CFA CFA 3 — Questions and Answers
Question 1: Standard III(B) Fair Dealing requires that members treat all clients fairly when:
- Disseminating investment recommendations or taking investment action (Correct answer)
- Charging management fees
- Reporting to regulators
- Hiring new analysts
Correct answer: Disseminating investment recommendations or taking investment action
Fair Dealing applies to the dissemination of recommendations and the execution of investment actions across clients.
Question 2: The Gordon (constant) growth dividend discount model values a stock as D1 divided by:
- (r - g) (Correct answer)
- (r + g)
- (g - r)
- r
Correct answer: (r - g)
Value equals next year's dividend divided by the required return minus the constant growth rate.
Question 3: A futures contract differs from a forward contract primarily because futures are:
- Standardized and exchange-traded with daily settlement (Correct answer)
- Customized over-the-counter agreements
- Always settled in physical commodities
- Free of counterparty risk entirely
Correct answer: Standardized and exchange-traded with daily settlement
Futures are standardized, traded on exchanges, and marked to market daily through a clearinghouse.
Question 4: Which measure of central tendency is most affected by extreme outliers?
- Arithmetic mean (Correct answer)
- Median
- Mode
- Geometric mean
Correct answer: Arithmetic mean
The arithmetic mean incorporates every value, so outliers pull it strongly.
Question 5: Operating leverage is highest for a firm with:
- High fixed costs relative to variable costs (Correct answer)
- High variable costs relative to fixed costs
- No debt financing
- High dividend payout
Correct answer: High fixed costs relative to variable costs
A large proportion of fixed costs magnifies the effect of sales changes on operating income.
Question 6: The Sharpe ratio evaluates portfolio performance by dividing excess return by:
- Standard deviation of returns (Correct answer)
- Beta
- Tracking error
- Downside deviation
Correct answer: Standard deviation of returns
The Sharpe ratio uses total risk (standard deviation) in its denominator.
Question 7: When the U.S. dollar appreciates against the euro, U.S. exports to the Eurozone tend to become:
- More expensive and less competitive (Correct answer)
- Cheaper and more competitive
- Unaffected
- Tax-exempt
Correct answer: More expensive and less competitive
A stronger dollar raises the foreign-currency price of U.S. goods, reducing export competitiveness.
CFA CFA 3
Standard III(B) Fair Dealing requires that members treat all clients fairly when: