2019 Level II Mock Exam PM

The afternoon session of the 2019 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 Ethical and Professional Standards 18
13–18 Quantitative Methods 18
19–24 Economics 18
25–30 Financial Reporting and Analysis 18
31–36 Equity 18
37–42 Fixed Income 18
43–48 Derivatives 18
49–54 Alternative Investments 18
55–60 Portfolio Management 18
Total: 180

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© 2018 CFA Institute. All rights reserved.
2 2019 Level II Mock Exam PM

2019 LEVEL II MOCK EXAM PM

Jacob Kostecka Case Scenario

Jacob Kostecka, CFA, is a portfolio manager at Forkson Investment Management,
an asset management and research focused organization. After obtaining his CFA
charter last month, Kostecka was transferred to the private wealth management
division at Forkson.
Dharshi Bope, a private wealth client, was involved in a major motorcycle accident
and is in critical condition, fighting for his life. Bope is a single parent with a daughter,
Paveen Nathoo, in her mid-­twenties. Since the accident, Nathoo has managed her
father’s affairs, paying all expenses, including investment advisory fees. In several
conversations with Nathoo, Kostecka highlighted Bope’s low risk tolerance and invest-
ment goal of capital preservation. Nathoo has indicated her interest in managing the
account more aggressively and possibly moving to another management firm. Nathoo
recently petitioned the court to appoint her full power of attorney to legally manage
Bope’s affairs. Prior to the court decision, Nathoo asks Kostecka to invest her father’s
account in the initial public offering (IPO) of Chatterbox, a highly sought after social
media company that has yet to generate a profit.
The following week, the court approves Nathoo’s request to act on behalf of her
father. Going through records in her father’s home, Nathoo discovers documents
showing Bope embezzled several million dollars from his employer, a real estate
development company. Most of these funds were placed directly into Bope’s personal
account, for which Nathoo is now responsible. Nathoo informs Kostecka about her
discovery; however, Kostecka does not act on this information, however, because it
is a large account for Forkson.
Nathoo establishes a non-­discretionary investment account at Forkson tied to her
newly established business. Shortly thereafter, Kostecka joins the board of Jabbertalk.
com, a smaller social media competitor to Chatterbox. Based on his knowledge of
Chatterbox, Kostecka believes the stock of Jabbertalk is a good investment, even
though it is not yet profitable. Buoyed by his faith in social media, Kostecka ultimately
purchases shares of Jabbertalk’s IPO for Nathoo’s account, as well as for all clients he
currently manages. When Kostecka informs Nathoo of the purchase, she expresses
concern about her legal responsibilities and lack of accounting knowledge in over-
seeing the account. Kostecka provides Nathoo a list of recommended professionals
he has worked with in the past, including attorneys and accountants. When he was
in college 10 years earlier, Kostecka was engaged to one of the attorneys but broke
off the relationship prior to their wedding, and one of the accountants was Kostecka’s
college roommate. Since then, Kostecka has not had any contact with the lawyer and
accountant.
The Jabbertalk investment is profitable on the first day of trading, doubling from
its opening price. Kostecka tells his clients the multifactor valuation model used by
Forkson shows Jabbertalk stock is still undervalued. Forkson’s research report, due
out the next day, will recommend investors hold their Jabbertalk shares. However,
Kostecka tells all his clients simultaneously they should sell their shares because he
believes Jabbertalk is overvalued and the stock price will fall soon. Kostecka notes
he has followed through on this belief by selling his personal holdings of Jabbertalk
shares. Nathoo ignores Kostecka’s recommendation to sell Jabbertalk. Over the next
week, the stock declines 75%.
Watching Jabbertalk’s severe share price decline, Nathoo becomes furious with
Kostecka because he did not sell shares of Jabbertalk in her account. She files a com-
plaint with Kostecka’s supervisor, Sally Fang, CFA, claiming she was misled on the value
2019 Level II Mock Exam PM 3

of the IPO in the days immediately after the stock started trading. Kostecka responds
to the complaint by telling Fang, “the analyst who wrote the hold recommendation
on Jabbertalk has only passed his CFA Level II examination. As a charterholder, I
have earned the right to use the CFA designation, so I am more qualified to manage
clients’ investments.”
In order to build his client base, Kostecka prepares performance information to
show prospective clients. He includes the firm’s c omposite p erformance b ased o n
similar discretionary client portfolios that are in compliance with the GIPS Standards.
In addition, Kostecka prepares his own composite performance, including all accounts
he manages. This presentation includes Nathoo’s account assuming she had sold her
shares of Jabbertalk. Along with his performance record, Kostecka provides a footnote
disclosing the following language: “If your account is managed on a discretionary
basis, you might expect results similar to those shown above.”
1 With regard to the investment request made by Nathoo to invest in Chatterbox,
Kostecka should most likely:
A follow Bope’s investment goals.
B seek advice from the court.
C comply with her request.
2 By not acting on the information reported by Nathoo, which CFA Institute
Standard of Professional Conduct has Kostecka least likely violated?
A Loyalty, Prudence, and Care
B Duties to Employers
C Knowledge of the Law
3 With regard to investing in Jabbertalk and recommending experts, Kostecka
most likely needs to disclose conflicts related to his:
A attorney relationship.
B board membership.
C accountant relationship.
4 In relation to Kostecka’s handling of the Jabbertalk stock recommendation,
which of the following CFA Institute Standards of Professional Conduct did he
least likely violate?
A Priority of Transactions
B Fair Dealing
C Communication with Clients
5 When Kostecka defends himself against Nathoo’s complaint, he most likely vio-
lated the CFA Institute Code of Ethics and Standards of Professional Conduct
concerning the:
A reference to candidacy in the CFA Program.
B misrepresentation of the meaning of the designation.
C right to use the CFA designation.
6 Kostecka’s performance presentation most likely conforms to CFA Institute
Standard III(D)–Performance Presentation with regard to:
A disclosure in the footnote.
B composites representing similar discretionary investment portfolios.
C fair and accurate representation of performance.
4 2019 Level II Mock Exam PM

Northside Capital Advisers Case Scenario

Brian Patrick, CFA, has recently joined Northside Capital Advisers (Northside) as
the firm’s assistant compliance officer. Northside manages individual accounts with
conservative mandates for a variety of retirements funds, as well as individual accounts
for high-­net-­worth investors with long investment horizons. Kyle Sang, CFA, is
Northside’s chief compliance officer and Patrick’s supervisor. Sang has been with the
firm since its inception and wrote the firm’s original Code of Ethics and Compliance
Manual. Sang provides Patrick with a copy of both documents and asks Patrick to
review them. He instructs Patrick to highlight any areas he feels should be revised or
enhanced. Patrick lists the items that need to be addressed. The first item on his list
is the lack of whistle-­blowing guidance for an employee who could potentially find
herself in a position of needing to report the firm’s activities.
The second item Patrick adds to his list concerns the responsibilities of supervi-
sors. Although the information contained in the Compliance Manual is accurate, he
believes it needs to be augmented so the firm’s supervisors have a clear understanding
of their responsibilities. He advises adding the following items to the firm’s Compliance
Manual, recommending Supervisors should do the following:
Recommendation 1: Conduct an initial review of the firm’s Policies and
Procedures, and review as necessary to ensure they are con-
sistent with applicable laws and regulations.
Recommendation 2: Incorporate a professional conduct evaluation as part of the
employee’s performance review.
Recommendation 3: Review the actions of all the firm’s employees, and identify
violators.

Patrick believes he needs a better understanding of the investment process before

he makes any investment-­policy-­related recommendations. He meets with Staci
Canton, the firm’s chief investment officer. Following his meeting with Canton, Patrick
suggests the following enhancements to the firm’s Compliance Manual related to
investment research:
Proposal 1: Develop criteria for assessing analysts’ research quality and
contribution, including the accuracy and timing of their
recommendations.
Proposal 2: Appoint a supervisor to review and approve communication
material.
Proposal 3: Develop detailed, written guidance that establishes the due
diligence procedures.

Patrick asks Canton to provide him with a copy of a recent research report that
would have been distributed to the firm’s clients. Patrick is provided a copy of the PT
Matias (PT) report, written by Amanda Burt, CFA. PT is involved in the manufacture of
aluminum cans supplied to the soft drink industry. She mentions that PT has recently
gone through a reorganization and is in a turnaround situation, so the potential returns
are quite large. The shares were recently purchased for all client portfolios in a block
trade. After reviewing the report, Patrick meets with Burt to discuss her approach to
researching companies, meeting with company management, and determining earn-
ings estimates. Burt explains to Patrick how carefully she documents her meetings
with management and shares her notes with him. He compares the meeting notes
with Burt’s recent report and notices she has included management’s guidance for
earnings and margins along with her own estimates.
While talking with Burt, Patrick asks if she ever plays a role when the marketing
department makes new business presentations. She tells him that because of her stock
selection track record, she is frequently involved in those types of meetings. She adds
2019 Level II Mock Exam PM 5

that she typically reviews the methodology used to research a company and deter-
mine a recommendation. They discuss the p otential clients, and she jokes that she
even made a presentation to an investment committee for the retirement assets of a
company under her coverage. The firm’s business development manager was unhappy
that she had a sell rating on the potential client’s stock when the sales pitch took place.
Patrick’s review of the firm’s C ode a nd C ompliance P olicies a nd P rocedures i s
almost complete. The final item to review is how the firm handles employees’ trading.
He notices the current Policies and Procedures are lacking. He notes that the firm
currently restricts employee participation in IPOs, has a very narrow blackout period
for employees trading securities on their buy list, and ensures personal trading policies
are kept confidential. Sang tells Patrick of the difficulty he experienced in trying to
get more robust personal trading policies and procedures approved. The board has
historically been reluctant to put restrictions in place that limit the staff’s ability to
invest their personal funds.
7 Under CFA Institute Standard IV: Duties to Employers, with regard to the
subject matter of the first item on Patrick’s list, whose interest is least likely of
importance?
A Northside’s
B The capital markets’
C Northside’s clients’
8 Which of Patrick’s recommendations is most likely insufficient to comply with
Standard IV(C): Responsibilities of Supervisors?
A Recommendation 1
B Recommendation 2
C Recommendation 3
9 To indicate the area of the investment research process he wants to address,
Patrick should most likely label the proposals as follows:
A Proposal 1 = Compensation, Proposal 2 = Reasonable Basis, Proposal 3 =
Distribution
B Proposal 1 = Reasonable Basis, Proposal 2 = Distribution, Proposal 3 =
Compensation
C Proposal 1 = Compensation, Proposal 2 = Distribution, Proposal 3 =
Reasonable Basis
10 Which of the following CFA Institute Standards of Professional Conduct has
most likely been violated in relation to the research report and purchase of PT
Matias?
A Suitability
B Fair Dealing
C Misrepresentation
11 Has Burt most likely violated the CFA Institute Standards of Professional
Conduct during the new business presentations?
A No
B Yes, with regard to Duties to Clients
C Yes, with regard to Disclosure of Conflicts
12 Which of Northside’s current personal trading policies is least consistent
with CFA Institute recommended procedures for Standard VI(B): Priority of
Transactions?
A IPO restriction
6 2019 Level II Mock Exam PM

B Policy confidentiality
C Blackout trading window

Jorge Reyes Case Scenario

Jorge Reyes is a financial analyst with Valores de Playa SA de CV, located in a suburb
of Mexico City, Mexico. Two nights a week he works as an adjunct professor at a local
technical institute, lecturing on investments and serving as a consultant in statistics
and related fields.
During one of his lectures, Reyes points out that regression plays an important
part in many empirical studies in finance. As an exercise, Reyes presents the results
of a regression of returns (Rt) on the company that owns the Mexican stock exchange
(ticker symbol BOLSAA.MX) against the US dollar/Mexican peso exchange rate
(Et). The data cover the period from late 2011 through early 2012. There are 64 daily
observations in the study. Exhibit 1 reports the results of the regression.

Exhibit 1  Regression Results: Rt = b0 + b1Et + εt

Coefficient Standard Error

Constant (b0) 0.0011 0.0019

USD/MXN exchange –0.5789 0.2221
rate (b1)
Number of observations used in the regression 64
Critical t-value at the 5% level of significance (two-­ 2
tailed test that the coefficient equals zero)

Standard
Adjusted Error of the Durbin– Significance of
R2 R2 Estimate Watson F-Value F-Value

0.0987 0.0842 0.0153 2.3434 6.7927 0.0114

One of the students asks Reyes about the adjusted R2 reported in Exhibit 1. Reyes
explains that adjusted R2 adjusts for the effects of serial correlation in the data.
A second student recalls that the presence of heteroskedasticity affects interpre-
tation of the test statistics computed by a regression. Reyes confirms that that is true
and suggests the students examine a plot of the predicted BOLSAA return values
minus their actual values (the BOLSAA residuals) against the independent variable
(USD/MXN exchange rate). Exhibit 2 provides such a graph.
2019 Level II Mock Exam PM 7

Exhibit 2  Plot of BOLSAA Residuals against the USD/MXN Exchange Rate

Y = BOLSAA residuals

X = USD-MXN exchange rate

Interpreting the graph, Reyes states:

The presence of heteroskedasticity is indicated when there is a systematic
relationship between the values of the residuals and the independent vari-
able. As shown in Exhibit 2, there is no systematic relationship between
the BOLSAA residuals and the USD/MXN exchange rate. Therefore, het-
eroskedasticity does not appear to be a problem in this regression.
In a later exercise, Reyes asks his students to consider a time series of weekly prices
of Maya 22 crude oil. A substantial proportion of Mexico’s oil production is Maya 22
heavy crude. The period of the study is from January 1997 to July 2008. At Reyes’s
suggestion, the students first model the prices as an exponential trend (log-­linear
model). They test for correlated errors from the model using the Durbin–Watson
statistic. The results are reported in Exhibit 3.

Exhibit 3  Durbin–Watson Test: Log-­Linear Model

Durbin–Watson test statistic 3.97
Durbin–Watson critical values for the null hypothesis that:
• there is no positive serial correlation (at the 5% level) 1.65 1.69
• there is no negative serial correlation (at the 5% level) 2.35

Reyes next suggests they use a first-­order autoregressive model [AR(1)]. To reduce
the effect of the exponential trend, the students continue to use the natural logarithms
of the prices, but now they also take the first differences of these logarithms of the
prices (xt). They fit an AR(1) to the differences of logs. The results of the regression
are reported in Exhibit 4.
8 2019 Level II Mock Exam PM

Exhibit 4  Regression Results: xt+1 = b0 + b1xt + εt+1 where xt = ln(Pt+1) –

ln(Pt)
Coefficient Standard Error t-Statistic

Constant (b0) 0.002381 0.002056 1.1582

xt (b1) 0.235546 0.039778 5.9214
Number of observations used in the 599
regression

Because nonstationarity or heteroskedasticity would negatively affect use of the

AR(1) model, Reyes asks the students to test for the presence of each. Results of the
unit root test for nonstationarity and of a test for the presence of heteroskedasticity
are reported in Exhibit 5.

Exhibit 5  Unit Root Test for Nonstationarity and the Test

for Heteroskedasticity
Unit root test statistic –18.7402
Unit root test critical value at the 5% level of –2.89
significance
Heteroskedasticity test statistic 2.016733
Heteroskedasticity test critical value at the 5% 1.96
level of significance

13 In the regression of the returns of BOLSAA.MX against the USD/MXN

exchange rate (Exhibit 1), the coefficient of the USD/MXN exchange rate is
most accurately described as:
A indeterminate because Exhibit 1 provides insufficient information.
B significantly different from zero.
C not significantly different from zero.
14 Reyes's explanation regarding Adjusted R2 is best characterized as:
A correct.
B incorrect, because adjusted R2 adjusts for the loss of degrees of freedom
when additional independent variables are added to a regression.
C incorrect, because adjusted R2 adjusts for heteroskedasticity in the indepen-
dent variables.
15 Reyes's interpretation of the graph in Exhibit 2 is best described as:
A correct.
B incorrect, because the effects of heteroskedasticity are, in a regression such
as this one, hidden by the negative slope of the regression line.
C incorrect, because heteroskedasticity is indicated when there is not a sys-
tematic relationship between the residuals and the independent variable.
16 The Durbin–Watson test reported in Exhibit 3 is most accurately interpreted as
indicating that the correlation in the errors is:
A insignificant.
B significantly positive.
2019 Level II Mock Exam PM 9

C significantly negative.
17 Based on the regression results reported in Exhibit 4, the mean-­reverting level
of the differences of logarithms of the Maya 22 prices [i.e., the time series as
modeled in the AR(1) model] is closest to:
A 0.30812.
B 0.00239.
C 0.00311.
18 Based on the results reported in Exhibit 5, the AR(1) model is best described as
having:
A a unit root.
B heteroskedasticity in the error term variance.
C reliable standard errors.

Central Aldorria Case Scenario

The Current Situation
Central Aldorria (CA) is a country located close to the equator with farming and
manufacturing interests. CA has ocean to its east and west but has plenty of fresh
water flowing through the central part of the country that is dammed by farmers for
irrigation purposes. As part of a compromise for ending a civil war 50 years earlier,
the farmers, rather than the central government, effectively own the rights to the
fresh water.
Since the end of the civil war, manufacturing firms that require fresh water have
located downstream from the farms. The manufacturers frequently need to negotiate
with the farmers to release water from the dams for a price.
Recently, a dispute between the country’s manufacturing interests and farm-
ing interests arose over the price of water. The farmers believe the price is too low
and have not let the dams release water, to the point that some fields have flooded.
Correspondingly, the manufacturers insist that the price is fair and want the farmers
to increase the availability of fresh water given the excess water available.

Regulatory Proposals
CA’s president, Celina Suarez, has brought together representatives from both groups
to consider a regulatory solution. Joseph Antoli represents the farmers, and Andrew
Benez represents the manufacturers.
Suarez proposes having the legislature empower a new agency, the Water Regulatory
Board (WRB), to deal with this conflict. The WRB would be funded by the govern-
ment and would have seven members (three members representing the farmers, three
members representing the manufacturers, and one appointed by the government).
The WRB will determine the appropriate price and volume of water, with the agency’s
decisions being legally binding.
Antoli asks Suarez why the seventh member of the WRB would be a government
appointee, and Suarez responds:
“The government-­appointed member would prevent preferential treatment
to either of the regulated groups. To prevent preferential treatment from
developing over time, the government-­appointed member will have only
a three-­year term and cannot serve consecutive terms.”
Antoli states that the dams, which are currently privately owned, need significant
maintenance, and so the price of water must increase from current price levels.
10 2019 Level II Mock Exam PM

Benez counters that if the government expects manufacturing to grow, a guaranteed

supply of fresh water at a fair price is necessary.
Suarez begins a discussion on the ownership interests in the dams. He proposes
that the government, through the WRB, purchase the dams at a fair market price and
then maintain them to benefit all. The WRB would then set the price of water and
guarantee a minimum level to downstream consumers.
Antoli proposes keeping the dams privately owned, with maintenance costs
(estimated to be 30% of the current value of the dam as an initial expense followed
by very low ongoing annual expenses) directly offsetting taxes owed by the owners
of the dams. In return, the owners of the dams must guarantee that a set amount of
water be made available at a price set by the WRB. Any additional water will be priced
through individual bargaining.
Benez proposes a compromise in which the government leases the dams with an
annual lease payment set at 10% of the current dam value for a period of 30 years,
with maintenance costs offsetting up to one-­third of the lease payment in any given
year. The WRB would then set the price and limits on water availability in the manner
suggested by Suarez. Further, the issue can be re-­addressed upon expiration of the lease.

The Regulatory Solution

After months of negotiation, the WRB is created. The WRB regulates the price and
the amount of water flowing from the dams, which are leased and maintained by the
government for 20 years. During this time, the government pays all maintenance costs
without any offset to lease payments.
Upon leasing the dams, the government needs to invest in roads to gain access to
the dams. This sort of investment had not been considered when assessing the repair
and maintenance of the dams. Although delayed, the improved dams allow for more
water than had been anticipated to become available and at lower prices owing to
the actions of the WRB.
As part of the compromise to have water regulated, the farming and manufac-
turing groups had agreed to invest in technology and practices for the more efficient
use of water. Although the manufacturers have been making these investments to use
water more efficiently, thereby reducing demand and helping to keep water prices
low, the farmers have chosen not to do so. Given the lower price of water because of
improvements to the dams, the farmers perceive no net revenue benefits from addi-
tional investment in the more efficient use of water.
19 Prior to the president’s intervention, the actions by the farmers relative to the
manufacturers over the disputed price of water is best described as:
A moral hazard.
B adverse selection.
C regulatory arbitrage.
20 The WRB, as initially proposed by Suarez, is best described as a(n):
A independent regulator.
B self-­regulating organization.
C regulator created by statute.
21 Suarez’s justification for the seventh member of the WRB is best described as
preventing regulatory:
A capture.
B arbitrage.
C competition.
2019 Level II Mock Exam PM 11

22 Suarez’s proposal for the ownership of the dams is best classified as which of the
following regulatory tools?
A Regulated monopoly
B Provision of public goods
C Public financing of private projects
23 Of the three proposals concerning dam ownership and maintenance, the pro-
posal that provides the least amount of regulatory burden is the one given by:
A Antoli.
B Benez.
C Suarez.
24 When assessing the outcomes from the regulatory solution for Central
Aldorria’s water problem, which of the following statements is most accurate?
A There is an indirect cost due to the farmer’s behavior.
B The behavior of the farmers is an example of a “hold out” problem.
C The additional net regulatory burden due to unanticipated events is equal to
the cost of building roads.

Panorama Investment Partners Case Scenario

Inside the offices of Panorama Investment Partners, Aisha Ishmael and Liam Lenihan,
principals at the firm, are meeting to discuss some investment decisions for their
flagship equity fund. Newly hired analyst Brandon Burgess joined the meeting to
observe and to provide some information he had gathered researching the potential
investments.
The two companies they are discussing are networking equipment makers, Zip
Technologies Ltd. (ZipTech) and Euronet GmBH (Euronet), both of which recently
reported results for the fiscal year ending 31 December 2017. Ishmael starts off by
mentioning an anomaly she had picked up on while listening to the analyst calls of
network and telecommunications providers, which are customers of the networking
equipment makers. Several of these customer organizations had reported higher-­
than-­originally-­forecasted capital spending in the final three months of 2017, and a
few had bragged about the favorable pricing they had been able to negotiate. Ishmael
further observes that all those with the unexpectedly higher spending were known
to use ZipTech as their primary equipment provider. Ishmael is concerned about the
possibility of earnings manipulation by ZipTech.
Lenihan states that he too is not impressed with Euronet. He notes that the com-
pany has again increased the proportion of its sales where it provides the financing.
He is also concerned that Euronet has categorized the associated loans receivable
from customers as a component of other assets rather than as accounts receivable.
Lenihan asks Burgess to calculate Euronet’s Beneish M-­score before their next
meeting. He provides Burgess with the Beneish coefficients for each variable (see
Exhibit 1). Lenihan wonders about the effect on the DSR value of reporting the loans
receivable as other assets and, in turn, the probability that Euronet’s M-­score will flag
it as a possible earnings manipulator.

Exhibit 1  Coefficients for Beneish M-­Score Variables

DSR (days sales receivables) 0.920
GMI (gross margin) 0.528
AQI (asset quality) 0.404
(continued)
12 2019 Level II Mock Exam PM

Exhibit 1  (Continued)

SG (sales growth) 0.892

DEPI (depreciation) 0.115
SGAI (sales, general, and administrative expenses) –0.172
Accruals ([Income before extraordinary items – Cash from opera- 4.670
tions]/Total assets)
LEVI (leverage) –0.327

Ishmael asks Burgess, “What have you come across with respect to the companies’
post-­retirement benefits?”
Burgess replies, “I noticed that both companies are reporting net pension liabilities.
Both companies amended their defined benefit pension plans during the year that just
ended, providing enhanced benefits on past service to retain key technical employees.
But I don’t understand why Euronet’s pension expenses were proportionately much
higher year over year than were those of ZipTech, because both companies have similar
workforces and the pension benefits were on par both before the amendments and after.”
Lenihan responds, “I think it’s because ZipTech reports under US GAAP while
Euronet reports under IFRS and because of how those reporting frameworks account
for past service costs.”
Burgess agrees to revisit the effect of the pension amendments and quickly moves
on to the exhibit he had brought along, showing some of the key assumptions under-
lying both companies’ other post-­employment benefit calculations (Exhibit 2).

