CFA Practice Test

Question 1

The formula will most likely be used to calculate the value of an existing single-family home utilized for residential purposes:

Accepted Answer

sales comparison approach.

Answer

The sales comparison approach is the most appropriate method for valuing existing single-family homes. This approach estimates value by comparing the subject property to similar properties that have recently sold in the same market, making adjustments for differences. The income approach is for income-generating properties, and the cost approach is typically for new construction or unique properties.

Question 2

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?

Accepted Answer

Commercial real estate.

Answer

Commercial real estate is an excellent fit for a high-net-worth individual with a long time horizon and a need for immediate income. It typically generates stable rental income, providing immediate cash flow, and offers potential for capital appreciation over the long term. Venture capital involves high risk and long horizons with no immediate income, while multi-strategy hedge funds may offer some liquidity but are not primarily focused on immediate income.

Question 3

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:

Accepted Answer

higher cash flow and less capable managers than its peers.

Answer

A company is most likely a great candidate for a management buy-in (MBI) if it has higher cash flow, as this cash flow is crucial for servicing the debt used in a leveraged buyout. Additionally, less capable existing managers present an opportunity for the new management team to improve operations and unlock value, making the target more attractive for an MBI.

Question 4

A REIT's funds from operations (FFO) are most likely computed as follows:

Accepted Answer

Net income plus depreciation less gains from sales of real estate plus losses from sales of
real estate.

Answer

Funds From Operations (FFO) is a key metric for REITs that adjusts net income to better reflect cash flow from operations. It is calculated by adding back depreciation and amortization to net income, and then adjusting for non-recurring gains or losses from the sale of real estate. This provides a clearer picture of a REIT's ongoing operational performance by removing non-cash expenses and non-operating income/losses.

Question 5

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?

Accepted Answer

Only Statement 1 is incorrect.

Answer

Historically, commodities have generally exhibited lower Sharpe ratios compared to both stocks and bonds, making Statement 1 incorrect. However, commodity prices are known for their significant volatility, which is typically higher than the smoother, more stable reported consumer price inflation volatility, making Statement 2 correct. Therefore, only Statement 1 is incorrect.