•

 If  member  or  candidate  has  reasonable  grounds  to  believe  that  the  employer  or  any  
client  activities  is  illegal  or  unethical  he  must  dissociate  or  separate  from  the  activity.
•  CFA  Institute  strongly  encourages  members  and  candidates  to  report  potential  violations  
1 B of  Code  and  Standards  committed  by  fellow  members  and  candidates.
•  Members  and  candidates  should  maintain  or  encourage  their  employers  to  maintain  
readily  accessible  current  reference  copies  of  applicable  statutes,  rules,  regulations  and  
important  cases.
In  context  of  IPOs  member  or  candidates  are  prohibited  from  purchasing  securities  for  
their  own  benefit  and  their  duty  of  loyalty  and  fairness  to  clients  cannot  be  overridden  by  
2 B
client  consent  to  patently  unfair  allocation  procedure.  If  the  IPO  is  suitable  for  clients  and  is  
a  hot  issue  he  should  allocate  shares  to  all  his  clients  on  a  pro-­‐rata  basis.
Klein  will  violate  Standard  IV-­‐A  ‘Loyalty  to  employers’  because  the  firm  only  allows  
secondary  research  (research  prepared  by  another  employee  at  the  same  firm).  Using  a  
3 B
report  prepared  by  another  firm  is  considered  third  party  research  ,  which  is  not  allowed  
by  McKinney  Alpha.
By  complying  with  GIPS  standards,  firms:
•  participate  in  competitive  bids  against  other  compliant  firms  throughout  the  world.
•  assure  prospective  clients  that  the  reported  historical  track  record  is  complete  and  fairly  
4 A presented.
•  strengthen  its  internal  control  over  performance  related  processes  and  procedures.
However,  GIPS  standards  certainly  do  not  eliminate  the  need  for  in-­‐depth  due  diligence  on  
the  part  of  the  investor.
The  portfolio  manager  violated  standard  I-­‐C  ‘Misrepresentation’  by  providing  a  range.  The  
standards  prohibit  manager  from  guaranteeing  clients  any  specific  return  or  even  a  range.  
5 B
Equity  investments  contain  some  elements  of  risks  that  make  their  returns  inherently  
unpredictable.  Providing  a  range  is  misleading  to  investors.
According  to  Standard  III-­‐C  ‘Suitability’,  when  members  and  candidates  are
responsible  for  managing  a  portfolio  to  a  specific  mandate,  strategy  or  style  they  are  not  
6 A
responsible  for  determining  the  suitability  of  the  fund  as  an  investment  for  the  investors  
who  may  be  purchasing  shares.
Milton  did  not  violate  any  CFA  Institute  code  or  standard  because  he  developed  a  new  
7 A model  and  re-­‐created  supporting  records  by  directly  gathering  information  from  Indigo  
Corp.
If  a  member  or  candidate  determines  that  information  is  material,  the  member  or  
8 A candidate  should  make  reasonable  efforts  to  achieve  public  dissemination  of  the  
information.
According  to  Standard  III-­‐D  ‘Performance  Presentation’  if  the  performance
information  presented  by  the  member  or  candidate  is  brief,  the  member  of
9 C candidate  must  make  available  to  client  and  prospects  on  request  the  detailed  information  
supporting  the  communication.  Best  practice  dictates  that  the  brief  presentation  include  a  
reference  to  the  limited  nature  of  the  information  provided.
An  opinion  of  his  friend  without  actual  knowledge  does  not  make  the  information  material.  
Ethical  &  Professional  Standards %
Chambers  violated  Standard  V-­‐A  ‘Diligence  and  Reasonable  Basis’  because  he  purchased  
the  stocks  of  Navarro  without  appropriate  research  and  investigation.  Chambers  also  
10 B
violated  Standard  VI-­‐B  ‘Priority  of  Transactions’  by  purchasing  stocks  for  his  father’s  
account  only  and  treating  the  account  differently  from  his  other  clients’  accounts.