Exhibit 2  Post-­Employment Benefit Assumptions Used by

ZipTech and Euronet
ZipTech Euronet

Discount rate 3.9% 3.4%

Estimated annual compensation increase 3.2% 2.8%
Near-­term health care cost trend rate 3.6% 4.1%
Ultimate health care trend rate 3.2% 3.1%
Years until ultimate trend rate is reached 8 years 10 years
Inflation rate 1.3% 1.5%

Lenihan studies the exhibit and comments, “This looks like useful information, but
now we need some analysis. Can you use this information to give us insights about
the impact of the post-­employment benefit reporting? Why don’t you write a report
and put it on my desk before you leave this evening.”
Ishmael makes a final suggestion: “See whether you can find any information on
how sensitive both companies are to changes in their actuarial assumptions. That
would provide additional richness in your report.”
25 If Ishmael’s concern about ZipTech’s possible earnings manipulation is valid, the
tactic the company is using is best described as:
A channel stuffing.
B classification shifting.
C contingent selling.
2019 Level II Mock Exam PM 13

26 Lenihan’s concern about Euronet’s loans receivable from customers most likely
indicates that he suspects that the company may be engaging in:
A off-­balance-­sheet financing.
B classification shifting.
C manipulative discretionary accruals.
27 The most likely effect of Euronet’s choice for reporting the loans receivable on
the Beneish M-­score is that the company’s probability of being flagged as an
earnings manipulator is:
A unchanged.
B increased.
C decreased.
28 Lenihan’s response about the difference in ZipTech’s and Euronet’s pension
costs is most likely:
A correct because Euronet would have reported past service costs in net
income immediately.
B incorrect because ZipTech’s past service costs are reported in OCI and are
not subsequently amortized to net income.
C incorrect because both companies would have accounted for pension costs
in the same way.
29 Which of the assumptions in Exhibit 2 would most likely result in a lower
reported post-­employment benefit obligation for Euronet as compared with
ZipTech?
A Near-­term health care trend rate
B Ultimate health care cost trend rate
C Years until the ultimate trend rate is reached
30 In response to Ishmael’s final suggestion, Lenihan is most likely to find the
required information in the:
A regulatory filings for the pension plan.
B management discussion and analysis.
C notes to the financial statements.

Cuyahoga River Navigators Case Scenario

Cuyahoga River Navigators, Inc. (CRN), based in Cleveland, Ohio, has a fleet of 30
watercraft consisting of riverboats, yachts, barges, and ships navigating the Cuyahoga
River and Lake Erie. CRN is a high-­beta stock, and its market liquidity is quite low.
Insiders own more than 50% and institutions own less than 30% of the firm’s common
stock. The company pays dividends and follows a constant payout ratio policy. The
company’s management is confident of a huge increase in revenue growth over the
next four to five years. To meet the capital needs for growth opportunities, CRN’s
management is contemplating the issuance of debt or common stock.
Abhishek Alahtab is a junior equity analyst at Cleveland Investment Research,
LLC, and follows regional small-­cap stocks trading in the over-­the-­counter market.
Amit Jatin, a senior equity analyst at Cleveland Investment Research, asks Alahtab to
evaluate CRN and prepare a research report for updating the firm’s recommendation
about the stock. He gives Alahtab CRN’s financial data, which are shown in Exhibits
1 and 2.
14 2019 Level II Mock Exam PM

Exhibit 1  Income Statement Excerpts, Years Ending 31 December ($

millions)
2013 2012

EBITDA 275 250

Depreciation expense 82.5 75
Operating income 192.5 175
Interest expense 16 14.9
Income before taxes 176.5 160.2
Income taxes 56.5 48
Net income 120 112.1
Common dividend 48 44.8

Exhibit 2  Selected Balance Sheet Data, Years Ending 31 December ($

millions)
Net investment in fixed capital 165.3
Net increase in working capital –1.80

2013 2012

Current assets 354.2 322

Accumulated depreciation 257.5 175
Notes payable 20 15
Long-­term debt 157.5 150
Common stock (50 million shares 800 800
outstanding)
Retained earnings 159.3 87.3
Total liabilities and equity 1,265.00 1,150.00

Ratios are calculated using year-­end values

Alahtab uses the Gordon growth model to estimate CRN’s intrinsic value. He
uses the firm’s sustainable growth rate for 2013 as a measure of dividend growth.
Using the capital asset pricing model (CAPM), he arrives at 11% as the required rate
of return on the stock.
Jatin disagrees with Alahtab’s preference for the Gordon growth model. He thinks
that CRN’s stock should be valued using sophisticated techniques that correctly
account for the huge increase in revenues expected over the next four to five years.
In particular, he suggests a couple of two-­stage valuation models: the H-­model and
the free cash flow to equity (FCFE) model. Upon a closer examination of the data and
expectations of high growth from the increased tourism and transportation on the
revitalized Cuyahoga River, Jatin suggests that Alahtab incorporate the following as
inputs into his H-­model and FCFE model computations:
■ A growth rate of 20% per year over the next four years (2014 through 2017) and
a 6% constant growth rate beyond 2017
■ An estimate of FCFE of $0.96 per share for 2014
2019 Level II Mock Exam PM 15

■■ The addition of a small-­firm risk premium of 2% to the rate of return on the

stock
■■ A tax rate of 35%
Additionally, Jatin makes the following statements concerning the valuation models
that he prefers:
1 The H-­model assumes that the dividend growth begins at a high rate and
declines linearly throughout the supernormal growth period until it reaches
a normal growth rate at the end. A smoother transition to the mature phase
growth rate would be more realistic than the erratic growth rate in dividends
displayed by the data.
2 The FCFE model ignores a company’s investment and financing policies as
well as its dividend policy. This model would be appropriate because free cash
flow is not affected by the firm’s dividend payout policy, but any stock issuance
in the future can have a significant impact on cash flow available to common
stockholders.
3 An increase in leverage will lead to a decrease in FCFE in the year the debt is
issued, thereby potentially reducing the value per share.
Alahtab reevaluates the stock following Jatin’s suggestions, but prior to issuing
the new price target and recommendation on CRN, Jatin and Alahtab meet with
Julia Lederman, the chief investment officer at Cleveland Investment Research, for
her approval. After taking a close look at the data and analyses, Lederman makes the
following statements:
1 I suggest we use a forward-­looking beta by making the Blume adjustment to
CRN’s raw beta. The adjustment increases the required return on CRN’s stock
as well as its intrinsic value.
2 It is good to see an adjustment for small-­firm risk premium, but the Pastor–
Stambaugh model should be used for estimating the required return on CRN’s
stock in order to capture the liquidity premium given the stock’s low liquidity.
3 I also suggest using a residual income model because, unlike free cash flows,
the accounting data used in residual income models may not require significant
adjustments.
The meeting concludes with the understanding that Alahtab will redo the analyses
per Lederman’s suggestions and bring the results back for her approval.
31 According to the Gordon growth model and the inputs used by Alahtab, CRN's
intrinsic value per share as of 2013 is closest to:
A $29.49.
B $16.80.
C $27.43.
32 Using the H-­model, the information in Exhibits 1 and 2, and Jatin’s estimates for
growth and required return on the stock, the intrinsic value of CRN’s stock as
of 2013 is closest to:
A $22.22.
B $17.55.
C $18.38.
33 Using the data in Exhibits 1 and 2 and the tax rate suggested by Jatin, CRN’s
FCFE per share for 2013 is closest to:
A $0.85.
16 2019 Level II Mock Exam PM

