CFA Practice Test
The formula will most likely be used to calculate the value of an existing single-family home utilized for residential purposes:
Explanation:
An existing single-family home for residential purposes will most likely be valued using the sales
comparison method
Which of the following alternative investments is the best fit for a high-net-worth individual with a long time horizon and a need for immediate income?
Explanation:
While all these investments are available to a high net worth investor with a long time horizon, only commercial
real estate is expected to produce current income.
Utilized buyout finance is assessing Siena Company relative to its peer companies. Siena is most likely a great candidate for an administration buy-in in the event that it has:
Explanation: In a management buy-in, a leveraged buyout (LBO) fund replaces the existing managers of a portfolio company with a new team it believes can increase the value of the company. Companies with high cash flow are attractive candidates for LBOs because their cash flow can help service the debt issued to finance the LBO. A company with high cash flow and capable managers is a potential candidate for a management buyout (MBO), a transaction in which the managers participate and stay on after the company goes private.
A REIT's funds from operations (FFO) are most likely computed as follows:
Explanation:
FFO, in its most basic form, equals net income plus depreciation charges on real estate property
less gains from sales of real estate property plus losses on sales of real estate property.
Consider the following propositions:
Phrase1: Commodities have generally had a higher Sharpe ratio than bonds but a lower Sharpe ratio than stocks.
Phrase 2: Commodity price volatility is typically higher than reported consumer price inflation volatility.
Which of these is the most likely case?
Explanation:
The Sharpe ratio for commodities as an asset class has historically been lower than for both stocks
and bonds. Historically, commodities have earned a lower return than stocks and bonds, and have
had a higher standard deviation than stocks and bonds.
The spot price of a commodity market is in contango if it is:
Explanation:
A commodity market is contango if the futures price is higher than the spot price
Which of the following is the least likely source of profit from a commodity futures position with collateral?
Explanation:
The sources of return from a collateralized commodities futures position are roll yield, collateral yield,
and spot price return.
In 20x7, an investment in a hedge fund with a 2-and-20 fee structure rose in value each period, yielding an 8 percent net return net of management fees. Which of the following provisions would have the highest incentive fees for 20x7?
Explanation:
With a soft hurdle rate, the incentive fee is a percentage of the entire return once the hurdle rate is
met. With a hard hurdle rate, the incentive fee is a percentage of return in excess of the hurdle rate.
A high water mark does not affect the incentive fee for an account that has increased in value each
period. A soft hurdle rate would result in incentive fees of 20% x 8% = 1.6% of assets; a 5% hard
hurdle rate would result in incentive fees of 20% x (8% — 5%) = 0.6% of assets; and a 7% hard
hurdle rate would result in incentive fees of 20% x (8% - 7%) = 0.2% of assets.
Which of the following alternative investments would be best for a high-net-worth individual with a long time horizon and a need for immediate income?
Explanation:
While all these investments are available to a high net worth investor with a long time horizon, only
commercial real estate is expected to produce current income.
The esteem of an existing single—family domestic utilized for private purposes will most likely be calculated utilizing the:
Explanation:
An existing single-family home for residential purposes will most likely be valued using the sales
comparison method
Kate Smith, CFA, is thinking about diversifying her typical investment portfolio with hedge funds. Werner calculates the diversification benefits of investing 5% of a portfolio's assets to hedge funds based on historical mean and standard deviation of hedge fund index results, as well as their association with traditional investment returns. Werner is most likely to:
Explanation:
Historical mean and standard deviation of returns for hedge fund indexes are likely to overestimate
expected return and underestimate risk due to survivorship and backfill biases. As a result,
determining a portfolio asset allocation to hedge funds based on these measures is likely to
overestimate the diversification benefits.
In a leveraged buyout (LBO), the mezzanine finance part is most likely to:
Explanation:
In the context of an LBO, mezzanine financing refers to debt that carries warrants or equity
conversion features. This debt is typically subordinated to other bonds that are issued to finance the
LBO. Committed capital is the investment of limited partners in a private equity fund and does not
include debt that the fund issues to finance a particular LBO.
The component of a long-only commodity futures position's yield that is not affected by whether the contract is in contango or backwardation is the:
Explanation:
Collateral yield depends on the yield on T-bills posted as collateral (margin). Roll yield, or the gains
and losses that result from entering into a new, longer-dated futures contract as previous contracts
expire or are closed out, depends on whether the contract is in contango (futures price greater than
spot price) or backwardation (futures price less than spot price). Futures markets for commodities
with high convenience yield tend to be in backwardation, while futures markets for commodities with
little to no convenience yield tend to be in contango.
