Q&A

CFA I: QUANTITATIVE METHODS

What is the difference between the inflation premium and the inflation rate?

Which of the following sentences better represent the difference between the inflation rate and the inflation premium?

  • a) The inflation premium is an extra return that compensates investors for expected inflation.
  • b) The inflation premium is monitored by central banks and it impacts the real value of money over time.
  • c) The inflation rate represents the additional return that investors demand to compensate for the loss of purchasing power due to inflation.

What is the difference between an ordinary annuity and an annuity due?

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?

  • a) We need to divide the value of the ordinary annuity by the gross rate of return.
  • b) We need to add the gross rate of return to the value of the ordinary annuity.
  • c) We need to multiply the value of the ordinary annuity by the gross rate of return.

CFA I: ECONOMICS

How can we determine if a firm is facing a perfectly competitive environment or an imperfectly competitive environment?

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?

  • a) In a perfectly competitive environment, firms face a perfectly inelastic, vertical demand curve, so the firm’s MR (Marginal Revenue) and the price of its product are identical.
  • b) In a perfectly competitive environment, firms face a perfectly elastic, horizontal demand curve, so the firm’s MR (Marginal Revenue) and the price of its product are identical.
  • c) In a perfectly competitive environment, firms face a negative-slope demand curve, so the firm’s MR (Marginal Revenue), is less than the price of its product.

How to differentiate between factors that affect short-term and long-term growth, and factors that affect only the short-term growth?

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?

  • a) Political Developments.
  • b) Changes in Technology.
  • c) Fiscal and Monetary Policy.

CFA I: FINANCIAL STATEMENT ANALYSIS

What are the six main phases of a financial analysis, according to the CFA Institute?

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?

  • a) Collect input data.
  • b) Process data.
  • c) Analyze/interpret the processed data.

What is the difference between the input method and the output method in revenue recognition?

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?

  • a) In the Input method, revenue is recognized based on the proportion of total costs that has been incurred in the period. On the other side, in the Output method, revenue is recognized according to units produced or milestones achieved.
  • b) In the Input method, revenue is recognized based on the proportion of total sales that has been generated in the period. On the other side, in the Output method, revenue is recognized according to total costs incurred through the period.
  • c) In the Input method, revenue is recognized based on the units produced in the supply chain through the period. On the other side, in the Output method, revenue is recognized according to the proportion of sales to cash flows generated in the period.

CFA I: CORPORATE ISSUERS

What is the difference between Public Equity and Private Equity?

For-profit corporations can be public or private. Which of the following sentences better explain the difference between private equity and public equity?

  • a) Public equity belongs to companies that are listed on an Exchange.
  • b) Public equity belongs to companies with a relatively high number of shareholders (usually more than 50).
  • c) Public equity in some countries is related to stock exchange listing, while in others is related to the number of shareholders.

What are the main differences between debt and equity financing used by corporations?

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?

  • a) Legal repayment option, discretionary payments, and finite term commitments.
  • b) Residual asset claim, tax-deductible expenses, and finite term commitments.
  • c) Tax-deductible expenses, legal repayment option, and finite term commitments.

CFA I: EQUITY INVESTMENTS

What are the main functions of financial systems?

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?

  • a) Saving, borrowing, raising capital, and managing risks.
  • b) Saving, borrowing, managing portfolios, and inflation reduction.
  • c) Raising capital, borrowing, managing investments, and economic growth.

What is the first world’s security market index?

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?

  • a) DJRA (1884).
  • b) DJIA (1878).
  • c) DJCA (1891).

CFA I: FIXED INCOME

What is the difference between money markets and capital markets?

When dealing with fixed-income securities, we can classify them as money market or capital market securities. Mark the correct sentence regarding this classification.

  • a) Treasury bills, commercial paper, consols, and certificates of deposits are classified as money market instruments.
  • b) The difference between money markets and capital markets depends on maturity as of today.
  • c) The difference between money markets and capital markets depends on maturity at issuance.

CFA I: DERIVATIVES

What is the difference between a firm commitment and a contingent claim?

When dealing with derivatives, we classify them into contingent claims and firm commitments. Which of the following sentences better represent the difference between them?

  • a) Firm commitments can be used to take either a long or a short position. Futures and options are examples of firm commitments.
  • b) In a firm commitment, both counterparties face an obligation to the other counterparty. Futures and forwards are examples of firm commitments.
  • c) In a firm commitment, only one of the counterparties faces an obligation to the other counterparty. Forwards and options are examples of firm commitments.

CFA I: ALTERNATIVE INVESTMENTS

What is the difference between alternative and traditional investments?

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?

  • a) Stocks, bonds, cash (deposits), real estate, and commodities.
  • b) Long-only stocks, long-only bonds, cash(deposits) and real estate.
  • c) Long-only publicly traded stocks, long-only publicly traded bonds, and cash (deposits).

CFA I: PORTFOLIO MANAGEMENT

What can we say about the performance of traditional asset classes in the long run?

If we consider data from the US market through a long period of time (1926 – 2017), which one of the following sentence is correct?

  • a) Small company stocks show the highest return and risk, while treasury bills show the lowest return and risk.
  • b) Large company stocks show the highest return and risk, while treasury bills show the lowest return and risk.
  • c) Commodities show the highest return and risk, while real estate assets show the lowest return and risk.

CFA I: ETHICAL AND PROFESSIONAL STANDARDS

What is the main difference between Codes of Ethics and Standards of Conduct?

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.

  • a) Codes of Ethics are commitments to upholding the law, while Standards of Conduct serve as a benchmark for the minimally acceptable behavior for community members.
  • b) Standards of Conduct are elements that any Code of Ethics must include.
  • c) Codes of Ethics are a set of moral principles designed to provide guidance for behavior, while Standards of Conduct serve as a benchmark for the minimally acceptable behavior for community members.