B $0.82.
C $0.92.
34 Using Jatin’s 2014 estimate for FCFE per share and his other suggested inputs
for growth and required return on the stock, the intrinsic value of CRN’s stock
as of 2013 is closest to:
A $21.27.
B $19.15.
C $17.37.
35 In regard to Jatin’s three statements concerning valuation models, he is most
accurate with respect to statement:
A 3.
B 1.
C 2.
36 In regard to her three statements, Lederman is most accurate with respect to
statement:
A 3.
B 1.
C 2.

Stellwagen Investment Partners Case Scenario

Stellwagen Investment Partners is an institutional investment manager located in
Boston that offers advice on both equity and fixed-­income strategies. Stellwagen man-
ages a number of separate accounts for large institutional investors and also serves as
a subadviser for mutual funds.
Thomas Harding, a fixed-­income portfolio manager at Stellwagen, is a member
of the firm’s investment committee. Harding is responsible for management of the
firm’s short-­and intermediate-­duration credit strategies. When making investment
decisions, he often relies on input from Stellwagen’s team of 15 credit analysts. Sarah
Hamilton is a credit analyst at Stellwagen and covers the technology and telecom-
munication sectors.
Hamilton is analyzing three bonds being considered for investment by Harding:
CommCo, which is currently callable at par; StorageTech, which is currently putable
at par; and NexTec, which has a make-­whole call provision. All three bonds have a
five-­year maturity, are of equivalent credit quality, and pay the same coupon (3.5%).
Harding believes that interest rates will increase more rapidly than currently implied
by the market.
Harding asks Hamilton what the impact of increased interest rate volatility and
changes to the shape of the yield curve would have on the value of these bonds. She
states that all else being equal,
Comment 1 increased interest rate volatility decreases the value of the
CommCo bond,
Comment 2 the value of NexTec’s make-­whole call provision increases as the
yield curve flattens,
Comment 3 and the value of StorageTech’s option will be more valuable with a
downward-­sloping yield curve than with a flat yield curve.
Hamilton has been working on interest rate scenarios to model how bond prices
would change given a 40 bp (basis point) upward or downward shift in the yield curve.
Her work is shown in Exhibit 1.
2019 Level II Mock Exam PM 17

Exhibit 1  Bond Sensitivity Analysis to 40 bp Interest Rate Shifts

CommCo StorageTech NexTec

Current price 99.70 100.35 100.05

Price rates up 40 bps 98.20 100.00 98.40
Price rates down 40 bps 100.00 101.85 101.70

To prepare for rising rates, Harding asks Hamilton to evaluate floating-­rate bond
issues. She reviews a two-­year floater issued by NexTec and creates a two-­year bino-
mial interest rate tree for valuation purposes, as shown in Exhibit 2. The bond pays
annual coupons based in the one-­year Libor. The Libor swap curve is the same as the
par yield curve: 2.5% at one year and 3.0% at two years.
Year 0 Year 1 Year 2

5.5258
3.8695

2.5000 4.5242
3.1681

3.7041

Harding subadvises a core-­plus bond fund that allows for up to 5% of assets to

be invested in convertible debt. Hamilton has read research from Stellwagen’s equity
team that has identified StorageTech equity as a top idea, with a price target of $120
per share. The stock does not pay a dividend and is trading for $90.00 per share on 2
April 2017. Harding asks Hamilton to provide him with the current conversion price,
conversion value, and market conversion premium per share based on data in Exhibit 3.

Exhibit 3  StorageTech Convertible Bond Data

Issue Date 1 April 2015
Maturity 1 April 2020
Issue Par Price $1,000.00
Stock Price at Issue $80.00
Initial Conversion Premium 20.0%
Convertible Price 2 April 2017 $1,050.00
Annual Coupon 2.5%

Based on this information, Hamilton calculates the conversion value to be $937.50

and the market conversion premium per share to be $10.80 per share.
37 Which of the bonds that Hamilton analyzes in Exhibit 1 is most likely to outper-
form given Harding’s expectations?
A NexTec
B CommCo
C StorageTech
38 Which of the bonds that Hamilton analyzes in Exhibit 1 is most likely to exhibit
effective negative convexity?
A StorageTech
18 2019 Level II Mock Exam PM

B CommCo
C NexTec
39 Which of Hamilton’s comments regarding interest rate volatility and the yield
curve is most likely correct?
A Comment 2
B Comment 1
C Comment 3
40 Based on Exhibit 1, which bond most likely has the shortest effective duration?
A CommCo
B StorageTech
C NexTec
41 If the NexTec floater had a 3% cap, the value of this embedded cap for the issuer
would be closest to:
A 1.57.
B 1.09.
C 0.49.
42 Is Hamilton most likely accurate regarding her convertible bond calculations?
A Yes
B No. The conversion value is incorrect.
C No. The market conversion premium is incorrect.

Mafadi Case Scenario

Mafadi Consulting Limited is a boutique financial services company located in
Johannesburg, South Africa. Mafadi specializes in providing commodity and currency
hedging solutions to institutional investors and corporations.
Andre Fourie is a senior client services consultant for Mafadi. He manages rela-
tionships with a number of institutions to assist with their hedging needs. One of
Fourie’s client’s is Global Bullion, a mining and exploration company headquartered
in the United States.
Fourie is discussing forward contracts with Patrick Jacob, a new risk analyst at
Global Bullion. Jacob is asking about similarities and differences between forward and
futures contracts. Fourie makes the following comments to Jacob:
Comment 1 If you are long a futures or forward contract and the price of the
underlying has risen, the value of a futures contract is most likely
lower than that of the equivalent forward contract.
Comment 2 Forward contracts are marked to market each day, whereas
futures contracts are not.
Comment 3 The market value of both futures and forward contracts at initia-
tion is zero.
Jacob wants to understand more about the carry arbitrage approach to valuation
and, as part of the discussion, Fourie describes the two fundamental rules for the
arbitrageur:
Rule 1 The arbitrageur never uses her own money to purchase the underlying
security and always invests any proceeds from short selling transac-
tions at the risk-­free rate.
Rule 2 The arbitrageur does not take any market price risk on the total trade,
but individual components of the trade may involve price risk.
2019 Level II Mock Exam PM 19

Mbali Ndlovu, a trader on Mafadi’s derivatives desk, works closely with Fourie to
implement solutions for his clients. Fourie asks Ndlovu to review and calculate the
value of a five- year ZAR20,000,000 swap into which Global Bullion entered two years
ago. It is a receive-fixed, Libor-based interest rate swap with annual resets (30/360 day
count). The fixed rate in the swap contract established two years ago was 3%. Exhibit 1
estimates the present value factors.

