CFA-Sample Level I Questions

These sample questions were developed to give candidates an indication of the question formats
used on the actual examination.
1. Anthony Buchard, CFA, disclosed a complaint by a former client on his annual professional
conduct statement. The CFA Institute Professional Conduct Program sent Buchard a Notice
of Inquiry and requested a copy of the client complaint. Buchard provided a copy of the
complaint; however, several parts of the complaint were blackened out. Buchard refused to
provide a complete copy of the complaint because it contained confidential client
information. According to the Standards of Practice Handbook, Buchard should:
A. provide a complete copy of the complaint to the Professional Conduct Program.
B. maintain all client information as confidential, including the information contained in the
client complaint.
C. sign a confidentiality agreement with the client that requires Buchard to keep the client
complaint confidential.
D. disclose only those parts of the complaint that contain information related to the client's
illegal activities or that are outside the scope of the confidential client relationship.

2. According to the Standards of Practice Handbook, which of the following activities is least
likely to breach a member's duty to a client?
A. Failing to vote proxies.
B. Failing to establish the investment objectives of the client.
C. Using soft dollar arrangements to pay firm management expenses.
D. Disclosing confidential client information to the CFA Institute Professional Conduct
Program.

3. Beth Patrick, a fixed income analyst at a brokerage company, assists her company's traders
by developing in-house bond ratings to supplement those of the major bond rating services.
The traders use disparities in the ratings to construct profitable investment strategies. Patrick
makes inferences from nonmaterial private information and news events, which she reflects
in her bond ratings. Patrick's approach:
A. reflects the mosaic theory.
B. violates confidentiality rules.
C. violates insider trading rules.
D. reflects the misappropriation of information theory.

4. Monique Stein, CFA, conducted a thorough analysis and issued a research report on a
manufacturing company. In the report, which was made available to all clients of her firm,
Stein included her opinion that she was uncertain about the ability of the company to perform
on a contract. The Chief Executive Officer of the company disagreed and submitted a
complaint to Stein's supervisor. The complaint alleged that employees of the manufacturing
company explained the contract to Stein, but that she did not accept their explanation.
According to the Standards of Practice Handbook, did Stein violate the CFA Institute
Standard of Professional Conduct relating to:
communication with clients
and prospective clients? diligence and reasonable basis?
A. No No
B. No Yes
C. Yes No
D. Yes Yes

5. For an investment portfolio, the Sharpe ratio is used to measure:
A. risk per unit of mean return.
B. mean return per unit of risk.
C. risk per unit of mean excess return.
D. mean excess return per unit of risk.

6. An analyst gathered the following information about the net profit margins of companies in
two industries:
Net Profit Margin Industry K Industry L
Mean 15.0% 5.0%
Standard deviation 2.0% 0.8%
Range 10.0% 15.0%
Compared with the other industry, the relative dispersion of net profit margins is smaller for
Industry:
A. L, because it has a smaller mean deviation.
B. L, because it has a smaller range of variation.
C. K, because it has a smaller standard deviation.
D. K, because it has a smaller coefficient of variation.

7. An individual deposits $10,000 at the beginning of each of the next 10 years, starting today,
into an account paying 9 percent interest compounded annually. The amount of money in the
account at the end of 10 years will be closest to:
A. $109,000.
B. $143,200.
C. $151,900.
D. $165,600.

8. An investor wants to have $1 million when she retires in 20 years. If she can earn a 10
percent annual return, compounded annually, on her investments, the lump-sum amount she
would need to invest today to reach her goal is closest to:
A. $100,000.
B. $117,459.
C. $148,644.
D. $161,506.

9. In hypothesis testing, a Type II error is:
A. rejecting a true null hypothesis.
B. rejecting a false null hypothesis.
C. failing to reject a true null hypothesis.
D. failing to reject a false null hypothesis.

10. An investment promises to pay $100 one year from today, $200 two years from today, and
$300 three years from today. If the required rate of return is 14 percent, compounded
annually, the value of this investment today is closest to:
A. $404.
B. $444.
C. $462.
D. $516.

11. According to new classical economists, is financing a reduction in current taxes by
government borrowing likely to result in an increase in:
aggregate demand? the real interest rate?
A. No No
B. No Yes
C. Yes No
D. Yes Yes

12. Which of the following is least likely to explain why government regulation is usually a suboptimal
response to monopolistic markets?
A. Regulatory agencies often reflect the views of special interests.
B. Owners of regulated companies can lack the incentive to operate at a low cost.
C. Regulatory agencies may lack information about the true costs and profits of companies.
D. Regulatory agencies can typically enforce marginal cost pricing but not average cost
pricing.

13. The law of diminishing marginal utility states that the:
A. marginal return derived from making successive units of investment eventually declines.
B. additional satisfaction derived from consuming successive units of a product eventually
declines.
C. additional satisfaction derived from consuming successive units of a product is limited by
the amount of disposable income.
D. additional satisfaction derived from consuming successive units of a product can be
increased by reducing the product price.

14. For a U.S. GAAP company, which of the following statements best describes the relationship
between the amount of accounting profits and the amount of economic profits of a company?
A. Accounting profits and economic profits are similar.
B. Economic profits are greater than accounting profits.
C. Accounting profits are greater than economic profits.
D. No systematic relationship exists between accounting and economic profits.

15. If the effects are fully anticipated, what impact is expansionary monetary policy most likely
to have on real economic activity?
A. Little or no impact.
B. Large expansionary impact.
C. Moderate expansionary impact.
D. Moderate contractionary impact.