Palmer  has  violated  ‘Market  Manipulation’  by  sharing  false  and  misleading
11 A
information  with  Fox.
 Alvarado  violated  the  standard  IV-­‐A  ‘Loyalty’.  Members  and  candidates  should  not  render  
services  until  they  receive  consent  from  their  employer  to  all  of  the  terms  of  the  
12 B arrangement.  All  the  work  performed  on  behalf  of  the  firm  is  the  property  of  the  firm  and  
should  be  erased  or  returned  to  the  employer  unless  the  employer  gives  permission  to  
keep  those  records  after  the  cessation  of  employment.
Both  Enrique  and  Rachael  violated  the  Standard  VII-­‐A  ‘Conduct  as  members  and  candidates  
in  the  CFA  Program’  Enrique  violated  the  standard  by  assisting  Rachael  on  the  CFA  
13 C
examination.  Rachael  disregarded  the  rules  and  regulations  related  to  the  CFA  program  by  
writing  after  the  final    anouncement  was  made.
Brokerage  commission  is  an  asset  of  the  client  and  is  used  to  benefit  the  client.  Although  
members  and  candidates  are  obligated  to  seek  best  price  and  best  execution,  in  the  case  of  
14 B client  directed  brokerage  arrangements,  the  client  directs  the  manager  to  use  services  of  a  
specific  broker.  The  member  or  candidate  should  disclose  to  the  client  if  the  member  or  
candidate  believes  that  the  brokerage  is  not  offering  best  price  and/or  execution.
According  to  the  recommendations  of  Standard  IV-­‐B  ‘Additional  Compensation  
Arrangements’,  members  and  candidates  should  make  an  immediate  written  report  to  
15 C
their  employer  specifying  any  compensation  they  propose  to  receive  for  services  in  
addition  to  the  compensation  or  benefits  received  from  their  employer.
Misleading  practices  resolved  by  following  GIPS  standards  include  (but  are  not  limited  to):
•  survivorship  bias,
16 C
•  varying  time  periods  and
•  representative  accounts.
Firms  must  not  link  its  non-­‐GIPS  compliant  performance  for  periods  beginning  on  or  after  1  
January  2000  to  GIPS  complaint  performance.
17 A Firms  may  link  non-­‐GIPS  compliant  performance  to  their  GIPS  compliant  performance  
provided  that  only  GIPS  compliant  performance  is  presented  for
periods  after  1  January  2000  and  the  firm  discloses  the  periods  of  noncompliance.
According  to  Section  4  ‘Disclosures’,  firms  are  not  required  to  make  negative
assurance  disclosures  i.e.  if  the  firm  does  not  use  leverage,  no  disclosure  of  the  use  of  
leverage  is  required.
According  to  Section  3’Composite  Construction’,  the  composite  return  is  the
18 C
asset-­‐weighted  average  of  the  performance  of  all  portfolios  in  the  composite.
According  to  section  5  ‘Presentation  and  Reporting’,  when  appropriate,  firms
have  the  responsibility  to  include  in  GIPS-­‐compliant  presentations  information  not  
addressed  by  the  GIPS  standards.
For  given  discount  rates,  the  greater  the  number  of  periods  the  smaller  will  be  the  present  
value.  (The  present  value  of  Balu’s  will  be  lower  than  Aarti’s).  For  a  given  number  of  
19 A
periods,  the  higher  the  discount  rate  the  smaller  will  be  the  present  value.  (The  present  
value  of  Raju’s  will  be  lower  than  Balu’s).
•  Correlation  only  deals  with  linear  relationships.
•  As  the  number  of  securities  in  a  portfolio  increases  the  importance  of  covariance  
20 C increases  all  else  equal.
•  A  correlation  of  +1  between  two  variable-­‐  A  and  B  indicates  that  if  A  increases  in  value,  
variable  B  will  definitely  increase,  but  not  in  the  exact  same  proportion.
The  sample  has  come  from  the  population  with  a  known  standard  deviation  and
21 B the  critical  z-­‐value  for  a  95%  confidence  interval  is  1.96.
Confidence  Interval  =  𝜇μ  ±  1.96  (σ÷√n)  =  29%±  1.96  (32%  ÷√5)  =  0.0095  –  0.5705.
The  efficiency  of  an  unbiased  estimator  is  measured  by  its  variance.  An  unbiased  estimator  
22 A is  efficient  if  no  other  unbiased  estimator  of  the  same  parameter  has  a  sampling  
distribution  with  smaller  variance.
 From  1  January  to  30  June:
Fund’s  beginning  market  value  =  $200  million
Ending  market  value  of  the  fund  =  $230  million  (1.15  x  $200  million)
Fund’s  holding  period  return  =  15%
23 B From  1  July  to  31  December:
Additional  investments  =  $63  million
Beginning  market  value  =  $293  million  ($230  m  +  $63  m)
Holding  period  return  =  (325  -­‐  293)  /  293  =  10.92%
Fund’s  time  weighted  rate  of  return  =  27.5597%  (1.15  x  1.1092)
σ2  =  ∑n i=1(Prob.)  x  [X  -­‐E(X)]2
24 B σ2  =  (0.15)  x  (9.25  -­‐  7.52)2+  (0.55)  x  (8.50  -­‐  7.52)2  +  (0.23)  x  (7.50  -­‐  7.52)2  +  (0.07)  x  (5.75  -­‐
7.52)2
2
S.D.  
Ho  :  σμ  =  √3σ.2  
 =versus.  
 1.0938Ha  :  μ≠  3.2
This  is  a  two  tailed  test  therefore  we  will  use  0.05  column  and  24  degrees  of
freedom.
25 B
t24  =  (3  -­‐  3.2)  /  (  0.62/  √25)    =  -­‐1.6129
-­‐1.6129  does  not  satisfy  either  t  >  1.711  or  t  <  -­‐1.711  and  we  do  not  reject  the  null  
hypothesis.
Portfolio  B  is  positively  skewed.  A  distribution  with  frequent  small  losses  and  few  large  
Quantitative  Methods % gains  has  positive  skew  (long  tail  on  the  right  side).  If  a  distribution  is  positively  skewed  
26 C with  mean  greater  than  its  median,  then  more  than  half  of  its  deviations  from  the  mean  
are  negative  and  less  than  half  are  positive.
Portfolio  A  is  less  peaked  (platykurtic)  than  normal  distribution  and  is  negatively  skewed.
For  a  normal  random  variable  approximately  68%  of  all  outcomes  fall  within  one  standard  
27 A
deviation  of  the  mean.