Exhibit 1  Present Value Factors for Five-­Year Swap

Maturity (years) Present Value Factor

1 0.9802
2 0.9560
3 0.9311

In addition to assisting Fourie, Ndlovu focuses on finding profitable trades for

Mafadi by investing the firm’s own capital. Ndlovu has noticed some unusual activity in
foreign exchange forward rates, especially the rates for the New Zealand dollar (NZD)
and the South African rand (ZAR), ZAR/NZD. The foreign exchange forward rate,
F0(ZAR/NZD, T), is currently below the foreign exchange spot rate, S0(ZAR/NZD).
Ndlovu is also evaluating the forward contract in Zulu Mineral Mining (Zulu) stock
to determine if an arbitrage opportunity exists. The South African 12-­month prime
rate is 3.25%. The spot price for Zulu is ZAR 60.50. Zulu pays an annual dividend
of ZAR3.00 on a semiannual basis, and the next dividend is paid in three months.
Interest compounds annually.
Ndlovu receives a request from Fourie to structure an OTC swap transaction for
one of his clients. After reviewing the request, Ndlovu agrees to be the counterparty
for a one-­year swap on Tanzanite Resources (Tanzanite) stock in which the client is
seeking to enter into a receive-­equity returns and pay-­fixed arrangement. Tanzanite
does not pay a dividend. The swap is structured as a quarterly reset, 30/360 day count,
with a notional value of ZAR 5,000,000. The fixed rate is 3.2% annually. Zulu has a
return of –3.6% for the first quarter.
43 Which of Fourie’s comments to Jacob is least likely accurate?
A Comment 1
B Comment 2
C Comment 3
44 Are Fourie’s comments regarding fundamental rules for arbitrageurs most likely
correct?
A No, Rule 1 is incorrect
B Yes
C No, Rule 2 is incorrect
45 The value of Global Bullion’s swap contract is closest to:
A ZAR1,720,380.
B ZAR1,324,380.
C ZAR344,076.
46 Based on the carry arbitrage model, New Zealand interest rates, compared with
South African interest rates, are most likely:
A higher.
20 2019 Level II Mock Exam PM

B the same.
C lower.
47 The three-­month forward price for Zulu stock is closest to:
A ZAR63.99.
B ZAR59.47.
C ZAR57.99.
48 The cash flow to Ndlovu after the first quarter of the Tanzanite swap is closest
to:
A ZAR219,529.
B –ZAR140,471.
C ZAR340,000.

Premier Immobilier Case Scenario

Premier Immobilier facilitates North American private real estate investment for
ultra-­high-­net-­worth investors by constructing and managing investment partnerships,
each of which focuses on specific sectors of the real estate market. Premier’s chief
investment officer, John Beaudiment, is meeting with a new client, Harris Lang. Lang,
who manages the Lang Family Office for members of his own family, is interested in
working with Premier for the family’s private real estate investments.
Beaudiment explains to Lang, “We enable our clients to bypass some of the
common disadvantages facing individual investors in private real estate. Structuring
our funds as partnerships allows investors to invest directly in real estate. Each part-
nership focuses on diversifying within a specific sector of the real estate market and
targets an exit strategy approximately 10 years following the fund’s creation. Over
that time frame, the plan is for investors to have received back at least the amount
of their initial capital in the form of dividends and/or capital gains. The exact life of
each fund is dependent on future economic conditions, and this avoids the need to
liquidate properties during an unfavorable market environment. The following list
provides three common benefits to investors in our funds, and Exhibit 1 describes
the characteristics of the four funds currently raising capital.”
Benefit 1: Stable income from investments not correlated to equity markets
Benefit 2: Reduction of reportable taxable income due to depreciation tax
credits
Benefit 3: Geographical diversification of real estate property investments

Exhibit 1  Fund Characteristics

Fund Name Description of Investment Activities Fund Exit Strategy

1 Golden Age Equity
Partners
2 Multifam Equity
Partners
Building and operation of senior independent
living facilities in coastal metropolitan areas
Construction of 15–20 luxury multifamily
apartment building projects in high-­growth
metropolitan areas
Sale of portfolio in public REIT offer-
ing in next 9–12 years
Building sale within 14–24 months of
each respective project initiation; sale
contracts generally agreed upon prior
to project initiation
2019 Level II Mock Exam PM 21

Exhibit 1  (Continued)

Fund Name Description of Investment Activities Fund Exit Strategy

3 Multifam Debt
Partners
4 Timbrian Equity
Partners
Provides floating-­rate financing for Multifam
Equity Partners and for qualified project
purchasers
Purchase and management of diverse timber-
lands in North America
Public sale of debt as mortgage-­
backed securities pool in 6–10 years
Sale of timberlands over next 9–12
years

Beaudiment continues, “Multifam Debt Partners, which provides financing for

Multifam Equity Partners, evaluates the credit quality of each proposed project in
order to negotiate the LTV or debt service coverage ratio (DSCR) required for each.
Multifam Equity Partners has already initiated building projects in three different
cities. The projects have similar expected rates of return. Multifam Debt Partners
has based its required debt service coverage ratios partially on the pro forma data
shown in Exhibit 2.”

