, appointing and terminating the employment of senior
management.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Correct Answer: A

Reference:
CFA Level I, Volume 4, Study Session 10, Reading 31, LOS f

A board of directors does not typically engage in the company’s day-to-day

business activities. The board guides and approves the company’s strategic
direction, taking into consideration the company’s risk profile. The board is also
responsible for selecting, appointing and terminating the employment of senior
management.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Questions 73 through 86 relate to Equity Investments

73. The current annual dividend for Glasgow Enterprises is $4. Dividends are
forecasted to grow for the next three years at an annual rate of 20% and then 5%
thereafter. The company’s required return on equity is 8% and its weighted
average cost of capital is 10%.

The intrinsic value of Glasgow’s shares is equal to:

A. $206.91.
B. $241.92.
C. $245.32.

Correct Answer: A

Reference:
CFA Level 1, Volume 5, Study Session 13, Reading 41, LOS g

A is correct.

D1 = $4.00(1 + 0.20)1 = $4.80

D2 = $4.00(1 + 0.20)2 = $5.76
D3 = $4.00(1 + 0.20)3 = $6.912
D4 = $4.00(1 + 0.20)3 (1 + 0.05)= $7.258

$).(*B
V3 = &.&B5&.&* = $241.920
$4.B& $*.)3 $3.6r(u$(4r.6(
V0 = (r.&B)s + (r.&B)t + (r.&B)v
= $206.914 ≈ $206.91

74. Asset-based valuation models are best suited for valuing companies:

A. which are privately traded.

B. operating in a hyper-inflationary environment.
C. with a higher proportion of property, plant, and equipment compared to
current assets.

Correct Answer: A

Reference:
CFA Level 1, Volume 5, Study Session 13, Reading 49, LOS l

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

A is correct. Asset-based valuation models are frequently used together with

multiplier models to value private companies.

B is incorrect. Asset values may be more difficult to estimate in a hyper-

inflationary environment which makes limits the application of asset-based
valuation models.

C is incorrect. The fair (market) value of property, plant and equipment is not
easily determinable. Therefore, the asset-based valuation model is difficult to
apply to companies with significant property, plant, and equipment.

75. The market price of Yacto’s stock decreased by $2 over the financial year 2013. If
the share price at the beginning of the year was $52.50, what dividend yield must
the company maintain to ensure total return is equal to 15%?

A. 3.81%.
B. 11.19%.
C. 18.81%.

Correct Answer: C

Reference:
CFA Level 1, Volume 4, Study Session 13, Reading 39, LOS e

Total return = (Pt – Pt – 1 + Dt)/Pt – 1

The total return can be separated into the price return and dividend yield.
Price return = – $2/$52.50 = – 0.03810 or – 3.8095%
Dividend yield = Dt/Pt – 1
Dividend yield = 15.000% – (– 3.8095%) = + 18.8095%

76. Market efficiency and asset-pricing models rely on the rationality of:

A. markets only.
B. investors only.
C. markets and investors.

Correct Answer: A

Reference:
CFA Level 1, Volume 5, Study Session 13, Reading 39, LOS h

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

A is correct. Both asset pricing models and the concept of market efficiency
assumes that markets are rational but do not require that each individual is
rational.

77. ABC Limited has reported a return on equity, net profit margin and financial
leverage ratio of 15.0%; 0.32; and 2.5 respectively. Asset turnover of ABC
Limited is closest to:

A. 0.12.
B. 0.19.
C. 0.22.

Correct Answer: B

Reference:
CFA Level 1, Volume 4, Study Session 13, Readings 40, LOS a.

ROE = Net profit margin × Asset turnover × Financial leverage

Asset turnover = ROE ÷ (Net profit margin × Financial leverage)

= 0.15 ÷ (0.32 × 2.5) = 0.18750

78. A trader purchases the stock of a company by borrowing 35% of the initial stock
price of $50 and financing the remainder with equity. The maintenance
requirement for the position is 25%. The price at which the trader will receive a
margin call is:

A. $8.13.
B. $23.33.
C. $43.33.

Correct Answer: B

Reference:
CFA Level 1, Volume 5, Study Session 12, Reading 36, LOS f

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

The trader’s initial equity is 65% of the initial stock price of $50.00 or $32.50 per
share. The price below which a margin call takes place is calculated using the
following formula:

GyzLF{/P}MJE $8(.*&u"5$*&.&&
"JLKE/P}MJE
= "
= 25%; 𝑃 = $23.33

If the price falls below $23.33, the trader will receive a margin call.

79. An analyst has collected the following information concerning a value weighted
index:

Beginning of End of Period

Period
Security Price ($) Shares Price ($) Shares
A 45.56 100 51.87 100
B 61.05 200 67.00 200
C 88.07 300 91.35 300

The return on the index is closest to:

A. 6.50%.
B. 7.42%.
C. 18.51%.

Correct Answer: A

Reference:
CFA Level 1, Volume 4, Study Session 12, Reading 37, LOS e

The value of the index is the change in market capitalization over the period:
Beginning market capitalization = ($45.56 × 100) + ($61.05 × 200) + ($88.07 ×
300) = $43,187.00

Ending market capitalization = ($51.87 × 100) + ($67.00 × 200) + ($91.35 × 300)

= $45,992.00

Return = ($45,992.00/$43,187.00) – 1 = 6.50%

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

80. A brokered market:

A. is organized as an order-driven market.

B. uses a crossing network to organize market trades.
C. is the platform for trading unique and infrequently traded instruments.

Correct Answer: C

Reference:
CFA Level 1, Volume 4, Study Session 12, Reading 36, LOS j

A brokered market is one in which brokers arrange trades among their clients.
They organize markets for which organizing a trade is difficult because
instruments are unique, infrequently traded and/or expensive.

An order-driven market is not organized for these instruments because few traders
would submit orders to brokers operating in such markets.

81. Sylvia Perez has purchased a 3-month put option with an exercise price of $35.00
by paying $5.50. The purpose behind the option purchase is to protect her
investment from adverse price movements. Perez will exercise the option if the
share price:

A. rises above $35.00.

B. declines below $35.00.
C. declines below $40.50.

Correct Answer: B

Reference:
CFA Level 1, Volume 4, Study Session 12, Reading 36, LOS c

A put option is exercised when the market price of the stock declines below the
exercise price. In Perez’s case, she will exercise her put option when the share
price declines below $35.00.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

82. Market bid-ask spread is equal to:

A. the highest bid price – the lowest ask piece.

B. the highest ask price – the lowest bid price.
(W•X •\‚•XƒW „\Y Z[\RXuW•X U]…XƒW Vƒ† Z[\RX)
C. (

Correct Answer: A

Reference:
CFA Level 1, Volume 4, Study Session 12, Reading 36, LOS g

The market bid-ask spread is equal to the difference between the best bid (highest
bid price) and best offer (lowest offer or ask price).

83. In contrast to public equity firms, the private equity firm:

A. operates in larger, unregulated markets.

B. management tend to focus on maximizing short-term results.
C. has less effective corporate governance policies and procedures.

Correct Answer: C

Reference:
CFA Level 1, Volume 4, Study Session 13, Reading 39, LOS c

Private equity firms score lower in terms of corporate governance effectiveness.

Since private equity firms hold investments of relatively longer holding periods,
management are better able to better manage their company for long-term value
creation. Thus, management is able to focus on the long-term. In the case of
public equity firms’ management is pressurized to focus on short-term results.

In contrast to public equity firms, private equity firms are not subject to the
stringent regulatory requirements often imposed on the former. Furthermore,
public equity markets are much larger than private equity markets.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

84. In contrast to the method of fundamentals, the method of comparables:

A. does not consider the future.

B. is based on the law of one price.
C. is more sensitive to assumptions.

Correct Answer: B

Reference:
CFA Level 1, Volume 4, Study Session 13, Reading 41, LOS g

The method of comparables is based on the law of one price; identical assets
should sell for the same price.

A failure to consider the future is a criticism aimed at price multiples in general.

Multiples calculated from trailing or current values of the divisor do not consider
the future whereas forward price multiples do.

The method of fundamentals is sensitive to the assumptions used as it depends on

cash flow forecasts or discounting to present value. However, the method of
comparables involves comparing the price multiple of the subject company to a
benchmark and so is not sensitive to assumptions used.

85. Gem Inc. has paid a dividend of $4.55 in the current year. From next year
onwards, annual dividend will grow at a constant rate of 2%. The company’s
shareholders require an 8% return to compensate for the risk associated with
equity shares. The intrinsic value of the stock is closest to:

A. $75.83.
B. $77.35.
C. $78.90.

Correct Answer: B

Reference:
CFA Level 1, Volume 4, Study Session 13, Reading 41, LOS e

𝐷& (1 + 𝑔) $4.55(1 + 0.02)

𝑉& = = = $77.35
𝑟−𝑔 0.08 − 0.02

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

86. Lockwood Associates is a recently established financial services firm. The

company will not be paying its shareholders dividends in the near future due to
insufficient profits. The date for initiating dividend payments is highly uncertain.

Which model will be most suitable for valuing the intrinsic value of company
stock?

A. Free cash flow model

B. Gordon growth model
C. Dividend discount model

Correct Answer: A

Reference:
CFA Level 1, Volume 4, Study Session 13, Reading 41, LOS f

Given that the company is not currently paying dividends and is not expected to in
the near future, a free cash flow model is the most optimal model to use for
valuing the intrinsic value of Lockwood’s stock.

The Gordon growth model is unsuitable because it generally assumes a perpetual

dividend growth rate. Lockwood Associates does not pay dividends and so this
model is unsuitable for valuing the company’s stock. The dividend discount
model assumes that the company is paying dividends and so is also unsuitable for
valuation purposes.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Questions 87 through 92 relate to Derivatives

87. Consider a call option selling for $8 in which the exercise price is $100. The
maximum loss to the buyer will be closest to:

A. $8.
B. 108
C. unlimited.

Correct Answer: A

Reference:
CFA Level 1, Volume 6, Study Session 16, Reading 48, LOS c

For a call option buyer, maximum loss is $8.

88. Which of the following derivative instruments entails default risk which is from
the short to the long only?

A. Swaps
B. Options
C. Forwards

Correct Answer: B

Reference:
CFA Level 1, Volume 6, Study Session 16, Reading 48, LOS c

In contrast to forwards and swaps, where either party could default to the other,
default risk in options is one-sided. The option buyer has no further obligations
beyond the payment of the premium upon contact initiation. However, the seller is
obligated to deliver if the buyer exercises the option. Therefore, the seller could
default to the buyer.

89. The combined actions of arbitragers:

A. push up the market prices.

B. cause the divergence of prices.
C. bring about the convergence of prices.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Correct Answer: C

Reference:
CFA Level 1, Volume 6, Study Session 16, Reading 49, LOS k

Arbitrage is referee to as law of one price. The combined actions of arbitragers

bring about the convergence of prices. Therefore, their actions push up the lower
prices and push down the higher prices until they converged.

90. Futures prices can differ from forward prices because

A. because of the effect of interest rates on interim cash flows.

B. because of the right to exercise early always has a value to the futures.
C. only if there are cash flows on the underlying such as dividend or interest.

Correct Answer: A

Reference:
CFA Level 1, Volume 6, Study Session 16, Reading 49, LOS b

Futures prices can differ from forward prices because of the effect of interest rates
on interim cash flows due to daily settlement.

91. All of the following contracts are privately negotiated and are subject to default
except:

A. swaps
B. futures
C. forwards

Correct Answer: C

Reference:
CFA Level 1, Volume 6, Study Session 16, Reading 48, LOS b

C is correct. Both swaps and forwards are privately negotiated and are subject to
default, whereas, futures are exchanged-traded contracts which provide daily
settlement and guarantee by the exchange though the clearing house.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

92. Over the counter derivatives are:

A. subject to the risk of default.

B. are guaranteed against default through the clearinghouse.
C. are guaranteed against decrease in value through the clearinghouse.

Correct Answer: A

Reference:
CFA Level 1, Volume 6, Study Session 16, Reading 48, LOS a

Option A is correct. Over the counter derivatives are subject to a greater risk of
default while exchange traded derivatives are guaranteed against default through
the clearinghouse.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Questions 93 through 104 relate to Fixed Income

93. Alex Cunningham is comparing three fixed-income securities held in his

investment portfolio. He would like to determine the issue offering the highest
interest yield. Details regarding the three issues are summarized in the exhibit
below:

Exhibit:
Details Concerning Fixed Income Issues
A B C
Full price per 100 of par value $98.85 $99.70 $103.30
Accrued interest $5.40 $3.10 $2.85
Coupon rate 3% 2% 3%
Coupon payment frequency Annually Quarterly Semi-annually

Which issue offers the highest interest yield?

A. A
B. B
C. C

Correct Answer: A

Reference:
CFA Level I, Volume 5, Study Session 14, Reading 44, LOS f

Interest yield = Coupon payments/Flat price

Flat price = Full price – accrued interest

Interest yield (A) = $3/($98.85 – $5.40) = 0.032103 or 3.2103%

Interest yield (B) = $2/($99.70 – $3.10) = 0.020704 or 2.07040%
Interest yield (C) = $3/($103.30 – $2.85) = 0.0298656 or 2.98656%

94. Coupon reinvestment risk:

A. increases with a lower coupon rate.

B. decreases with a longer reinvestment time period.
C. dominates market risk for a buy-and-hold investor.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Correct Answer: C

Reference:
CFA Level I, Volume 5, Study Session 14, Reading 44, LOS f

Coupon reinvestment risk increases with a higher coupon rate and a longer
reinvestment time period.

Coupon reinvestment risk dominates market risk when the investor has a long
term time horizon i.e. a buy-and-hold investor.

95. A deferred coupon bond:

A. is issued at a premium to par.

B. permits in kind interest payments.
C. provides tax advantages to the issuer.

Correct Answer: C

Reference:
CFA Level I, Volume 5, Study Session 14, Reading 42, LOS d

Deferred coupon bonds are issued at a discount to par. They provide tax
advantages if the issuer is able to delay the taxes due on interest income, which is
typically first paid a few years after bond issuance.

A payment in kind bond gives the issuer the option to pay interest in kind or in
cash or a mixture of the two.

96. Karl Tatsimo invests in two bond issues; a two-year, 5.00% semi-annual coupon
payment corporate bond priced at 95.67 per 100 of par value and a three-year,
3.00% semi-annual coupon payment government bond priced at 93.45 per 100 of
par value.

The corporate bond’s annual yield-to-maturity stated on a semi-annual basis is:

A. equal to 7.37%.
B. equal to that of the government bond.
C. lower than that of the government bond.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Correct Answer: A

Reference:
CFA Level I, Volume 5, Study Session 14, Reading 44, LOS f

The corporate government bond’s yield stated on a semi-annual basis is higher.

