Question 1

Sally Wang, CFA, an analyst with Ayax Securities, covers the oil and gas equities in South
America. Wang is invited along with a group of other analysts to visit the oil producing site of
VenzOil. The one-day trip is co-sponsored by VenzOil and AmerSecurities, LLC., a leading
investment and brokerage firm. Since the exploration and production site is at a remote location,
the only access is by a chartered plane. The travel expenses will be jointly borne by VenzOil and
AmerSecurities. After seeking approval from her firm, Wang joins the selected group of analysts
to travel to the intended location. At the site, the group is invited to attend a lavish dinner at the
end of the day, where they will get the chance of meeting with the top management and
President of VenzOil to discuss any matters pertaining to the investment and feasibility of the
new exploration site. Wang is least likely in violation of Standard I (B), Independence and
Objectivity, by doing which of the following:
A. Accepting both the travel expense coverage and the dinner invitation.
B. Accepting the dinner invitation but refusing the travel expense coverage.
C. Accepting travel expense coverage but refusing to attend the dinner.

Question 2
Tracy Keegan wins a lottery worth $1 million and meets with her advisor, John Isaac, to discuss
her asset allocations. Isaac suggests that they should make changes to Keegan’s investment
policy statement. After discussing her investment objectives and constraints, Isaac recommends
a high-growth fund, which has high management fees, but is ranked amongst the top funds.
Isaac further explains that the high-growth fund has shown consistent capital appreciation over
the last five-year period, with average returns exceeding the benchmark by 80 basis points. He
reminds Keegan that the past performance is no guarantee of future returns but his clients with
similar risk and return profile as Keegan’s are very satisfied with the fund’s returns. Isaac also
mentions to Keegan that he will receive a one-time referral fee of 1.5% calculated on the
year-end performance of the high-growth fund and gives Keegan an estimated amount. When
recommending the high-growth fund to Keegan, has Isaac violated any CFA Institute Standards?
A. Yes, relating to suitability.
B. No.
C. Yes, relating to referral fees.

Question 3
Sonya Aggarwal, CFA, is a struggling portfolio manager at Optima Securities. She has been told
by one of her clients that if she achieves an annual total return of 15% or more, he will
compensate her beyond what she earns at Optima. Aggarwal is worried about her mortgage
payments, therefore, she should:
A. refuse the offer because it will create conflicts of interest with other accounts.
B. obtain permission from her employer prior to accepting the compensation offer.
C. refuse the compensation offer on grounds that it will be more time consuming and
pressurize her to achieve higher results.

Question 4
Torbin Holmes, CFA, works as a research analyst at Aquatic Asia Investment Management. As a
standard procedure, all recommendations go through a series of reviews before they are
disseminated to clients. Holmes uses a tool, based on fundamental analysis developed by
another analyst at the firm, upon which he bases his recommendations. He has, however,
modified a few assumptions to tailor it to his needs, while leaving the core tool unchanged. All his
reports acknowledge the tool is developed by both the analyst at his firm and himself. In addition,
he also uses other sources such as interviewing industry experts and company personnel, blogs,
company visits, information from journals, etc. Holmes sends his latest recommendation for
internal review, and in the meantime, buys shares of the stock for his personal account. Later,
since Holmes decides not to recommend the stock to his clients, he deletes all the supporting
information he had collected. Holmes has most likely violated which of the following CFA Institute
Standards of Professional Conduct?

1. Priority of Transactions.
2. Misrepresentation.
3. Record Retention.

A. I, II and III.
B. III.
C. I and III.

Question 5
Which of the following statements regarding GIPS compliance is correct ?
A. Verification of GIPS compliance may be performed by the firm’s compliance
department.
B. Software that calculates performance according to GIPS standards can claim
compliance with these standards.
C. Complying with the GIPS standards is voluntary.

Question 6
Graham Dean, CFA, is a fixed-income analyst at Green Door Investments. He regularly
subscribes and pays for research reports written by SACRA-credit rating agency, specifically by
one of their credit analysts, Todd Benjamin. Benjamin’s reports are very well-written with
complete analysis, summaries and forecasts about the issuer and the instrument. Over time,
Dean has come to rely upon Benjamin’s recommendations which have proved to be quite
accurate most of the time. Therefore, Dean uses Benjamin’s analysis, data and graphs with slight
changes in his own bond analysis reports . This is after Dean received written permission by
SACRA to use the summaries, forecasts and data from their credit analyst’s reports. Dean does
not acknowledge the source of his analysis in his reports. Benjamin, at times, reports the results
of relevant finance studies in his reports. Dean, on learning about these studies from Benjamin’s
reports, reads the original study and mentions where applicable the results in his reports. He
always cites the original study with proper reference to its authors, but does not state that he
learned of the study through Benjamin’s reports. Has Dean violated the CFA Institute Standards
in preparing and distributing his research reports with respect to the use of Benjamin’s analysis
and data?
A. No.
B. Yes, related to misrepresentation.
C. Yes, related to conflicts of interest.
Question 7
Sharon Asher is a portfolio manager for Metropolis Asset Management (MAM). One of her
brokers, TIG, is offering a new service where it will provide proprietary research through client
brokerage arrangement. In order to attract Asher and other portfolio managers, TIG is lowering
its fees for its full-service which now includes execution of trades and research and making it
comparable to its previous execution-only trades. Asher has always been satisfied with the trade
execution provided by TIG. After comparing TIG’s new service rates with other brokers used for
client accounts that prohibit soft dollar arrangements, Asher realizes that they are only marginally
higher, and decides to trade for those accounts too that prohibit soft dollar arrangements. Has
Asher violated the CFA Institute Standards of Professional Conduct?
A. No, because she has conducted a comparison of TIG rates with other brokers and
found only a marginal difference between them.
B. Yes, Asher may not use the new trading service of TIG as the commissions are
prohibited by the accounts’ soft dollar restrictions.
C. No, because the new trading service provides execution and research at attractive
prices.

Question 8
Kyra Roddick, CFA, is an equity research analyst at ICI Financial Services, a large financial
services group. Roddick values stocks using a proprietary model following which the
recommendations are sent to all institutional and retail clients. She realizes a mistake in
estimating the inputs for a stock she recently valued. She corrects the error, and performs the
valuation again, upon which the recommendation changes from sell to a buy. She emails the
change in recommendation to all institutional clients. A fortnight later, she buys the stock for her
personal portfolio. Roddick most likely violated which of the following CFA Institute standards?
A. Priority of transactions.
B. Loyalty to clients.
C. Fair Dealing.

Question 9
Pete Frampton, CFA, recently accepts a position on the board of directors of a youth soccer
program that is the local chapter of a national “sports for underprivileged youth” program run by a
not-for-profit organization. The program managers have just started a new campaign to raise
awareness and to collect funds in order to expand the number of participants. Frampton believes
that many of his clients at BRI Capital will be willing to make donations to the campaign. During
the week, he adds a small paragraph explaining the highlights of the fund-raising campaign and
his new position on the organization’s board, in the newsletter to all his clients. Has Frampton
violated the Code and Standard?
A. No.
B. Yes, by soliciting clients for donation.
C. Yes, by not getting approval of the organization for writing about the campaign.

Question 10
Susan Bright, CFA, is a research analyst at Edward Investment Bank. Edward underwrote the
IPO issue of Forest Essentials Inc., an organic beauty products and wellness company, and
acquired 500,000 shares of the company then. As the stock is not on the watch list now, the
Investment Banking Department asks Bright to issue a favorable research report on Forest
Essentials. Bright independently runs the stock through her valuation models and finds the stock
to be overvalued. Based on the CFA Institute Standards of Professional Conduct, what is the
best course of action for Bright to follow?
A. Bright should not heed the request of the investment banking division.
B. Bright should issue a buy recommendation when the price of Forest Essentials falls.
C. Bright should issue a sell recommendation as it is overpriced.

Question 11
Brian Finch is a research analyst with JY Investment Company. He prepares a “Hold”
recommendation on CresCement Corporation. Which of the following situations will least likely
present a conflict of interest for Finch that would have to be disclosed?
A. Finch has personal ownership of common stock of CresCement.
B. JY holds for its own account a significant position in CresCement’s common stock.
C. Finch’s neighbour has ownership of common stock of CresCement, and is a
fee-paying client of JY.

Question 12
Melissa Chen has just been hired by Super Investment Management Company (SIMC), and has
also passed the Level II CFA examination. She is enrolled to sit for the Level III CFA examination
next year. In the marketing brochure of the firm, it is stated, “Melissa Chen has passed Level II of
the CFA Exam.” A colleague informs Chen that this statement should be modified to make it
more marketable to their clients and prospects, and suggests the following change. “Melissa
Chen, Level III CFA Candidate, is the new portfolio manager at SIMC.” Does the reference to
Chen’s passing Level II of the CFA Exam as presented in the firm’s brochure, or the change
suggested by the colleague, violate the CFA Institute Standards?
A. The statement in the marketing brochure is a violation, but not the suggested
change.
B. Neither the marketing brochure statement nor the suggested change is a violation.
C. Only the suggested change is a violation.

Question 13
Seema Khatri, a Level III candidate in the CFA Program, works with Richmond, Bradley, and
Cooper Securities (RBC), plc., a large securities and investment company. She writes about the
performance of Richmond Fixed-Income Fund in the quarterly newsletter to all clients, and
concludes the newsletter by stating that: “RBC is taking all the necessary steps to ensure that
they have satisfied all the requirements of the GIPS standards. It has chosen SeaGrade, as an
independent third-party verifier to test the firm’s composites’ construction, policies and
procedures as they relate to compliance with the GIPS standards. The Richmond Fixed-Income
Fund follows the GIPS requirements of performance presentation and reporting, therefore, it is
already partially GIPS compliant.” Is Khatri’s statement consistent with the Global Investment
Performance Standards?
A. Yes.
B. No, because the Richmond Fixed-Income Fund may not claim partial compliance.
C. Yes, because third-party verifier does test construction of firm’s composites.
Question 14
Rohan Agarwal works as a securities trader in a country where no punitive action is taken
against insider trading. The regulatory body governing capital markets is still in its formative
stages so the securities laws and regulations are minimal. Agarwal adheres to his country’s local
laws and regulations. Agarwal should most likely take which of the following actions to comply
with the CFA Institute Standards of Professional Conduct?
A. Continue following his country’s mandatory laws and regulations.
B. Follow the CFA Institute Code and Standards.
C. Disclose to his clients that he adheres to his country’s laws and regulations.

Question 15
Anita Bain works as a portfolio manager specializing in emerging market equities at a large
investment management firm. The firm has clearly documented soft dollar policies that are
communicated to the clients. The manager has discretion to select the broker as long as the best
execution principle is followed. Bain will least likely violate Standard III (A) Loyalty, Prudence,
and Care if she uses soft dollars for which of the following?
A. Pay the fees for the Level III exam of the CFA program as the portfolio management
skills learnt from the program will directly benefit the clients.
B. Report on political and social stability in Russia and Brazil.
C. Hire a research analyst to assist in managing the portfolio as her clientele is
increasing

Question 16
Celine Jourdan, CFA, manages small cap equity portfolios for her clients. However, recently due
to a slowdown in the economy, the performance of small cap equity markets has suffered and
she is worried about not meeting the return requirements of her clients. Considering the situation,
Jourdan decides to reduce the equity exposure of her clients and replace it with investment
grade fixed income securities which have shown better prospects. Jourdan most likely violated
the CFA Institute Standards of Professional Conduct regarding:
A. diligence and reasonable basis.
B. suitability.
C. fair dealing.

Question 17
Jonathan Friedman hires Monica Bates as a research analyst for Atlantic Investments. Bates
previously worked as an analyst at Pacific Investments where she learned the fundamentals of
stock valuation. She later developed a tool for valuing stocks during her tenure at Pacific
Investments, which she uses for all her research. When Bates joins Atlantic, she applies the
valuation knowledge she learned at Pacific for her recommendations. Eventually, to make the
selection process easier, she brings the tool she developed at Pacific to Atlantic. Bates also
persuades her friend and research analyst at Pacific to join Atlantic. At her new job, Bates most
likely violated the CFA Institute Standards of Professional conduct with respect to:
A. the valuation tool.
B. use of the valuation knowledge she acquired at Pacific.
C. persuading her analyst friend to join Atlantic
Question 18
Walter Brown, CFA, runs an independent investment advisory firm. His clientele consists of about
300 retail clients. Brown picks stocks from a master recommendation list for each client account,
based on their suitability. To make the stock selection process easier, he has hired an external
adviser who sends him a list of the stocks to be recommended after performing detailed analysis.
Brown took due care in selecting the external adviser based on the criteria stipulated by the
Code and Standards. He, however, does not disclose the source of his stock picks to his clients.
Brown has most likely violated which of the following CFA Institute Standards of Professional
Conduct?
A. Diligence and Reasonable Basis.
B. Fair Dealing.
C. Communication with clients and prospective clients.

Question 19
Andrew Lawrence, CFA, is a portfolio manager at IFC Asset Management. He directs the trades
of all his client accounts as well as his personal account to Quantum Brokers. Quantum is aware
that Lawrence directs all his transactions to be executed through them. In appreciation, they
always execute trades for his personal account at the best price possible, and before executing
trades for his client accounts. Quantum has not been able to give the client accounts the lowest
price for buying and the highest price for selling stocks. His clients are also not aware of the
exclusive brokerage relationship with Quantum. According to the CFA Institute Code and
Standards, Lawrence should least likely do which of the following?
A. Execute trades for client accounts and Lawrence at the same time.
B. Seek best execution for his clients.
C. Not have an exclusive brokerage relationship with Quantum.

Question 20
Rebekah Walters has joined as a trainee at an investment management firm that has many CFA
charterholders. She asks her manager, Rene Hopkins, about the CFA program who makes the
following statements:

Statement 1: CFA charterholders must pay membership dues on an annual basis along with
other membership requirements to use the designation.

Statement 2: Members and candidates may use the CFA designation after completing the three
levels.

Statement 3: As all asset managers of our firm are charterholders, we use it as part of the firm’s
name.

Which of the following statements by Hopkins least likely violated the CFA Institute Standards of
Professional Conduct?

A. Statement 1.
B. Statement 2.
C. Statement 3.
Question 21
Sakshi Mehta, CFA, is a reputed mining analyst based in Sydney. She has been covering the
iron and steel industry for over a decade and a half. South Korea based steel manufacturer,
Posco, recently announced that it was setting up India’s largest integrated steel plant in the
eastern state of Orissa. Posco has invited Mehta and a few other analysts from around the world
to independently analyze the prospects, challenges, impact on pricing, and tour the proposed site
at a remote location in Orissa, which is off-limits for the public. In addition, Posco has also
arranged for a trip to the rainforests in Sunderbans. Mehta accepts the invitation to the mining
sites in Orissa and the trip to Sunderbans as she plans to visit the steel plants in West Bengal
afterward. Which of the following may Mehta accept that least likely violate the CFA Institute
Standards of Professional Conduct?
A. Flying in Posco’s private airplane to the proposed plant site in Orissa and modest
accommodation in Posco’s guest house.
B. Private flight to the proposed plant site in Orissa, a private bus for the group to
Sunderbans and modest accommodation in Posco’s guest house.
C. Round trip flight tickets from Sydney to the nearest airport to the proposed plant site
in Orissa.

Question 22
On June 21, Rana Fahim of Tameed Investments, buys bonds for one of her portfolios. The bond
trades infrequently and because of Fahim’s purchase, the market price increases. Fahim is
aware of its low trading volume before the transaction and that buying the bond will materially
affect its market price, but it is not her intention to cause market distortion. Fahim’s supervisor
Aaron Hershel asks her for an explanation, and points out the firm’s policy on market
manipulation: “The employees of Tameed Investments must not involve in trades that distort
prices or artificially inflate volumes with the intention of misleading the market participants.” Do
Fahim’s bond purchase and Tameed’s policy on market manipulation comply with the CFA
Institute Standards?
A. Yes, the bond’s purchase and Tameed’s policy on market manipulation comply with
the CFA Institute Standards.
B. Only the bond’s purchase is consistent with the Standards.
C. Only Tameed’s policy on market manipulation is consistent with the Standards.

Question 23
Lana Boyle recently joined HLB Asset Management Company, as an investment manager. In her
previous firm, TYK Securities, she was one of a team of three managers who were responsible
for the development and promotion of new investment products to the firm’s clients. With the
written permission of TYK, Boyle presents the performance history of the products that were
launched while she was at TYK, as evidence of her past success. The CFA Institute Standard
most likely violated by Boyle is:
A. Suitability
B. Loyalty.
C. Misrepresentation.
Question 24
Salman Mehmood, CFA, is a senior money manager for Ariya Investments, a large asset
management firm. Recently he became involved with the Green Crescent Foundation, as a
trustee. Green Crescent is a non-profit foundation for the education and development of
underprivileged children. It has assets slightly in excess of PKR 200 million. Mehmood feels that
informing Ariya of his involvement with Green Crescent is not necessary because his new
responsibilities at Green Crescent are not that time consuming. Has Mehmood violated the CFA
Institute Standard?
A. Yes, related to misrepresentation.
B. Yes, related to disclosure of conflicts.
C. No

Question 25
Nathan just sat for his Level III exam and is dissatisfied about his performance in the exam. He
blames it on the third-party provider, because for the exam preparation, Nathan had used study
notes and concept test questions from them, to supplement the CFA curriculum. He posts the
following comments on the provider’s websites’ discussion forum and on an internet chat room
frequented by candidates of the Level III CFA exam:

“Comparing your firm’s CFA Program study notes and test questions with the actual questions on
the day of the exam, I found them lacking in every way in providing the appropriate practice and
understanding. The questions were very difficult in the actual exam and your practice questions
did not thoroughly cover questions in fixed income involving portfolio immunization and duration
and convexity of assets and liabilities which were asked in the exam.” “Your material is
incomplete and not appropriate for practice purposes.”

Which of the following statements is most likely correct?

A. Nathan did not violate the Code and Standards with his comments.
B. Nathan violated the Code and Standards by providing specific information of the
questions asked in the exam.
C. Nathan violated the Code and Standards by commenting on the difficulty of the
questions in the exam.

Question 26
A firm manages portfolios based on the following strategies:

● Strategy A: Aggressive growth. Under this strategy the firm selects small-cap stocks with
strong growth potential over the next few years.
● Strategy B. Large cap value. Under this strategy large-cap value stocks are selected.
To report performance, the firm:

A. should create a composite for Strategy A, and another composite for Strategy B.
B. can create a single composite choosing best performing portfolios under Strategy A
and Strategy B.
C. can include non-discretionary portfolios managed according to Strategy A and
Strategy B in the composite.
Question 27
John Louis, director finance at a Firm, has purchased a stock of Company A that will pay a
dividend of $3 per share forever beginning at t=3. He believes that the stock should be valued at
a discount rate of 10.50%, given its risks. Which of the following statements is most likely
correct?
A. The value of a share today will be closest to $23.40.
B. The value of a share will be closest to $28.57.
C. The value of a share will be closest to $21.18.

Question 28
The demand schedule in a perfectly competitive market is given by P = 80 – 1.6Q (for Q ≤ 50).
The long-run cost structure of each company is:

Total cost: 500 + 5Q + 6Q2

Average cost: 500/Q + 5 + 6Q

Marginal cost: 5 + 11Q

New companies will enter the market at any price greater than:

A. 84.
B. 95.
C. 115

Question 29
Deferred tax liabilities are appropriately treated as equity when:
A. the timing of tax payments is uncertain.
B. they are not expected to reverse.
C. the amount of tax payments is uncertain.

Question 30
Uwe Hohn, a javelin throw contestant, is likely to throw a javelin between 84 and 100 meters
only, the distance being uniformly distributed. What is the probability that Uwe throws the javelin
under 90 meters?
A. 0.375.
B. 0.438.
C. 0.625.

Question 31
An analyst has gathered the following data about a country’s economy for the year 2015:

Account name Amount ($ trillions)

Investment spending 500
Government surplus 35
Net imports 58
The country’s domestic saving is closest to:

A. 407.
B. 523.
C. 593.

Question 32
Other comprehensive income most likely includes which of the following?
A. Realized holding gains and losses on securities measured at Fair value through other
comprehensive income (FVTOCI).
B. Foreign currency translation adjustments.
C. Unrealized gains and losses on securities measured at Fair value through profit or
loss (FVTPL).

Question 33
The reported earnings before interest and tax for Buzz Enterprise were USD218,000 for the year
ended 31 December 2011. During the year, lease payments of USD86,000 were made. Given
that the interest coverage ratio for Buzz Enterprise was 3.16, what was the fixed charge
coverage ratio for 2011?
A. 1.85.
B. 1.96.
C. 2.53.

Question 34
Which of the following theories encourage active government participation in managing
aggregate demand?
A. Real Business Cycle theorists
B. The Austrian school
C. Keynesians

Question 35
An investor is planning for his retirement and has USD1,000,000 to invest. However, he will need
USD55,000 at the end of the year to pay for his son’s college expenses. He has an option to
invest in three alternative portfolios:

Portfolio Expected Return Standard Deviation of Returns

1 7% 9%
2 13% 18%
3 15% 20%
Using Roy’s safety-first criterion, which of the alternative portfolios most likely minimizes the
probability that the investor’s portfolio will have a value lower than USD1,000,000 at year-end?
 A. Portfolio 1.
B. Portfolio 2.
C. Portfolio 3.