Exhibit 2  Multifam Equity Partners Pro Forma Data

Number of NOI expected Estimated mkt
Property units per unit DSCR value

Multifam I 90 CAD25,000 1.30 CAD45,000,000

Multifam II 100 CAD30,000 1.40 CAD50,000,000
Multifam III 120 CAD20,000 1.50 CAD60,000,000

Beaudiment adds, “Each of the four funds has its own team that conducts due
diligence of target properties. They start by preparing initial due diligence reports that
are submitted to Premier’s investment committee. The summary page of one fund’s
report highlights the following sections:
I. Property survey
II. Physical/engineering inspection for structural issues
III. Zoning compliance regulations, parking ratios, etc.
IV. Cash flow statements for operating expenses and revenues”

49 Which of the funds listed in Exhibit 1 would most likely enable investors to
meet all three of the benefits?
A Timbrian Equity Partners
B Multifam Equity Partners
C Golden Age Equity Partners
50 Unexpected inflation and rising interest rates would have the greatest negative
short-­term impact on the earnings of:
A Timbrian Equity Partners.
B Multifam Equity Partners.
C Golden Age Equity Partners.
51 Would data from Multifam Equity Partners be more useful than data from
Golden Age Equity Partners for the construction of a hedonic price index?
22 2019 Level II Mock Exam PM

A Yes
B No, because Golden Age Equity Partners can more easily supply NOI data
C No, unless the data from Multifam Equity Partners were adjusted for the
appraisal lag
52 Which of Multifam Equity Partners’ properties listed in Exhibit 2 most likely
has the highest assumed growth rate?
A Multifam I
B Multifam II
C Multifam III
53 Which of Multifam Equity Partners’ properties listed in Exhibit 2 is most likely
permitted the highest maximum LTV on an interest-­only loan?
A Multifam I
B Multifam II
C Multifam III
54 Which fund’s due diligence report will least likely contain the listed sections
from the summary page?
A Timbrian Equity Partners
B Multifam Equity Partners
C Golden Age Equity Partners

Hoskins Bank Corporation Case Scenario

Hoskins Bank Corporation (HB) is a US bank holding company with lines of business
in corporate banking, retail banking, capital markets, and private wealth management.
HB’s annual risk assessment meeting with its external regulator will be in 90 days.
In preparation for this meeting, Richard Hextall, CEO, and Alice Klink, chief risk
officer, are meeting with independent risk consultant David Donovan, a principal of
Donovan and MacNab Risk Advisory LLC.
Hextall asks Klink to review HB’s primary risk exposures. Klink begins by sug-
gesting that the liquidity gap is a primary risk exposure for retail banking, stating
that “with a 99% level of confidence, we expect our ratio of interest-­earning assets to
interest-­paying liabilities will range between 90% and 110%.” For corporate banking,
Klink believes that credit deterioration is a primary risk exposure and states that “over
any one-­month period, there is a 1% probability of incurring a single-­name loan loss
for an amount that is not greater than 0.55% of the loan portfolio.” Klink believes that
market risk is a primary risk exposure for capital markets, stating that “there is a 1%
chance of HB losing at least 1.30% of its Tier 1 capital over a one-­day period.”
During last year’s review, the regulator expressed concern that HB did not have
an effective risk management process in place for its short-­term, investment-­grade
bond portfolio. Donovan asks about the bank’s progress in addressing this concern.
Hextall explains that HB has implemented a value at risk (VaR) approach and notes
that there are three distinct methods to estimate VaR. The parametric method assumes
that the distribution of returns on the risk factors is normal, and it is considered to
be a straightforward approach. The historical simulation method also relies on the
normal distribution assumption. The Monte Carlo simulation method relies on neither
a normal distribution nor past returns and, as a result, is able to accommodate bonds
that may contain embedded options.
2019 Level II Mock Exam PM 23

Donovan cautions Hextall that VaR may not capture information related to large
losses, portfolio composition, and performance. He states that these limitations may
be addressed by variations, or extensions, to VaR. For example, CVaR captures the
potential loss if VaR is exceeded. IVaR measures ex ante tracking error. Relative VaR
is used to determine the effect on VaR from any changes in portfolio composition.
Recalling the financial c risis, H extall a sks K link a bout H B’s p otential e xposure
to any future adverse, extreme events. Klink replies that HB’s investment portfolio
currently holds short-duration, high-investment-grade bonds but does not hold any
equity securities or derivative instruments. Klink adds that the illiquidity conditions
that were prevalent during the financial crisis continue to exist, according to a reverse
stress test she conducted on 10 plausible independent risk factors.
Donovan transitions the discussion to the private wealth division by asking Hextall
to discuss the differences in risk measurement for banks in comparison to traditional
asset managers, such as HB’s private wealth division. Hextall states that risk measures
for banks typically consider liquidity, solvency, and capital sufficiency, whereas risk
measures for traditional asset managers typically are focused on investment perfor-
mance. Hextall provides an example, stating that “HB, for its private wealth clients,
calculates active share for each client and uses ex ante tracking error to measure the
degree to which clients’ current portfolios might underperform their benchmarks
in the future. For equity-only portfolios, forward-looking beta is used to measure
sensitivity to the broad equity market.”
Hextall asks Klink to review the constraints used in the context of measuring the
risk of the corporate banking division. Klink responds by stating that the corporate
banking division’s capital allocation is $2,800 million. This amount considers market
risk, credit risk, and operational risk for which the minimum required return is 11%.
Capital limits, position limits, and stop-loss limits are assigned to manage both overall
exposure and exposure to single-name event risk. The market risk management con-
straints for each of the corporate banking division’s lending groups are summarized
in Exhibit 1.

Exhibit 1  Market Risk Management Constraints for Corporate Banking

Lending Groups ($ millions)
Lending Group Return Capital Limit Position Limit Stop-­Loss Limit

Secured 120 800 32 80

Cash Flow 120 1,200 24 60
Real Estate 120 1,000 10 70

55 Which of Klink’s statements regarding HB’s risk exposures is most likely correct
as it relates to value at risk?
A The statement about retail banking
B The statement about capital markets
C The statement about corporate banking
56 Which of Hextall’s explanations regarding the three distinct methods of VaR is
least likely correct?
A Historical
B Parametric
C Monte Carlo
24 2019 Level II Mock Exam PM

57 Donavan’s statement about extensions to VaR is most likely correct with respect
to:
A IVaR.
B CVaR.
C relative VaR.
58 In replying to Hextall’s recollection of the financial crisis, Klink most likely con-
sidered which risk measure?
A VaR
B Scenario analysis
C Sensitivity analysis
59 Is Hextall’s statement regarding the private wealth division likely correct?
A Yes.
B No, it is incorrect about forward-­looking beta.
C No, it is incorrect about ex ante tracking error.
60 With respect to capital allocation, which lending group listed in Exhibit 1 is
least likely attractive?
A Secured
B Cash Flow
C Real Estate