Here's the e-mail tip of the week I received from Allen Resources:
__________________________________________________________
Subj: Allen Resources - CFA Tip of the Week - 10/7/98
Date: 10/7/98 4:10:53 PM Pacific Daylight Time
From: Pass@AllenResources.com (Allen Resources - CFA Prep)
Sender: tip-week-owner@AllenResources.com
Reply-to: info@AllenResources.com
To: tiprecipients@AllenResources.com (Tip Recipients (E-mail))
These questions will help you assess your progress in preparing
for the CFA exam.
All of the questions come from our TestBank Software for all three
CFA levels.
- 5 questions & answers for Level I
(approximately 6,100 Questions are in our Level I Software)
- 1 question & answer for Level II
(approximately 1,630 Questions are in our Level II Software)
- 1 question & answer for Level III
(approximately 1,522 Questions are in our Level III Software)
*** Level I
Question 1: Standard III (A) states that members notify their
________ of the Code and Standards. This notification must be done
________.
a) any of these answers is acceptable; as long as the notification
is made.
b) nearest Society secretary; within 45 days of candidacy
c) nearest Society secretary; orally or in writing
d) chief operating officer; (or equivalent); in writing
e) chief operating officer; (or equivalent); orally or in writing
f) immediate supervisor; within 45 days of candidacy
g) immediate supervisor; in writing
h) immediate supervisor; orally or in writing
Question 2: Which of the following would most likely cause the
price of wheat to decline?
a) a technological advance that lowers the cost of producing
wheat.
b) a sandwich craze among Americans, causing them to increase
their demand for whole-wheat bread.
c) an increase in the price of soybeans, a substitute for wheat.
d) an increase in the production costs of corn, a substitute for
wheat.
Question 3: As the result of specialization and trade, according
to the law of comparative advantage, total output will
a) rise if a nation is a net exporter and fall if the nation is a
net importer of goods and services.
b) rise only when there is an accompanying decline in the total
output of one's trading partners.
c) decline because specialization is costly.
d) increase since resources will be better directed toward their
highest-valued use.
Question 4: Which of the following statements are true?
I. Correlation coefficients between markets are not constant
II. Risky foreign assets in a domestic portfolio increase risk
III. Currency fluctuation is a major part of a diversified
portfolio's total return
a) none of these answers
b) I, II & III
c) II & III
d) I & III
e) I only
f) I & II
g) III only
h) II only
Question 5: Which statement is not true?
a) The higher the payout ratio in a given industry, the more
important dividends are to shareholders.
b) The higher the proportion of debt, the higher the return on
equity ratio will be.
c) Within industries, firms tend to have similar capital
structures.
d) Most ratios vary across time within a given industry.
e) High P/E ratios tend to go with high payout ratios.
f) The lower the dividend yield, the greater the anticipated price
appreciation.
Answer 1: g
Rationale & Reference:
Standard III (A): Relationship with and Responsibilities to the
Employer, states that: "Members shall inform their employer, in
writing, through their direct supervisor, that they are obligated
to comply with the Codes and Standards and are subject to
disciplinary sanctions for violations thereof."
Standards Handbook, p. 33
Answer 2: a
Rationale & Reference:
Technological improvements reduce the opportunity cost of
production and increase supply (by shifting the supply curve to
the right). Producers of wheat will be willing to supply the same
quantity of wheat but at a lower price.
Gwartney & Stroup, p. 71
Answer 3: d
Rationale & Reference:
The law of comparative advantage predicts an increase in total
output because each country will use more of its resources to
produce those goods that it can produce at a relatively low cost.
Opportunity cost reveals the low cost producer of each good. The
reallocation of resources according to the lowest cost producer in
each good will cause total output to increase.
Gwartney & Stroup, pp. 846-848
Answer 4: e
Rationale & Reference:
Correlation coefficients between markets are not constant.
Correlation increases when global factors dominate domestic
factors and affect all financial markets.
The addition of risky foreign assets to a purely domestic
portfolio reduces the total risk of the portfolio when the
correlation coefficient is reasonably small.
Currency risks may more than offset the reduction in security
risk, especially when considering short time periods. However,
currency fluctuation has never been the major component of total
return in a diversified portfolio over a long period of time.
Solnik, pp. 100-106
Answer 5: e
Rationale & Reference:
High P/E ratios tend to go with low payout ratios as both of these
measures are associated with higher growth rates. Remember that
low payout ratios are common for high-growth companies as they
give up a paying large dividends to finance their firm.
Kolb, p. 369
*** Level II
Question:
Learning Outcome Statement:
Regarding business valuation and the estimation of cash flows,
state the discounting rule for inflation-adjusted cash flows.
Answer:
The simple rule on expected inflation is to be consistent about
matching cash flows and discount rates. If the cash flows being
discounted are nominal cash flows (cash flows that have expected
inflation built into them), the appropriate discount rate is the
nominal rate (a discount rate with an expected inflation
component). If the cash flows discounted are real cash flows (cash
flows based upon constant dollars), the appropriate discount rate
is a real rate.
The effect of mismatching cash flows and discount rates on value
can be substantial. If the nominal cash flows are discounted at
real discount rates, the resulting value will be higher than the
true value. If, however, real cash flows are discounted at nominal
rates, the resulting value will be lower than the true value.
Damodaran, p. 58
*** Level III
Question:
Learning Outcome Statement:
Illustrate how hidden transaction costs, such as market impact,
market timing, and opportunity costs, affect investment management
results.
Answer:
1. Market Impact
Market impact is the cost of buying liquidity.
This impact is measured as the change in price between the time an
order is presented to a broker and the actual execution. Thus, it
is the price change during the time the order is exposed to the
market by the broker.
2. Market Timing
This is the cost of not executing the entire order at the same
time. Most institutional orders are larger than can be presented
to the market-place. Timing is the cost of seeking liquidity. This
cost depends on what happens to the stock's price while an order
is held on the buy-side trade desk. As the order is parceled out
over time, the price may rise or fall. That component is the
interday cost.
3. Opportunity Cost
This is the cost of not executing the trade. For example, the
price may move away, the manager may pull the order, the liquidity
is not there. This is the cost of liquidity failure.
For example, the part of the order not executed in the market
incurs a timing cost, the part that is never executed incurs an
opportunity cost.
Wagner, p. 16
***********************************************
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E-mail: Pass@AllenResources.com
Internet: allenresources.com
________________________________________
Good stuff.
RT |