Question 36
Two companies, Hover and Indigo, develop operating systems and accessories for mobile
phones. Hover follows IFRS, while Indigo follows US GAAP. Which of the following statements is
most likely true regarding the development of operating systems and accessories?
A. Hover can capitalize the software development cost if it meets certain criteria.
B. Indigo can capitalize the accessories related development cost if it meets certain
criteria.
C. Both companies must expense all development costs related to these intangible
assets.

Question 37
If a test design does not encompass the companies that are not in the database anymore due to
merger, dissolution, or bankruptcy, and only looks at companies that exist in the current time
period, it is subject to:
A. time-period bias.
B. look-ahead bias.
C. survivorship bias.

Question 38
Three countries produce cloth and machines, and the output per worker per day in each country
is as follows:

Country Cloth Machines

A 6 8
B 4 6
C 5 7
Which country most likely has the absolute advantage for producing machines?

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

Question 39
On January 1, 2011, BioGen Inc. issued bonds with a face value of USD10,000,000, and with a
term of 5 years paying 5% coupon annually on 31 December. The market rate at issuance was
4%. The company did not elect to carry the bonds at fair value. In December 2013 the market
rate increased to 4.5% and the company decided to buy back (retire) the bonds after the coupon
payment on December 31. As a result, the gain on retirement reported on the 2013 statement of
income is closest to:
 A. USD94,976.
B. USD102,354.
C. USD110,739.

Question 40
Which of the following reports is least likely to be filed with the SEC?
A. Annual report.
B. Form 10-K.
C. Proxy statement.

Question 41
An investor examines the following rate quotes for the US Dollar and the Hong Kong Dollar.

Spot rate HKD/USD 3.2487 HKD 1-year interest rate 5.6%

1-year forward rate HKD/USD 3.2538 USD 1-year interest rate 4.8%
Is the forward contract correctly priced? If not, how can the investor make an arbitrage profit?

A. The forward contract is correctly priced; there is no arbitrage opportunity.

B. The forward rate is less than what it should be; an arbitrage profit can be made by
selling USD in the spot market and buying USD in the forward market.
C. The forward rate is less than what it should be; an arbitrage profit can be made by
buying USD in the spot market and selling USD in the forward market.

Question 42
The annual returns on Optimus Stock Fund reported skewness of −0.1082, kurtosis of 2.7418
while excess kurtosis of −0.2582 during the period 2017-2019. Which of the following is least
likely correct about the fund’s return distribution?
A. The fund’s returns are platykurtic which implies that its tails are thinner than the
normal distribution.
B. The fund’s returns are leptokurtic which implies that its tails are thinner than the
normal distribution.
C. The fund’s returns are negatively skewed which implies that its left tail is longer.

Question 43
Lily Cho, equity manager, uses a stock screener and selects the following metrics: a global equity
index, P/E ratio lower than the median P/E ratio, and a price-book value ratio lower than the
median price-book value ratio. The stocks selected would be most appropriate for portfolios of:
A. growth investors.
B. market-oriented investors.
C. value investors.
Question 44
Which of the following is most likely represented as inflows of economic resources to a company
under the IFRS framework?
A. Assets.
B. Equity.
C. Revenues.

Question 45
HBL offers stated annual interest rate of 8.00%. Ali, a CFA candidate, informs his friend that the
effective annual rate on the deposit is 8.33%. The frequency of compounding periods per year on
the deposit is closest to:
A. fortnightly.
B. monthly.
C. daily.

Question 46
Demand for earphones (QEP), is a function of price of mobile phones (PMP), price of speakers
(PS), income level (I) and the price of earphones (PE). Assume that mobile phones are a
complement and speakers are a substitute. Based on the given information, which of the
following best represents a possible demand function for earphones?
A. QEP = 450 – 3.5PMP – 2.75PS + 1.25I – 3.68PE.
B. QEP = 450 – 3.5PMP + 2.75PS + 1.25I – 3.68PE.
C. QEP = 450 + 3.5PMP – 2.75PS + 1.25I – 3.68PE.

Question 47
Amigos is a US based retailer of sports shoes. It has 30 stores in Sweden and 15 in Sri Lanka.
The stores in Sri Lanka have been in losses for the past several years. Owing to losses, the
Company’s management has decided to shut down 10 underperforming stores in Sri Lanka.
Which of the following is most likely correct statement in this regard?
A. Closing of 10 underperforming stores in Sri Lanka will be reported as a discontinued
operation on income statement of Amigos.
B. Closing of 10 underperforming stores in Sri Lanka will be reported as an unusual item
on income statement of Amigos.
C. Closing of 10 underperforming stores in Sri Lanka will be reported as a continued
operation on income statement of Amigos.

Question 48
The stock price of Nestlé is USD20. The probability of 10% up movement in any given period is
70% and the probability of 15% down movement in any given period is 30%. The probability that
the stock price of Nestlé will be USD18.7 at the end of two periods is closest to:
A. 13.5%.
B. 21%.
C. 42%.
Question 49
Orange Inc. is a monopoly enjoying very high barriers to entry. Its marginal cost is USD6,000 and
its average cost is USD7,200. A recent market study has determined the price elasticity of
demand to be 1.3. The company will most likely set its price at:
A. $7,800.
B. $31,200.
C. $26,000.

