2009 Level II Mock Exam: Morning Session The morning session of the 2009 Level II Chartered Financial Analyst® Mock Examination has 60 questions. To best simulate the exam day experience, candidates are advised to allocate an average of 18 minutes per item set (vignette and 6 multiple choice questions) for a total of 180 minutes (3 hours) for this session of the exam.
Questions
Topic
Minutes
1-6
Ethical and Professional Standards
18
7-12
Quantitative Methods
18
13-18
Financial Statement Analysis
18
19-24
Financial Statement Analysis
18
25-30
Corporate Finance
18
31-36
Economics
18
37-42
Equity Investments
18
43-48
Fixed Income Investments
18
49-54
Derivative Investments
18
55-60
Portfolio Management
18
Total:
180
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Questions 1 through 6 relate to Ethical and Professional Standards.
Sang-Gyung Jun Case Scenario Sang-Gyung Jun is enrolled in an MBA program and serves as an unpaid intern for Portree Investment Services. During his internship, Jun’s supervisor at Portree, Barbara Fantine, teaches him several stock valuation techniques. Jun hopes his unpaid internship will eventually result in full-time employment with Portree, and he enthusiastically recruits a number of wealthy clients, most of whom are members of Jun’s family. Fantine praises his efforts, remarking that “these clients are the foundation on which you can build your career at Portree.” Despite his success, Jun’s internship remains unpaid even after he receives his MBA degree and passes the CFA® Level III examination. Jun seeks full-time employment with Upsala Financial Corp. which specializes in serving high net worth individuals. When interviewing for the position at Upsala, Jun informs his interviewer that “I need to obtain only one more year of work experience before I will receive the CFA charter. After the interview, Jun contacts the clients he has recruited at Portree to ask if they would become his clients at Upsala. None of these clients accept this offer. When Fantine learns of Jun’s plans to leave Portree, she informs Jun, “You are not permitted to use any of the valuation techniques I have taught you because they belong to me.” Jun subsequently accepts the position at Upsala and informs Fantine. On the same day, Fantine receives news about the departure of another Portree employee, Jasmine Velez, CFA. Velez is leaving to start an investment firm that will directly compete with Portree. Velez has not contacted any potential clients, but during non-work hours she has incorporated her new firm and obtained the necessary licenses. On Jun’s first day of work at Upsala, he receives and reviews a copy of the firm’s compliance policy, excerpts of which appear in Exhibit 1.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Exhibit 1 Upsala Financial Corp. Compliance Policy Independent Practice Employees of Upsala may enter into independent practice only in business segments not already targeted by Upsala, and only in roles clearly leading to improvements in employee skill and expertise that can be used beneficially by Upsala. Priority of trades Transactions for employers must have priority over transactions in securities or other investments of which a member or candidate is the beneficial owner. The interests of outside clients must be given priority over accounts registered in the name of Upsala itself. Moreover, all personal trades by employees of Upsala firm will be pre-cleared in accordance with the firm’s compliance policies. Jun also receives new business cards which read “Sang-Gyung Jun, CFA, Investment Consultant.” Jun mails letters of introduction with the business cards to contacts and potential clients. In his first meeting with new colleagues Jun, wanting to create a favorable image states, “I passed all three CFA examinations on the first try, which places me in an elite category of exceptional charterholders.” Jun later impresses his supervisor at Upsala with his knowledge of stock valuation techniques. He does not inform his supervisor that he learned the techniques from Fantine at Portree. Several months later, Jun receives an offer of part-time consulting work from a family friend who needs assistance marketing investment services to high-net-worth individuals in Korea. Jun reviews the firm’s policy on independent practice and confirms that Upsala does not conduct business in Korea. Jun is convinced that the consulting work will improve his skills and thus benefit Upsala. He accepts the consulting work which requires approximately three hours of late-night work on Mondays and Wednesdays. Since Jun only requires 4-6 hours of sleep he does not feel that this night work will interfere with his responsibilities. Jun then sends an email to his supervisor informing him of the consulting offer, its requirements, duration, compensation, and the skills he expects to develop from the work.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
1. Did Jun’s actions immediately following his interview with Upsala most likely violate the CFA Institute Standards of Professional Conduct? A. Yes. B. No, because he no longer owes a duty of loyalty to Portree. C. No, because the Portree clients have not accepted the offer to move.
2. When using the stock valuation methods at Upsala, does Jun violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because he does not have Fantine’s permission. C. Yes, because he does not inform his supervisor of the source of his knowledge.
3. When preparing to establish an investment firm, does Velez violate the CFA Institute Standard relating to Duty to Employer? A. No. B. Yes, because she plans to compete directly with Portree. C. Yes, because she incorporated the firm before leaving Portree.
