Which of the following sentences better represent the difference between the inflation rate and the inflation premium?
How can we calculate the value of an annuity due taking the value of an ordinary annuity, if both annuities have the same number of years, and the same value year after year?
In statistics, within the measures of central tendency we can find the median, the mode, and the mean, and inside this last measure, we can differentiate between arithmetic, geometric, weighted, and harmonic mean. Mark the correct sentence regarding the main advantages of the arithmetic mean?
Suppose that you have estimated the probability distribution of a hedge fund for next year considering three different scenarios. There is a 40% probability of generating a 30% return (optimistic scenario), a 25% probability of generating a 5% return (flat scenario), and a pessimistic scenario with a negative return of 10%. Calculate with these inputs, the expected value and the standard deviation of this hedge fund?
The Pearson correlation coefficient is a number between -1 and +1 that measures the consistency or tendency for two investments to act in a similar way. It is used to determine the effect on portfolio risk when two assets are combined. Which of the following sentences better represents the limitations of the correlation analysis implemented through the Pearson correlation coefficient?
Under profit-maximizing conditions, firms can be classified as operating in either a perfectly competitive or an imperfectly competitive environment. Which of the following sentences help us to differentiate between both environments?
When analyzing and understanding business cycles, we distinguish between factors affecting the short-term growth, and factors affecting both the short-term and the long-term growth. Which one of the following factors affect both the short-term and the long-term growth?
Which of the following sentences better reflects the difference between monetary and fiscal policy?
According to the CFA Institute, we can determine seven roles accomplished by Central Banks all over the world. Which of this roles is specifically associated to helping to prevent bank runs?
In the CFA level I curriculum, there is a reading dealing with Geopolitics. Which of the following sentences better defines this important concept?
Analysts work in a variety of positions within the investment management industry, and the CFA Institute establishes six phases in the process of financial analysis. Which one of these phases is responsible for creating adjusted financial statements, common-size statements, ratios and graphs?
When a firm sells products or services that will be delivered over a long period of time, (e.g., two years), and the firm knows the amount of money it will collect at the end of the transaction, the revenue can be recognized in each period according to two potential methods. Which of the following sentences represents the difference between the output and the input method?
Intangible assets are those lacking physical form, such as patents and trademarks. Regarding the reporting of intangible assets in the balance sheet, we need to remember some relevant rules. Which of the following sentences is correct?
When financial analysts review the different financial statements reported by companies. It is crucial to understand how these financial statements are linked. Mark the correct sentence in relation to these linkages.
Evaluation of the cash flow statement should involve an overall assessment of the sources and uses of cash between the three main categories (operating, investing, and financing activities) as well as an assessment of the main drivers of cash flow within each category. Mark the correct sentence regarding where the major sources and uses of cash flow are between the mentioned three categories.
For-profit corporations can be public or private. Which of the following sentences better explain the difference between private equity and public equity?
When comparing debt financing to equity financing used by corporations, there are some key differences. Which of the following sentences represents differential characteristics of debt financing?
When analyzing the relationships between the different stakeholders in corporations, such as governments, customers, shareholders, bondholders, suppliers, managers, board of directors, and employees, we can find different types of relations, such as contractual or agency (principal-agent) relationships. Which of the following can be considered as an agency relationship?
When dealing with relevant periods in each company, such as the reception of inventory from suppliers, the reception of cash from clients or the payment of cash to suppliers, we define two relevant periods expressed in days, the operating cycle and the net operating cycle, what is the main difference between both cycles.
In the Corporate Issuers (Corporate Finance) area, we define capital investments as those with a life longer than one year, so they are included in the long-term portion of balance sheets. Which of the following types of capital investments is associated to machine replacement and infrastructure improvement?
Financial systems help people to achieve their goals. This can be illustrated through the functions of financial systems. Which one of the following lists represents the main functions of financial systems?
Nowadays, security market index are extensively used by investors around the world, and there is huge variety of indices. Which of the following sentences represents the first world’s security market index?
According to the EMH (Efficient Market Hypothesis) proposed by Nobel Prize winner Eugene Fama, informationally efficient markets are those in which asset prices reflect new information quickly and rationally. Mark the correct sentence in terms of active vs. passive investments, and efficient vs. inefficient markets.
A key difference between debt and equity securities is the voting rights that are implicit in equities. Which of the following represents a voting process in which each share represents one vote?
When financial analysts elaborate Company Research Reports there are three main elements, which one of these elements is related to the determination of the business model, the analysis of revenue and revenue drivers, the analysis of operating profitability and working capital, and the analysis of capital investments and capital structure?
When dealing with fixed-income securities, we can classify them as money market or capital market securities. Mark the correct sentence regarding this classification.
When dealing with the main repayment structures of fixed-income securities, we can find different methods for amortization. Mark the correct sentence regarding repayment structures of bonds.