28 A

Option  A  is  correct.  NPV  rule  is  based  on  external  market  determined  discount  rates  
because  it  assumes  reinvestment  at  opportunity  cost  of  capital.
The  NPV  rule’s  assumption  about  reinvestment  rates  is  more  realistic  and  more  
29 A economically  relevant  because  it  incorporates  market  determined  opportunity  cost  of  
capital  as  a  discount  rate.
IRR  assumes  that  cash  flows  are  reinvested  at  IRR  and  thus  IRR  rankings  are  not  affected  by  
any  external  interest  rate  or  discount  rate.
A  lognormal  distribution:
•  is  bounded  below  by  0  and  has  long  right  tail.
•  is  completely  described  by  two  parameters  i.e.  the  mean  and  the  variance  like  normal  
30 C
distribution.
•  may  well  describe  a  stock  price  whose  continuously  compounded  returns  do  not  follow  a  
normal  distribution.
 Point  and  figure  charts  are  always  drawn  on  graph  paper,  consist  of  columns  X’s  alternating  
31 C
with  column  of  O’s  and  neither  time  nor  volume  is  plotted  on  the  graph.
•  Parametric  tests  are  relatively  unaffected  by  violations  of  assumptions.
•  In  nonparametric  tests,  generally  observations  are  converted  into  ranks  according  to  
32 C their  magnitude.
•  Nonparametric  tests  are  considered  distribution-­‐free  methods  because  they  do  not  rely  
on  any  underlying  distribution  assumption.
In  a  Vickery  auction,  the  bidder  submitting  the  highest  bid  wins  the  item,  but  pays  the  
33 C amount  bid  by  the  second  highest  bidder.  This  is  also  known  as  the  second  price  sealed  bid  
auction.
Household  saving  =  Personal  disposable  income  –  (consumption  expenditures  +  interest  
paid  by  consumers  +  personal  transfer  payments  to  foreigners)
34 B
Household  saving  =  $833,685  –  ($692,370  +  $20,100  +  $2,250)
=  $118,965.
35 C Heckscher-­‐Ohlin  model  assumes  labor  and  capital  are  variable  factors  of  production.

36 A

The  positive  income  effect  and  positive  substitution  effect  will  lead  to  an  increase  in  the  
consumption  of  Good  X.
The  AD  curve  will  be  flatter  if:
•  Investment  expenditure  is  highly  sensitive  to  interest  rates.
37 B
•  Saving  is  insensitive  to  income.
•  Money  demand  is  insensitive  to  income  and  interest  rates.
Consumers  with  steeper  indifference  curve  will  have  greater  MRSXY  i.e.  they  will  be  willing  
to  give  up  more  of  good  Y  to  get  additional  units  of  good  X.
38 B
Gains  from  voluntary  exchange  can  be  achieved  when  consumers  have  different  MRSXY  i.e.  
Economics %
(different  marginal  rates  of  substitution).
Options  A  and  B  are  practical  criticisms  of  the  Keynesian  fiscal  policy,  which  takes  a  short-­‐
term  perspective.
39 C
Option  C  is  the  criticism  about  neoclassical  and  Austrian  school  of  thoughts.  It  is  difficult  to  
achieve  market  equilibrium  through  reduction  in  generalized  price  and  wage.
The  impact  of  changes  in  exchange  rates  on  the  trade  balance  can  be  analyzed  through  two  
different  approaches:
i.  Elasticities  approach
ii.  Absorption  approach.