4. To make Upsala’s statement on Priority of Trades consistent with CFA Institute Standards, Jun’s most appropriate recommendation is to revise it so that: A. the interests of clients must be given priority over accounts in which Upsala’s employees are beneficial owners. B. the interests of clients must be given priority over family accounts and accounts registered in the name of Upsala itself. C. transactions for clients and then employers have priority over transactions in securities or other investments of which a member or candidate is the beneficial owner.
5. Jun least likely violated CFA Institute Standards of Professional Conduct with his: A. use of the business card. B. statement about charterholders. C. statement about passing exams.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
6. When accepting the part-time consulting position, does Jun most likely violate any CFA Institute Standards? A. No, because he does not need consent. B. Yes, because he does not provide adequate disclosure to Upsala. C. Yes, because the work requirements will interfere with his duties to Upsala.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Questions 7 through 12 relate to Quantitative Methods
Jacques Nordique Case Scenario Jacques Nordique is a quantitative analyst at Brimford Investment Management. One of the firm’s managing partners asks Nordique to collect and analyze data as part of a project to explain and to forecast the behavior of price/earnings (P/E) ratios. Nordique wants to examine timeseries models of P/E behavior and begins by collecting 15 years of monthly data on market P/E ratios. After considering several different time-series models, Nordique estimates a regression equation of the form: (P/E) = + (P/E) t–1 +
Equation 1
ε
and obtains the results shown in Exhibit 1. Nordique believes the time series is mean reverting and given the estimated coefficients, he calculates the mean-reverting level of the market P/E ratio to be 13.3. Exhibit 1 Regression Results Dependent Variable is the Market Price/Earnings (P/E) Ratio Regression Statistics R-squared 0.959 F-statistic 4160.885 Standard Error of Estimate 0.988 Number of Observations 179 Durbin-Watson Statistic 2.115 Intercept (P/E) t–1
Coefficients 0.332 0.975
Standard Error 0.189 0.015
Nordique shares his time-series results with his supervisor, Amy Beloit. She is interested in the implications for stock-bond allocation, especially given that Brimford’s investment strategists are neutral on the future direction of interest rates. After reviewing the results, Beloit has two concerns about the time series estimated in Exhibit 1: (1) do the error terms exhibit heteroskedasticity; and (2) does the time series exhibit a unit root? Exhibit 2 contains critical values of several test statistics that may be relevant to the results that Nordique and Beloit are interpreting. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Degrees of freedom 2 120+
7.
Exhibit 2 Critical Values of Selected Test Statistics t-statistic Durbin-Watson Statistic One-tailed Probabilities α = 0.05, K = 1 p = 0.05 p = 0.025 = 1.65 = 1.69 2.92 4.30 1.66 1.98
Nordique’s most appropriate action to determine if Equation 1 correctly fits the time series is to examine the: A. R-squared value and F-statistic. B. autocorrelation between the error terms. C. correlation between the squared error terms and the independent variable.
8. To determine whether Beloit’s first concern is valid, Nordique’s most appropriate action would be to: A. perform the Dickey-Fuller test. B. regress the squared residuals from Equation 1 on the squared residuals lagged one period. C. test whether the variance of the error in one period depends on the variance of the error in successive time periods.
9. Which of the following models is most appropriate to determine if Beloit’s second concern is justified? A. (P/E) t – (P/E) t–1 = + (P/E) t–1 + B. (P/E) t – (P/E) t–1 = + [(P/E) t – (P/E) t–1 ] + C. (P/E) t – (P/E) t–1 = + [(P/E) t–1 – (P/E) t–2 ] + ε
ε
ε
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
10. If Beloit’s second concern about the time-series results in Exhibit 1 is correct, Nordique’s most appropriate action is to: A. do nothing. B. re-estimate the regression using the form: (P/E) = + (P/E) t-1 + (P/E) t-2 + . C. re-estimate the regression using the form: [(P/E) – (P/E) t-1 ] = + [(P/E) t-1 – (P/E) t-2 ] + . ε
ε
11. If Nordique’s belief about the behavior of the time series is correct, which of the following is most appropriate? A. Underweight stocks if the P/E is above its historical average. B. Overweight stocks if the P/E is above its mean reversion level. C. Underweight stocks if the P/E is above its mean reversion level.
12. If Nordique’s model is correctly specified, and the market P/E ratio is 22.50 in June 2008, the estimate of the market P/E ratio for August 2008 is closest to: A. 21.39. B. 22.04. C. 22.27.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Question 13 through 18 relate to Financial Statement Analysis
Greg Fannerson (ACI) Case Scenario Greg Fannerson, CFA, is a financial analyst with Alchemy Consolidated Industries, Inc. (ACI). ACI is a U.S. corporation involved in several industry sectors and, in addition, has a significant portfolio of intercorporate investments. ACI follows U.S. GAAP when preparing its financial statements. Fannerson’s supervisor, Charles Wilmington, has requested that Fannerson provide an update on ACI’s existing equity investments. Fannerson has developed Exhibit 1, containing information about the companies. Exhibit 1 ACI Inc. Portfolio A Equity Investments (amounts in millions) Investees’ Market Total Cost Value Reported Dividends Ownership Investment Basis 31 Net Paid by Percentage ($U.S.) December Income Investees in 2008 2008 2008 Columbus 60 percent $200 $200 $65 $10.0 Inc. De Soto 33 percent $125 Not $90 $15.0 Inc. applicable Le Vaca 30 percent $0 $2 ($50) 0 Inc. Marco Inc. 25 percent $75 $65 $60 $12 Viking Inc. 5 percent $20 $40 $80 $10
Dividends Received by ACI in 2008 $6.0 $5.0 0 $3.0 $0.5
In addition to the equity investments in Exhibit 1, Fannerson was asked to evaluate two recently acquired debt holdings, which have been classified as held-to-maturity. Information about these securities is shown in Exhibit 2.
Investment Cortez Inc. Da Gama Inc.
Exhibit 2 ACI Inc. Portfolio B Debt Securities (amounts in millions) Cost Basis Market Value (Purchased at Par Value) 31 December 2008 $50 $46 $35 $30
Interest Received by ACI in 2008 $3 $2
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Wilmington mentions that the economic circumstances regarding the two debt securities has deteriorated significantly and asked Fannerson’s opinion on how the way in which these securities had been classified affected ACI’s performance. Fannerson has gathered the following additional information: • • • • • •
At time of purchase the market value of the net assets of Columbus were equal to their book values. The number of seats that ACI holds on the respective Boards of its’ equity investments is shown in Exhibit 3. De Soto is a joint venture between ACI and two other partners. Marco has a majority holder that exercises control over Marco’s operations. ACI has been unhappy with the performance of the Le Vaca investment for some time and has been attempting to divest its holding with no success. ACI does not classify equity securities as held-for-trading securities. Exhibit 3 Seats on the Board held by ACI in its Investee Companies Company Total Number Seats controlled of Directors by ACI Columbus 12 7 De Soto 9 3 Marco 16 0 Le Vaca 12 4 Viking 15 0
13. The incremental effect on ACI’s net income ($ millions) from its investment in Columbus is closest to: A. 39. B. 45. C. 65.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
14. If ACI were to use the IFRS (International Financial Reporting Standards) recommended method to account for De Soto instead of U.S. GAAP, which of the following will be the item most likely to increase for ACI? A. Net income. B. Total revenues. C. Return on assets.
15. The year-end 2008 balance sheet carrying value (in $ millions) of De Soto was closest to: A. 125. B. 150. C. 155. 16. The equity income from investments that should be reported on ACI’s 2008 income statement (in $-millions) is closest to: A. 18. B. 30. C. 33.
17. ACI’s investment income will include dividends from which of the following investments? A. Viking only. B. Marco and Viking. C. De Soto, Marco and Viking.
18. If ACI had classified the debt securities in Portfolio B as available-for-sale securities, its pre-tax income ($-millions) for 2008 would have most likely been: A. 9 lower. B. 4 lower. C. unchanged.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Question 19 through 24 relate to Financial Statement Analysis
Erika Wong Case Scenario Erika Wong, an analyst with Montreal Investments, is forecasting 2008 results for Garrison Inc. Garrison has two wholly owned European subsidiaries: Catlette and Heren. Wong has prepared individual forecasts for the parent company (before consolidating the subsidiaries) in U.S. dollars and for the two subsidiaries in their local currency (the Euro). She wants to determine how the translation of subsidiary results will affect the consolidated results of operations, using the following additional information: • • •
Both Catlette and Heren use the FIFO method for inventory. Catlette’s results will be translated into dollars using the all-current method. Heren’s results will be remeasured into dollars using the temporal method.
Wong’s forecasted exchange rates for the U.S. dollar and Euro are shown in Exhibit 1 along with historical rates. Her forecasted financial data for Catlette Company are presented in Exhibits 2 and 3. Wong is particularly concerned about whether the choice of translation methods will distort Garrison’s financial ratios relative to the ratios in local currencies. She plans to translate the forecasted financial statements for the subsidiaries into U.S. dollars using the methods which Garrison is expected to use. Exhibit 1 Exchange Rates 31 December 2007 31 December 2008 2008 average Rate when Catlette’s fixed assets were acquired Rate when Catlette acquired Year-end 2007 inventory Year-end 2008 inventory
0.80 Euro = 1.00 US dollar 0.75 Euro = 1.00 US dollar 0.78 Euro = 1.00 US dollar 0.85 Euro = 1.00 US dollar 0.82 Euro = 1.00 US dollar 0.75 Euro = 1.00 US dollar
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Exhibit 2 Catlette Company Forecasted Balance Sheet 31 December 2008 (in millions of Euro) Cash and receivables Inventory Fixed Assets Total Assets
50 200 1,000 1,250
Liabilities Capital Stock Retained Earnings
350 650 250
Total liabilities and stockholders’ equity
1,250
Exhibit 3 Catlette Company Other Financial Data (in millions of Euro) 2008 Forecasted Sales 2008 Forecasted Cost of sales 31 December 2007 Inventory
1,000 700 100
19. Considering the translation method chosen, Garrison most likely designated the Euro as the functional currency for: A. Heren only. B. Catlette only. C. both Heren and Catlette.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
20. When Garrison consolidates Heren’s results, it will ignore exchange rate translation gains and losses on: A. monetary items if unrealized. B. nonmonetary items if realized. C. nonmonetary items if unrealized.
