Mock Exam 2023 #1 First Session Ethical and Professional Standards

Level I of the CFA® Exam
Mock Questions with Answers - Mock Exam 2023 #1 - First

Session (Ethical and Professional Standards, Quantitative
Methods, Economics & Financial Statement Analysis)
Offered by AnalystPrep
Last Updated: Sep 5, 2023
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Q.1 A random sample of 50 CFA exam candidates was found to have an average IQ of 130. T he
standard deviation among candidates is known (approximately 20). Assuming that IQs follow a normal
distribution, the 2-sided 95% confidence interval for the mean IQ of CFA candidates is closest to:
A. [124.5; 135.5].
B. [125;135].
C. [130; 135.5].
T he correct answer is A.
For any sample that comes from a normally distributed population, we know that:
X̄ − μ
N (0, 1)
σ
√n
when σ is known.
T hus, a 95% CI for the mean,
α
μ = X̄ ± Zα /2 ×
√n
20
= 130 ± 1.96 × = 130 ± 5.5437
√50
Where α = 0.05 so Zα /2 = 1.96
Which can be expressed as [124.5; 135.5]
CFA Level 1, Vol ume 1, Readi ng 6– Hypothesi s Testi ng, LOS 6g: i denti fy the appropri ate
test stati sti c and i nterpret the resul ts for a hypothesi s test concerni ng the popul ati on
mean of both l arge and smal l sampl es when the popul ati on i s normal l y or
approxi matel y normal l y di stri buted, and the vari ance i s (1) k nown or (2) unk nown
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© 2014-2023 AnalystPrep.
Q.2 A pension fund manager expects that payments of $1,500,000 per year will be paid to retirees
starting at the beginning of Year 6. T hey will extend until Year 19. T he discount rate is 8%
compounded annually. T he present value of the pension liability today is closest to:
A. $7,792,901.63
B. $8,416,333.80
C. $12,366, 355.50
T he correct answer is B.
From the perspective of Year 5, we have an ordinary annuity with 14 payments.
1 1
⎡ 1 − (1+r)N ⎤ ⎡ 1 − (1+0. 08)14⎤
PV = A × ⎢ 1
⎥= , 500, 000 × ⎢ ⎥ = 12, 366, 355.5
r 0.08
⎣ ⎦ ⎣ ⎦
Now we can calculate the P V at t = 0 (today):
12, 366,355.5
PV = = 8, 416, 333.80
(1 + 0.08)5
A i s i ncorrect. It assumes 6 years in the calculation of PV as follows:
$12, 366,355.50
PV = = $7, 792, 901.63
1.086
C i s i ncorrect. It is the resulting PV of 14 ordinary annuity payments for 5 years as calculated
above.
CFA Level 1, Vol ume 1, Readi ng 1 – The Ti me Val ue of Money, LOS 1c: Cal cul ate and
i nterpret the future val ue (FV) and present val ue (PV) of a si ngl e sum of money, an
ordi nary annui ty, an annui ty due, a perpetui ty (PV onl y), and a seri es of unequal cash
fl ows.
Q.3 Zeng is developing a regression model to predict stock market returns using the GDP growth
rate. He considers quarterly returns of the S&P 500 (S&P) as a proxy for stock market returns and
quarterly changes in GDP as GDP growth rate (GDP Growth). T he linear regression model is as
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follows:
S&P = β0 + β1(GDP Growth) + ϵ
Zeng develops the following partial ANOVA table and regression statistics based on the last 10 years
of quarterly data pertaining to the S&P 500 and GDP.
DF Sum of Squares
Regression 1 108
Residual 38 To be calculated
Total 39 155.5
T he standard error of the estimate for Zeng’s model to predict stock market returns using the GDP
growth rate is closest to:
A. 0.0366.
B. 0.0534.
C. 1.1180.
sum of square of errors

Standard Error of Estimate (SSE) = √
n−2
Where:
Sum of square of Errors = SST-SSR = 155.8 − 108 = 47.5

N = 40 (Based on 10 years of quarterly data)
T hus,
47.5
SSE = √ = 1.1180
40 − 2
CFA Level 1, Vol ume 1, Readi ng 7 – Introducti on to Li near Regressi on, LOS 7e: descri be
the use of anal ysi s of vari ance (ANOVA) i n regressi on anal ysi s, i nterpret ANOVA
resul ts, and cal cul ate and i nterpret the standard error of esti mate i n a si mpl e l i near
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regressi on.
Q.4 Suppose the GDP deflator for Brazil was 120.0 in 2012 and 211.5 in 2017. T his indicates an
inflation rate of:
A. 9.80%
B. 12.00%
C. 15.30%
We need to calculate the compound growth rate of the GDP deflator, from 2012 to 2017:
1
211.5 5
( ) − 1 = 0.12 = 12.0%
120.0
CFA Level 1, Vol ume 2, Readi ng 10 – Aggregate Output, Pri ces, and Economi c Growth,
LOS 10c: Compare nomi nal and real GDP and cal cul ate and i nterpret the GDP defl ator.
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Q.5 A portfolio's mean return is 15%, and its standard deviation is 18%. T he returns are normally
distributed. What confidence interval does the -20.28% to 50.28% range describe?
A. 99%
B. 95%
C. 68%
(50. 28−15)
T he upper limit is 50.28, which is = 1.96 standard deviations above the mean 15. T he lower
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(15−(−20. 28))
limit is -20.28, which is = 1.96 standard deviations below the mean 15. A 95% confidence
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interval is a range of 1.96 standard deviations around the mean.
CFA Level 1, Vol ume 1, Readi ng 5 – Sampl i ng and Esti mati on, LOS 5h: Cal cul ate and
i nterpret a confi dence i nterval for a popul ati on mean, gi ven a normal di stri buti on wi th
1) a k nown popul ati on vari ance, 2) an unk nown popul ati on vari ance or 3) an unk nown
popul ati on vari ance and a l arge sampl e si ze
Q.6 T he most likely effect of imposing additional emissions control requirements on electricity
producers is:
A. a leftward shift in the electricity supply curve.
B. a rightward shift of the electricity demand curve.
C. a leftward movement along the electricity supply curve.
T his is most easily understood by recognizing that for any given quantity of electricity production,
producers must now receive sufficient extra income to recover the additional cost of the emission
control equipment. T herefore, this is a leftward movement of the supply curve.
LOS 10h: Expl ai n causes of movements al ong and shi fts i n aggregate demand and
suppl y curves.
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Q.7 A random X follows a discrete uniform distribution over the interval [8,54]. What is the
probability that X is between 14 and 21?
A. 0.15
B. 0.24
C. 0.70
For uniform discrete uniform distribution, we know that:
1
f(x; a, b) = ; x = a, a + 1, a + 2,. . ., b
b − a+ 1
And,
x − a+ 1
F (x) = P (X ≤ x)) = ;a≤ x ≤ b
b − a+ 1
We need:
P (14 ≤ x ≤ 21) = F (21) − F (14)

21 − 8 + 1 14 − 8 + 1
= −
54 − 8 + 1 54 − 8 + 1
14 7
= −
47 47
= 0.14893 ≈ 0.15
CFA Level 1, Vol ume 1, Readi ng 4 – Common Probabi l i ty Di stri buti ons, LOS 4c:
descri be the properti es of a di screte uni form random vari abl e, and cal cul ate and
i nterpret probabi l i ti es gi ven the di screte uni form di stri buti on functi on.
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Q.8 If the economy is at or near full employment, a sudden and unanticipated reduction in the
availability of a key resource such as electricity is most likely to:
A. Shift aggregate supply to the left, resulting in higher GDP.
B. Shift aggregate supply to the left, resulting in higher prices.
C. Shift aggregate demand to the left, causing a higher price level.
A sudden and unanticipated reduction in the availability of a key resource is most likely to shift
aggregate supply to the left resulting in higher prices. A famous example of this was the oil price
shock from actions by OPEC which resulted in stagflation. Output shrank while the inflation rate
rose.
CFA Level 1, Vol ume 2, Readi ng 10– Aggregate Output, Pri ces, and Economi c Growth,
LOS 10j : Di sti ngui sh among the fol l owi ng types of macroeconomi c equi l i bri a: l ong-run
ful l empl oyment, short-run recessi onary gap, short-run i nfl ati onary gap, and short-run
stagfl ati on
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Q.9 Given that the growth in technology, labor, and capital is 2%, 3%, and 4%, respectively, assuming
that the national income allocated to labor compensation is 55%, the growth in potential GDP is
closest to:
A. 5.45%
B. 5.55%
C. 5.85%
T he growth rate of an economy depends on the rate at which technological advances, labor forces,
physical and human capital, and natural resources grow. T herefore, these forces can be summarized
to the GDP equation as follows:
Growth in potential GDP = Growth in technology + W L (growth in labor) + W c (growth in capital),
where W L and W C are the relative shares of capital and labor in national income.
Growth in potential GDP = 2% + (0.55 × 3%) + (0.45 × 4%) = 5.45%
LOS 10m: Descri be sources, measurement, and sustai nabi l i ty of economi c growth.
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Q.10 T he correlation coefficient of Microsoft and Apple’s stock returns is 0.7. T he return variance
of Microsoft is 0.004, and the return variance of Apple is 0.008. T he covariance of Microsoft and
Apple’s stocks is closest to:
A. 0.000795
B. 0.00395
C. 0.02
SMicrosoft = 0.0040. 5 = 0.0632
SApple = 0.0080. 5 = 0.0894
Cov(Microsoft, Apple) = r × SMicrosoft × AApple = 0.7 × 0.0632 × 0.0894 = 0.00395
CFA Level 1, Vol ume 1, Readi ng 3 – Probabi l i ty Concepts, LOS 3k : Cal cul ate and
i nterpret the expected val ue, vari ance, standard devi ati on, covari ances, and
correl ati ons of portfol i o returns.
Q.11 Kelly Cronin is one of the statistical experts at CMSSP. He is presently using internally-
developed software to explain the relationship between a company’s EPS growth and profitable
opportunities as measured by the spread between the equity return on new projects and the firm’s
cost of equity. After regressing a sample company’s historical EPS on its return spread for the past
ten years, Cronin presented the results to his superior, Brendan T racy. T he following table displays
the results of the regression:
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Exhibit 1: Explaining EPS Growth by Changes
in the Return Spread
Coefficients Standard error
Intercept 1.207 0.5522
Return spread 22.901 1.992
Regression Statistics
Standard error of
1.120
estimate
Observations 62
Mean return spread 0.0943
Variance of mean return
0.007721
spread
Using the information provided in Exhibit 1, if the return spread equals 15%, the 95 percent
prediction interval for EPS growth will be closest to:
A. 2.38% to 6.91%.
B. 2.40% to 6.88%.
C. 2.08% to 7.21%.
T he first step in such a problem is to make the prediction:
EPS growth = 1.207 + b(spread between the equity return on new projects and the firm’s cost of equity)
= 1.207 + 22.901(0.15) = 4.6421%
Next, we compute the variance of forecast/prediction error, s2f.To do that, we need:
Squared standard error of the estimate: s2
Value of independent variable: X
Mean retrun spread: X̄
Variance of the mean return spread: s2x
T hen, we apply the formula:
¯
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1 (X − X̄ )2
s2f = s2 [1 + + ]
n (n − 1)s2x
1 (0.15 − 0.0943)2
= 1122 [1 + + ]
62 (62 − 1)0.007721
= 1.2544(1 + 0.016129 + 0.0065873) = 1.282895
T hus,
Sf = √1.282895 = 1.13265
T he critical value of the t-statistic, tc , given a 95% confidence interval and (62 – 2) = 60 degrees of
freedom, is approximately 2.00. Finally, the prediction interval is:
4.642 ± tcSf = 4.642 ± 2(1.113265) = [2.3767% to 6.9073%]
CFA Level 1, Vol ume 1, Readi ng 7 – Introducti on to Li near Regressi on, LOS 7g:
cal cul ate and i nterpret the predi cted val ue for the dependent vari abl e, and a predi cti on
i nterval for i t, gi ven an esti mated l i near regressi on model and a val ue for the
i ndependent vari abl e.
Q.12 If the significance level of a test is 0.05 and the probability of a type II error is 0.25, the power
of the test is closest to:
A. 0.2
B. 0.7
C. 0.75
T he correct answer is C.
T he power of a test is 1 - P(T ype II error) = 1 − 0.25 = 0.75
CFA Level 1, Vol ume 1, Readi ng 6 – Hypothesi s Testi ng, LOS 6d: Expl ai n a deci si on rul e
and the rel ati on between confi dence i nterval s and hypothesi s tests, and determi ne
whether a stati sti cal l y si gni fi cant resul t i s al so economi cal l y meani ngful .
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Q.13 Suppose your portfolio has declined in value from $1,240,000 to $1,114,000 during the year.
T he continuously compounded rate of return is closest to:
A. -10.71%
B. 6.21%
C. 12.48%
Continuous compounding applies when either the frequency with which we calculate interest is
infinitely large or the time interval is infinitely small. Put quite simply, under continuous
compounding, time is viewed as continuous.
S1
Continuous rate = ln(1 + H P R) = ln ( )
S0
Where S1 is the value at the end of the period and S0 is the value at the beginning of the period.
1, 114, 000
ln( ) = −0.1071 or − 10.71%
1, 240, 000
CFA Level 1, Vol ume 1, Readi ng 4 – Common Probabi l i ty Di stri buti on, LOS 4m:
Cal cul ate and i nterpret a conti nuousl y compounded rate of return, gi ven a speci fi c
hol di ng peri od return.
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Q.14 One of the periodic financial journals stated that the probability that the Indian Stock Exchange
increases to 30,000 index points this month is 60%. As an analyst, estimate the probability of an
increase as odds.
A. T wo-to-five.
B. T hree-to-two.
C. T hree-to-five.
Since the p(E)=0.6, the odds for E is given by:
p (E) ( 35 )
E = = = 3/2
1 − p (E) ( 25 )
T he odds of the increase are three-to-two.
CFA Level 1, Vol ume 1, Readi ng 3 – Probabi l i ty Concepts, LOS 3c: Descri be the
probabi l i ty of an event i n terms of odds for and agai nst the event.
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Q.15 As the degrees of freedom increases and the t-statistic approaches the z-statistic, the tails of
the distribution:
A. Become thicker.
B. Become thinner.
C. Do not change.
T he tails of the t-distribution are usually thicker than the normal distribution, so when the number of
observations increases and the degrees of freedom increase, the t-distribution becomes more spiked
with thinner tails.
CFA Level 1, Vol ume 1, Readi ng 4– Common Probabi l i ty Di stri buti ons, LOS 4n:
Descri be properti es of Student's t-di stri buti on and cal cul ate and i nterpret i ts degrees
of freedom.
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Q.16 Consider the following table for a country’s nominal GDP and corresponding GDP deflators.
Year Nominal GDP GDP deflator

1995 290 85
2000 310 90
2005 360 100
2010 342 115
2015 375 118
For the year 2015, its real GDP (in constant 1995 dollars) is closest to:
A. 270
B. 318
C. 521
To convert to constant 1995 dollars, real GDP = nominal GDP × ( GDP deflator 1995 85
) = 375 × ( 118 ) = 270.
GDP deflator 2015
LOS 10c: Compare nomi nal and real GDP and cal cul ate and i nterpret the GDP defl ator.
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Q.17 An analyst gathered the following national data (in thousands of U.S dollars) for a country for the
year 2017:
Exports of goods and services $ 6, 500, 000

Investment income received from foreign investment $ 980, 000
Imports of goods and services $ 3, 500, 000
Payments due for domestic financial assets owned by foreign investors $ 2, 220, 000
T he country's current account is closest to:
A. $1,760,000
B. $4,240,000
C. $6,200,000
$6, 500, 000 + $980, 000 − $3, 500, 000 − $2, 220, 000 = $1, 760, 000
CFA Level 1, Vol ume 2, Readi ng 10– Aggregate Output, Pri ces, And Economi c Growth,
LOS 10e: Expl ai n the fundamental rel ati onshi p among savi ng, i nvestment, the fi scal
bal ance, and the trade bal ance.
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Q.18 Which of the following is least likely a benefit of having strong institutions in a country, with
respect to geopolitics?
A. T hey allow countries to engage internationally with independence.
B. T hey contribute to more stable internal and external political forces.
C. Increase in the likelihood of a country defecting from its cooperative roles.
Strong institutions such as independent judiciaries, stable democratic governments, and effective
regulatory bodies, are more likely to increase a country's commitment to its international obligations
and cooperative agreements. Strong institutions provide a framework for transparent decision-
making, accountability, and oversight, which can help prevent corruption, political instability, and
unilateral actions that could undermine international cooperation.
A i s i ncorrect. Countries with strong institutions, including organizations promoting the rule of law
and property rights, act internationally with more authority and independence.
B i s i ncorrect. Strong institutions guarantee the stability of internal and external political forces,
giving countries more opportunities to develop cooperative relationships.
CFA Level 1, Vol ume 2, Readi ng 13– Introducti on to Geopol i ti cs, LOS 13a: Descri be
geopol i ti cs from a cooperati on versus competi ti on perspecti ve.
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Q.19 A survey is conducted to determine if the average starting salary of investment bankers is equal
to or greater than $57,000 per year. Given a sample of 115 newly employed investment bankers with
a mean starting salary of $65,000 and a standard deviation of $4,500, and assuming a normal
distribution, the test statistic is closest to:
A. 20.44
B. 19.06
C. 1.78
Standard deviation
Standard error of the sample =
√Sample size
$4, 500
=
√115
= 419.6272
Now,
Sample Mean - Hypothesized value

Test statistic =
Standard error of the sample mean
65, 000 − 57, 000
=
419.6272
= 19.06
CFA Level 1, Vol ume 1, Readi ng 6– Hypothesi s Testi ng, LOS 6g: Identi fy the appropri ate
test stati sti c and i nterpret the resul ts for a hypothesi s test concerni ng the popul ati on
mean of both l arge and smal l sampl es when the popul ati on i s normal l y or
approxi matel y normal l y di stri buted, and the vari ance i s 1) k nown or 2) unk nown.
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Q.20 A portfolio manager of a fixed income has developed the below contingency table of the number
of bonds within the portfolio by sector and bond rating.
Bond-rating
Sector A AA AAA
Housing 24 33 28
Security 28 26 24
Banking 98 83 36
Agriculture 150 95 61
T ransport 20 26 16
T he relative frequency of AA-rated banking bonds, based on the total count, is closest to:
A. 11.10%
B. 31.56%
C. 39.17%
T he relative frequency for any value of the sector in the table based on the total count is determined
as follows;
AA-rated sector bond value 83

Relative frequency = = = 11.10%
Total count of all bond rating values 748
B i s i ncorrect. 31.56% is the relative frequency for AA-rated banking bonds, calculated based on
the marginal frequency for all AA-rated bonds as follows:

Total count of all bond rating values 33 + 26 + 83 + 95 + 26
C i s i ncorrect. 39.17% is the relative frequency for AA-rated banking bonds, calculated based on
the marginal frequency for all banking bonds as follows:

Total count of all bond rating values 98 + 83 + 36
CFA Level 1, Vol ume 1, Readi ng 2: Organi zi ng, Vi sual i zi ng, and Descri bi ng Data, LOS
2d: Interpret a conti ngency tabl e.
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Q.21 A small island nation has the following economic characteristics:
Account (in billion dollars)

Government expenditure 100
Current account balance 1
Consumption 350
Investment 10
Capital depreciation allowance 8
Exports 6
Imports 10
T he GDP of this country (in billions of dollars) is closest to:
A. 447
B. 449
C. 456
GDP = C + I + G + (X − M)
= [Consumption + Investment + Government expenditures + Net exports]
= 350 + 10 + 100 + (6 − 10)
= 456
LOS 14a: Cal cul ate and expl ai n gross domesti c product (GDP) usi ng expendi ture and
i ncome approaches.
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Q.22 Calculate the 4-firm Herfindahl-Hirschman Index of Tech Inc., Sun Systems, LiteC.org, and Git
firms with market shares of 32%, 20%, 31%, and 17%, respectively.
A. 0.2674
B. 0.5171
C. 1
T he Herfindahl-Hirschman index (HHI) is a measure of the size of firms in relation to
the industry and an indicator of the amount of competition among them.
4-firm HHI = 0.322 + 0.202 + 0.312 + 0.172 = 0.2674
CFA Level 1, Vol ume 2, Readi ng 9– The Fi rm and Mark et Structures, LOS 9g: Descri be
the use and l i mi tati ons of concentrati on measures i n i denti fyi ng the mark et structure
Q.23 Given the following returns: 12%, 16%, 10%, 7%, the mean absolute deviation is closest to:
A. 2.40%
B. 2.75%
C. 3.10%
(12%+16%+10%+7%)
First, we have to find the mean, which is = 11.25
4
(|12% − 11.25%| + |16% − 11.25%| + |10% − 11.25%| + |7% − 11.25%|)

MAD = = 2.75%
4
CFA Level 1, Vol ume 1, Readi ng 2 – Organi zi ng, Vi sual i zi ng, and Descri bi ng Data. LOS
2j : cal cul ate and i nterpret measures of di spersi on;
22
Q.24 Suppose that the exchange rate between the Canadian dollar and the Brazilian real is BRL/CAD
= 3.27. If the interest rate in Canada is 2.5 percent and the interest rate in Brazil is 8.0 percent, the
exchange rate you should expect one year from today is closest to:
A. BRL/CAD 3.10.
B. BRL/CAD 3.45.
C. BRL/CAD 3.53.
To understand the Fisher relationship that links interest rates and forward exchange rates, recognize
that an investment in the Canadian dollar should convert to the same number of Brazilian reais (the
plural of real), as one would obtain by converting the dollar to reais and investing it in Brazil. T hat is
1 × 1.025F = 3.27 × 1.08
, where F is the future exchange rate between the Canadian dollar and the real.
Solving for the future rate,
1.08 BRL 3.45

F = 3.27 × ( )=
1.025 CAD
CFA Level 1, Vol ume 2, Readi ng 15 – Currency Exchange Rates, LOS 15f: Expl ai n the
arbi trage rel ati onshi p between spot rates, forward rates, and i nterest rates.
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Q.25 For an inferior good, if the price of the good falls in comparison to a normal good, the most
accurate outcome is:
A. income effect will reinforce the substitution effect leading to a larger increase in demand.
B. income effect will offset the substitution effect leading to a smaller increase in demand.
C. income effect will reinforce the substitution effect leading to a larger decrease in demand.
T he income effect will be negative and opposite to the substitution effect. T herefore, a price
reduction will, as in the case of a normal good, cause substitution towards the now cheaper good, but
this effect will be weakened by the income effect, which is negative in the case of an inferior good.
CFA Level 1, Vol ume 2, Readi ng 8– Topi cs i n Demand and Suppl y Anal ysi s, LOS 8b:
Compare substi tuti on and i ncome effects.
24
Q.26 Given the following stock returns for a portfolio: 15%, 28%, 36%, 19%, 21%, 25%, the
population standard deviation is closest to:
A. 5.40%
B. 6.78%
C. 7.18%
(15 + 28 + 36 + 19 + 21 + 25)
Mean = = 24
6
(15 − 24)2 + (28 − 24)2 + (36 − 24)2 + (19 − 24)2 + (21 − 24)2 + (25 − 24)2
Population variance = = 46
6
1
Population standard deviation = 46 2 = 6.78
CFA Level 1, Vol ume 1, Readi ng 2 – Organi zi ng, Vi sual i zi ng, and Descri bi ng Data, LOS
2j : Cal cul ate and i nterpret measures of di spersi on.
25
Q.27 An economy is operating at full employment when the government eliminates sales taxes; this
will most likely result in:
A. cost-push inflation.
B. supply-push inflation.
C. demand-pull inflation.
Eliminating the sales tax, all else equal will increase consumption spending. T his is a rightward shift
in aggregate demand and if the economy is already at or near full employment, demand-pull inflation is
the most likely consequence.
CFA Level 1, Vol ume 2, Readi ng 11– Understandi ng Busi ness Cycl es, LOS 11k : Contrast
cost-push and demand-pul l i nfl ati on.
Q.28 T he Canadian dollar and the Euro share a common feature with most other major currencies in
that:
A. they can be exchanged for a fixed quantity of gold.
B. these currencies have value only because of our shared willingness to accept them.
C. their values relative to the UK pound and the US dollar float within tightly controlled
bounds.
Modern currencies are almost all fiat currencies with values relative to other currencies
determined by demand and supply. T here are some exceptions, especially in the case of small
economies, where the local currency has a fixed exchange rate with, for example, the US dollar. At
various points, major currencies were tied to precious metals such as gold, which has the benefit of
limiting the central bank’s ability to create inflation by the expansion of the money supply.
CFA Level 1, Vol ume 2, Readi ng 12– Monetary and Fi scal Pol i cy, LOS 12b: Descri be
functi ons and defi ni ti ons of money.
26
Q.29 After the 2008 financial crisis, the emerging market economies have demonstrated tremendous
GDP growth. T he following table contains the hypothetical GDP of 10 emerging markets.
Emerging Markets GDP (T rillion USD)

Taiwan 1.1
T hailand 1.1
Pakistan 1.3
Iran 1.4
T urkey 1.5
Saudi Arabia 1.6
Korea 1.8
Mexico 2.2
Indonesia 2.8
Brazil 3.2
Using the given data, the 60th percentile of emerging markets GDP is closest to:
A. USD 1.72 trillion
B. USD 2.68 trillion
C. USD 6.6 trillion
Since n=10, then
L 60
60th percentile = (n + 1) × = (10 + 1) × = 6.6
100 100
T he X 6 = 1.6 and X 7 = 1.8.T herefore
Estimated 60th percentile = X 6 + 0.6(X 7 − X 6) = 1.6 + 0.6 × (1.8 − 1.6) = 1.72
B i s i ncorrect. It indicates the arithmetic mean of the resulting GDPs.

C i s i ncorrect. It indicates the approximate value of a percentile.
2i : Cal cul ate quanti l es and i nterpret rel ated vi sual i zati ons.
27
Q.30 For the years 1981, 1982, and 1983, the year-to-year changes in the Canadian CPI were 10.0,
12.5, and 10.9 percent, respectively. For 1984 and 1985, although prices continued to rise, the year-
to-year changes declined to 5.8 and 4.3 percent, respectively. T he 1984 and 1985 changes most likely
indicate a period of:
A. Deflation.
B. Stagflation.
C. Disinflation.
Disinflation is a reduction in the rate of inflation. It occurs when the rate at which the prices are
rising is diminishing.
Deflation is a decrease in the price level.
A i s i ncorrect. Deflation refers to the decrease in the price level.
B i s i ncorrect. Stagflation is an economic phenomenon marked by slow economic growth and
rising prices.
CFA Level 1, Vol ume 2, Readi ng 11– Understandi ng Busi ness Cycl es, LOS 11g: Expl ai n
i nfl ati on, hyperi nfl ati on, di si nfl ati on, and defl ati on.
Q.31 Smith Hermes is a portfolio manager that invests in smalls cap stocks that are subject to
mergers and acquisitions. T he asset allocation and the return data of Smith's portfolio are provided in
the following table. Using the given data, the deviation of the weighted average (mean) return from
the arithmetic mean return of the portfolio will be closest to:
Asset Asset Return Asset Allocation

Solar Panel Corp. 21% 13%
Crowd fund Inc. 17.50% 24%
Peer-Loaning Co. -11% 27%
Dimitri Bogus Ltd. -9% 17%
Hanover Corp. 27% 19%
A. T he weighted average mean deviates by -1.54%.
B. T he weighted average mean deviates by 7.80%.
28
C. T he weighted average mean deviates by 1.21%.
Weighted average return on each asset = Weight of asset × Return of asset
Note the above formula has been used in the following table. We then sum up the individual weighted
means of all the assets to get the weighted mean of the portfolio
Deviation of the weighted average mean = Weighted average mean − Arithmetic mean
return from the arithmetic mean return
= 7.56% − 9.10%
= −1.54%
Asset Asset Return Asset Allocation Weighted Avg.

Solar Panel Corp. 21% 13% 2.73%
Crowd fund Inc. 17.50% 24% 4.20%
Peer-Loaning Co. -11% 27% -2.97%
Dimitri Bogus Ltd. -9% 17% -1.53%
Hanover Corp. 27% 19% 5.13%
Arithmetic Mean 9.10%
Weighted Average Mean 7.56%
Note the arithematic and weighted average mean is calculated as:
(21% × 13%) (17.5% × 24%) (−11% × 27%) (−9% × 17%) (27% × 19

Weighted Average mean = + + + +
100% 100% 100% 100% 100%
= 7.56%
21% + 17.5% + (−11%) + (−9%) + 27%

Arithmetic mean = = 9.10%
5
B i s i ncorrect. It indicates the Weighted Average Mean.
C i s i ncorrect. It indicates the Arithmetic Mean.
2h: eval uate al ternati ve defi ni ti ons of mean to address an i nvestment probl em.
29
Q.32 You have been provided the following table:
20X8 20X9
Nominal GDP 1, 602, 309 1, 601, 210
Real GDP (Constant 20X2 dollars) 1, 324, 222 −
Implicit GDP Price deflator 121 119
Based on the information presented, which of the following statements is correct when comparing
20X9 to the previous year?
A. Nominal GDP decreased, in part because of deflation, while real GDP rose.
B. Nominal GDP decreased while real GDP fell slightly due to inflation.
C. T he change in real GDP cannot be estimated without knowing the change in wages.
To answer this question we need to calculate real GDP for 20X9, as follows:
Nominal GDP
Real GDP 20x9 = × 100
Price deflator
1, 601, 210
= × 100
119
= 1,345, 555
T herefore, we can see that the economy grew, in real terms: from 1,324,222 to 1,345,555.
B and C are i ncorrect. Real GDP increased from 1,324,222 in 20X8 to 1,345,555 in 20X9.
CFA Level 1, Vol ume 2, Readi ng 10 – Aggregate Output, Pri ces, and Economi c Growth
LOS 10c: compare nomi nal and real GDP and cal cul ate and i nterpret the GDP defl ator;
30
Q.33 The Istanbul Stock Exchange posted returns of 10% for the past fi scal year. The 10
mutual funds i n the same mark et underperformed and overperformed the Istanbul
mark et return at di fferent scal es. The fol l owi ng tabl e shows the i nterval of returns
under and above the Istanbul mark et return:
Interval Values
I (-5.75 ≤ observation < -2.75)
II (-2.75 ≤ observation < 0.25)
III (0.25 ≤ observation < 3.25)
IV (3.25 ≤ observation < 6.25)
The returns of mutual funds are -5.75%, -3.5%, -1.7%, 0.9%, 1.2%, 2.3%, 3.2%, 5.5%,
5.8%, and 6.25%. Usi ng the gi ven data, i denti fy whi ch of the fol l owi ng i nterval s has
the hi ghest cumul ati ve rel ati ve frequency.
A. Interval I.
B. Interval III.
C. Interval IV.
The correct answer i s C.
To sol ve thi s questi on we need to cal cul ate the frequency di stri buti on tabl e as shown
bel ow. Si nce the cumul ati ve frequency adds up to the absol ute frequenci es as i t moves
forward, the cumul ati ve rel ati ve frequency of the l ast i nterval wi l l al ways be the
hi ghest.
Intervals Absolute Cumulative Cumulative Relative

Frequency Frequency (%) Frequency Frequency
I (-5.75 ≤ observation < -2.75) 2 20.00 % 2 20.00 %
II (-2.75 ≤ observation < 0.25) 1 10.00 % 3 30.00 %
III (0.25 ≤ observation < 3.25) 4 40.00 % 7 70.00 %
IV (3.25 ≤ observation < 6.25) 3 30.00 % 10 100.00 %
CFA Level 1, Vol ume 1, Readi ng 2 – Organi zi ng, Vi sual i zi ng and Descri bi ng Data LOS
2c: Interpret frequency and rel ated di stri buti ons;
31
Q.34 If the central bank reduces the reserve requi rements and i ncreases net
redempti ons (purchases) of treasury securi ti es, then:
A. i nterest rates woul d ri se, and bank l endi ng acti vi ti es woul d decrease.
B. bank s woul d i ncrease l endi ng acti vi ti es, and the money suppl y woul d
i ncrease.
C. bank s woul d decrease acceptance of deposi ts, and the money suppl y woul d
decrease.
The correct answer i s B.
Both of these acti ons by the central bank i ncrease the money suppl y. If bank s are
requi red to pl ace l ess cash on deposi t at the central bank , thei r capaci ty to l end i s
i ncreased. Increasi ng the net redempti on (purchases) of treasury securi ti es means
more cash i s l eft i n ci rcul ati on, whi ch i ncreases the money suppl y.
CFA Level 1, Vol ume 2, Readi ng 12– Monetary and Fi scal Pol i cy, LOS 12h: Descri be
tool s used to i mpl ement monetary pol i cy.
32
Q.35 A profi t-maxi mi zi ng monopol i st shoul d choose an output l evel and pri ce such
that:
A. Margi nal revenue equal s margi nal cost, and pri ce exceeds average total cost.
B. Margi nal revenue i s greater than margi nal cost, and pri ce equal s average
total cost.
C. Margi nal revenue i s greater than margi nal cost, and pri ce i s l ess than
average vari abl e cost.
The correct answer i s A.
For al l i ndustri es, the output i s opti mi zed when margi nal revenue equal s margi nal
cost. However, the monopol i st can then set the pri ce above-average total cost and wi l l
be abl e to capture economi c rents.
CFA Level 1, Vol ume 2, Readi ng 9– The Fi rm and Mark et Structures, LOS 9c: Descri be a
fi rm's suppl y functi on under each mark et structure.
33
Q.36 The mean return of 36 BB+ corporate bonds sampl e i s 7.5%, and the sampl e's
standard devi ati on i s 14%. Assumi ng that the popul ati on i s normal l y di stri buted and
the popul ati on vari ance i s unk nown, the 95% confi dence i nterval for the popul ati on
mean i s cl osest to:
(See t-tabl e)
A. [2.77%; 12.23%].
B. [2.93%;12.06%].
C. [3.56%; 11.43%].
Si nce the popul ati on vari ance i s unk nown and the popul ati on i s normal l y di stri buted,
we wi l l use a t-stati sti c. The t-stati sti c for a 95% confi dence i nterval and 35 degrees of
freedom (df = n-1) i s 2.030.
Standard Deviation of the sample mean

T he standard error of the sample =
√Samplesize
14
= = 2.33
√36
The confi dence i nterval i s 7.5 − (2.03 × 2.33) = 2.77 and 7.5 + (2.03 × 2.33) = 12.23. Thus, the
confi dence i nterval i s [2.77% , 12.23%].
Usi ng a rel i abi l i ty factor based on the t-di stri buti on i s essenti al for a smal l sampl e
si ze. Usi ng a t rel i abi l i ty factor i s appropri ate when the popul ati on vari ance i s
unk nown, even when we have a l arge sampl e, and coul d use the central l i mi t theorem to
j usti fy usi ng a z rel i abi l i ty factor. In thi s l arge sampl e case, the t-di stri buti on
provi des more conservati ve (wi der) confi dence i nterval s.
CFA Level 1, Vol ume 1, Readi ng 5 – Sampl i ng and esti mati on, LOS 5h: cal cul ate and
i nterpret a confi dence i nterval for a popul ati on mean, gi ven a normal di stri buti on wi th
1) a k nown popul ati on vari ance, 2) an unk nown popul ati on vari ance, or 3) an unk nown
vari ance and a l arge sampl e si ze..
34
Q.37 Whi ch of the fol l owi ng statement(s) i s/are true wi th regard to reporti ng of
Property, Pl ant, and Equi pment by compani es?
I. IFRS permi ts compani es to report PPE usi ng ei ther a cost model or a

reval uati on model . US GAAP permi ts onl y the cost model for reporti ng PPE.
II. Reversal s of i mpai rment l osses are permi tted under US GAAP.
III. IFRS al l ow a company to use the cost model for some cl asses of assets and the
reval uati on model for others, but the company must appl y the same model to al l
assets wi thi n a parti cul ar cl ass of assets.
A. I onl y.
B. I & II onl y.
C. I & III onl y.
IFRS permi ts compani es to report PPE usi ng ei ther a cost model or a reval uati on
model . US GAAP permi ts onl y the cost model for reporti ng PPE. Reversal s of
i mpai rment l osses are permi tted under IFRS but not under US GAAP. IFRS permi ts
compani es to use the cost model for some cl asses of assets and the reval uati on model
for others; the company must appl y the same model to al l assets wi thi n a parti cul ar
cl ass of assets.
CFA Level 1, Vol ume 3, Readi ng 23 – Long-l i ved Assets, LOS 23n: Compare the fi nanci al
reporti ng of i nvestment property wi th that of property, pl ant, and equi pment
35
Q.38 Li vecom, a pharmaceuti cal company, i s work i ng on a drug that woul d cure
l euk emi a. The total costs, before the stage of assessi ng feasi bi l i ty, were $23 mi l l i on.
The mol ecul e has passed the feasi bi l i ty stage, and the company i ntends to devel op the
mol ecul e for commerci al sal e. The devel opment was compl eted wi thi n 6 months, and
the costs i ncurred amounted to $76 mi l l i on. However, the company has not yet recei ved
any approval from the FDA. The most appropri ate accounti ng treatment of the costs i f
the company fol l ows IFRS i s:
A. record an expense of $23 mi l l i on and record an i ntangi bl e asset of $76

mi l l i on.
B. charge an expense of $99 mi l l i on and record an i ntangi bl e asset of $23

mi l l i on after recei vi ng the approval .
C. record an i ntangi bl e asset of $99 mi l l i on, charge an expense of $23 mi l l i on i f

the approval i s recei ved, and $99 mi l l i on i f the FDA rej ects the mol ecul e.
IFRS requi res costs i ncurred duri ng a research phase to be recorded as an expense and
costs i ncurred duri ng a devel opment phase to be recorded as an i ntangi bl e asset.
CFA Level 1, Vol ume 3, Readi ng 22– Long-l i ved Assets, LOS 22b: Compare the fi nanci al
reporti ng of the fol l owi ng types of i ntangi bl e assets: purchased, i nternal l y devel oped,
acqui red i n a busi ness combi nati on
36
Q.39 Bak u Mart, a chai n of hypermark ets, reported a net i ncome of $400,000 and pai d
cash di vi dends of $260,000 to preferred stock hol ders for 2016. At the begi nni ng of
2016, Bak u had 8,000 shares of common stock outstandi ng, but the fi rm i ssued 3,000
new shares on November 1st, 2016. Gi ven thi s i nformati on, the basi c EPS of Bak u Mart
i s cl osest to:
A. $8.26
B. $16.47
C. $22.00
To cal cul ate basi c EPS, we need to subtract the preferred di vi dend from the net i ncome
and di vi de the resul t by the wei ghted average shares of common stock .
Net Income − Preferred Dividend

Basic EPS =
Weighted average shares of common stock
Where
8, 000 × 12 + 3000 × 2
Weighted average shares of common stock = = 8, 500
12
Thus,
(400, 000 − 260, 000)

Basic EPS = = $16.47
8,500
CFA Level 1, Vol ume 3, Readi ng 18– Understandi ng Income Statements, LOS 18g:
Descri be how earni ngs per share i s cal cul ated and cal cul ate and i nterpret a company's
earni ngs per share (both basi c and di l uted earni ngs per share) for both si mpl e and
compl ex capi tal structures.
37
Q.40 A company reported the fol l owi ng transacti ons duri ng Apri l 2019:
I. Purchase of 800 uni ts at $75/uni t on Apri l 2nd, 2017

II. Purchase of 470 uni ts at $82/uni t on Apri l 10th, 2017
III. Purchase of 230 uni ts at $78/uni t on Apri l 16th, 2017
If the company sol d 550 uni ts duri ng the month, the cost of goods sol d (COGS), usi ng
the wei ghted average cost method, i s cl osest to:
A. $41,250
B. $42,708
C. $44,180
[($800 × 75) + ($470 × 82) + ($230 × 78)]

Average cost per unit (WAC) = = $77.65
1, 500
COGS = $77.65 × 550 = $42, 707.50
CFA Level 1, Vol ume 3, Readi ng 22 – Inventori es, LOS 22c: Cal cul ate and compare the
cost of sal es, gross profi t, and endi ng i nventory usi ng di fferent i nventory val uati on
methods and usi ng perpetual and peri odi c i nventory systems.
Q.41 Bask i n Ice Creams' net i ncome for the year ended 31st December 2016 was USD
1,750,000. The fol l owi ng are the detai l s of the common stock of the company.
Shares outstanding as on 1 Jan 2016 96, 000