Question 50
Company A classifies some financial assets as “FVTOCI”. Company B reports similar financial
assets as “FVTPL”. What adjustment should be made to Company A’s statements before
comparing with the financial statements of Company B?
A. Realized gains and losses will be recognized in equity.
B. Unrealized gains and losses will be added to net income.
C. Unrealized gains and losses will be recognized in equity.

Question 51
Aero Corp. prepares its financial statements using IFRS. It reports its interest payment on
long-term debt as a financing activity. If the company reports under US GAAP, the most likely
effect on the cash flow statement would be a(n):
A. decrease in cash flow from investing activities.
B. increase in cash flow from operating activities.
C. increase in cash flow from financing activities.

Question 52
Which of the following is least likely an assumption of a classic simple linear regression model?
A. The variance of the error term is the same for all observations.
B. The error term is correlated across observations.
C. The error term is normally distributed.

Question 53
In regard to the aggregate demand curve and an increase in one of its associated factors, which
of the following relationships is least accurate?

Increase in factor Shifts the AD curve Reason

A. Housing prices Rightward Lower investment
B. Stock prices Rightward Higher consumption
C. Exchange rate* Leftward Lower exports and higher
imports
*Exchange rate is foreign currency per unit of domestic currency
A. Option A.
B. Option B.
C. Option C.
Question 54
A review of a company’s inventory records for the year indicates that the following costs were
incurred:

Fixed production overhead: 200,000

Direct material and direct labor: 100,000

Storage costs incurred during production: 52,000

Abnormal waste costs: 16,000

If the company operated at full capacity during the year, the total capitalized inventory cost is
closest to:

A. $300,000.
B. $352,000.
C. $368,000.

Question 55
A Type II error is best described as when a test
A. rejects a false null hypothesis.
B. rejects a true null hypothesis.
C. fails to reject a false null hypothesis.

Question 56
The reserve requirement for banks in an economy is 5 percent. The total money created from a
deposit of $350 into an account is closest to:
A. $7,000.
B. $368.
C. $333.

Question 57
The company prepares its accounts in accordance with IFRS. The inventory cost at year end is
USD405,000, while the estimated selling price is USD421,000. If the costs necessary to make
the inventory worthy of being sold are USD18,000, the inventory recorded will be closest to:
A. $403,000.
B. $405,000.
C. $421,000.

Question 58
Flair Flowers is reviewing the result of sale of a vehicle, sold for €45,000 on 30 April 2016. The
following information about the vehicle is provided:

Acquisition cost of the vehicle €95,000

Acquisition date 1 May 2012
Estimated residual value €7,500
Expected useful life 7 years
Depreciation method Straight-line
Which of the following is most likely the result of sale of the vehicle?

A. A loss of €4,286.
B. Neither a gain nor a loss.
C. A gain of €4,286.

Question 59
The following information is available on a company for the current year:

Net Income: USD2,500,000

Average number of shares outstanding: 150,000

Convertible preferred shares outstanding: 5,000

Preferred dividend per share: USD5

Each preferred is convertible into 5 shares of common stock

Convertible bonds, USD100 face value per bond at 6% coupon: USD60,000

Each bond is convertible into 20 shares of common stock

Corporate tax rate: 35%

The diluted EPS is closest to:

A. USD13.38.
B. USD14.29.
C. USD15.29.

Question 60
Following is some information about one-year certificates of deposit:

Compounding Stated annual

frequency rate
CD Monthly 10.30%
1
CD Quarterly 10.21%
2
CD Continuously 10.15%
3
If otherwise similar, which of the securities is most preferable?

A. CD1.
B. CD2.
 C. CD3.

Question 61
The demand schedule in a perfectly competitive market is given by P = 90 – 4.5Q (for Q ≤ 80).
The long-run cost structure of each company is:

Total cost: 380 + 5Q + 8Q2

Average cost: 338/Q + 5 + 8Q

Marginal cost: 5 + 10Q

New companies are most likely to enter the market at a price greater than:

A. USD135.
B. USD31.5
C. USD80.

Question 62
A company’s balance sheet shows the following:

Current Assets

Cash and cash equivalents USD 1,900

Marketable securities 300

Notes and accounts receivable, trade 1,750

Allowance for doubtful accounts (500)

Inventories 1,000

Deferred income taxes 540

Other current assets 250

Total current assets USD5,240

Current Liabilities

Accounts payable and other accrued liabilities USD2,800

Current portion of borrowings 1,020

Other current liabilities 1,260

Total current liabilities USD5,080

The company’s quick ratio is closest to:

A. 0.68.
B. 0.78.
C. 1.03.
Question 63
Rebecca Wilson, age 40 and single, is a scientist at Environmental Lab, Inc. She has invested in
6 stocks of a construction industry. In order to book profits and change her portfolio allocation,
she wants to sell 3 stocks and rank them as No. 1, 2, 3, and 4. Which of the following is most
likely correct regarding possible ways of selling 3 stocks out of 6?
A. There are 120 ways of selecting 3 stocks from a group of 6 stocks when ordering of
selling is important.
B. There are 20 ways of selecting 3 stocks from a group of 6 stocks when ordering of
selling is important.
C. There are 18 ways of selecting 3 stocks from a group of 6 stocks when ordering of
selling is important.

Question 64
Below is the market share of companies in the beverage industry. The market shares are before
merger of Cola and Fizzi.