Which of the following sentences better explains the concept of a “fallen angel” in terms of creditworthiness of bonds, according to the CFA Institute?
Lines of credit are a relevant way of external loan financing for companies. Which of the following sentence better represents the main difference between committed and uncommitted lines of credit?
When analyzing fixed-income securities, issuers can be either public or private. Which of the following sentence is true according to the CFA Institute?
When dealing with derivatives, we classify them into contingent claims and firm commitments. Which of the following sentences better represent the difference between them?
When dealing with derivatives, we classify them into contingent claims and firm commitments. Futures and forwards are two of most well-known derivatives. Which of the following sentences is correct in relation to the differential characteristics between futures and options?
Derivative transactions offer a number of operational advantages to cash or spot markets in many instances. Which of the following sentences better reflects these operational advantages of financial derivatives?
In finance, the market efficiency establishes that market prices should not allow for the possibility of riskless profit or arbitrage in the absence of transaction costs. Which of the following sentences do NOT represent a clear situation of arbitrage with derivatives?
Suppose investment company Omicron owns 25,000 common non-dividend paying shares of company ABC with a spot price of $154.58. Omicron enters into a forward contract with a financial intermediary to sell forward 25,000 shares at a forward price of $150 per share in 11 months. Calculate the value per share at maturity of the forward position if the spot price of ABC at maturity is $165.
There are different ways to classify investments. One of these classifications differentiates between traditional and alternative investments. Which one of the following sentences includes examples of traditional investments?
Suppose a private equity (PE) firm makes an initial investment in company Epsilon of $5 million. Then, at the end of the first year, the firm needs to place additional capital for an amount of $2.5 million, and at the end of the fourth year, another additional capital investment of $1.5 million. Finally, the position is sold at the end of the sixth year for $15 million. Calculate the value of the IRR and the value of the MOIC.
Within private equity strategies, the CFA Institute differentiates among leverage buyouts, venture capital, and growth capital. Leverage buyouts can be segregated into MBOs and MBIs. Which of the following sentences better reflects the main difference between both types of leverage buyouts?
Alternative investments, as opposed to traditional investments, have some specific characteristics that make them specially relevant for any investment portfolio. Real estate is a type of alternative investment with a long tradition among investors all over the world. Which of the following sentences better represents the main reasons for investing in Real Estate?
Natural resources, as part of the alternative investments asset class, have some unique products and characteristics, the ownership of these assets can be either institutional or individual. Which of the following natural resources have owners that are mainly institutional?
If we consider data from the US market through a long period of time (1926 – 2017), which one of the following sentence is correct?
In portfolio theory we use different graphical representations to illustrate the key concepts. Which of the following sentences better represents the CAL (Capital Allocation Line?
Which of the following performance measures represents the ratio of the standard deviation of an equally weighted portfolio to the standard deviation of a randomly selected security of this portfolio?
Portfolio planning can be defined as a program developed in advance of constructing a portfolio that is expected to define the client’s investment objectives. The written document governing this process is the investment policy statement (IPS). The main elements of an IPS can be classified into objectives and constraints. Mark the correct sentence in relation to objectives and constraints of a default IPS?
In general, behavioral biases come in two forms: cognitive errors and emotional biases. Both forms of bias, regardless of their source, may cause decisions to deviate from what is assumed by traditional finance theory. What is the main difference between both types of biases?
Ethical conducts are relevant to balance moral principles and industry practices in any kind of business. Mark the correct sentence in terms of the relationship between a Code of Ethics and Standards of Conduct.
All CFA Institute members and candidates enrolled in the CFA Program are required to comply with the Code of Ethics and with the Standards of Professional Conduct. The two CFA Institute institutions responsible for enforcement of both the Code and Standards are:
Roberto Velasco, passed the CFA levels I and II in his first attempt, and he recently registered for the Level III exam. Roberto works for a global investment firm known as Alpha Searchers, and his company adopted the Code of Ethics and the Standards of Professional Conduct three years ago. Which one of the following is most likely a violation of the Code of Ethics and Standards of Professional Conduct?
Amelia Bulonska is a highly respected technology sector analyst with Dadu&Fefe and has been asked by another investment firm to be the key spokesperson for a conference it is organizing. This investment firm has offered to pay her all expenses, plus bringing 3 all-expenses paid companions and a golf outing at Pebble Beach which is close to the accommodation. What should Bulonska do to avoid violating Standard I(B)?
Robert Swatz is a financial advisor who is trying to get a new client and to do so, he says, “I only have a 4-year track record, but I’ve averaged a 34% return on my clients’ accounts”. This sentence is true, but Swatz does not mention to the prospectthat he has few clients, and that this high average is mainly because one of his clients took a strong position in derivatives against the recommendation of Swatz and the operation finally went very well, removing that operation the average profitability of the accounts of his clients would be 5%. Has Swatz violated the Standards?