Shares repurchased on 1 May 2016 16, 000
Shares issued on 1 August 2016 40, 000
Shares issued on 1 Nov 2016 6, 000
Shares outstanding on 31 Dec 2016 126, 000
The company decl ared and pai d USD 450,000 di vi dends on preferred stock . What i s the
company’s wei ghted average number of shares outstandi ng?
A. 101,000
B. 103,000
38
C. 126,000
Number of shares duri ng Jan to Apri l 2016 (4 months) = 96, 000
Number of shares duri ng May to Jul y 2016 (3 months) = 80, 000
Number of shares duri ng August to Oct 2016 (3 months) = 120, 000
Number of shares duri ng Nov to Dec 2016 (2 months) = 126, 000
The wei ghted average number of shares outstandi ng i s determi ned by the l ength of
ti me each quanti ty of shares was outstandi ng:
4 months
96, 000 × ( ) = 32, 000
12 months
3 months
80, 000 × ( ) = 20, 000
12 months
3 months
120, 000 × ( ) = 30, 000
12 months
2 months
126, 000 × ( ) = 21, 000
12 months
T he weighted average number of shares outstanding:103, 000
CFA Level 1, Vol ume 3, Readi ng 17 – Understandi ng Income Statements, LOS 17g:
compl ex structures.
39
Q.42 Fi rm A reports under US GAAP, and Fi rm B fol l ows IFRS. Both fi rms sel l
i denti cal assets hel d for i nvestment purposes for the same pri ce of $2.5 mi l l i on.
Assumi ng that the i ncome tax on the sal e of the i nvestment i s $275,000, whi ch fi rm i s
most l i k el y to report l ower cash fl ows from operati ng acti vi ti es?
A. Fi rm A wi l l most l i k el y report l ower cash fl ows from operati ons.
B. Fi rm B wi l l most l i k el y report l ower cash fl ows from operati ons.
C. Both fi rms wi l l al ways have i denti cal cash fl ows from operati ons.
Si nce Fi rm B fol l ows IFRS, i t i s al l owed to report taxes under operati ng or i nvesti ng
acti vi ti es. Fi rm A fol l ows US GAAP, and i t i s requi red to report al l taxes under cash
fl ow from operati ng acti vi ti es.
Therefore, Fi rm A wi l l most l i k el y report l ower cash fl ow from operati ng acti vi ti es
whi l e Fi rm B can report taxes under-i nvesti ng or operati ng acti vi ti es.
CFA Level 1, Vol ume 3, Readi ng 20–Understandi ng Cash Fl ow Statements LOS 20c:
contrast cash fl ow statements prepared under Internati onal Fi nanci al Reporti ng
Standards (IFRS) and the US general l y accepted accounti ng pri nci pl es (US GAAP).
40
Q.43 The most accurate defi ni ti on of a company’s operati ng cycl e i s:
A. The average amount of ti me that el apses between acqui ri ng i nventory and

sal es of fi ni shed goods to customers.
B. The average amount of ti me that el apses between sel l i ng the fi ni shed goods
and payi ng the payabl es to suppl i ers.
C. The average amount of ti me el apses between acqui ri ng i nventory, sel l i ng the

fi ni shed goods, and col l ecti ng the cash from sal es to customers.
The operati ng cycl e of a company can be defi ned as the average amount of ti me that
el apses between acqui ri ng i nventory and col l ecti ng the cash from sal es to customers.
CFA Level 1, Vol ume 3, Readi ng 19 – Understandi ng Bal ance Sheets, LOS 19h: cal cul ate
and i nterpret l i qui di ty and sol vency rati os
41
Q.44 ABC Equi pment Li mi ted has made the fol l owi ng i nventory purchases duri ng the
fi rst quarter of 2017.
Period Number of units Price per unit (in thousands)

January 108 GBP 45
February 94 GBP 48
March 86 GBP 46
Duri ng the quarter, the company sol d 200 uni ts at GBP 50,000 per uni t. The company
has 88 uni ts at the end of the quarter and speci fi cal l y i denti fi es that 86 were those
procured i n March, and the bal ance were purchased i n January 2017. If the company
fol l ows the wei ghted average cost method, the gross profi t of the company duri ng the
1st quarter of 2017 i s cl osest to (i n thousands):
A. GBP 719
B. GBP 744
C. GBP 849
The wei ghted average cost per uni t woul d be:
Inventory purchases
January 108 units at 45,000 per unit = GBP 4,860,000
February 94 units at 48,000 per unit = GBP 4,512,000
March 86 units at 46,000 per unit = GBP 3,956,000
Total uni ts 288 = GBP 13,328,000
The wei ghted average cost woul d be = GBP 46,277.78 per uni t.
Gross profit (in thousands) = (Sales price per unit– weighted average cost per unit) × 200 = GBP 744.44
CFA Level 1, Vol ume 3, Readi ng 22– Inventori es, LOS 22c: Cal cul ate and compare the
cost of sal es, gross profi t, and endi ng i nventory usi ng di fferent i nventory val uati on
methods and usi ng perpetual and peri odi c i nventory systems.
42
Q.45 Whi ch of the fol l owi ng are excl uded when determi ni ng i nventory costs under both
the IFRS and US GAAP?
I. Admi ni strati ve overheads

II. Abnormal amounts of wasted materi al s, l abor, and overheads
III. Costs i nvol ved i n bri ngi ng i nventori es to thei r present l ocati on and condi ti on
IV. Storage costs, unl ess they are necessary i nput to a further producti on process
A. II and IV.
B. I, II, and IV.
C. I, III, and IV.
Admi ni strati ve overheads, abnormal amounts of wasted materi al s, l abor, and
overheads, sel l i ng costs, and storage costs, unl ess they are necessary i nputs to a
further producti on process, are excl uded from the determi nati on of i nventory costs. The
cost of i nventori es compri ses al l costs of purchase, costs of conversi on, and other costs
i ncurred i n bri ngi ng the i nventori es to thei r present l ocati on and condi ti on.
CFA Level 1, Vol ume 3, Readi ng 22– Inventori es, LOS 22a: Contrast costs i ncl uded i n
i nventori es and costs recogni sed as expenses i n the peri od i n whi ch they are i ncurred.
43
Q.46 Core Corp. has an i nventory wi th a carryi ng val ue of $12,000. Usi ng the data
gi ven bel ow, cal cul ate the current i nventory val ue after adj ustments i f Core reports
under GAAP.
Selling Price $8, 000

Selling Cost $1, 500
Normal Profit $2, 000
Replacement cost $6, 500
A. $4,500
B. $5,500
C. $6,500
Under US GAAP, the i nventory i s wri tten down i f the carryi ng val ue of i nventory i s
above the repl acement cost, but the repl acement cost cannot be greater than the Net
Real i zabl e Val ue (Sel l i ng pri ce - Sel l i ng cost) or l ower than NRV mi nus Normal profi t.
The repl acement cost i s $6,500 whi ch i s al so equal to NRV (8,000 - 1,500).
Si nce the carryi ng val ue of i nventory i s $12,000, the i nventory wi l l be wri tten down to
the repl acement cost of $6,500.
CFA Level 1, Vol ume 3, Readi ng 22– Inventori es, LOS 22g: Descri be the measurement of
i nventory at the l ower of cost and net real i zabl e val ue.
44
Q.47 Whi ch of the fol l owi ng are most l i k el y the two characteri sti cs of a deci si on-useful
fi nanci al report?
A. Profi tabl e and Audi ted.
B. Rel evance and Fai thful representati on.
C. Conservati ve and Factual .
The two characteri sti cs of deci si on-useful fi nanci al reporti ng are rel evance and
fai thful representati on. Rel evance i s defi ned as the i nformati on that i s materi al i n
k nowl edge and that can affect the deci si on mak i ng of the user of the i nformati on.
Fai thful representati on of fi nanci al reporti ng i ncl udes the qual i ti es of compl eteness,
neutral i ty, and absences of error.
CFA Level 1, Vol ume 2, Readi ng 17– Fi nanci al Reporti ng Standards, LOS 17c: Descri be
the Internati onal Accounti ng Standards Board's conceptual framework , i ncl udi ng
qual i tati ve characteri sti cs of fi nanci al reports, constrai nts on fi nanci al reports, and
requi red reporti ng el ements.
45
Q.48 One year ago, ABC Corp bought a corporate bond for $1,000 and cl assi fi ed i t as
avai l abl e for sal e. It col l ected $40 i n coupons, and the bond i s now worth $1,020. What
shoul d ABC Corp show for thi s bond on i ts bal ance sheet?
A. $1,000
B. $1,020
C. $1,060
Securi ti es avai l abl e for sal e (and for tradi ng) shoul d be shown at thei r fai r val ue on
the bal ance sheet. Onl y securi ti es hel d to maturi ty shoul d be shown at amorti zed costs
on the bal ance sheet.
CFA Level 1, Vol ume 3, Readi ng 17– Understandi ng Income Statements, LOS 17a:
Descri be the components of the i ncome statement and al ternati ve presentati on formats
of that statement.
Q.49 Bask i n Ice Creams' net i ncome for the year ended December 31st , 2016, was USD
1,750,000. The fol l owi ng are the detai l s of the common stock of the company.
Shares outstanding on January 1 2016 96 , 000

Shares repurchased on May 1, 2016 16 , 000
Shares issued on August 1 2016 40 , 000
Shares issued on November 1, 2016 6 , 000
Shares outstanding on December 31, 2016 126 , 000
The company decl ared 3 for 1 stock spl i t on March 1st, 2016, whi ch took effect on
October 1st, 2016. If the company decl ared and pai d a USD 450,000 di vi dend on
preferred stock , the company’s basi c EPS i s cl oses t to:
A. 4.21
B. 5.99
C. 12.62
46
Number of shares from Jan to Apri l 2016 (4 months) = 96, 000
Number of shares from May to Jul y 2016 (3 months) = 80, 000
Number of shares from August to Oct 2016 (3 months) = 120, 000
Number of shares duri ng Nov to Dec 2016 (2 months) = 126, 000
The wei ghted average number of shares outstandi ng i s determi ned by the l ength of
ti me each quanti ty of shares was outstandi ng:
4 months
96, 000 × ( ) = 32, 000
12 months
3 months
80, 000 × ( ) = 20, 000
12 months
3 months
120, 000 × ( ) = 30, 000
12 months
2 months
126, 000 × ( ) = 21, 000
12 months
The wei ghted average number of shares outstandi ng: 103,000
For the cal cul ati on of EPS, a stock spl i t i s treated as i t took effect at the begi nni ng of
the year 2016. The wei ghted average number of shares outstandi ng for EPS cal cul ati on
purposes i s 309,000.
(Net Income– Preferred dividends) (1, 750, 000– 450, 000)

T he basic EPS = = = 4.21
Weighted average number of shares 309,000
CFA Level 1, Vol ume 3, Readi ng 18 – Understandi ng Income Statements, LOS 18g:
47
Q.50 XYZ coffee l i mi ted has provi ded the fol l owi ng i nformati on to the equi ty anal ysts
for the year ended on December 31st, 2016.
Beginning retained earnings (in millions) USD 2,845

Estimated distributions to equity shareholders (in millions) USD 275
Ending retained earnings (in millions) USD 3,750
The esti mated net i ncome (i n mi l l i ons) i s cl osest to:
A. USD 1.67j .
B. USD 905.
C. USD 1,180.
Ending retained earnings = Beginning retained earnings + Estimated net income– Estimated distributions to equity s
Hence,
Estimated net income = Ending retained earnings − Beginning retained earnings + Estimated distributions to equity
= 3, 750– 2, 845 + 275 = USD 1,180 millions
CFA Level 1, Vol ume 3, Readi ng 27– Appl i cati ons of Fi nanci al Statement Anal ysi s, LOS
27b: Demonstrate how to forecast a company’s future net i ncome and cash fl ow.
48
Q.51 On June 1st , 2017, Hal l Street Journal recei ved a cash payment of USD 1,000 for a
two-year subscri pti on to the monthl y j ournal . Thi s transacti on woul d most l i k el y
resul t i n whi ch of the fol l owi ng on June 1st , 2017?
A. cash i ncreased by USD 1,000, and i ncome i ncreased by USD 1,000.
B. cash i ncreased by USD 1,000, and unearned fees i ncreased by USD 1,000.
C. cash i ncreased by USD 1,000; unearned fees i ncreased by USD 500, and
i ncome i ncreased by USD 500.
In thi s transacti on, the Hal l Street Journal has recei ved cash rel ated to the sal e of
subscri pti ons. The company has not actual l y earned the subscri pti on fees because i t
has an obl i gati on to provi de j ournal s i n the future to the subscri ber. Hence, thi s
amount i s to be recorded as a l i abi l i ty cal l ed unearned fees/revenues. The amount wi l l
be transferred to revenue when the company del i vers the j ournal s to the subscri ber
CFA Level 1, Vol ume 3, Readi ng 18– Understandi ng i ncome statements, LOS 18b:
Descri be general pri nci pl es of revenue recogni ti on and accounti ng standards for
revenue recogni ti on.
49
Q.52 Thermax Steel Company had a wei ghted average of 60,000 shares of common stock
outstandi ng. The company has onl y one potenti al l y di l uti ve securi ty: USD 25,000 of 4
percent converti bl e bonds, converti bl e i nto a total of 5,000 shares. The company
reported a net i ncome of USD 100,000 for the year ended on 30th June 2016. The tax rate
i s 30%. The di l uted EPS of the company i s cl osest to:
A. USD 1.55
B. USD 1.67
C. USD 1.69
If the bonds are converted, the bonds woul d no l onger be outstandi ng, and i nstead, an
addi ti onal 5,000 shares of common stock woul d be outstandi ng. Al so, Thermax steel
company woul d not have pai d i nterest of USD 1,000 on the converti bl e debt i f the debt
securi ti es had been converted. The net i ncome avai l abl e to common sharehol ders
woul d have i ncreased by USD 700 on an after-tax basi s.
Basic EPS Diluted EPS