21. The translation method used by Garrison for Catlette is best justified if: A. Catlette is a sales outlet for the parent’s products. B. Catlette is a self-contained independent operating entity. C. Garrison’s reporting currency is used as the functional currency for Catlette.
22. When Garrison consolidates Catlette’s results, unrealized exchange rate translation gains or losses on monetary assets will be: A. unreported. B. reported in non-operating earnings. C. reported in equity as a cumulative translation adjustment. 23. When Wong converts her forecasted balance sheet for Catlette into U.S. dollars, total assets at 31 December 2008 (in $ millions) will be closest to: A. 1,038. B. 1,510. C. 1,667.
24. When Wong converts her forecasted income statement data for Catlette into U.S. dollars, gross profit margin for 2008 will be closest to: A. 27.2%. B. 30.0%. C. 32.7%.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Question 25 through 30 relate to Corporate Finance
MFT Plc Case Scenario MFT Plc is a money management firm based in the U.K. One of MFT’s funds invests in companies with effective corporate governance and conservative capital structures. Rollo Martin, a newly hired analyst, prepares a presentation for the MFT investment committee. Before screening potential investment opportunities, Martin asks his supervisor Hugh Crabbin how to identify effective corporate governance structures and systems. Crabbin states that Martin should look for the following corporate governance attributes: • • •
Transparency in disclosures; Measurable performance accountabilities; Directors identifying strongly with managers’ interests.
Martin gathers information on a potential investment, France-based TML S.A. The company’s website provides details of its corporate governance, some of which is presented in Exhibit 1. Exhibit 1 Extract from TML S.A.’s Corporate Governance Information Board Responsibilities 1. Acquire adequate training so that members are able to adequately perform their duties. 2. Hire the chief executive officer, determine the compensation package, and periodically evaluate the officer’s performance. 3. Establish corporate values and governance structures for the company to ensure that the business is conducted in an ethical, competent, fair, and professional manner. After reviewing this information, Martin is concerned about TML management’s ability to receive excessive compensation. In addition to TML’s corporate governance, Martin analyzes the company’s capital structure. He observes that it has a low debt-to-equity ratio relative to its peers. Martin determines the unlevered value for TML to be €2,000,000,000. He makes the estimates shown in Exhibit 2 to assess the impact of leverage on TML’s capital structure.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Exhibit 2 Selected Leverage Scenarios for TML S.A. Scenario Present Value of Costs of Financial Distress in € thousand Weighted Average Cost of Capital Cost of Equity
Low
Current
Medium
High
0
100
1,000
25,000
11.00% 11.00%
10.50% 13.00%
10.00% 16.00%
11.00% 19.00%
Carol Reed, MFT’s chief investment officer, is interested in TML’s dividend policy. TML uses a longer-term residual dividend approach and currently earnings are near the cyclical high. Martin explains that in the past the company has kept its cash dividend stable despite rising earnings. Moreover, he believes that the recent increase in earnings is only temporary. In addition to paying cash dividends, the company has a share repurchase program. Reed does not agree that much of the increase in TML’s earnings is temporary. She wants to know from Martin what the expected dividend of TML would be if the company used a 5-year period to adjust the dividend towards a target payout ratio of 40 percent. Martin uses TML’s regular dividend per share of €0.50, last year’s earnings of €2.50 per share, and current year’s anticipated earnings of €3.0 per share to calculate the expected dividend.
25. Crabbin’s list of corporate governance attributes, given in response to Martin’s question, is least appropriate with regard to: A. transparency. B. identification. C. measurability.
26. Is each of the responsibilities of the board of directors listed in Exhibit 1 a component of an effective corporate governance system? A. Yes. B. No, because item 1 is not a component. C. No, because item 2 is not a component.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
27. Martin’s concern about management most accurately reflects: A. asset risk. B. accounting risk. C. strategic policy risk.
28. Assuming static trade-off theory holds and using the information in Exhibit 2, TML’s value is: A. unaffected by capital structure. B. highest under the low leverage scenario. C. highest under the medium leverage scenario. 29. Given TML’s dividend policy and Martin’s assessment of its earnings, TML’s most likely course of action would be to: A. reduce share repurchases. B. increase the cash dividend. C. maintain the current cash dividend.
30. If TML were applying the proposed target payout ratio its expected dividend would be closest to: A. €0.54. B. €0.70. C. €0.74.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Question 31 through 36 relate to Economics
Faye Kennant Case Scenario Faye Kennant, an equity analyst, is preparing a research report on Svensoft Oyj, which sells application software to large financial services firms and is based in Helsinki, Finland. Kennant plans to conduct an industry analysis, consider several valuation alternatives, and select an appropriate valuation tool for stock selection. Her first step is to consider whether Svensoft is in an attractive industry and to gauge whether Svensoft has a strong position within the industry. She prepares the following industry analysis: •
•
• • • • •
Industry structure and rivalry: The application software industry is dominated by two companies: Waldoware and Meteor. The founders of Waldoware and Meteor are longterm rivals and the two firms compete brutally for every customer. Svensoft has historically avoided competition with the two by focusing on the needs of large financial services providers and segmenting its offerings. Waldoware recently acquired a small financial services software firm and has committed significant resources to it for competing more effectively. Meteor, on the other hand, has developed its own offering, which many customers consider superior to Svensoft’s offering. Threat of new entry: The dominant positions enjoyed by existing players have resulted in significant barriers to entry into the software industry which in turn enabled the existing players to maintain high profitability. Prominent features of barriers to entry in this industry are: low customer switching costs, high supply-side economies of scale, incumbency advantages, and high capital requirements. Threat of substitutes: substitute products are not currently available. Customer power: Since most financial services firms already have some sort of application software, the recent increase in available offerings is allowing them to negotiate much better deals for renewals or new licenses. Supplier power: Labor is the primary input to application software. The increased rivalry has created a high demand for programmers and elevated salaries, particularly for experienced programmers. Demand: Application software has largely penetrated its target customer base and industry revenue growth has slowed. However, the growth of unit sales in this industry has been closely tracking the overall economic growth. Supply: There are few limitations to the quantity of application software that can be provided.
Svensoft has decided to respond to these pressures by further focusing on the reliability of its applications. Financial services customers have cited reliability as their key consideration in purchase decisions. Svensoft currently lags Waldoware in this regard but intends to become the most reliable. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Given the consolidation that has already taken place in the industry, Kennant believes Svensoft could be acquired. She considers several potential valuation models to determine Svensoft’s potential takeover value. Further, in regard to the process of valuing stocks, Kennant believes the following: 1. Apply appropriate valuation models well grounded in traditional intrinsic value and discounting concepts; the most important factor in determining a security’s intrinsic value is a forecast of “earning power” and it should be determined independent of market price. 2. As Graham and Dodd stipulated, growth stocks should be purchased at bargain prices, whereas cyclical stocks should be purchased at prices within a range of their intrinsic value.
31. According to Kennant’s industry analysis, which of the following is the least attractive competitive force for the software industry? A. Customer power. B. Threat of new entry. C. Threat of substitutes.
32. In regard to the prominent threat of new entry factors that Kennant has included in her industry analysis, she is least accurate with respect to: A. incumbency advantages. B. customer switching costs. C. supply-side economies of scale.
33. The industry analysis model for Svensoft pays least attention to: A. demand. B. profitability. C. external factors.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
34. Which life cycle phase best describes the application software industry? A. Mature. B. Growth. C. Declining.
35. Which of the following is the least attractive factor with regard to the pricing power in the applications software industry? A. Key supply inputs. B. Product segmentation. C. Industry concentration.
36. Kennant’s beliefs are most accurate with respect to her belief: A. 1 but not 2. B. 2 but not 1. C. both 1 and 2.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Question 37 through 42 relate to Equity Investments
Robert Davenport case Scenario Robert Davenport, CFA, is reviewing the report on Fashion Wire that his firm issued last year. Fashion Wire is a U.S. company operating in the appliance industry. Selected data from the 31 December 2008 balance sheet and the 2008 income statement are shown in Exhibits 1 and 2. The data from the financial statements were adjusted as follows: • • • •
Assets and liabilities are at fair value. Depreciation expense reflects the economic obsolescence of assets. Non-recurring items have been removed. Clean surplus accounting applies. Exhibit 1 Fashion Wire Adjusted Selected Data from Balance Sheet as of 31 December 2008 (U.S. $ millions) Total Current Assets Fixed Assets (net of depreciation) Total Assets
8,665 4,584 13,249
Current Liabilities (non interest bearing) Long-term Debt Shareholders’ Equity Total Liabilities and Shareholders’ Equity
7,936 3,188 8,125 13,249
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Exhibit 2 Fashion Wire Adjusted Selected Data from Statement of Income Year Ended 31 December 2008 (U.S. $ millions except for dividends and share data) Operating Income (EBIT) Interest Expense Income before Taxes Taxes (30%) Net Income
1,633 240 1,393 418 975
Dividends per share Number of shares outstanding (millions)
$0.60 812
Davenport also gathers the following information: • The current stock price is $10.00 per share. • The required return on equity capital ( ) is 12.0 percent. • The company’s before-tax and after-tax weighted average cost of capital (WACC) respectively are 11.8 percent and 10.1 percent. Davenport is deciding whether the next report on Fashion Wire should include residual income and related measures of valuation. He first wants to support his belief that shareholders are better informed with the economic value added (EVA) measure than with traditional net income measure. He also wants to show how residual income is calculated. Fashion Wire has already announced several new projects that will greatly increase the size of the company. Davenport has decided to use value-based measures, specifically EVA, to illustrate his concern that shareholder value for Fashion Wire may decrease despite the new projects and larger company size. Dev Raj, Davenport’s supervisor, presents the following scenario for Rajasthan Appliances, a Fashion Wire competitor, and asks him to provide a valuation of the competitor’s stock using a residual income valuation model: • • • •
Return on equity (ROE) is 14 percent and the growth rate of earnings is 7 percent; both figures are assumed to remain constant indefinitely. The book value per share is $12.00. The cost of equity capital ( ) is 12.5 percent. The before-tax and after-tax weighted average cost of capital (WACC) are 11.3 percent and 10.6 percent, respectively. The market value per share is $14.00.
Further, Raj states that residual income models are appropriate even for valuing firms with the following characteristics: By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
(1) Firms where cash flows are unpredictable. (2) Firms that do not pay dividends or when dividends are not predictable. In responding to Raj, Davenport expresses his concern regarding the differences in accounting practices that could result in misleading valuations when using residual income models. Specifically, Davenport makes the following two statements: 1. The residual income model will underestimate the value of the company if it chooses to capitalize an expenditure rather than expensing it. 2. Accounting for changes in the value of investments considered to be “available-for-sale” biases the valuation by incorrectly stating both book value of equity and ROE. In closing, Raj asks Davenport to take the above accounting issues into consideration when valuing companies using residual income models.
37. The best support for Davenport’s belief about the economic value added (EVA) measure and the traditional net income measure is that EVA: A. uses cash flow data while net income uses accounting data. B. deducts the dollar cost of capital from the net operating profit after taxes while net income does not. C. deducts the interest charge on debt from the net operating profit after taxes while net income does not.
38. Fashion Wire’s residual income in 2008 is closest to: A. -$168. B. $ 0. C. $154.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
39. Which of the following results from value-based metrics would best support Davenport’s concern about Fashion Wire’s shareholder value, new projects, and larger company size? A. Dollar cost of total capital > Net operating profit after taxes. B. Return on equity (ROE) > return on equity capital required by investors ( ). C. Strategic investments that are not expected to generate a return immediately.
40. Based on the scenario provided to Davenport by his supervisor, the intrinsic value of Rajasthan Appliances’ stock using the residual income valuation model is closest to: A. $15.27. B. $19.53. C. $23.33.
41. In regard to the appropriateness of firm characteristics for using residual income models, Raj is most accurate with respect to: A. dividends only. B. cash flows only. C. both cash flows and dividends.
42. In regard to Davenport’s response to Raj, it is most accurate to state that he is correct with respect to: A. statement 1 but not 2. B. statement 2 but not 1. C. neither statement 1 nor 2.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Questions 43 through 48 relate to Fixed Income Investments. Madden Roarke Case Scenario Madden Roarke, CFA, is a fixed income analyst for Goldrick & Kildow PLC (GK), an investment management firm. Roarke has been asked to provide an analysis of Windmiller, Ltd., a manufacturer of automobile components. GK’s bond portfolio has a large holding of Windmiller bonds and its manager, Elizabeth Ferguson, is worried that the rating agencies may lower their ratings on the debt. In order to learn more about Windmiller, Roarke reviews recent news reports. From these, he learns that the firm’s CEO is 83 years old and in poor health. The reports note that the CEO is widely credited for Windmiller’s recent turnaround, but that industry insiders are surprised that there is no evidence of succession planning in place. Roarke gathers balance sheet information from Windmiller’s most recent financial reports, which he summarizes in Exhibit 1. Exhibit 1 Windmiller Balance Sheet Information (in billions) 2008 2007 Cash & marketable securities 10.1 9.2 Inventories 5.2 2.8 Accounts receivable 7.8 6.8 Other receivables 3.4 4.6 Current Assets 26.5 23.4 Plant & equipment 43.8 36.7 Other fixed assets 12.7 10.0 Total Assets 83.0 70.1 Short-term debt 12.4 10.3 Current long-term debt 2.4 4.1 Accounts payable 3.7 3.0 Other payables 1.2 0.8 Current liabilities 19.7 18.2 Long-term bonds 34.1 23.7 Long-term bank loans 0.0 5.9 Total liabilities 53.8 47.8 Common par value 0.8 0.8 Retained earnings 28.4 21.5 Total liabilities + equity 83.0 70.1 The Windmiller bonds held in the GK portfolio are currently rated A by the major rating agencies. Using information from Windmiller’s balance sheets and income statements for the By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
last two years, Roarke has calculated the values of a variety of financial ratios. In addition, he has determined the median values for these ratios for bonds of various ratings and provides the information in Exhibit 2.
EBIT interest coverage Pretax return on capital Operating income/Sales Funds from operations/ Total debt
Exhibit 2 Selected Windmiller Ratios and Median Ratio Values by Rating Windmiller Windmiller Median for 2008 2007 A rating 5.51 5.72 5.41 13.94% 14.70% 14.18% 16.61% 18.57% 16.40% 26.38%
26.75%
27.06%
Median for BBB rating 3.75 10.43% 13.84% 18.73%
Ferguson is considering adding asset backed securities to the portfolio and asks Roarke to compare the rating process for asset backed securities to the rating process for corporate bonds. Roarke makes three statements: Statement 1: Collateral typically plays a much greater role in a securitization’s rating than in a bond’s rating. Statement 2: In the typical securitization, there are few operational or business risks to consider relative to those found in a corporation. Statement 3: The servicer’s quality plays a much greater role in determining an asset-backed security’s rating than the firm’s management quality does for a bond.
43. Ferguson’s concern is best described as: A. default risk. B. downgrade risk. C. credit spread risk.
44. The news reports provided information about which of the traditional measures of credit? A. Capacity B. Character C. Covenants
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
45. Using standard ratio analysis and the balance sheet information in Exhibit 1, the change in Windmiller’s short-term solvency from 2007 to 2008 is best described as: A. unclear. B. improved. C. deteriorated.
46. What characteristic of Windmiller’s balance sheet most clearly suggests that its debt has an investment grade rating rather than a junk (high yield) bond rating? A. The level of inventory and its change from 2007 to 2008. B. The level of bank loans and its change from 2007 to 2008. C. The level of retained earnings and its change from 2007 to 2008.
47. Given the information provided in Exhibit 2, the most likely outcome is that Windmiller’s bonds: A. will be downgraded. B. will retain their current rating. C. will be placed on negative outlook.
48. Which of Roarke’s statements regarding the ratings process is most likely false? A. Statement 1. B. Statement 2. C. Statement 3.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Questions 49 through 54 relate to Derivative Investments.
Ravi Baloo Case Scenario Ravi Baloo is a portfolio manager with Springtree Investments, a U.S.-based asset management firm. Baloo is considering using derivatives to enhance returns and manage risk. He asks his junior analyst, Thomas Monk, to help him. In Exhibit 1, Monk summarizes the relationship between an increase in the value of each of the listed inputs and the value of a European-style call option, holding all else constant. Exhibit 1 Effect of Increasing Input Values on European Call Option Values Effect on Input Call Option Value Exercise price Decrease Risk-free rate Decrease Time to expiration Increase Volatility of the underlying Increase Monk wonders about the delta and gamma of a long call option position. Monk makes the following statements: Statement 1: “The delta of an out-of-the-money call moves towards 0 as expiration approaches even if the price of the underlying does not change. Statement 2: Gamma is smaller when there is more uncertainty about whether the option will expire in- or out-of-the-money. Statement 3: Delta is a more precise measure of the change in the option’s value when the gamma of the option is larger.” Baloo asks Monk to assist him in analyzing the following transactions: Transaction 1: Arbitrage Strategy on Acuriva Ltd. (ACT) Equity. Exhibit 2 provides current market prices and data of selected instruments related to ACT equity. Exhibit 2 Current Market Prices and Data Security Price European call option on ACT equity $2.25 European put option on ACT equity $3.40 ACT equity price $33.66 Time to expiration of options 3 months By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Exercise price of options Annualized risk-free rate
$35.00 6.00%
Monk determines that the value of a synthetic call option expiring in 3 months with an exercise price of $35.00 is $2.58. Transaction 2: Purchase of a European put option on Tekvonix (TVX) equity. Monk uses a oneperiod binomial model to calculate the value of a one-year put option on TVX equity. Details of the put option are given in Exhibit 3. Exhibit 3 European Put Option on TVX Equity Time to expiration 1 year TVX equity price $52 Exercise price $45 Model predicted up move 15% Model predicted down move 20% Annualized risk-free rate 6.00% Transaction 3: Equity swap to gain exposure to the Russell 2000 index. Springtree enters into a two-year equity swap in which it will receive the rate of return on the Russell 2000 Index and will pay a fixed interest rate equal to 4.99 percent. The swap has annual payments. The Russell 2000 Index is at 757.09 at the beginning of the swap and the notional principal of the swap is $100 million. Transaction 4: Baloo expects to enter a pay-fixed position in a 4-year interest rate swap in six months. He asks Monk to explain how a swaption can be used to protect Springtree from an adverse change in interest rates. Monk makes the following statements: Statement 4: “Springtree should purchase a payer swaption. Statement 5: The swaption fixes the rate that Springtree will pay on its swap. Statement 6: A swaption can be settled in cash at expiration.” Monk considers a scenario in which the Russell 2000 Index falls to 723.86 in 100 days and the term structure of interest rates is as presented in Exhibit 4. Exhibit 4 Term Structure of LIBOR Interest Rates 100 Days Later Days (T) (T) (T) 260 0.0442 0.9691 620 0.0499 0.9209 Note: Calculations are on a 360-day basis. T = Time to expiration; (T) = LIBOR rate to time T; (T) = Discount factor of $1 from time T to the present. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Monk states, “The value of this equity swap is the amount of money that is exchanged on the annual payment date.”
49. Which of the relationships shown in Exhibit 1 is incorrect? A. Volatility B. Risk-free rate C. Exercise price
50. Which of Baloo’s statements regarding the delta and gamma of a call option is correct? A. Statement 1 B. Statement 2 C. Statement 3
51. Baloo’s arbitrage strategy in Transaction 1 should include: A. selling the put option in the market and buying the equity. B. selling the put option in the market and shorting the equity. C. buying the put option in the market and shorting the equity.
52. The value of the one-year put option in Transaction 2 is closest to: A. $0.83. B. $1.70. C. $2.38.
53. Given Monk’s scenario, the market value of Transaction 3 is closest to: A. –$5,910,000. B. –$3,070,000. C. -$1,070,000.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
54. Which of the statements Monk makes with respect to Transaction 4 is incorrect? A. Statement 4 B. Statement 5 C. Statement 6
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Questions 55 through 60 relate to Portfolio Management.
Maria Mendez Case Scenario Maria Mendez, CFA, is a research analyst at Three-Star Investment Management. Mendez is collecting and analyzing data as part of a project to explain and forecast Three-Star’s portfolio returns using arbitrage pricing theory (APT). Mendez begins by collecting 5 years of monthly data including: 1) surprise in GDP growth (GDP) and 2) surprise in inflation (INF) to use in explaining portfolio returns. Mendez estimates a two-factor APT model and obtains the results shown in Exhibit 1. Exhibit 1 Results – Two-factor APT Model Dependent Variable is the Portfolio Return Sensitivity to GDP Sensitivity to Inflation Portfolio Factor Factor P 1.0 0.8 Q 0.7 –0.4 R 1.2 1.6 Mendez shares her results with Andy Benoit, her supervisor and a portfolio manager. He is interested in computing forecasted portfolio returns given his expectations for factor prices and the risk free rate shown in Exhibit 2. He also wants to know the expected return for a new portfolio that will be comprised of equal parts of Portfolios Q and R. Exhibit 2 Expected Risk-free Rate and Factor Prices Risk-free Rate of Return 4.5% Factor Surprise in GDP Growth Surprise in Inflation
Factor Price 3.0% –2.5%
Benoit is also interested in comparing active risk between two of his other portfolios. He asks Mendez to estimate the BARRA US-E3 factor model which incorporates industry categories and risk indexes. The results of the active risk analysis are presented in Exhibit 3. Based on her results, Mendez computes information ratios for Portfolios S and T equal to 0.25 and 0.55, respectively.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
Exhibit 3 Results – Active Risk Squared Decomposition Active Factor Portfolio
Industry
Risk Indexes
S 10.0 T 2.0 Note: Entries are percent squared
12.0 26.0
Total Factor
Active Specific
22.0 28.0
14 12
Active Risk Squared 36 85
55. The model estimated in Exhibit 1 is most accurately described as a: A. statistical factor model. B. factor sensitivity model. C. macroeconomic factor model.
56. Given the model estimated in Exhibit 1, the expected return on Portfolio P is closest to: A. 4.40%. B. 5.50%. C. 6.80%.
57. Given the model estimated in Exhibit 1, the expected return on Benoit’s new portfolio combining Portfolios Q and R is closest to: A. 5.85%. B. 7.20%. C. 7.70%.
58. Based on the results reported in Exhibit 3, the tracking risk for Portfolios S is closest to: A. 3.7%. B. 4.7%. C. 6.0%.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
59. Based on the analysis reported in Exhibit 3, the most appropriate conclusions regarding the active risk analysis of the two portfolios is that: A. portfolio S assumed higher total factor risk and active specific risk. B. portfolio T had higher active bets on the risk indexes and higher total factor risk. C. portfolio S had lower active bets on the risk indexes and lower active specific risk.
60. Given the information ratios computed by Mendez, the most appropriate conclusion regarding the performance of the two portfolios is that, relative to Portfolio S, Portfolio T experienced: A. less active risk. B. more risk per unit of return. C. superior risk-adjusted performance.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.