40 C The  Absorption  approach  focuses  on  the  impact  of  exchange  rates  on  aggregate  
expenditure/savings  decisions.

The  Elasticities  approach  focuses  on  the  effect  of  changing  the  relative  price  of  domestic  
and  foreign  goods.  Thus  it  exhibits  a  microeconomic  view  of  the  relationship  between  
exchange  rates  and  trade  balance.
 Capital  includes  buildings,  machinery  and  equipment  used  in  production.  The  cost  debt  
41 C
capital  is  referred  to  as  interest.
Coincident  indicators  are  variables  that  change  at  roughly  the  same  time  as  peaks  or  
42 B
troughs
Monopolistic  competition  is  characterized  by:
•  low  barriers  to  entry
43 B •  many  sellers
•  zero  long-­‐run  profit
•  some  pricing  power
Fiscal  policy  is  less  effective  than  monetary  policy  to  deal  with  short-­‐run  stabilization  fiscal  
44 B policy  as  it  is  very  time  consuming  to  implement  and  it  is  politically  easier  to  loosen  fiscal  
policy  than  to  tighten  it.
Reduction  in  lease  receivable  each  year
=  Annual  lease  payment  less  Accrued  interest

At  1st  January  20X5

Reduction  in  lease  receivable:
=  ₹74,000  –  0
=  ₹74,000
Value  of  lease  receivable:
45 B =  ₹475,000  –  ₹74,000
=  ₹401,000

At  1st  January  20X6

Reduction  in  lease  receivable
=  ₹74,000  –  (₹401,000  x  10%)
=  ₹33,900
Value  of  lease  receivable
=  ₹401,000  –  ₹33,900
=  ₹367,100
Under  IFRS,  cash  receipt  of  interest  can  be  classified  as  either  an  investing  or  operating  
46 C
activity.
47 C Under  U.S.  GAAP,  at  the  end  of  year  1,  NCC  would  recognize  €0  revenue,  €0  cost  of  construction  and  €0  income.  The  €12  million  expenditu
In  a  period  an  expenditure  that  is  capitalized  the  firm’s:

Total  assets  increase  initially  (before  the  impact  of  depreciation  charges).  Debt-­‐to-­‐equity  
48 A
and  ratio  is  initially  unaffected.  However  at  the  end  of  the  accounting  period,  depreciation  
charges  will  lower  the  net  book  value  of  the  company’s  assets.  Cash  outflow  from  
operations  lowers.
An  auditor  might  issue  a  qualified  opinion  when  he  has  concerns  regarding:
i.  going  concern  assumption  of  the  company.
49 C
ii.  some  unreported  pending  contingent  liabilities.
iii.  valuation  of  certain  items  on  the  balance  sheet.
When  securities  are  classified  as  ‘available  for  sale’  securities  in  U.S.  GAAP  (or  securities  
50 B measured  at  fair  value  through  ‘other  comprehensive  income’  in  IFRS)  unrealized  gains  and  
losses  are  not  reported  in  the  income  statement  rather  they  are  recognized  in  equity.
At  the  time  of  sale,  the  accounting  treatment  for  Alpha  is  as  follows:
•  Accounts  receivable  and  revenue  increased  by  €68,500.
51 B
•  Inventory  decreased  by  €61,000.
•  Cost  of  goods  sold  increased  by  €61,000.
 •  Unlike  U.S.  GAAP,  IFRS  requires  an  annual  review  of  residual  value  and  useful  life.
52 B •  Unlike  U.S.  GAAP,  under  IFRS  each  component  of  an  asset  must  be  depreciated  
separately.
FCFF  =  CFO  +  After  tax  interest  –  CFInv.
53 A                      =  ₹18  million  +  ₹3.9  million  –  ₹14.25  million
                     =  ₹7.65  million.
Options  A  and  C  are  correct.  Impairment  loss  reduces  net  income  and  carrying  value  of  
asset.  It  is  considered  to  be  a  non-­‐cash  charge  and  therefore  does  not  affect  the  cash  flows  
54 B statement.
Impairment  is  considered  to  be  non-­‐recurring  item  and  thus  is  not  included  in  the  future  
projections  by  analysts.
Understatement  of  earnings  volatility  is  called  smoothing  the  earnings.  Earnings  smoothing  
can  result  from  two  ways:
•  By  using  conservative  choices  to  understate  earnings  in  periods  when  a  company’s  
55 A
operations  are  performing  well.
•  By  using  aggressive  choices  to  overstate  earnings  in  periods  when  a  company’s  
operations  are  struggling.
Two  principles  of  IOSCO  for  issuers  are:
•  Issuers  should  timely,  fully  and  accurately  disclose  financial  results,  risks  and  other  
56 B material  information  to  investors.
•  Issuers  should  prepare  their  financial  statements  using  internationally  acceptable  
accounting  standards.
The  elements  directly  related  to  measurement  of  financial  performance  are:
•  Income
•  Expenses
•  Capital  maintenance  adjustments
57 C
The  elements  directly  related  to  measurement  of  financial  position  are:
•  Assets
Financial  Reporting  and  Analysis % •  Liabilities
•  Equity
Ending  shareholders’  equity  =  Beginning  shareholder’s  equity  +  Net  income  –  cash  
dividends  –  net  unrecognized  gains/losses
=  $20  million  +  $7  million  -­‐  $0.5million  -­‐  $0  million  =  $26.5  million
58 A
Unrecognized  gains/losses  include:
•  Unrealized  loss  on  available  for  sale  securities  =  -­‐$1  million
•  Foreign  currency  translation  gain  =  $1  million
Net  unrecognized  gains/losses  =  $0  million
Based  on  the  data  the  analyst  can  conclude  that  the  firm:
•  has  improved  its  efficiency.
•  has  failed  to  improve  its  profitability.

If  the  growth  rate  of  revenue  is  greater  than  assets  growth  rate  it  may  indicate  that  
59 B company  is    increasing  efficiency.  When  net  income  is  growing  at  a  faster  rate  than  
revenue  it  may  indicate  that  company’s  profitability  is  increasing  but  as  the  major  portion  
of  net  income  is  due  to  non-­‐recurring  items  then  it  means  company  has  failed  to  improve  
its  profitability.
When  a  company  grows  at  a  rate  greater  than  that  of  overall  market  in  which  it  operates  it  
is  regarded  as  positive  sign  and  indicates  that  the  company  is  easily  able  to  attract  equity  
capital.  There  is  insufficient  market  data  to  arrive  at  this  conclusion.
 Total  debt  ratio  x  Financial  leverage  =  Total  debt-­‐to-­‐equity
Financial  leverage  =  Total  debt-­‐to-­‐equity/Total  debt  ratio
60 C
=  1.65/0.45
=  3.6667
Accounting  Goodwill:
It  is  based  on  the  accounting  standards  and  is  recognized  only  when  acquisitions  take  
place.
61 B Economic  Goodwill:
It  is  based  on  the  economic  performance  of  the  company.  It  is  not  reflected  on  the  balance  
sheet  rather  it  is  reflected  in  the  stock  price  of  the  company  (at  least  theoretically).

Companies  are  required  to  provide  segment  information  under  both  IFRS  and  U.S.  GAAP  
although  companies  are  not  required  to  provide  full  financial  statements  for  segments.
62 C
Companies  must  disclose  the  factors  used  to  identify  reportable  segments  and  the  types  
and  products  and  services  sold  by  each  reportable  segment.
Under  IFRS,  Munchkin  will  write  down  its  inventory  to  $11.2  million  and  record  $0.8  million  
63 A
as  an  expense  in  the  income  statement.
As  contributions  are  not  tax  deductible,  no  temporary  difference  results  from  the  $500,000  
64 A contribution.  This  constitutes  a  permanent  difference  and  thus  no  deferred  tax  asset  or  
liability  will  be  recognized.
Under  IFRS  identifiable  intangible  asset  must  meet  three  definitional  criteria.  The  asset  
must  be:
i.  identifiable,
ii.  under  the  control  of  company  and
iii.  expected  to  generate  future  economic  benefits.
65 C

In  addition  the  following  two  recognition  criteria  which  must  be  met  is:
i.  it  is  probable  that  the  expected  future  economic  benefits  of  the  asset  will
flow  to  the  company  and
ii.  the  cost  of  the  asset  can  be  reliably  measured.
The  bonds  were  issued  at  a  discount  and  sales  proceeds  were  $979,221.60  (see  below).  
Under  the  effective  interest  rate  method,  interest  expense  is  calculated  as:
bonds’  carrying  value  x  market  interest  rate.