Questions 16-20 assume U.S. GAAP (generally accepted accounting principles) unless
otherwise noted.

16. An analyst gathered the following information about the new capital lease obligation a
company made at the beginning of the year:
Annual end of year payments $16,000
Term of the lease 10 years
Appropriate discount rate 10%
Depreciation method Straight-line
Salvage assumption Zero salvage value
In the first year of the lease, the cash flow from financing section of the lessee company's
statement of cash flows will contain a lease-related cash outflow that is closest to:
A. $6,169.
B. $9,831.
C. $14,400.
D. $16,000.

17. An analyst has determined that Megamore Industries uses the LIFO inventory method.
Megamore's reported gross income for the year is most likely to be overstated and require
adjustment by the analyst if, during the year, Megamore experienced a(n):
A. increase in inventory prices.
B. decrease in inventory prices.
C. increase in inventory quantities.
D. decrease in inventory quantities.

18. In the Statement of Cash Flows for a U.S. company, which of the following best describes
how interest received and interest paid, respectively, are classified?
Interest received Interest paid
A. Operating Operating
B. Operating Investing
C. Investing Operating
D. Investing Investing

19. An analyst gathered the following information about a fixed asset purchased by a company:
• Purchase price $12,000,000
• Estimated useful life 5 years
• Estimated salvage value $2,000,000
Using the double-declining-balance depreciation method, the company's depreciation
expense in Year 2 will be closest to:
A. $2,000,000.
B. $2,400,000.
C. $2,880,000.
D. $7,680,000.

20. The following information applies to a company's preferred stock:
• Current price $47.00 per share
• Par value $50.00 per share
• Annual dividend $3.50 per share
If the company's marginal corporate tax rate is 34 percent, the after-tax cost of preferred
stock is closest to:
A. 4.62%.
B. 4.91%.
C. 7.00%.
D. 7.45%.

21. The divisor for the Dow Jones Industrial Average (DJIA) is most likely to decrease if a stock
in the DJIA:
A. has a stock split.
B. has a reverse split.
C. pays a cash dividend.
D. is removed and replaced.

22. A silver futures contract requires the seller to deliver 5,000 Troy ounces of silver. An
investor sells one July silver futures contract at a price of $8 per ounce, posting a $2,025
initial margin. If the required maintenance margin is $1,500, the price per ounce at which the
investor would first receive a maintenance margin call is closest to:
A. $5.92.
B. $7.89.
C. $8.11.
D. $10.80.

23. The current price of an asset is 100. An out-of-the-money American put option with an
exercise price of 90 is purchased along with the asset. If the breakeven point for this hedge is
at an asset price of 114 at expiration, then the value of the American put at the time of
purchase must have been:
A. 0.
B. 4.
C. 10.
D. 14.

24. An analyst gathered the following information about a company:
• 2001 net sales $10,000,000
• 2001 net profit margin 5.0%
• 2002 expected sales growth −15.0%
• 2002 expected profit margin 5.4%
• 2002 expected common stock shares outstanding 120,000
The company's 2002 expected earnings per share is closest to:
A. $3.26.
B. $3.72.
C. $3.83.
D. $4.17.

25. Industry life cycles are typically categorized by the:
A. level of competition.
B. rates of growth in sales.
C. level of productive capacity.
D. rates of growth in return on equity.

26. Does trading take place at market prices that are updated continuously throughout the entire
trading day in the case of:
exchange traded funds? traditional mutual funds?
A. No No
B. No Yes
C. Yes No
D. Yes Yes

27. If an investor's required return is 12 percent, the value of a 10-year maturity zero-coupon
bond with a maturity value of $1,000 is closest to:
A. $312.
B. $688.
C. $1,000.
D. $1,312.

28. Which of the following is least likely to affect the required rate of return on an investment?
A. Real risk-free rate.
B. Asset risk premium.
C. Expected rate of inflation.
D. Investors' composite propensity to consume.

29. An individual investor's investment objectives should be expressed in terms of:
A. risk and return.
B. capital market expectations.
C. liquidity needs and time horizon.
D. tax factors and legal and regulatory constraints.

30. With respect to the security market line (SML) and the value of a stock, if the stock's
estimated return is greater than its expected (required) return, the stock plots:
A. above the SML and is overvalued.
B. below the SML and is overvalued.
C. above the SML and is undervalued.
D. below the SML and is undervalued.

31. An investor with a portfolio located on the capital market line to the left of the market
portfolio has:
A. a lending portfolio.
B. a borrowing portfolio.
C. lower unsystematic risk than the market portfolio.
D. higher unsystematic risk than the market portfolio.

32. Which of the following statements best reflects the importance of the asset allocation
decision to the investment process? The asset allocation decision:
A. helps the investor decide on realistic investment goals.
B. identifies the specific securities to include in a portfolio.
C. determines most of the portfolio's returns and volatility over time.
D. creates a standard by which to establish an appropriate investment time horizon.

Answers:
1. A.
2. D.
3. A.
4. A.
5. D.
6. D.
7. D.
8. C.
9. D.
10. B.
11. A.
12. D.
13. B.
14. C.
15. A.
16. A.
17. D.
18. A.
19. C.
20. D.
21. A.
22. C.
23. D.
24. C.
25. B.
26. C.
27. A.
28. D.
29. A.
30. C.
31. A.
32. C.