Market share (%)

Cola 35
Fizzi 25
Malt 15
Pepsti 15
Chillz 5
Energetica 5
The 4-firm concentration ratio before and after merger is closest to:

A. 23 percent and 41 percent.

B. 90 percent and 95 percent.
C. 80 percent and 95 percent.

Question 65
An analyst chooses the direct method rather than the indirect method for analyzing a firm’s
operating cash flows. The least likely reason for his selection is to:
A. avoid making adjustments for non-cash items.
B. identify operating cash flows by source and by use.
C. understand the relationship between net income and operating cash flows.

Question 66
The followings costs are incurred by a company related to its inventory during the year:

Cost (USD)
Gross purchase price 133,000
Trade discounts 8,000
Storage costs 12,000
Abnormal wastage costs 20,500
Shipping cost to customers 9,500
Assuming an 8% import duty on purchase price net of discounts, the amount charged to
inventory cost is closest to:

A. USD135,000.
B. USD155,500.
C. USD177,000.

Question 67
In an economy, consumption is 60% of pre-tax income and the average tax rate is 30% of total
income. If planned government expenditures are expected to increase by USD2 billion, the
increase in total incomes and spending (USD in billions) is closest to:
A. USD2.0.
B. USD2.5.
C. USD5.0.

Question 68
For the USMLE Step 1 exam, the passing rate is 72% for international students. Research
reveals that 58% of international students study from the BRS Pathology book. It is also found
that out of the international students who passed, 81% had studied from this book. If an
international student studies from BRS Pathology book, the probability that he/she passes is
closest to:
A. 65.25%.
B. 81.00%.
C. 100.0%.

Question 69
Omega Enterprises is in the process of developing a new product. If the company prepares its
financial statements in accordance with IFRS, the most appropriate accounting treatment for
those costs incurred in the project is to:
A. expense all research and development costs as incurred.
B. capitalize all research and development costs as incurred.
C. expense costs until technical feasibility has been established; capitalize development
costs after that.

Question 70
For each 3-point shot that Stephen Curry makes in an NBA match, there is a constant probability
of 68% that it goes in. In the first quarter of a playoff match, Curry attempts five 3-point shots.
What is the probability that more than 3 of these shots go in?
A. 0.3220.
B. 0.3421.
C. 0.4875.
Question 71
Schwimmer Corp. prepares financial statement using US GAAP. The company assesses a piece
of equipment for recoverability on 31 December 2011. It is found that the equipment has a
carrying value of USD200,000, but a fair value of USD190,000. Given that the undiscounted cash
flows the equipment is expected to provide in the future are USD205,000. What is most likely to
be the reported value of the equipment after it is assessed for recoverability?
A. USD190,000.
B. USD200,000.
C. USD205,000.

Question 72
A report produced by a dealer includes the following exchange rates:

Spot Expected Spot Rate in One

Rate Year
USD/CA 1.542 1.578
D
USD/AU 1.124 1.218
D
CAD/GB 1.383 1.435
P
The most accurate calculation of the expected depreciation (%) of the British pound (GBP)
relative to the Australian dollar (AUD) is:

A. 2.33 percent.
B. 2.00 percent
C. 2.04 percent.

Question 73
Zeus Telecom incurred research costs of USD3.5 million, which were expensed in the current
year for accounting purposes, whereas the applicable tax laws require the research costs to be
expensed over a five-year period. The tax base for research costs is closest to:
A. USD0.7 million.
B. USD2.8 million.
C. USD3.5 million.

Question 74
An analyst is testing whether the returns of a stock of Lulus Retail Corporation is equal to the
average CPI of 12%, using a confidence interval of 99%. The p-value for the test statistic is found
to be 0.00872. What is the most appropriate conclusion for this test?
A. Do not reject the null hypothesis.
B. Reject the null hypothesis.
C. We need the value of the standard error to conclude.
Question 75
A firm can sell 150 units and earn total revenue of CAD 450,000. However, if 200 units are sold,
revenue will total CAD 570,000. The marginal revenue per unit associated with selling 200 units
instead of 150 units is closest to:
A. CAD 2,400.
B. CAD 2,850.
C. CAD 3,000.

Question 76
Which of the following is least likely the required disclosures in the Notes to the Financial
Statements under IFRS?
A. Information about the key assumptions concerning the future that have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year.
B. Amount of any cumulative preference dividends recognized.
C. Significant accounting policies used by the Company in preparation of the Financial
Statements.

Question 77
A Company has invested USD250 million on 30 June 2018 in a fixed-income security investment,
with 8.5 percent coupon paid semi-annually. Additionally, market interest rates have declined
such that the value of the fixed-income investment has increased by USD1,000,000 as of 30
June 2019. The Company measured the fixed income investment at Fair Value through Other
Comprehensive Income. Which of the following is most likely correct statement with respect to
the accounting of the debt security on June 30, 2019?
A. The Company will report both interest income of USD21,250,000 and the unrealized
gain of USD1,000,000 on its Income Statement.
B. The Company will report the interest income of USD21,250,000 on its Income
Statement and the unrealized gain of USD1,000,000 on a Statement of
Comprehensive Income as Other Comprehensive Income.
C. The Company will report investment asset at its book value of USD250,000,000 on
its Balance Sheet

Question 78
Ivan Ho, CFA, a Fund Manager at SRL Capital is managing an equity portfolio. He is interested in
replicating the stock index named AG-500 which consists of securities from various sectors and
with different characteristics. Given the nature of population, which of the following sampling
procedure should Ivan most likely prefer to use?
A. Simple random sampling
B. Stratified random sampling
C. Systematic sampling

Question 79
A survey shows that the only difference between Lemon Cola and all other drinks in the
beverage industry is the package and labeling. The current market price of Lemon Cola is
USD9.5 while all the other drinks are sold at USD7.0. The beverage industry is least likely to be
characterized as:
A. oligopoly.
B. monopolistic competition.
C. perfect competition.