Sales  proceeds  (PV  of  bond  issue):

N=  5;  I/Y  =  6.5%;  PMT  =  $60,000;  FV  =  $1,000,000;  CPT  PV  =  -­‐  $979,221.60
66 C
Interest  expense  for  the  year  ended  2012  is  
$979,221.60  x  6.5%  =  $63,649.40.
Interest  expense  for  the  year  ended  2013  is  
$982,871.01  x  6.5%  =  $63,886.62.
Carrying  value  $982,871.01  in  year  2013  is  derived  as  {$979,221.60  +  ($63649.40  -­‐
$60,000)}.
Pension  expense  for  employees  directly  related  to  production  is  added  to  inventory  and  
67 B
expensed  through  cost  of  sales.
A  screen  to  identify  firms  with  low  P/E  ratios  will  
68 C
most  likely  exclude  growth  companies  from  the  sample.
 The  discounted  payback  period  for  project  X  and  Y  are  almost  equal.  
Insert  the  respective  amounts  in  the  Cash  Flow  function  of  your  calculator  and  then  press  
the  NPV  key.  Here,  enter  I=12.  Then  press  the  downward  arrow  till  you  see  the  DPB  (not  
69 C PB).  Press  compute.

The  discounted  payback  period  for  both  the  projects  is  about  3.94  years.

Net  present  value  method  assumes  that  cash  flows    of  a  project  are  reinvested  at  ‘r’,  that  is  
70 B
the  opportunity  cost  of  capital,  which  is  a  more  realistic  discount  rate.
Stock  dividends  do  not  affect  the  shareholders’  total  cost  basis  however  the  cost  per  share  
held  decreases  when  stock  dividends  are  paid.
71 B
Generally  stock  dividends  are  not  taxable  and  do  not  affect  the  market  value  of
shareholders’  wealth.
Sovereign  yield  spread:
=  India’s  Govt.  Bond  yield  -­‐  U.S  T-­‐Bond  yield
=  8.81%  -­‐  2.64%
=  6.17%

72 A

=  6.71%  x  54%/32%
=  11.32  %
Corporate  Finance %
Rai  Corp.’s  cost  of  equity:
=  RF  +  β  (ERP  +  country  RP)
=  4.2%  +  2.3  (6.5%  +  11.32%)
=  45.19%

When  a  company  finances  share  repurchases  with  cash  its  

73 C assets  and  shareholders’  equity  decrease  and  leverage  increases.

When  a  reliable  current  market  price  for  a  company’s  debt  

is  not  available,  the  cost  of  debt  can  be  estimated  using  the  current  rates  based  on  the  
74 B bond  rating  we  expect  when  we  issue  new  bonds.  This  approach  is  referred  to  as  matrix  
pricing.

75 C

Both  assets  and  shareholders’  equity  decline  if  the  repurchase  is  financed  with  cash.  As  a  
76 C result,  leverage  increases.  Leverage  will  increase  even  more  if  the  repurchase  is  financed  
with  debt.
 For  short  selling  purposes  if  a  security  is  hard  to  borrow,  the  rebate  rate  may
77 C  be  very  low  or  even  negative.  Such  securities  are  said  to  be  on  special.  Otherwise  rebate  
rate  is  usually  10  basis  points  less  than  the  overnight  rate  in  the  interbank  funds  market.
A  fundamental  weighting  method  is  similar  to  contrarian  investment  strategy
 i.e.  whenever  the  portfolio  is  rebalanced,  weights  of  securities  that  have  increased  in  
78 B relative  value  are  reduced  and  weights  of  securities  that  have  fallen  in  relative  value  are  
increased.  Fundamental  weighting  is  not  biased  towards  the  shares  of  firms  with  largest  
market  capitalization.
Under  a  statutory  voting,  each  share  represent  one  vote.  Therefore,  Shilpa  can  cast  
79 B maximum  of  1000  votes  for  each  candidate  i.e.  she  has  to  allocate  her  voting  rights  evenly  
among  all  candidates.
Market  orders  generally  execute  immediately  if  other  traders  are  willing  to  
take  other  side  of  the  trade,  however  they  can  be  very  expensive  to  execute  especially  
80 A when  the  order  is  placed  in  the  market  for  a  thinly  traded  security  or  when  the  order  is  
large  relative  to  normal  trading  activity.  In  such  cases  market  buy  order  may  fill  at  high  
prices.
The  performance  of  commodity  indices  can  be  quite  different  from  their  underlying  
commodities  because:
•  indices  are  based  on  future  contracts  on  the  commodities  instead  of  actual  commodities.
•  returns  of  indices  include:
81 C
 i)returns  from  changes  in  future  prices
 ii)collateral  return  
iii)  roll  yield.

Option  A  is  correct.  It  is  appropriate  to  use  EV  for  comparing  companies  with  significantly  
different  capital  structures.
82 A
Options  B  and  C  are  incorrect.  EV  reflects  the  real  economic  value  of  a  company  and  does  
not  have  the  negative  earnings  problem  because  EBITDA  is  usually  positive.
V4  =  6  /  (8%  -­‐  6%  )  =  300
83 B
V0  =    300  /  (1+  8%)  4  =  220.5089
The  five  influences  that  affect  an  industry’s  growth,  revenues  and  profits  are:
Equity  Investments % i.  Macroeconomic  influences
ii.  Technological  influences
iii.  Demographic  influences
iv.  Governmental  influences
84 B v.  Social  influences

Macro-­‐economic  variables  that  affect  industry  growth  are:

•  GDP
•  Interest  rates
•  Inflation
•  Availability  of  credit
Continuous  trading  markets  use  discriminatory  pricing  rule.  Under  this  rule  limit  price  of  
85 B the  order  or  the  quote  that  first  arrived  determines  the
trade  price.
Asset  based  valuation  models  work  well  for  companies  that  do  not  have  a  
86 A high  proportion  of  intangibles  or  off  the  book  assets  and  that  have  a  high  proportion  of  
current  assets  and  current  liabilities.
 An  industry  tends  to  be  more  competitive  when  the  industry:
•  is  fragmented.
87 B •  has  high  fixed  costs.
•  sells  undifferentiated  products.
•  has  high  exit  barriers.
Preferred  stocks  are  treated  like  fixed  income  securities.  The  intrinsic  value  can  be  
calculated  through  calculator  as:
r  =  6/2  =  3  
n  =  3x2  =  6  
Dividend  PMT  =  10
88 C
FV=  100
Calculate  PV  =  137.92