Corporate bond’s annual yield-to-maturity quoted on a semi-annual basis is
7.368% (3.684% × 2) or 7.37%:

2.5 2.5 2.5 102.50

95.67 = + + + , r = 3.684%
(1 + r ) 1
(1 + r ) 2
(1 + r ) 3
(1 + r )4

The government bond’s annual yield-to-maturity quoted on a semi-annual basis is

5.394% (2.697% × 2):

1.5 1.5 1.5 1.50 1.50 101.50

93.45 = + + + + + , r = 2.697%
(1 + r ) 1
(1 + r ) 2
(1 + r )3
(1 + r )4
(1 + r )5
(1 + r )6

97. Fixed-income securities that are issued with a maturity of less than one year are
most likely known as:

A. Eurobonds.
B. money market securities.
C. capital market securities.

Correct Answer: B

Reference:
CFA Level I, Volume 5, Study Session 14, Reading 42, LOS a

Fixed-income securities with a maturity of less than one year are known as money
market securities. Fixed income securities with a maturity exceeding one year are
known as capital market securities.

Eurobonds are used to classify bonds by currency denomination as opposed to by

maturity.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

98. In the event of company default, the debt category that will rank the highest is:

A. first lien debt.

B. second lien debt.
C. senior unsecured debt.

Correct Answer: A

Reference:
CFA Level I, Volume 5, Study Session 15, Reading 47, LOS b

In the event of default, senior debt will rank higher than subordinated debt.
Within senior debt first lien debt holds a higher ranking relative to second lien
debt.

99. A risk of relying on credit agency ratings least likely include that they:

A. may be fallible.
B. overestimate event risk.
C. tend to lag bond prices and credit spread movements.

Correct Answer: B

Reference:
CFA Level I, Volume 5, Study Session 15, Reading 47, LOS d

Risks in relying on agency ratings include:

• they may be fallible; historical events have confirmed that ratings agencies
did not see the accounting fraud being committed by companies.
• Idiosyncratic or event risk is difficult to anticipate and capture.
• Ratings tend to lag market pricing of credit. Bond prices and credit
spreads tend to move more quickly due to changes in perceived
creditworthiness than changes in the credit ratings.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

100. The Jameson Foundation has a fixed income portfolio comprising of three
corporate bonds, A, B and C. The exhibit below summarizes details concerning
the fixed income portfolio:

Exhibit
A B C
Annual modified duration 3.4 7.8 12.3
Annual modified convexity 12.2 16.9 23.8
Price per par value 92.34 95.78 99.35

If the yield changes by 50 basis points, the security that will exhibit the greatest
percentage price change is:

A. A.
B. B.
C. C.

Correct Answer: C

Reference:
CFA Level I, Volume 5, Study Session 15, Reading 46, LOS h

Bond C exhibits the greatest absolute percentage price change of 6.1203%.

é1 2ù
%DPV Full = (- AnnModDur ´ DYield ) + ê ´ AnnConvexity ´ (DYield ) ú
ë2 û
é1 2ù
= (- 3.4 ´ 0.0050) + ê ´ 12.2 ´ (0.0050) ú = -0.016848
Full
%DPV A
ë2 û
é1 2ù
= (- 7.8 ´ 0.0050) + ê ´ 16.9 ´ (0.0050) ú = -0.03879
Full
%DPV B
ë2 û
é1 2ù
= (- 12.3 ´ 0.0050) + ê ´ 23.8 ´ (0.0050) ú = -0.061203
Full
%DPVC
ë2 û

101. Which of the following prices is most likely quoted by dealers?

A. Clean price
B. Matrix price
C. Invoice price

Correct Answer: A

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Reference:
CFA Level I, Volume 5, Study Session 14, Reading 44, LOS d

The clean price is quoted by dealers. This price is also known as the flat price or
quoted price.

The full price or invoice price is the price paid by the buyer and received by the
seller on the settlement date.

102. Assuming the yield-to-maturity is constant, Macaulay and modified durations

A. jumps upward during a coupon period.

B. jumps upward when the coupon payment is made.
C. decline smoothly in a ‘saw-tooth’ pattern, when the coupon payment is
made.

Correct Answer: B

Reference:
CFA Level I, Volume 5, Study Session 15, Reading 46, LOS f

During a coupon period, Macaulay and modified durations decline smoothly in a

‘saw-tooth’ pattern, assuming the yield-to-maturity is constant. When the coupon
payment is made, the durations jump upwards.

103. Relative to an option-free, a putable bond will most likely:

A. trade at a higher yield.

B. trade at a higher price.
C. is associated with a higher reinvestment risk.

Correct Answer: B

Reference:
CFA Level I, Volume 5, Study Session 14, Reading 42, LOS f

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Putable bonds can be exercised if interest rates rise after the issue date, thus
depressing the bond price. Bondholders can put the bond back to the issuer and
get cash. This cash can be reinvested to earn a rate of interest in line with the
higher market interest rates; this will also serve to lower reinvestment risk.

Since the put provision has value to bondholders, the price of a putable bond will
be higher than the price of an otherwise similar bond issued without the put
provision. Similarly, the yield on a bond with a put provision will be lower than
the yield on an otherwise similar non-putable bond.

Putable bonds have lower reinvestment risk relative to option-free bonds (see
above).

104. An investor purchases a 2-year, 10% annual coupon payment corporate bond. The
forward curve for one-year rates is demonstrated in the exhibit below:

Exhibit
Time period Forward rate
0y1y 1.0535%
1y1y 2.7984%
2y1y 3.0367%
3y1y 4.7842%

Using the forward rates, the price of the corporate bond per 100 of par value is
closest to:

A. $109.30.
B. $113.32.
C. $115.78.

Correct Answer: C

Reference:
CFA Level I, Volume 5, Study Session 14, Reading 44, LOS h

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Firstly, spot rates for the first two years need to be determined.

The implied one-year spot rate (z1) is 1.0535%

The two-year implied rate (z2) is 1.9222%:

(1 + z2)2 = [(1+ 1.0535%) × (1 + 2.7984%)] = [(1.0105) × (1.0280)]

(1 + z2)2 = 1.0388
(1 + z2) = 1.0192
z2 = 0.019222 or 1.9222%

10 110
Price of the bond = 1
+ 2
= 115.7858
(1.010535) (1.019222)

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Questions 105 through 110 relate to Alternative Investments

105. The exhibit below illustrates real estate valuation data collected by Simone Irk, an
investment analyst. The data collected by Irk concerns real estate investment
trusts (REITs). The analyst would like to employ a direct capitalization approach
when comparing the relative valuations of the three REITs (A, B and C).

Exhibit:
Valuation Data Concerning REIT A, B, and C
Net Gains Recurring
REIT Funds from from Sales Capital Capitalization
operations of Real Estate Expenditures Rate
A $35,000 $4,200 $12,000 5%
B $80,000 $12,400 $28,000 8%
C $75,000 $9,900 $33,500 6%

Using adjusted funds from operations (AFFO), the REIT with the highest
valuation is:

A. A.
B. B.
C. C.

Correct Answer: C

Reference:
CFA Level 1, Volume 6, Study Session 17, Reading 50, LOS e

AFFO = Funds from operations × recurring capital expenditures

Value = AFFO/Capitalization rate

Value (REIT A) = ($35,000 – $12,000)/0.05 = $460,000

Value (REIT B) = ($80,000 – $28,000)/0.08 = $650,000

Value (REIT C) = ($75,000 – $33,500)/0.06 = $691,667

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

106. Which of the following is most likely the dominant primary private equity fund
strategy?

A. Venture capital
B. Distressed investing
C. Development capital

Correct Answer: A

Reference:
CFA Level 1, Volume 6, Study Session 17, Reading 50, LOS g

Primary private equity fund strategies include leverage buyouts, venture capitals,
distressed investing and development capital. Leverage buyouts and venture
capital are the dominant strategies.

107. When commodity futures prices are higher than spot prices, the futures market is
said to be in a state of:

A. contango and the convenience yield is low.

B. contango and the convenience yield is high.
C. backwardation and the convenience yield is low.

Correct Answer: A

Reference:
CFA Level 1, Volume 6, Study Session 17, Reading 50, LOS e

When commodity futures prices are higher (lower) than spot prices, the futures
market is said to be in a state of contango (backwardation) and convenience yields
are low or negligible (high).

108. The characteristics that make a company particularly attractive as an LBO target
least likely include a firm:

A. with depressed stock price.

B. that is inefficiently managed.
C. with weak & unsustainable cash flows.

Correct Answer: C

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Reference:
CFA Level 1, Volume 6, Study Session 17, Reading 50, LOS e

The characteristics that make a company particularly attractive as an LBO target

include:

• undervalued/depressed stock price

• willing management
• inefficiently managed companies
• strong and sustainable cash flows

109. When the futures prices are higher than the spot price, it can most likely to be
concluded that:

A. there is little or nor convenience yield.

B. the commodity forward curve is not upward sloping.
C. interest earned on the collateral is less than risk-free rate.

Correct Answer: C

Reference:
CFA Level 1, Volume 6, Study Session 17, Reading 50, LOS d

When the futures prices are higher than the spot prices, the commodity forward
curve is upward sloping. Price are considered to be in contango. Contango occurs
when there is little or no convenience yield.

110. An analyst listed the following characteristics of alternative investments as an

asset class in general.

1. Less transparency
2. High level of regulation
3. Narrow manager specialization
4. Potentially problematic historical risk and return data

How many characteristics he identified correctly?

A. 2
B. 3
C. 4

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Correct Answer: B

Reference:
CFA Level 1, Volume 6, Study Session 17, Reading 50, LOS

The characteristics common to nay alternative investments include:

• Illiquidity of underlying investments

• Narrow manager specialization
• Low correlation with traditional investments
• Low level of regulation and less transparency
• Limited and potentially problematic historical risk and return data
• Unique legal and tax considerations

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Questions 111 through 120 relate to Portfolio Management

111. Bitcoin is a well-known example of a (an):

A. deep learning network.

B. permissioned DLT network.
C. open permissionless network.

Correct Answer: C

Reference:
CFA Level 1, Volume 6, Study Session 19, Reading 57.

Bitcoin is a well-known example of an open permissionless network.

112. Maxine Carrell, a university professor, made the following statements during a
lecture:

Statement 1:“The capital allocation line joins the optimal risky portfolio and the
risk-free asset.”

Statement 2:“The optimal portfolio for an investor must lie on the capital
allocation line.”

Carrell is most likely correct with respect to:

A. Statement 1 only.
B. Statement 2 only.
C. Statement 1 and Statement 2.

Correct Answer: C

Reference:
CFA Level 1, Volume 6, Study Session 18, Reading 52, LOS g

Carrell’s both statements are correct.

The capital allocation line joins the optimal risky portfolio and the risk-free asset.

The portfolio of an optimal investor must lie on the capital allocation line.

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

113. Risk infrastructure most likely refers to:

A. The people and systems required to track risk exposures.

B. The top level system of structures, rights and obligations by which
organizations are controlled.
C. The extensions of risk governance into both the day-to-day operation and
decision making processes of the organization.

Correct Answer: A

Reference:
CFA Level 1, Volume 6, Study Session 19, Reading 55, LOS b

Risk infrastructure refers to the people and systems required to track risk
exposures and perform most of the quantitative risk analysis to allow an
assessment of the organization’s risk profile.

114. In contrast to open-end funds, a disadvantage of investing in closed-end funds is

that they:

A. have a limited ability to grow.

B. charge fees for investing in and redeeming from the fund.
C. may require the manager to liquidate assets for meeting redemptions at a
point in time when least desirable.

Correct Answer: A

Reference:
CFA Level 1, Volume 6, Study Session 19, Reading 55, LOS e

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Closed-end funds have a limited ability to grow. This is because these funds do
not accept money for investment into the fund. New investors invest in the fund
by buying existing shares and investors liquidate by selling existing shares. Thus,
the number of outstanding shares does not change.

Load funds, another classification for mutual funds, charge investors fees for fund
investment and redemption.

A disadvantage of open-end funds is that the asset manager will need to sell assets
to meet fund redemptions. However, this may come at a time when the investor
may not want to redeem from the fund.

115. The exhibit below summarizes data concerning annual returns, annual standard
deviation and betas for an investor’s two asset portfolio. The portfolio’s expected
return is equal to 15%.

Exhibit:
Annual Annual Standard
Asset Return (%) Deviation (%) Beta
A 14 10 1.5
B 18 16 0.9

The amount invested in both assets is respectively closest to:

Asset A: Asset B:
A. 17% 83%
B. 42% 58%.
C. 75% 25%.

Correct Answer: C

Reference:
CFA Level 1, Volume 6, Study Session 18, Reading 52, LOS a

75% is invested in Asset A and 25% in Asset B where wA = weight of Asset A

and wB = weight of Asset B in the portfolio.

15 = (14) (wA) + (18)(1 – wA)

wA = 0.75
wB = 1 – 0.75 = 0.25

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

116. All of the following are applications of distributed ledger technology to

investment management except:

A. tokenization.
B. cryptocurrencies.
C. algorithmic trading.

Correct Answer: C

Reference:
CFA Level 1, Volume 6, Study Session 19, Reading 57.

Applications of distributed ledger technology (DLT) to investment management

includes cryptocurrencies and tokenization.

117. Mitchell Young holds an investment portfolio comprising two equity securities, A
and B. The portfolio is equally invested in the two securities. The exhibit below
summarizes annual risk and return data concerning Young’s portfolio:

Exhibit
Security Annual Annual Standard
Return (%) Deviation (%)
A 22 17
B 16 13

If the covariance of returns between the two securities is – 0.0157, the correlation
between the two securities is closest to:

A. – 0.71.
B. – 0.44.
C. + 0.19.

Correct Answer: A

Reference:
CFA Level 1, Volume 4, Study Session 18, Reading 52, LOS c

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Cov RA , RB = p RA , RB s As B

- 0.0157
p R A , RB = = -0.710407
0.17 ´ 0.13

118. The slope of the capital allocation line (CAL) is measured using the:

A. Sharpe ratio.
B. Treynor ratio.
C. information ratio.

Correct Answer: A

Reference:
CFA Level 1, Volume 4, Study Session 18, Reading 53, LOS b & h

With total return on its y-axis, the risk-free rate of return as the intercept, and total
risk (standard deviation) on its x-axis, the slope of the CAL is the Sharpe ratio.

119. The exhibit below summarizes risk, return and beta information concerning the
Lightman Foundation’s investment portfolio.

Exhibit:
Annual Standard Weight in
Stock Deviation (%) Beta Portfolio (%)
A 23.5 1.5 25
B 9.4 0.6 30
C 8.5 1.1 10
D 12.5 0.3 35
Total 100

Based on the information presented, portfolio beta is closest to:

A. 0.14.
B. 0.77.
C. 0.87.

Correct Answer: B

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 Level I of CFA Program Mock Exam 6 – Solutions (PM)

Reference:
CFA Level 1, Volume 4, Study Session 18, Reading 53, LOS e

Portfolio beta = (0.25)(1.5) + (0.30)(0.6) + (0.10)(1.1) + (0.35)(0.3) = 0.77

120. Tactical asset allocation:

A. focuses on adding portfolio value in the short-run.

B. deviates from policy exposures to nonsystematic risk factors.
C. selects securities with an expected return higher than the asset class
benchmark.

Correct Answer: A

Reference:
CFA Level 1, Volume 4, Study Session 19, Reading 54, LOS g

Tactical asset allocation involves a deliberate deviation from the policy exposures
to systematic risk factors with the objective of adding value from forecasts of
near-term returns of those asset classes.

Security selection involves selecting securities, which have a higher expected

return than the benchmark for the purposes of enhancing portfolio return.

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