Net Income USD 100,000 USD 100,000
After-tax interest - 700
Weighted average of shares 60, 000 65, 000
(if converted)
EPS USD 1.67 USD 1.55
CFA Level 1, Vol ume 3, Readi ng 18– Understandi ng Income Statements, LOS 18g:
50
Q.53 Mi l an-Ronal do Inc. i s a purchasi ng agent of anti que pai nti ngs i n the Detroi t
area. The fi rm has found a sel l er named Mr. X. Mr. X i s ready to sel l a Worl d War II
pai nti ng to Mi l an-Ronal do Inc. at the mutual l y agreed pri ce of $15 mi l l i on. The
pai nti ng was sol d to Mr. X a few years ago for $17 mi l l i on, but because Mr. X has l egal
i ssues, he i s wi l l i ng to l et i t go for l ess. The most appropri ate term for the pri ce at
whi ch the transacti on wi l l tak e pl ace i s the:
A. Fai r val ue.
B. Amorti zed cost.
C. Present val ue.
A fai r val ue i s an amount at whi ch two parti es i n an arm's l ength transacti on wi l l
exchange the asset. Si nce the buyer and sel l er of the pai nti ng have mutual l y agreed to
pay $15 mi l l i on, i t i s the fai r val ue of the pai nti ng.
CFA Level 1, Vol ume 2, Readi ng 17– Fi nanci al Reporti ng Standards, LOS 17c: Descri be
the Internati onal Accounti ng Standards Board's conceptual framework , i ncl udi ng
qual i tati ve characteri sti cs of fi nanci al reports, constrai nts on fi nanci al reports, and
requi red reporti ng el ements.
51
Q.54 XYZ equi pment l i mi ted has made the fol l owi ng i nventory purchases duri ng the
fi rst quarter of 2017.
Period Number of units Price per unit

January 108 GBP 45
February 94 GBP 48
March 86 GBP 46
Duri ng the quarter, the company sol d 200 uni ts at GBP 50 per uni t. The company had 5
uni ts of i nventory at the cost of GBP 49 per uni t on hand at the begi nni ng of the quarter.
The company has 93 uni ts at the end of the quarter and speci fi cal l y i denti fi es that 86
were those procured i n March. Assumi ng FIFO methods, what i s the gross profi t of the
company duri ng the fi rst quarter of 2017?
A. GBP 698
B. GBP 719
C. GBP 849
Revenue for the 1st quarter = 200 uni ts × GBP 50= GBP 10,000. The total cost of goods
sol d for the 1st quarter i s:
Cost of goods sol d
Beginning inventory 5 units at 49 per equipment = GBP 245

January 108 units at 45 per equipment = GBP 4,860
February 87 units at 48 per equipment GBP 4,512
GBP 9,281
Gross profi t
Revenues GBP 10,000

Total cost of goods sold GBP 9,281
GBP 719
CFA Level 1, Vol ume 3, Readi ng 22– Inventori es, LOS 22c: cal cul ate and compare cost of
sal es, gross profi t, and endi ng i nventory usi ng di fferent i nventory val uati on methods
and usi ng perpetual and peri odi c i nventory systems.
52
Q.55 When pri ces are ri si ng, the val ue of endi ng i nventory i s the hi ghest under the:
A. FIFO method.
B. LIFO method.
C. Wei ghted average cost.
When pri ces are ri si ng, the val ue of endi ng i nventory i s the hi ghest under the FIFO
method.
When pri ces are ri si ng, the val ue of cost of goods sol d i s the l owest under the FIFO
method.
CFA Level 1, Vol ume 3, Readi ng 21– Inventori es, LOS 21d: Cal cul ate and expl ai n how
i nfl ati on and defl ati on of i nventory costs affect the fi nanci al statements and rati os of
compani es that use di fferent i nventory val uati on methods.
53
Q.56 Whi ch of the fol l owi ng form i s fi l ed by SEC regi strants to report materi al
corporate events on a more current basi s?
A. Form 8-K.
B. Form 11-K.
C. Forms 3, 4, and 5.
Form 8-K i s used by SEC regi strants to report materi al current events such as
acqui si ti ons or di sposal of corporate assets, changes i n securi ti es and tradi ng
mark ets, matters rel ated to accountants and fi nanci al statements, corporate
governance and management changes on a more current basi s. Forms 3, 4, and 5 are
used to report benefi ci al ownershi p of securi ti es. Form 11-k i s the annual report of
empl oyee stock purchase, savi ngs, and si mi l ar pl ans.
B i s i ncorrect. Form 11-k i s the annual report of empl oyee stock purchase, savi ngs, and
si mi l ar pl ans.
C i s i ncorrect.Forms 3, 4, and 5 are used to report benefi ci al ownershi p of securi ti es.
CFA Level 1, Vol ume 3, Readi ng 16 – Introducti on to Fi nanci al Statement Anal ysi s, LOS
16e: Identi fy and descri be i nformati on sources that anal ysts use i n fi nanci al
statement anal ysi s besi des annual fi nanci al statements and suppl ementary
i nformati on.
54
Q.57 In the Uni ted States, l i sted compani es are most l i k el y to provi de the fol l owi ng
detai l s i n Management’s Di scussi on & Anal ysi s:
I. Si gni fi cant events and uncertai nti es that affect the company’s l i qui di ty, capi tal
resources, and resul ts of operati ons
II. Informati on about the effects of i nfl ati on, changi ng pri ces, or other materi al events
and uncertai nti es that may cause the future operati ng resul ts and fi nanci al condi ti on
to depart from the current reported fi nanci al i nformati on
III. Informati on about off-bal ance sheet obl i gati ons and contractual commi tments
IV. Cri ti cal accounti ng pol i ci es that requi re management to mak e subj ecti ve
j udgments
A. I and II.
B. I, II, and IV.
C. I, II, III and IV.
Management must hi ghl i ght any favorabl e or unfavorabl e trends and i denti fy
si gni fi cant events and uncertai nti es that affect the company's l i qui di ty, capi tal
resources, and resul ts of operati ons.
The MD&A must al so provi de i nformati on about the effects of i nfl ati on, changi ng
pri ces, or other materi al events and uncertai nti es that may cause the future operati ng
resul ts and fi nanci al condi ti on to materi al depart from the current reported fi nanci al
i nformati on. In addi ti on, the MD&A must provi de i nformati on about off-bal ance sheet
obl i gati ons and contractual commi tments.
Compani es shoul d al so provi de di scl osure i n the MD&A that di scusses the cri ti cal
accounti ng pol i ci es that requi re management to mak e subj ecti ve j udgments and
si gni fi cantl y i mpact reported fi nanci al resul ts.
CFA Level 1, Vol ume 2, Readi ng 16– Introducti on to Fi nanci al Statement Anal ysi s, LOS
16c: Descri be the i mportance of fi nanci al statement notes and suppl ementary
i nformati on—i ncl udi ng di scl osures of accounti ng pol i ci es, methods, and esti mates—
and management’s commentary.
55
Q.58 When an audi tor determi nes that the fi nanci al statements depart from
accounti ng standards and are not fai rl y presented, he/she i ssues:
A. qual i fi ed audi t opi ni on.
B. an adverse audi t opi ni on.
C. an unqual i fi ed audi t opi ni on.
An adverse audi t opi ni on i s i ssued when an audi tor determi nes that the fi nanci al
statements materi al l y depart from accounti ng standards and are not fai rl y presented.
A i s i ncorrect. A qual i fi ed audi t opi ni on i s the one i n whi ch there i s some scope
l i mi tati on or excepti on to accounti ng standards.
C i s i ncorrect. An unqual i fi ed audi t opi ni on i s i ssued when the fi nanci al statements
gi ve a "true and fai r vi ew" or are "fai rl y presented" i n accordance wi th appl i cabl e
accounti ng standards.
16d: Descri be the obj ecti ve of audi ts of fi nanci al statements, the types of audi t reports,
and the i mportance of effecti ve i nternal control s.
56
Q.59 Whi ch of the fol l owi ng i nformati on sources documents forms fi l es are requi red to
be fi l ed by compani es peri odi cal l y as per the SEC?
I. Form 10-K, 20-F, and 40-F
II. Annual report
III. Form 10-Q and 6-K
A. I and II.
B. I and III.
C. I, II, and III.
Form 10-K, Form 20-F, and 40-F are requi red to be fi l ed annual l y by US regi strants,
certai n Canadi an regi strants, and al l other non-US regi strants respecti vel y. Most
compani es prepare an annual report to sharehol ders, but i t i s not a requi rement of the
SEC. Form 10-Q i s requi red to be fi l ed quarterl y by US compani es, and Form 10-Q i s
requi red to be fi l ed semi annual l y by many non-US compani es.
16e: Identi fy and descri be i nformati on sources that anal ysts use i n fi nanci al
statement anal ysi s besi des annual fi nanci al statements and suppl ementary
i nformati on.
57
Q.60 Whi ch of the fol l owi ng acts prohi bi t mi srepresentati ons, requi res i ni ti al
regi strati on of al l publ i c i ssuances of securi ti es and speci fi es the fi nanci al and other
si gni fi cant i nformati on that i nvestors must recei ve when securi ti es are sol d?
A. Securi ti es Act of 1933.
B. Sarbanes – Oxl ey Act of 2002.
C. Securi ti es Exchange Act of 1934.
The Securi ti es Act of 1933 prohi bi ts mi srepresentati ons, requi res i ni ti al regi strati on
of al l publ i c i ssuances of securi ti es, and speci fi es the fi nanci al and other si gni fi cant
i nformati on that i nvestors must recei ve when securi ti es are sol d. The Securi ti es
Exchange Act created the Securi ti es Exchange Commi ssi on and gave the SEC authori ty
over al l aspects of the securi ti es i ndustry, and empowered the SEC to requi re peri odi c
reporti ng by compani es wi th publ i cl y traded securi ti es. The Sarbanes-Oxl ey act of
2002 created the Publ i c Company Accounti ng Oversi ght Board (PCAOB) to oversee
audi tors.
16d: Descri be the obj ecti ve of audi ts of fi nanci al statements, the types of audi t reports,
and the i mportance of effecti ve i nternal control s.
58
Q.61 Whi ch of the fol l owi ng forms of referral fees, compensati on, consi derati on, or
benefi t earned when i ssui ng a recommendati on shoul d most l i k el y be di scl osed?
A. Onl y cash consi derati ons.
B. Onl y consi derati ons i n the form of cash or soft dol l ars.
C. Consi derati ons i n the form of cash, soft dol l ars or i n k i nd.
Accordi ng to Standard VI(C) – Referral Fees, referral fees,
compensati on, consi derati on or benefi t i ncl ude al l fees that are pai d i n cash, soft
dol l ars, and i n k i nd.
A and B are i ncorrect. Cash and soft dol l ars are consi derati ons that must be i ncl uded
when i ssui ng a recommendati on as per Standard VI (C).
CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal , LOS
70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and Standards,
i ncl udi ng the sub-secti ons of each Standard.
59
Q.62 Bl ai r Noi r, CFA, i s an anal yst i n the heal thcare sector. Noi r recentl y attended a
meeti ng wi th the management of a company under her coverage. In the meeti ng,
management expressed extremel y posi ti ve vi ews about a drug that i s i n the
devel opment stage. Based on the management's vi ews, Noi r stated i n her report: "In the
comi ng years, the Company wi l l see a si gni fi cant growth i n sal es."
Whi ch of the fol l owi ng statements i s most accurate regardi ng Standard V(B) –
Communi cati on wi th Cl i ents and Prospecti ve Cl i ents?
A. Noi r has vi ol ated Standard V(B) – Communi cati on wi th Cl i ents and

Prospecti ve Cl i ents as she presented management's statement as an opi ni on.
B. Si nce Noi r rel i ed on the management's statement as facts, she has vi ol ated
Standard V(B) – Communi cati on wi th Cl i ents and Prospecti ve Cl i ents.
C. Noi r i s not i n vi ol ati on of Standard V(B) – Communi cati on wi th Cl i ents and

Prospecti ve Cl i ents as she had a reasonabl e basi s for her statement.
Noi r has vi ol ated Standard V(B) – Communi cati on wi th Cl i ents and Prospecti ve
Cl i ents by not di sti ngui shi ng between fact and opi ni on. As the case stated, Noi r's
statement was based on the vi ews of the management.
A and C are i ncorrect. Standard V (B) requi res members to di sti ngui sh between facts
and opi ni ons cl earl y. Noi r shoul d have veri fi ed the management’s statement based on
facts before communi cati ng the recommendati ons to prospecti ve cl i ents.
CFA Level 1, Vol ume 6, Readi ng 57– Code of Ethi cs and Standards of Professi onal
Conduct, LOS 57c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and
Standards, i ncl udi ng the sub-secti ons of each Standard.
60
Q.63 Mandy El mar, CFA, has been researchi ng Xoom Corp. El mar was al most done wi th
her research and was pl anni ng to get the report typed today and del i vered to the cl i ents
the next day. However, thi s morni ng, El mar l ost her fol der, whi ch had al l the Xoom
Corp's documents. In a pani ck ed state, she cal l ed the management of Xoom Corp who,
sent her thei r company proj ecti ons. Al though El mar di d not remember the exact
forecast from her report, she k new they were l ower than management’s proj ecti ons.
Therefore, El mar reduced the forecast provi ded by the management of Xoom by 15%.
She al so used graphs and charts from another report a col l eague performed on Xoom 2
years earl i er. El mar managed to fi ni sh the report and submi tted i t on ti me to the
cl i ents.
El mar has most l i k el y:
A. Vi ol ated Standard V(A) – Di l i gence and Reasonabl e Basi s, Standard I(C) –