As  the  preferred  stock  is  trading  at  a  price  equal  to  its  intrinsic  value  therefore  the  stock  is  
fairly  valued.
89 A Value  of  a  forward  contract  at  expiration  is  the  value  of  the  asset  minus.
Maximum  profit  to  the  buyer  of  put  =  X  –  p0  =  $82  –  $9  =  $73.
90 C
Breakeven  price  at  expiration  ST*  =  X  –  p0  =  $82  -­‐  $9  =  $73.
The  derivative  price  depends  on  the  characteristics  of  the  underlying,  the  characteristics  of  
91 C the  derivative  and  the  risk  free  rate.  The  derivative  price  does  not  depend  on  investor’s  risk  
aversion.
Derivative  Instruments  % 92 A The  seller  makes  no  payments  until  a  credit  event  occurs.
The  cost  of  protective  put  can  be  reduced  by  selling  a  call  option  and  this  
93 B
strategy  is  known  as  ‘collar’.
By  virtue  of  the  fact  that  derivative  markets  require  less  capital,  information  
can  flow  into  the  derivative  markets  before  it  gets  into  the  spot  market.  The  difference  
94 C
may  well  only  be  a  matter  of  minutes  or  seconds  but  it  can  provide  the  edge  to  astute  
traders.
95 A The  highest  ranked  unsecured  debt  is  senior  unsecured  debt.
The  formula  for  PVBP  is:
96 A
PVBP  =  [(PV-­‐)  -­‐  (PV+)]  /  2  =  (76.18  -­‐  74.35)  /  2  =  0.915
The  difference  between  market  value  of  the  security  used  as  collateral  and  the  value  of  the  
loan  is  known  as  repo  margin.  Repo  margin  allows  for  some
97 B
worsening  in  market  value  and  provides  the  cash  lender  a  margin  of  safety  if  the  
collateral’s  market  value  declines.
Par  value  of  the  bond  is  $1,000  and  purchase  price  is  $970.  The  implied  interest  earned  in  
98 A
the  bond  in  equal  to  the  difference  of  par  value  and  purchase  price.
Both  firms,  Alpha  and  Beta  have  negative  free  cash  flows  after  dividends.  A  
firm  with  positive  free  cash  flow  after  dividend  can  use  its  cash  flow  to  pay  down  debt  or  
99 C
build  up  cash  on  the  balance  sheet;  either  outcome  is  a  form  of  deleveraging  and  is  
favorable  from  credit  risk  stand  point.
If  all  the  three  coupon  payments  are  reinvested  at  12%,  the  future  value  of
coupon  payments  is  $26.99  as  calculated  below:
100 A
Fixed  Income  Investments % 8  x  (1+12%)2  +  8  x  (1+12%)1  +  8  =  26.9952
The  interest  on  interest  gain  from  compounding  is  2.99  (26.99  -­‐  24).
The  latest  sovereign  bond  issue  for  a  given  maturity  is  also  referred  to  as
101 C
‘Benchmark  Issue.’
Under  the  change  of  control  put,  in  the  event  of  acquisition,  bondholders  have  the  right  to  
102 A
require  the  issuer  to  buyback  their  debt  often  at  par  or  at  some  premium  to  par  value.
103 B Modified  duration:  902.37  -­‐  882.15  /  2  x  (0.001)(891.87)  =  11.3357
 (1+  2.28%)  x  (1+  2.58%)  x  (1+  4.03%)  =  (1+  z3)3
104 A (1.0228  x  1.0258  x  1.0403)  =  (1+  z3)3
1.09147  =  (1+  z3)3
z3  
For  =t  2he  
.9605   ≅  2a.96%
rating   gencies  likelihood  of  default  is  the  primary  factor  in  assigning  
105 B their  ratings.  The  secondary  factors  include  the  priority  of  payment  in  the  event  of  default  
and  potential  loss  severity  in  the  event  of  default.
When  interest  rates  are  falling,  the  effective  duration  of  a  callable  bond  will  be  lower  than  
106 B that  of  an  otherwise  comparable  non-­‐callable  bond.  At  high  interest  rates,  the  effective  
durations  of  the  callable  and  non-­‐callable  bonds  are  very  similar.
During  period  of  financial  crises,  the  correlation  between  hedge  funds  and
107 B
financial  market  performances  may  increase.
During  period  of  financial  crises,  the  correlation  between  hedge  funds  and
108 A
financial  market  performances  may  increase.
The  four  broad  categories  of  hedge  fund  strategies  identified  by  HFRI  are:
i.  Event-­‐driven
109 B ii.  Relative  value
iii.  Equity  hedge
iv.  Macro  strategies
110 B Later  stage  financing  in  venture  capital  investing  is  capital  provided  for  major  expansion.
Sharpe  Ratio  is  not  an  appropriate  risk-­‐return  measure  for  alternative  investments  due  to:
•  Their  illiquidity.
111 B •  Their  valuation  is  conducted  using  estimates,  rather  than  observable
transaction  prices.
•  Their  returns  are  not  normally  distributed.

Alternative  Investments %

112 C

Risk  budgeting  quantifies  and  allocates  the  tolerable  risk  by  specific  metrics.  Risk  tolerance  
113 B on  the  other  hand  focuses  on  the  appetite  for  risk  and  what  is  acceptable.
Risk  budgeting  specifically  focuses  on  how  that  risk  is  taken.
When  an  investor’s  ability  to  take  risk  is  above  average  but  willingness  is  below  average,  
114 C
the  investor’s  risk  tolerance  is  below  average.

Porfolio  Management %
 The  equation  of  SCL  is  represented  by:
Ri  –  Rf  =  α  +  β  (RM  –  RF)
115 C
Intercept  =  α  (Jensen’s  alpha  )
Slope  =  β
The  primary  objectives  of  endowments  and  foundations  are  generating  sufficient  income  
116 B
to  the  fund  the  objectives  and  maintaining  the  real  asset  value  of  the  fund.
117 B Annualized  return  for  investor  =  (1−0.5%)52  -­‐1  =  -­‐22.95%
Porfolio  Management %
118 A Both  M2  and  Sharpe  ratio  are  based  on  total  risk  and  provide  similar  rankings  to  evaluate  
portfolio  performances.
Generating  higher  returns  from  security  selection  depends  upon  two  factors:
i.  skills  of  investment  managers  (greater  the  skill,  higher  the  value  added
from  security  selection).
119 C ii.  informational  efficiency  (lower  information  efficiency  can  easily  generate
higher  returns  from  security  selection.  Higher  information  efficiency
requires  greater  level  of  skill  to  generate  higher  returns  and  passive
management  is  preferred).
Market’s  beta  =  δm,m  x  σm  /σm  =  1
120 C (Any  asset’s  beta  itself  is  1,  so  the  beta  of  market  is  1).
Asset’s  beta  =  δi,m  x  σi/σm  =  0.67  x  0.34  /  0.19  =  1.20