CFA Exam

CFA Exam Levels 1 Sample Question

Q1. Which of the following statements regarding the Markowitz efficient frontier is least likely to be correct? The optimal portfolio for:

  1. a more risk-averse investor will lie inside the efficient frontier but will lie outside the efficient frontier for a less risk-averse investor.

  2. an investor is found at the point of tangency between the efficient frontier and an investor’s highest utility curve.

  3. an investor in the portfolio that lies on the efficient frontier and provides her with the greatest level of utility.

  4. None of These

    Correct Answer:

    (A)a more risk-averse investor will lie inside the efficient frontier but will lie outside the efficient frontier for a less risk-averse investor.

Q2. A primary motivation for investment in commodities is most likely the:

  1. positive correlation of commodities with unexpected inflation.
  2. positive correlation of commodities with stock and bond investments.

  3. positive volatility of commodities relative to stock and bond investments.

  4. None of These

Correct answer

(B) positive correlation of commodities with unexpected inflation.

Q3) Compared to investors with long investment time horizons, investors with short investment time horizons most likely require:

  1. less liquidity and greater emphasis on capital appreciation.
  2. less liquidity and less emphasis on capital appreciation.

  3. more liquidity and less emphasis on capital appreciation.

  4. None of These

Correct answer

(C) more liquidity and less emphasis on capital appreciation.

Q4. An investor purchases a 1-month out-of-the-money American call option on a stock. A week later, the stock price is less than the call option strike price. The time value of the option is most likely:

  1. A negative amount.

  2. Zero.

  3. A positive amount.

  4. None of These

Correct answer

C) A positive amount.

Q5. An equity analyst working for a growth-oriented mutual fund has a tendency to misvalue the stocks of popular companies that she has previously recommended and the fund already owns. Her behavior is most likely consistent with which of the following biases?

  1. Confirmation bias

  2. Escalation bias

  3. Prospect theory

  4. None of These

Correct answer

A)Confirmation bias

CFA Exam Levels 2 Question Paper

Q. SMC Case Scenario Ian Sherman, CFA, is a portfolio manager at SMC, an investment advisory firm that offers investment products and services to individual and institutional clients. SMC has adopted the CFA Institute Research Objectivity Standards and implemented policies in compliance with the Standards. All of SMC’s investment professionals have earned CFA charters. Sherman tells prospective clients, “The CFA charter is the highest credential in the global investment management industry. As charterholders we are committed to the highest ethical standards. Completion of the program has dramatically improved the team’s portfolio management knowledge and their ability to achieve better p During the conference, private equity firm Caruso Limited announces a takeover bid for Muryan. Immediately, Muryan shares increase 30 percent in value. Martineau is skeptical of the transaction as she doubts that the Caruso partners fully understand the changing industry dynamics of the target firm. She hypothesizes that they would cancel the deal if they did. Concerned that Caruso will eventually cancel the deal, Martineau drafts an updated report and reiterates her sell recommendation on Muryan. Since SMCs Investment Committee had overturned her previous sell recommendation on Muryan she goes into great detail as to why she believes Caruso will not complete the deal. She emails the recommendation to Sherman the next afternoon. That evening, Martineau considers what action to take regarding the 5,000 shares of Muryan held in her husband’s personal account. The firm’s policy on personal investments and trading requires that Martineau receive approval from the compliance department in advance of all trades in securities in subject companies in her assigned industry. She is concerned that if Sherman accepts her recommendation to liquidate all fund holdings of Muryan, the stock price will drop before she receives approval from the compliance department. Martineau decides to use derivatives to hedge her husband’s position because these types of trades do not require advance approval from the compliance department. The next morning, on Martineau’s recommendation, Sherman’s trader sells all of SMC’s mutual fund’s entire positions of Muryan for a sizable gain. Martineau hedges her husband’s position. Several weeks later, as Martineau had hypothesized, Caruso cancels the deal and Muryan’s stock price declines 20 percent. Martineau’s derivatives position effectively hedges her husband’s position in the stock. Sherman learns that a wealthy investor in the fund might liquidate his holdings due to doubts about suitability and economic forecasts. Sherman carefully reviews the client’s investment objectives, and informs the client, “You should not sell. Our fund is still suitable for you. You have been invested with us throughout the past 12 years and I urge you to continue to stay fully invested. I was just looking at the investment record of a former client who happens to be a relative of mine, Karoll Reeves, who has traded in and out of our funds during that same period. Her returns have badly lagged yours.” The client elects to maintain his holdings in Sherman’s fund. A month later, Martineau leaves SMC and starts the Galaxy hedge fund with Anjali Shah as her partner. The first client to commit to the hedge fund instructs the Galaxy partners to direct its trades through RLB Securities. RLB charges higher-than-average fees, but provides some unique informational services to investors. In return for receiving Galaxy’s trading business, RLB promises to refer potential clients to Galaxy. Shah tells Martineau “A larger client base will create economies of scale and will eventually allow Galaxy to lower its expenses for all clients.” Martineau agrees. She and Shah explain the directed brokerage arrangement carefully to prospective clients. They require each client to sign a statement that reads, “It is not necessary for Galaxy to seek best price and execution, and I am aware of the consequence for my account. I consent to Galaxy’s trades being executed by RLB Securities.” Martineau’s actions regarding her husband’s account most likely violate the CFA Institute Research Objectivity Standards because she:

  1. should seek to ensure that trades for immediate family members are not done in advance of or disadvantage investing clients.

  2. trades within the restricted trading period of at least 5 calendar days prior to and after issuing a research report.

  3. did not receive advance approval from the compliance department for trades in her assigned industry.

  4. None of These

Correct answer

  1. should seek to ensure that trades for immediate family members are not done in advance of or disadvantage investing clients.

CFA Exam Levels 3 Question Paper

Joenia Dantas Case Scenario Joenia Dantas is a financial risk manager for Alimentos Serra (AS), a Brazilian manufacturer and exporter of soybean-based food products. AS is a privately held corporation, wholly owned byCesar Serra. Recently, AS took out a R25,000,000, four-year, floating-rate bank loan requiring semi-annual payments of interest based on SELIC (Banco Central do Brasil’s overnight lending rate) plus a spread of 4.50 percent and repayment of principal at maturity. Serra believes that interest rates will rise in the near future and worries that AS will be unable to absorb the higherloan costs associated with an increase in rates. Dantas tells him that she will convert the loan to a 10.80 percent fixed rate by entering into the pay-fixed side of a four-year, R25,000,000 notional principal interest rate swap with semi-annual payments that exchanges SELIC for a fixed rate of 10.80 percent. She explains that the swap will act as a hedge for the loan, reducing the company’s net cash flow risk and net market value risk. Discussions with Dantas about using interest rate swaps to reduce risk cause Serra to think about the fixed income portion of his personal investment portfolio, which includes R12.0 million in bonds that have a modified duration of 5.50 years. Serra’s beliefs about rising interest rates make him want to reduce the bond portfolio’s modified duration to 2.00 years using interest rateswaps. In order to determine the correct swap position, he needs to learn how to calculate the modified duration of a swap. He asks Dantas how to do this. She explains it to him, using the example described in Exhibit 1. Exhibit 1 Data for Swap Example Maturity of swap 4 years Payment structure semiannual Fixed rate on swap 10.8% Duration of 4-year, 10.8% coupon bond 2.91 years Serra decides to use a swap that has a modified duration of -2.40 years for the pay-fixed side to reduce his bond portfolio’s duration to the desired level. Dantas knows that AS currently needs to borrow an additional R30,000,000 for 5 years to fund its growth. Brazilian credit markets have tightened and it would cost 17.70 percent per year to borrow this amount locally, but AS can obtain a yen-denominated loan at a fixed rate of 9.50 percent. This would expose it to substantial currency risk. A 5-year currency swap is available in which AS would pay interest in real to the counterparty at 12.20 percent and receive interest in yen from the counterparty at 7.10 percent. The current exchange rate is ¥40/R. In addition to the current needs, in six months AS will enter into a four-year, quarterly payment, R 50,000,000 loan to fund local projects. Dantas expects to borrow these funds at a floating rate and convert the loan to fixed using an interest rate swap. She explains to Serra that AS can commit to a fixed rate of 14.3 percent for the future loan by buying a payer swaption today with an exercise rate of 14.3 percent for a four-year swap with quarterly payments and a notional principal amount of R50,000,000. If AS enters into the yen-real currency swap with a notional principal of ¥1.2 billion (R40.0 million), net yen interest expense for each year is closest to:

  1. ¥85.20 million.

  2. ¥28.80 million

  3. ¥114.00 million.

  4. None of These

Correct answer

B.¥28.80 million.