Mi srepresentati on, and Standard V(C) – Record retenti on.
B. Vi ol ated Standard I(C) – Mi srepresentati on, Standard III(D) – Performance

Presentati on, and Standard III(E) – Preservati on Of Confi denti al i ty.
C. Vi ol ated Standard V(A) – Di l i gence and Reasonabl e Basi s, Standard I(B) –

Independence and Obj ecti vi ty, and Standard III(E) – Preservati on Of
Confi denti al i ty.
By usi ng the forecasts provi ded by management, El mar has vi ol ated the standard
regardi ng di l i gence and reasonabl e basi s. The graphs and charts used i n the report
were from other reports. Hence, she has vi ol ated Standard I(C) – Mi srepresentati on
that addresses pl agi ari sm. El mar has no fi l es of her own research, thus vi ol ati ng
Standard V(C) – Record Retenti on.
B and C are i ncorrect. Nothi ng l eads us to bel i eve that El mar vi ol ated Standard III(E)
– Preservati on of Confi denti al i ty, Standard III(D)- Performance Presentati on, and
Standard I(B) Independence and Obj ecti vi ty from the i nformati on presented.
CFA Level 1, Vol ume 6, Readi ng 57 – Code of Ethi cs and Standards of Professi onal
61
Q.64 Ronda Bayes, CFA, recentl y j oi ned Sk yl ark Investments. Whi ch of the fol l owi ng
recommendati ons from Sk yl ark 's di rectors i s l east l i k el y i n l i ne wi th the CFA
Insti tute standards' recommendati ons?
A. Bayes shoul d wri te a personal ethi cal statement.
B. A back ground check shoul d be conducted on Bayes.
C. Bayes shoul d be made aware that di shonest personal behavi or refl ects poorl y
on the professi on.
CFA Insti tute does not requi re members to wri te personal ethi cal statements.
Conduct, LOS 57a: Descri be the structure of the CFA Insti tute Professi onal Conduct
Program and the process for the enforcement of the Code and Standards.
Q.65 Whi ch of the fol l owi ng i s the l east l i k el y moti vati on for the creati on of the GIPS?
A. Improvi ng the servi ces offered to cl i ents.
B. Standardi zi ng the performance presentati on for faci l i tati ng compari son.
C. Increasi ng the i nterventi on of the government i n the i nvestment i ndustry.
The GIPS was created to support sel f-regul ati on and to reduce the i nvol vement of the
government i n the i nvestment i ndustry.
CFA Level 1, Vol ume 6, Readi ng 72 – Introducti on to the Gl obal Investment Performance
Standards (GIPS), LOS 72a: Expl ai n why the GIPS standards were created, what parti es
the GIPS standards appl y to, and who i s served by the standards
62
Q.66 Justi n Scott, CFA, i s an anal yst and covers Amond Corp. In one of hi s recent
meeti ngs wi th the management of Amond Corp, Scott recei ved non-materi al fi nanci al
data. Usi ng thi s i nformati on provi ded by management and hi s k nowl edge of the
i ndustry and competi tors, Scott thi nk s that Amond i s l i k el y to mak e a tender offer to
one of i ts competi tors. If Scott's anal ysi s i s correct, thi s wi l l materi al l y i mpact Amond
Corp's sharehol ders.
Whi ch of the fol l owi ng statements i s most accurate?
A. Scott shoul d publ i sh the report.
B. Scott shoul d not di ssemi nate any i nformati on unti l the tender offer i s made
publ i c.
C. Scott shoul d send a copy of the report to the Management of Amond Corp for
veri fi cati on.
Si nce the concl usi on i s reached by usi ng non-materi al i nformati on al ong wi th Scott's
k nowl edge of the i ndustry and competi tors (mosai c theory), publ i shi ng the concl usi on
i s not a vi ol ati on of any standard.
B and C are i ncorrect. Scott shoul d i nstead di ssemi nate any i nformati on unti l the
tender offer i s made publ i c, and the management of Amond Corp shoul d not veri fy a
copy of the report.
63
Q.67 Vi n Wi sel y, CFA, i s empl oyed by Wi se Corp to provi de i nvestment advi ce to pensi on
pl an parti ci pants. Wi sel y real i zes that the stock of Wi se Corp i s one of the i nvestment
opti ons for the pl an parti ci pants. However, he bel i eves that i nvesti ng i n Wi se Corp
stock i s too ri sk y for a pensi on pl an and advi ses the empl oyees not to i nvest i n Wi se
Corp. The company treasurer tel l s Wi sel y that he i s vi ol ati ng hi s fi duci ary duty to the
Company by gi vi ng such advi ce. He al so tel l s hi m that he coul d l ose hi s j ob i f he
conti nues.
Wi sel y shoul d most l i k el y:
A. Conti nue to advi se empl oyees to sel l the stock of Wi se Corp.
B. Conti nue gi vi ng hi s "Sel l " recommendati on but menti oni ng the di fferi ng
opi ni on of the treasurer.
C. Inform empl oyees about the confl i ct of i nterest and stop advi si ng them on the
stock of Wi sel y Corp.
Al though Wi sel y i s empl oyed by Wi se Corp, hi s j ob i s to advi se the pl an's parti ci pants.
He cannot compromi se on hi s responsi bi l i ty to advi se hi s cl i ents appropri atel y. Thi s
wi l l vi ol ate the standard on Loyal ty, Prudence, and Care.
B and C are i ncorrect. Si nce Wi sel y has been empl oyed as an i nvestment advi sor, he
shoul d not stop gi vi ng hi s recommendati on. Al so, the treasurer i s not an i nvestment
advi sor, and hi s opi ni on does not have to be menti oned.
Standards, i ncl udi ng the sub-secti ons of each Standard
64
Q.68 Fi nanci al advi sors at Asda manage i ndi vi dual cl i ents' i nvestments. To i denti fy
the most appropri ate portfol i o for any cl i ent, Asda uses a model that anal yzes a range
of si mul ated portfol i os and comes up wi th a probabi l i ty of achi evi ng di fferent l evel s of
returns. A portfol i o that gi ves the hi ghest probabi l i ty of achi evi ng the cl i ent's
mi ni mum requi red return i s sel ected.
The Advi sors at Asda are most l i k el y:
A. not i n vi ol ati on of any standard.
B. Vi ol ati ng Standard III (C) – Sui tabi l i ty.
C. vi ol ati ng Standard I (C) – Mi srepresentati on.
By onl y choosi ng a portfol i o that gi ves the hi ghest probabi l i ty of achi evi ng the
mi ni mum requi red return speci fi ed by the cl i ent, fi nanci al advi sors at Asda are
vi ol ati ng Standard III (C) – Sui tabi l i ty. Cl i ents' needs are much more compl ex than
si mpl y bei ng attri buted a l evel of mi ni mum requi red return.
A i s i ncorrect. The Advi sors at Asda are i n vi ol ati on of Standard III(C) on sui tabi l i ty.
C i s i ncorrect. The Advi sors are i n vi ol ati on of Standard III(C)- Sui tabi l i ty and not
Standard I(C)- Mi srepresentati on.
65
Q.69 Jason Al i , CFA, i s a seni or fi xed-i ncome anal yst at a research fi rm. Al i overl ook s
three j uni or anal ysts who di rectl y report to hi m. The j uni or offi cers work together as a
team to generate research reports, whi ch are revi ewed by Al i upon compl eti on. For
thei r current assi gnment, the anal ysts are coveri ng a corporate bond i ssued by
Maxwel l l ndustri al s. Unbek nownst to Al i and the two other anal ysts, Li sa Dougl as, one
of the j uni or anal ysts, has i nsi der i nformati on concerni ng an unannounced posi ti ve
earni ngs surpri se. Thi s i nformati on was shared by a corporate executi ve for the
purposes of enti ci ng traders to purchase the i ssue. Based on thi s i nformati on, Dougl as
presses the other anal ysts to i ssue a buy recommendati on provi di ng no val i d
j usti fi cati on for hi s deci si on. The report i s compl eted and rel eased wi th a buy
recommendati on.
As Dougl as' supervi sor, Al i i s most l i k el y i n vi ol ati on of the CFA Insti tute Standards of
Professi onal Conduct because she:
A. acted on materi al nonpubl i c i nformati on.
B. di d not di scl ose the i nsi der i nformati on to her team members.
C. i ssued a recommendati on that l ack ed a reasonabl e and adequate basi s.
Al i i s i n vi ol ati on of the CFA Insti tute Standards of Professi onal Conduct because he
di d not mak e reasonabl e efforts to ensure that Dougl as, who was subj ect to hi s
authori ty, compl i es wi th the CFA Insti tute Standards of Professi onal Conduct. The 'buy'
recommendati on i s not back ed by a reasonabl e and adequate basi s, and by fai l i ng to
check for thi s duri ng hi s revi ew of the report, Al i has vi ol ated hi s duty as a supervi sor.
Standard V(A): Di l i gence and Reasonabl e Basi s requi res members and candi dates to
support research recommendati ons wi th a reasonabl e and adequate basi s.
A i s i ncorrect. The i nsi der i nformati on recei ved by Dougl as i s cl assi fi ed as materi al
and nonpubl i c, as Maxwel l executi ves excl usi vel y shared i t wi th the anal yst for the
sol e purpose of enti ci ng tradi ng. Despi te thi s fact, there i s no way that Al i coul d have
k nown that the report bei ng rel eased was based on such i nformati on. Therefore, he i s
not i n vi ol ati on of Standard l l (A): Materi al Nonpubl i c Informati on i n thi s regard.
B i s i ncorrect. Di scl osi ng materi al nonpubl i c i nformati on to team members does not
refl ect an acti on that i s consi stent wi th Standard l l (A): Materi al Nonpubl i c
Informati on. Dougl as shoul d i nstead mak e reasonabl e efforts to achi eve publ i c
di ssemi nati on of the i nformati on, and i f that i s not possi bl e, he shoul d communi cate
the i nformati on onl y to the desi gnated supervi sor and compl i ance personnel wi thi n the
member's or candi date's fi rm.
CFA Level 1, Vol ume 6, Readi ng 71 – Gui dance for Standards I–VII, LOS 71a:
Demonstrate the appl i cati on of the Code of Ethi cs and Standards of Professi onal
Conduct to si tuati ons i nvol vi ng i ssues of professi onal i ntegri ty
66
Q.70 Consi der the fol l owi ng statements about the rol e of composi tes i n performance
presentati on: Statement I: Composi tes hel p i n presenti ng a fi rm’s performance under
vari ous asset cl asses. Statement II: Composi tes hel p eval uate a fi rm’s performance i n
a si ngl e stati sti c that enabl es compari son across fi rms. Statement III: Composi tes
hel p the i nvestor to eval uate i f a fi rm i s GIPS compl i ant. Whi ch of the above
statement(s) about composi te i s/are most l i k el y accurate?
A. I onl y.
B. I & II onl y.
C. I, II & III.
Composi tes refer to groupi ngs of i ndependent di screti onary portfol i os denoti ng si mi l ar
i nvestment strategi es or obj ecti ves. Composi tes do not hel p to eval uate a fi rm’s
performance i n a si ngl e stati sti c that enabl es compari son across fi rms and do not hel p
the i nvestor eval uate i f a fi rm i s GIPS compl i ant.
Standards (GIPS), LOS 70c: expl ai n the purpose of composi tes i n performance
reporti ng.
67
Q.71 Paul Teshi ma i s prepari ng a research report on a new drug cal l ed ABXV IV i n the
oncol ogy i ndustry. He gets i n touch wi th a few sci enti sts and medi cal professi onal s
work i ng i n oncol ogy and obtai ns i nformati on about competi ng oncol ogy treatments.
Most of these drugs are i n the pre-cl i ni cal devel opment phase, whi ch i s publ i c
i nformati on. In hi s research report, Teshi ma concl udes that ABXV IV mi ght have some
competi ng drugs comi ng i nto the mark et i n the next few years i f the pre-cl i ni cal and
cl i ni cal tri al s prove successful .
Has Teshi ma most l i k el y vi ol ated any CFA i nsti tute Code and Standards ?
A. No, Teshi ma i s not i n vi ol ati on of any CFA Insti tute Code and Standards.
B. Yes, Teshi ma has vi ol ated the CFA Insti tute Code and Standards of Materi al
Nonpubl i c Informati on.
C. Yes, Teshi ma has vi ol ated the CFA Insti tute Code and Standards by not
performi ng due di l i gence to confi rm the rel i abi l i ty of the i nformati on.
An anal yst i s al l owed to expand hi s k nowl edge through i nteracti on wi th i ndustry
experts. Nothi ng i n the case tel l s us that the i nformati on obtai ned by Teshi ma can be
cl assi fi ed as materi al non-publ i c i nformati on
68
Q.72 Eva Watson, CFA, i s a manager at Fern Investments. Watson's compensati on
i ncl udes a base sal ary and a percentage of fees generated by the fi rm. It al so i ncl udes
a performance bonus i f the cl i ents' return i s 200 bps hi gher than the benchmark . Eva
di d not di scl ose the compensati on arrangement i n a meeti ng wi th a prospecti ve cl i ent.
Eva has most l i k el y:
A. not vi ol ated Standard VI(A) – Di scl osure of Confl i cts by not di scl osi ng the
compensati on.
B. vi ol ated Standard VI(A) – Di scl osure of Confl i cts by not di scl osi ng the
performance bonus.
C. not vi ol ated Standard VI(A) – Di scl osure of Confl i cts by not di scl osi ng the
bonus arrangement as there i s no i nherent confl i ct of i nterest i n the bonus.
Compensati on l i nk ed to the performance of the portfol i o may encourage the manager of
the portfol i o to tak e more ri sk and hence shoul d be di scl osed to prospecti ve cl i ents as
per Standard VI(A) – Di scl osure of Confl i cts.
A and C are i ncorrect. Eva has vi ol ated Standard VI (A) regardi ng di scl osi ng confl i cts
by not di scl osi ng the performance bonus
69
Q.73 John Reed, CFA, i s managi ng the portfol i o of Brandy Anni ston, a weal thy cl i ent.
Mrs. Anni ston i s part of the company's mai l i ng l i st. She i s al so i nformed that she
shoul d contact her i nvestment manager whenever there i s a si gni fi cant change i n
ci rcumstances. It has been more than 2 years si nce Reed and Anni ston have spok en.
Is Reed most l i k el y i n vi ol ati on of Standard III(C) – Sui tabi l i ty?
A. Yes, Reed has vi ol ated Standard III(C) – Sui tabi l i ty.
B. No, the case presented does not i nvol ve Standard III(C) – Sui tabi l i ty.
C. No, as there has been no si gni fi cant change i n Anni ston's fi nanci al si tuati on.
Standard III(C) – Sui tabi l i ty requi res that members and candi dates update cl i ent
i nformati on regul arl y (at l east yearl y).
B and C are i ncorrect. Reed vi ol ates Standard III (C) regardi ng sui tabi l i ty as he fai l ed
to regul arl y update the cl i ent i nformati on for more than 2 years.
70
Q.74 Jenni fer Li vel y, CFA, manages accounts for WS Capi tal . When transacti ng any
trades i n her cl i ent's accounts, Li vel y ensures that she does not trade i n her mother's
account, who i s al so a cl i ent, unti l al l the other cl i ents have been al l owed to trade.
Is Li vel y's approach to tradi ng i n her mother's account most appropri atel y i n l i ne wi th
Standard VI (B) – Pri ori ty of Transacti on?
A. No, Li vel y shoul d not trade i n her mother's account at al l .
B. No, Li vel y shoul d treat her mother's account l i k e any other cl i ent account.
C. Yes, Li vel y gi ves al l her cl i ents enough opportuni ty to trade before tradi ng i n
her mother's account.
Accordi ng to Standard VI (B) – Pri ori ty of Transacti on, fami l y members who are al so
cl i ents shoul d be treated as a cl i ent account and shoul d not be at a di sadvantage.
A and C are i ncorrect. Standard VI(B) requi res cl i ents and empl oyers to pri ori ti ze
i nvestments transacti ons i n whi ch a member i s a benefi ci al owner.
71
Q.75 When i ntroduci ng hersel f to a potenti al cl i ent, Jhansu Hal don usual l y says, "I was
awarded a CFA degree i n 2015." Hal don i s most l i k el y:
A. not i n vi ol ati on of any standard i n menti oni ng thi s.
B. i n vi ol ati on of Standard VII(A) – Conduct as Members and Candi dates i n the