Cathy Williams, CPA, is an asset manager who wants to put some of his money into alternative ventures. Williams buys a security that represents a proportional claim to a pool of loans' cash flows. Williams has most likely invested in which alternative investment category?
Explanation:
One of the ways to invest in real estate is by purchasing residential or commercial mortgage-backed
securities.
A private equity fund sells the following items to exit a portfolio company through a trade sale:
Explanation:
Atrade sale involves selling a portfolio company to a competitor or another strategic buyer. An IPO
involves selling all or some shares of a portfolio company to the public. A secondary sale involves
selling a portfolio company to another private equity firm or a group of investors.
The phrase "mezzanine-stage financing" is used to characterize the financing in the context of venture capital:
Explanation:
Mezzanine-stage venture capital financing provides capital during the period prior to an initial public
offering.
When compared to its accounting-based net asset value (NAV), a hedge fund trading NAV:
Explanation:
If a fund calculates a trading NAV, it will adjust market prices downward for securities in which it
holds positions that are large relative to trading volume or total value outstanding and thus are less
liquid.
A portfolio manager is more likely to predict higher returns if a percentage of assets is allocated to alternative investments, because alternative investments:
Explanation:
Adding alternative investments to a traditional portfolio may increase expected returns because (1)
some alternative investments are less efficiently priced than traditional assets, providing
opportunities for skilled managers; (2) alternative investments may offer a premium for being illiquid;
and (3) alternative investments often employ leverage.
Which of the following assertions concerning a public company's annual reports, SEC filings, and press releases in the United States is the most accurate?
Explanation:
Besides the annual SEC filings, an analyst should examine a company’s quarterly or semiannual
filings- These interim filings typically update the major financial statements and footnotes, but are not
necessarily audited. Annual reports to shareholders and press releases are written by management
and are often viewed as public relations or sales materials.
A private equity firm that wishes to obtain money from a portfolio company without giving up ownership is most likely to:
Explanation:
Recapitalization is when the company issues debt to fund a dividend distribution to equity holders
(the fund). It is not an exit, in that the fund still controls the company, but often is a intermediate step
toward an exit.
Which of the following is most likely to happen if a company employs the weighted average cost of capital (WACC) to discount the cash flows of higher-risk projects?
Explanation:
Risky projects will seem relatively more attractive than they actually are, causing them to be
undertaken a disproportionately high percentage of the times they are considered.
It is most likely that a strong corporate code of ethics will allow:
Explanation:
It is not uncommon for individuals to be members of the boards of directors of more than one firm.
This is acceptable as long as they maintain independence and act in the interests of the firms’
shareholders. A strong corporate code of ethics should discourage the company from awarding
consulting contracts or finders fees to board members or relatives of board members.
The point on the company's investment opportunity schedule that best determines the amount of an appropriate the capital budget for a corporation is:
Explanation:
The investment opportunity schedule is a downward sloping curve of the internal rates of return
(expected returns) of potential projects ranked from highest to lowest. This curve intersects the
company’s upward sloping marginal cost of capital curve at an amount of capital where the marginal
projects IRR just equals the firms cost of capital. The firm should accept projects with lRRs that
exceed the marginal cost of capital (lie to the left of the intersection) and reject projects with lRRs
less than the marginal cost of capital (lie to the right of the intersection).
The form of short-term finance whose cost is most directly linked to a firm's customers' creditworthiness is:
Explanation:
Factoring refers to the sale of receivables without recourse; that is, the risk that the firms customers
will not pay, or will not pay in a timely manner, is borne by the factor, who purchases the receivables.
Thus, the amount the factor will pay per dollar of receivables ' is lower (higher discount or interest
Tate)— if the credit quality—of the firms credit customers is lower.
A company with S2 earnings per share decides to buy back a portion of its stock at $25 per share. The company's after-tax cost of debt is 6%, and it gets a 2% after-tax yield on its spare cash. - When the company buys back shares, the earnings per share will be:
Explanation:
The earnings yield on the firm’s shares is 2 / 25 = 8%. Because both the firm‘s after-tax yield on
excess cash and its after-tax cost of borrowing are less than the earnings yield, financing a share
repurchase either with excess cash or with debt will increase earnings per share.