Question 80
Parks Company’s financial information is provided below:

• Sales: USD2.3 million

• Cost of goods sold: USD0.93 million

• Cash: USD0.5 million

• Accounts receivable: USD0.8 million

• Ending Inventory: USD0.25 million

•Beginning Inventory: USD 0.20 million

• Accounts payable: USD0.5 million

The company’s cash conversion cycle (in days) is closest to:

A. 29.04
B. 48.6.
C. 66.2.

Question 81
Which ratio is most likely lower for a company using LIFO method to account for inventory, during
a period of rising prices, when compared against a company using weighted average cost
method?
A. P/E ratio.
B. Inventory turnover.
C. Earnings per share.

Question 82
Why is a geometric mean return calculation most likely preferred over a geometric mean
calculation, when using stock return data? It is because:
A. return data can be less than one.
B. return data can be negative
C. the geometric mean return is closer in value to the arithmetic mean.

Question 83

Which of the following recent economic events in Country A will cause aggregate demand curve
to shift left?
 A. The central bank reduced bank reserves, reducing money supply.
B. The capacity utilization rate has increased by 3.1% compared to previous year’s
levels.
C. Corporate profits reported by companies in Country A increased by 25% over last
year’s levels with further increase forecasted for future years.

Question 84
A company issued USD10,000,000 of bonds with a 10-year maturity at 98. Five years later, the
company called the bonds at 102 when the unamortized discount was USD30,000. The company
would most likely report a loss of:
A. USD230,000.
B. USD250,000.
C. USD260,000.

Question 85
The table below shows data of consumption baskets and prices for two years 2013 and 2014:

Goods 2013 2014

Quantity Price Quantity Price
1 packet of candy 23 $10 30 $12
1 bar of chocolate 50 $8 55 $11
1 Banana 30 $6.5 30 $7
The value of the Paasche index is closest to:

A. 123.62.
B. 128.58.
C. 125.67.

Question 86
An equity investor evaluates a portfolio with only two stocks. He gathers the following information
from the historical returns of these stocks:

Stock A Stock B
Expected return 15% 12%
Standard deviation 3.7% 2.6%
Covariance between returns –0.00072
If the weightage of Stock A is 40%, portfolio standard deviation is closest to:

A. 0.012%.
B. 1.08%.
C. 3.04%.
Question 87
Shua’a Corp is offered a five-year lease contract for use of an asset with an implied interest rate
of 11% and an annual lease payment of USD35,000 per year payable at the end of each year.
Therefore, the present value of the lease payments is close to USD129,356. The asset will be
amortized over the five-year lease term on a straight-line basis. Shua’a Corp reports under IFRS.
In Year 3 the principal repayment will be closest to:
A. USD25,592
B. USD25,871
C. USD23,056

Question 88
Ashley Groves, aged 40, is an investor. He wants to know whether the alpha return of equity
mutual funds are correlated with their management fee for equity funds. He has shortlisted 6
equity mutual funds. He wants to test whether the population correlation of alphas and
management fees after ranking is zero. The following table presents the sample.

Equity Mutual Fund 1 2 3 4 5 6

Alpha (X) -1.15 -0.95 -1.00 -1.30 -0.80 -0.98
Management Fee (Y) 0.85 0.80 1.00 1.05 0.75 0.82

Spearman Rank Correlation Distribution Approximate Upper-Tail Rejection Points

Sample Size α = 0.05 α = 0.025 α = 0.01

5 0.8000 0.9000 0.9000
6 0.7714 0.8286 0.8857
7 0.6786 0.7450 0.8571
8 0.6190 0.7143 0.8095
9 0.5833 0.6833 0.7667
Given the above information and significance level of 0.05, which of the following is most likely
correct?

A. We do not reject the null hypothesis because rS is equal to 1.943.

B. We will reject the null hypothesis because rS is equal to 1.943.
C. We will reject the null hypothesis because rS is equal to 0.7714.

Question 89
Pakistan manufactures 650,000 yards of cotton, but has a domestic demand of 800,000 yards of
cotton. The world price of cotton is USD12 per yard and Pakistan shall import 150,000 yards of
cotton from the world market at free trade prices. The Pakistani government decides to impose a
15 percent tariff and the prices would increase to USD13.8 per yard. The domestic production
will, hence, increase to 730,000 yard of cotton, while domestic demand will fall to 780,000 yards.

The gains in producer surplus and government revenue are closest to:
 A. USD1,242,000 and USD90,000.
B. USD1,314,000 and USD90,000.
C. USD1,242,000 and USD45,000.

Question 90

Philippe Jorion, CFA is an economist at an BMB Investment Bank. He is analyzing the

performance of event-driven strategies in hedge funds. After examining the historical data from
2000 to 2015, he concluded that event-driven strategies produce superior investment
performance. Jorion’s friend, David, who is analyst at another Bank, is conducting research of
event-driven strategies impact on performance based on the data used by Jorion. David’s
research is subject to which of the following bias?

A. Look-ahead bias.
B. Data-snooping bias.
C. Data selection bias.