CFA® Program.
C. i n vi ol ati on of Standard VII(B) – Reference to CFA Insti tute, the CFA®

desi gnati on, and the CFA® Program.
Hal don vi ol ates the Standard VII(B) – Reference to CFA Insti tute, CFA® desi gnati on or
CFA® program by referri ng to the CFA® charter as a degree.
A i s i ncorrect. Hal don has vi ol ated Standard VII(B) regardi ng the CFA i nsti tute, the
CFA® desi gnati on, and the CFA® Program.
B i s i ncorrect. Hal don has vi ol ated Standard VII(B) and not Standard VIII(A).
72
Q.76 Davi d Li am, CFA, manages portfol i os for several weal thy cl i ents. Li am met wi th
Mr. Goel , one of hi s cl i ents, over l unch. Li am advi ses Mr. Goel to doubl e hi s i nvestment
i n JKF Corp as the operati onal restructuri ng i s expected to bri ng i n hi gher
profi tabi l i ty.
To not vi ol ate Standard V – Investment Anal ysi s, Recommendati on, and Acti on, what
shoul d Li am most l i k el y do when he reaches hi s offi ce?
A. Davi d Li am shoul d record the detai l s of hi s meeti ng and i nvestment

recommendati on.
B. Davi d Li am shoul d fi rst veri fy the sui tabi l i ty of the i nvestment and then
execute the order.
C. Davi d Li am shoul d i denti fy other cl i ents for whom i nvestment i n JKF i s

sui tabl e and i nform them about the expected i ncrease i n profi tabi l i ty.
Standard V(C) – Record Retenti on requi res members to document al l the
recommendati ons and communi cati ons wi th cl i ents. Li am shoul d have al ready
consi dered the sui tabi l i ty of the i nvestment before mak i ng the recommendati on. Li am
shoul d refrai n from executi ng the order unti l he recei ves confi rmati on from Mr. Goel .
Note: Identi fyi ng other cl i ents for whom i nvestment i n JKF i s sui tabl e wi l l fal l under
Standard III(B) – Fai r Deal i ng and not Standard V – Investment Anal ysi s,
Recommendati on, and Acti on.
Q.77 Whi ch of the fol l owi ng statements are components of the CFA Insti tute Code of
Ethi cs?
I. Act wi th i ntegri ty, competence, di l i gence, respect, and i n an ethi cal manner
wi th the publ i c, cl i ents, prospecti ve cl i ents, empl oyers, empl oyees, col l eagues i n
the i nvestment professi on, and other parti ci pants i n the gl obal capi tal mark ets.
II. Preserve the confi denti al i ty of i nformati on communi cated by cl i ents, prospects,
or empl oyers about i nvestment matters.
73
III. Practi ce and encourage others to practi ce professi onal l y and ethi cal l y to refl ect
credi t on themsel ves and the professi on.
A. Onl y I.
B. Onl y I and III.
C. I, II, and III.
Statements I and III are components of the Code of Ethi cs. Statement II i s part of the
Standard of Professi onal Conduct.
The 6 components of the Code of Ethi cs are:
1. Act wi th i ntegri ty, competence, di l i gence, respect, and i n an ethi cal manner
wi th the publ i c, cl i ents, prospecti ve cl i ents, empl oyers, empl oyees, col l eagues i n
the i nvestment professi on, and other parti ci pants i n the gl obal capi tal mark ets.
2. Pl ace the i ntegri ty of the i nvestment professi on and the i nterests of cl i ents
above thei r own personal i nterests.
3. Use reasonabl e care and exerci se i ndependent professi onal j udgment when
conducti ng i nvestment anal ysi s, mak i ng i nvestment recommendati ons, tak i ng
i nvestment acti ons, and engagi ng i n other professi onal acti vi ti es.
4. Practi ce and encourage others to practi ce i n a professi onal and ethi cal manner
that wi l l refl ect credi t on themsel ves and the professi on.
5. Promote the i ntegri ty of, and uphol d the rul es governi ng, capi tal mark ets.
6. Mai ntai n and i mprove thei r professi onal competence and stri ve to mai ntai n and
i mprove the competence of other i nvestment professi onal s.
70a: Descri be the structure of the CFA Insti tute Professi onal Conduct Program and the
process for the enforcement of the Code and Standards.
74
Q.78 Ami r Kari mi l i , CFA, has been very vocal about hi s vi ews on the CFA® exam
testi ng pol i ci es. Kari mi l i cl ai ms that "Because there are a l ot of CFA charterhol ders,
I bel i eve that the CFA Insti tute del i beratel y fai l s students to save the presti ge of CFA®
charter from di l uti on."
Whi ch of the fol l owi ng i s most accurate about Kari mi l i 's behavi or?
A. . Kari mi l i has not vi ol ated any CFA Insti tute Code and Standards.
B. Kari mi l i has vi ol ated Standard V(B) – Communi cati on wi th Cl i ents and

Prospecti ve Cl i ents.
C. Kari mi l i has vi ol ated Standard VII(A) –Conduct as Members and Candi dates
i n the CFA® Program.
Kari mi l i i s not i n vi ol ati on of any standard as members and candi dates are al l owed to
express thei r opi ni on about the CFA Insti tute or Program.
75
Q.79 When a fi rm i s bei ng veri fi ed for Compl i ance wi th GIPS, whi ch of the fol l owi ng i s
a veri fi er most l i k el y to do?
I. A veri fi er must attest that the fi rm's procedures and processes for performance
presentati on are i n accordance wi th GIPS.
II. A veri fi er shoul d cl earl y di sti ngui sh the composi tes for whi ch the veri fi cati on i s
done and not done.
A. Onl y I.
B. Onl y II.
C. Both I and II.
A veri fi er i s requi red to attest i f the fi rm procedures and processes are i n accordance
wi th the GIPS requi rements. Veri fi cati on i s vol untary and i s requi red on the whol e
fi rm. Therefore, statement II i s i ncorrect.
Standards (GIPS), LOS 72c: Expl ai n the purpose of composi tes i n performance
reporti ng.
76
Q.80 Leena McCarrol l and Eri c Smi th are fri ends and work for the same i nvestment
management fi rm. McCarrol l i s a CFA® l evel II candi date. Whi l e i ntroduci ng hersel f
to the cl i ents, she usual l y menti ons that she expects to pass the CFA® l evel II exam i n
June. On hi s busi ness card, Eri ck Smi th menti ons that he has passed both l evel s I and
II CFA® exams at hi s fi rst attempts, whi ch i s a fact.
Are Leena McCarrol l and Eri c Smi th most l i k el y i n vi ol ati on of any standard?
A. Nei ther Leena McCarrol l nor Eri c Smi th i s i n vi ol ati on of any standard.
B. Onl y Leena McCarrol l i s i n vi ol ati on of Standard VII(B) – Reference to CFA

Insti tute, the CFA Desi gnati on, and the CFA® Program.
C. Both Leena McCarrol l and Eri c Smi th are i n vi ol ati on of Standard VII(B) –
Reference to CFA Insti tute, the CFA Desi gnati on, and the CFA® Program.
Leena McCarrol l has vi ol ated Standard VII (B) – Reference to CFA Insti tute, CFA
Desi gnati on, and the CFA Program by stati ng that she i s expected to pass at a future
date.
A and C are i ncorrect. Leena McCarrol l vi ol ates Standard VII(B) whi l e Eri c Smi th i s
not i n vi ol ati on of any standard as a candi date, or member can state i f he/she has
passed the CFA® exam at the fi rst attempt.
77
Q.81 Ravi Mehra i s an Indi an ci ti zen work i ng i n Indi a for the US branch of a Canadi an
bank . Referral fees are al l owed i n the U.S. and Canada but not i n Indi a.
If the company offers referral fees, what i s the most l i k el y acti on to be tak en by Ravi
Mehra, CFA?
A. Mehra shoul d not accept the referral fees.
B. Mehra shoul d accept the referral fees and di scl ose the referral fees.
C. Mehra shoul d accept the referral fees, and there i s no requi rement to mak e
any di scl osure as referral fees are al l owed i n US and Canada.
As per Standard I(A)- Knowl edge of the l aw, i n the case of confl i cti ng l aws, the stri ctest
of the l aws shoul d be fol l owed. In thi s case, Mehra shoul d fol l ow Indi an l aw that
prohi bi ts referral fees.
B and C are i ncorrect. Accordi ng to Standard I(A)- Knowl edge of the l aw requi res
members to understand and compl y wi th any government's appl i cabl e l aws, rul es, and
regul ati ons. If there exi sts a confl i ct, members shoul d compl y wi th the more stri ct
l aw, whi ch i s the Indi an l aw i n thi s case.
78
Q.82 Al y Nabi l , CFA, covers the real estate sector of the Mi ddl e East. Emar Group, a
Real Estate company i n Dubai , has gotten a few phone cal l s from Nabi l , who i s tryi ng to
esti mate the company's val ue. Emar runs 878 Hotel i n Dubai and recentl y offered
Nabi l a tri p to Dubai and stay at 878 at Emar Group's expense.
Whi ch of the fol l owi ng i s the most appropri ate acti on that Nabi l shoul d tak e not to
vi ol ate any CFA Insti tute Code and Standards?
A. Al y shoul d decl i ne the offer.
B. Al y shoul d accept the offer and menti on i t i n hi s research report.
C. Al y shoul d accept the offer and i nform hi s supervi sor about the offer.
As per Standard I (B)- Independence and Obj ecti vi ty, whi l e modest gi fts are al l owed,
anal ysts cannot tak e gi fts from compani es that are under thei r coverage.
B and C are i ncorrect. Standard I(B)- Independence and Obj ecti vi ty requi res that
members must not offer, sol i ci t, or accept any gi ft, benefi t, compensati on, or
consi derati on that reasonabl y coul d be expected to compromi se thei r own’s
i ndependence and obj ecti vi ty. Hence, Nabi l shoul d compl y wi th thi s standard.
79
Q.83 Laura Hal don, CFA, has work ed for a ful l -servi ce brok erage fi rm. She recentl y
met wi th a cl i ent and i nformed them that her fi rm coul d provi de the servi ces they need
after understandi ng al l the requi rements.
Has Hal don most l i k el y vi ol ated Standard I (C)-Mi srepresentati on gi ven the
i nformati on menti oned above?
A. Yes, Hal don cannot mak e such commi tments.
B. No, Hal don i s not i n vi ol ati on as thi s was onl y oral communi cati on.
C. No, Hal don i s not i n vi ol ati on i f her commi tment was based on facts.
If the commi tment made by Laura Hal don was based on facts, Laura has not vi ol ated
Standard I(C) – Mi srepresentati on. It does not mak e any di fference i n thi s case i f the
communi cati on i s oral or not.
i ncl udi ng the sub-secti ons of each Standards.
80
Q.84 Marco Tri ael l i , CFA, work s for a l arge bank i n New York Ci ty. He has recentl y
been arrested for parti ci pati ng i n a non-vi ol ent protest agai nst capi tal i sm.
Has Tri ael l i most l i k el y vi ol ated any CFA Insti tute Code and Standards?
A. Yes, Tri ael l i has vi ol ated Standard IV(A) – Duti es to Empl oyer.
B. Yes, Tri ael l i has vi ol ated Standard I(D) – Professi onal Mi sconduct.
C. No, Tri ael l i has not vi ol ated any CFA Insti tute Code and Standards.
Getti ng arrested for parti ci pati ng i n a non-vi ol ent protest i s not a vi ol ati on of any
secti on. CFA Insti tute standards are about professi onal conduct. Conduct i nvol vi ng
fraud, di shonesty, etc. wi l l be a vi ol ati on but a non-vi ol ent protest i s not a vi ol ati on.
The fact that he work s for a l arge bank does not mean that he cannot parti ci pate i n a
protest agai nst capi tal i sm.
81
Q.85 Robert Wal k er, CFA, deci ded to buy the stock of Raymond Inc. However, si nce the
stock i s thi nl y traded, Wal k er i s worri ed that buyi ng the stock i n l arge vol ume wi l l
resul t i n a pri ce surge. To avoi d the surge i n pri ce, Wal k er deci des to do the
transacti on by getti ng i nto a seri es of bl ock trades.
Wal k er has most l i k el y:
A. not vi ol ated any CFA Insti tute Code and Standards.
B. vi ol ated Standard II(B) – Mark et Mani pul ati on by getti ng i nto an

i nformati on-based mani pul ati on.
C. vi ol ated Standard II(B) – Mark et mani pul ati on by getti ng i nto a transacti on-
based mani pul ati on.
Wal k er has not vi ol ated any standard. If Wal k er woul d have tri ed to di stort pri ces
arti fi ci al l y, then i t woul d have been a vi ol ati on.
82
Q.86 Whi ch of the fol l owi ng i s l east l i k el y expected from a member wi th fi duci ary
responsi bi l i ty for a pensi on pl an?
A. The member shoul d al ways act i n the i nterest of pl an parti ci pants
B. The member shoul d mak e j udgments from the perspecti ve of the total
portfol i o.
C. In the case of a proxy fi ght, the member shoul d provi de support to the
sponsor's management.
Accordi ng to Standard III(A)– Loyal ty, Prudence, and Care, a fi duci ary shoul d anal yze
the proposal of the management and shoul d provi de support to the management i n the
event of a proxy fi ght onl y i f i t i s benefi ci al to the pl an parti ci pants.
A and B are i ncorrect. Both statements are correct. The member shoul d mak e
j udgments from the perspecti ve of the total portfol i o and act i n the i nterest of pl an
parti ci pants.
CFA Level 1, Vol ume 6, Readi ng 70– Code of Ethi cs and Standards of Professi onal , LOS
83
Q.87 Ai sun Al mas, CFA, has been managi ng the portfol i o of Mrs. Sanem for the past
year. Al mas was abl e to earn good returns for Mrs. Sanem and requested that Mrs.
Sanem tel l her fri ends about the above-average returns that she coul d earn on her
portfol i o.
Is Al mas most l i k el y i n vi ol ati on of Standard III(D) – Performance Presentati on?
A. No, Al mas i s not vi ol ati ng the standard.
B. Yes, Al mas i s vi ol ati ng the standard as the message does not pass the test of
compl eteness.
C. Yes, Al mas i s vi ol ati ng the standard as she cannot request that her cl i ent
tal k about the portfol i o performance to others.
Standard III(D)– Performance Presentati on requi res that members communi cate
performance fai rl y, accuratel y, and compl etel y and cover wri tten and oral
communi cati ons. Performance for one year i s a very short peri od that does not pass the
test of compl eteness.
A i s i ncorrect. From the statement, Al mas vi ol ates Standard III(D)- Performance
Presentati on on compl eteness si nce one year’s performance i s a short peri od.
C i s i ncorrect. Requesti ng her cl i ent to tal k about the portfol i o does not vi ol ate
Standard III(D).
i ncl udi ng the sub-secti ons of each Standard./em>
84
Q.88 Ignaci o Dawson i s an i nvestment advi sor at Larson Securi ti es Inc. Hubert
Padi l l a, a hi gh-net-worth cl i ent, offered Dawson a 2% profi t shari ng each year on
achi evi ng a return above 20%, to whi ch Dawson agrees. When Padi l l a ask ed about
brok erage, Dawson advi ses Padi l l a to shi ft hi s brok erage Towards Wi l l i s Brok ers as
they are the best i n town i n terms of pri ci ng and servi ce qual i ty. When Padi l l a l eft,
Dawson wrote an emai l to hi s empl oyer regardi ng hi s compensati on arrangement wi th
Padi l l a. The next day, Dawson recei ved a cash check i n the name of Larson Securi ti es
from Wi l l i s Brok ers for i ntroduci ng the new cl i ent to them.
Dawson has most l i k el y vi ol ated Standard IV(B): Addi ti onal Compensati on
Arrangements by:
A. fai l i ng to di scl ose Padi l l a about Larson's arrangement wi th Wi l l i s Brok ers.
B. accepti ng Padi l l a's offer before obtai ni ng permi ssi on from hi s empl oyer.
C. fai l i ng to di scl ose Padi l l a regardi ng hi s fi rm's arrangement wi th Wi l l i s and

fai l i ng to di scl ose hi s profi t-shari ng arrangement pri or to obtai ni ng consent
from hi s empl oyer.
Dawson has vi ol ated Standard IV(B): Addi ti onal Compensati on Arrangements by
fai l i ng to obtai n consent from hi s empl oyer before accepti ng a profi t-shari ng
arrangement wi th Padi l l a. Dawson has al so vi ol ated Standard VI(C): Referral Fees by
fai l i ng to di scl ose to Padi l l a hi s fi rm's referral arrangement wi th Wi l l i s Brok er. He
shoul d have cl earl y menti oned hi s fi rm's arrangements, such as di scl osure, whi ch
coul d have caused Padi l l a to reassess Dawson's recommendati on and mak e a more
cri ti cal eval uati on of Wi l l i s Brok er's servi ces.
85
Q.89 Dan Wal ton, CFA, i s a supervi sor of a research anal yst team at Pi oneer Investi ng.
Wal ton noti ced that Eva Peters devel oped a new model and started tradi ng based on the
new model wi thout testi ng i t. Wal ton ask s Peters to stop tradi ng i mmedi atel y. When
Wal ton enqui red further i nto the si tuati on, he real i zed that the company has no pol i cy
or gui del i nes for testi ng new model s.
What i s the most appropri ate acti on to be tak en by Wal ton i n thi s si tuati on?
A. Wal ton shoul d fi re Peters for not testi ng the model .
B. Wal ton shoul d report Peters to the Compl i ance Team.
C. Wal ton shoul d encourage the fi rm to devel op gui del i nes for the testi ng of new
model s.
Si nce there were no gui del i nes or pol i cy, Wal ton cannot fi re Eva Peters, and reporti ng
Peters to the Compl i ance Team wi l l al so be of no use. As recommended i n Standard
V(A)– Di l i gence and Reasonabl e Basi s, the best course of acti on, i n thi s case, i s for
Wal ton to encourage the fi rm to devel op gui del i nes for testi ng new model s.
Q.90 Cl oe Vendetti , CFA, i s a busi ness strategi st at WQS i nvestments, an i nvestment

fi rm k nown for hi ri ng i nvestment managers who have the CFA desi gnati on or
candi dates. Due to thi s, Cl oe cl ai ms that her fi rm offers superi or returns compared to
other fi rms i n the i ndustry i n a recent press statement. Hi stori cal l y, the fi rm has
offered i ts cl i ents above-average returns.
Under the CFA Insti tute Code and Standards, Cl oe’s cl ai m:
A. di d not vi ol ate the CFA Insti tute Code and Standards by cl ai mi ng superi or
returns.
B. di d not vi ol ate CFA Insti tute Code and Standards because hi stori cal returns
have been above average.
C. shoul d have not guaranteed superi or returns because thei r managers have
CFA desi gnati ons.
86
Cl oe has vi ol ated Standard VII(B) - Responsi bi l i ti es as a CFA Insti tute Member or CFA
Candi date - Reference to CFA Insti tute, the CFA Desi gnati on, and the CFA Program. She
shoul d not cl ai m that her fi rm offers superi or returns because i ts managers are CFA
members and candi dates. Accordi ng to Standard VII(B) - Responsi bi l i ti es as a CFA
Insti tute Member or CFA Candi date - Reference to CFA Insti tute, the CFA Desi gnati on,
and the CFA Program members and candi dates must not mi srepresent or overstate the
meani ng or i mpl i cati ons of membershi p i n the CFA Insti tute or hol di ng the CFA
desi gnati on.
Above-average hi stori cal returns shoul d not be ti ed to the fact that the i nvestment
fi rm’s managers are CFA candi dates and members.
A i s i ncorrect. Cl oe vi ol ated the Standard VII(B)Standard VII(B) - Responsi bi l i ti es as
a CFA Insti tute Member or CFA Candi date - Reference to CFA Insti tute, the CFA
Desi gnati on, and the CFA Program by cl ai mi ng to offer superi or returns because her
fi rm hi res CFA candi dates or members onl y. Guaranteei ng superi or returns because of
the k nowl edge attai ned from the CFA Program i s a vi ol ati on.
B i s i ncorrect. Stati ng the fi rm’s hi stori cal returns i s acceptabl e but guaranteei ng
these returns i n the future i s a vi ol ati on because of the ri sk s i nherent i n i nvesti ng.
CFA Level 1, Vol ume 1, Readi ng 71 – Gui dance for Standards I—VII, LOS 71a:
demonstrate the appl i cati on of the Code of Ethi cs and Standards of Professi onal
Conduct to si tuati ons i nvol vi ng i ssues of professi onal i ntegri ty.
87

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Level I of the CFA® Exam

Mock Questions with Answers - Mock Exam 2023 #1 - First

Last Updated: Sep 5, 2023

prohibited. Infringers will be prosecuted in their local jurisdictions. ”

T hus, a 95% CI for the mean,

Where α = 0.05 so Zα /2 = 1.96

Which can be expressed as [124.5; 135.5]

From the perspective of Year 5, we have an ordinary annuity with 14 payments.

Now we can calculate the P V at t = 0 (today):

A i s i ncorrect. It assumes 6 years in the calculation of PV as follows:

C i s i ncorrect. It is the resulting PV of 14 ordinary annuity payments for 5 years as calculated

S&P = β0 + β1(GDP Growth) + ϵ

sum of square of errors

Sum of square of Errors = SST-SSR = 155.8 − 108 = 47.5

interval is a range of 1.96 standard deviations around the mean.

popul ati on vari ance and a l arge sampl e si ze

A. a leftward shift in the electricity supply curve.

B. a rightward shift of the electricity demand curve.

C. a leftward movement along the electricity supply curve.

control equipment. T herefore, this is a leftward movement of the supply curve.

For uniform discrete uniform distribution, we know that:

P (14 ≤ x ≤ 21) = F (21) − F (14)

A. Shift aggregate supply to the left, resulting in higher GDP.

B. Shift aggregate supply to the left, resulting in higher prices.

C. Shift aggregate demand to the left, causing a higher price level.

to the GDP equation as follows:

Growth in potential GDP = Growth in technology + W L (growth in labor) + W c (growth in capital),

Growth in potential GDP = 2% + (0.55 × 3%) + (0.45 × 4%) = 5.45%

SMicrosoft = 0.0040. 5 = 0.0632

SApple = 0.0080. 5 = 0.0894

Cov(Microsoft, Apple) = r × SMicrosoft × AApple = 0.7 × 0.0632 × 0.0894 = 0.00395

correl ati ons of portfol i o returns.

T he first step in such a problem is to make the prediction:

Next, we compute the variance of forecast/prediction error, s2f.To do that, we need:

Squared standard error of the estimate: s2

Value of independent variable: X

Mean retrun spread: X̄

Variance of the mean return spread: s2x

T hen, we apply the formula:

freedom, is approximately 2.00. Finally, the prediction interval is:

4.642 ± tcSf = 4.642 ± 2(1.113265) = [2.3767% to 6.9073%]

i ndependent vari abl e.

T he power of a test is 1 - P(T ype II error) = 1 − 0.25 = 0.75

compounding, time is viewed as continuous.

hol di ng peri od return.

Since the p(E)=0.6, the odds for E is given by:

T he odds of the increase are three-to-two.

with thinner tails.

Year Nominal GDP GDP deflator

Exports of goods and services $ 6, 500, 000

T he country's current account is closest to:

bal ance, and the trade bal ance.

A. T hey allow countries to engage internationally with independence.

B. T hey contribute to more stable internal and external political forces.

C. Increase in the likelihood of a country defecting from its cooperative roles.

unilateral actions that could undermine international cooperation.

giving countries more opportunities to develop cooperative relationships.

geopol i ti cs from a cooperati on versus competi ti on perspecti ve.

Sample Mean - Hypothesized value

AA-rated sector bond value 83

AA-rated sector bond value 83

AA-rated sector bond value 83

2d: Interpret a conti ngency tabl e.