Kaplan Mock 4 Pm

Front 1

CFA just hired as Portfolio Manager for Investment manager that services institutional clients. CFA for past 9 years has spent 5 hours per week providing investment advice to local university. She does not disclose arrangement to employer b/c it will not affect her duties at new job. Why does this violate the standards on loyalty?

Back 1

Especially since her employer deals with instl. clients, and she is providing inv advice to an instl. client, it is likely that she is competing with her employer for business and therefore ""engaging in any activity that would deprive the firm of profit". This is allowed under independent practice for compensation, but only if a notification is provided to employer, and the employer consents to the proposed independent practice before it begins.

Front 2

What is the Harmonic mean used for?

Back 2

The harmonic mean is not typically used to compute the historical performance or forecast the expected performance of an investment; rather it is used to compute the average cost of shares purchased over time.

Front 3

Ann Karson is evaluating a new drug product of Lancer Pharmaceutical Company. To receive approval, the new drug must reduce symptoms in a larger percentage of patients, on average, than the current standard of treatment. The most appropriate hypothesis test is a test of differences between means of the new drug and current treatment. Why, and when would you use a paired comparison test?

Can you use either test if the sample data is not normally distributed?

Back 3

You are trying to gauge whether the mean of one pop is greater than the mean of the other. To do this you use a test of differences between means to find out if the difference is greater or less than one if the populations are independent.

(H[Null]: m1 - m2 < 0 ; H[Alt]: m1 - m2 > 0)

You would use a paired comparisons test if the samples ARE DEPENDENT

BOTH REQUIRE SAMPLE DATA TO BE NORMAL

Front 4

What is the power of a test?

Back 4

The probability that a test will reject a false null

1 - P(type 2 error)

The more likely that a test will reject a false null, the more powerful a test.

Higher Power of a test is better, more likely to come to the right conclusion

Front 5

What is the relationship between the calculated test statistic and the critical value in regards to knowing when to reject the null hypothesis

Back 5

The decision rule is to reject the null hypothesis whenever the (absolute value of the) calculated test statistic exceeds its critical value (i.e., the test statistic lies in the "rejection tail")

Front 6

What is the calculated test statistic

what is the critical value?

Back 6

Calculated test statistic - calculated from sample data and is compared to critical value to know whether or not to reject the Null Hypo

Critical Value - comes from tables based on you level of significance (Confidence interval) and sets a threshold based on your confidence level that a calculated test statistic must exceed to reject the null.

Front 7

Elliott wave theory is a cycle theory which has impulse waves and corrective waves. Which waves moves with the trend, and how many smaller waves is each comprised of?

Back 7

Elliott wave theory defines an impulse wave as a wave in the direction of the prevailing trend. An impulse wave is composed of five smaller waves. A corrective wave (against the prevailing trend) is composed of three smaller waves.

Front 8

The major limitations of Monte Carlo simulation are that it is __________ __________ and will provide answers that are no better __________ __________ __________ __________ and that it cannot provide the insights __________ __________ __________ __________ . Monte Carlo simulation is useful for performing __________ __________ . One of the first steps in Monte Carlo simulation is to specify the probably distribution along with the distribution parameters. The distribution specified does not have to __________ __________

Back 8

The major limitations of Monte Carlo simulation are that it is fairly complex and will provide answers that are no better than the assumptions used and that it cannot provide the insights that analytic methods can. Monte Carlo simulation is useful for performing "what if" scenarios. One of the first steps in Monte Carlo simulation is to specify the probably distribution along with the distribution parameters. The distribution specified does not have to be normal.

Front 9

For a business to exercise price discrimination, its customers must have what characteristic in regards to price elasticity of demand?

Back 9

They must be different customer groups with different price elasticities of demand

Front 10

What is Cost-Push inflation initiated by? What chain of event occurs after this to have cost push inflation fully materialize?

Back 10

A key Productive input (i.e. Oil) has its price increase. This reduces Short run aggregate Supply, raising prices and lowering employment. Central bank responds by increasing the money supply, boosting aggregate demand, pushing real GDP back to full employment, BUT causing prices to rise even further. If continued price increases in input prices reduce SR AS and the central bank is forced to repeat, Cost -Push inflation ensues.

Front 11

What affect on Aggregate Demand does an increase in expected inflation have, and what causes this?

Back 11

An increase in expected inflation causes aggregate demand to increase as consumers make purchases sooner and businesses increase investment in anticipation of higher profits.

Front 12

Draw out the Average and Marginal Cost curve

Back 12

Front 13

AFC slopes __________

The vertical distance between the ATC and AVC curves is equal to ________

MC declines initially, then __________

MC intersects AVC and ATC at their __________

MC curve above AVC is the firms __________ (in a perfectly competitive market)

Back 13

AFC slopes downwards

The vertical distance between the ATC and AVC curves is equal to AFC

MC declines initially, then increases

MC intersects AVC and ATC at their minimum points

MC curve above AVC is the firms short run supply curve (in a perfectly competitive market)

Front 14

Although economic profits in the long run are zero, why is there disagreement over the efficiency of long-run output in a monopolistically competitive market?

Back 14

Total costs include costs associated with advertising and product differentiation. Both things create value that for the most part tends to offset inefficiency from the reduction in output compared to perfect competition, but there is no guideline for the efficient amount of differentiation, which leaves to door open to whether it is as efficient as a perfectly competitive market

Front 15

Component depreciation is allowed under IFRS/GAAP and required under IFRS/GAAP

Back 15

Component depreciation is allowed under GAAP

and required under IFRS

Front 16

An increase in work-in-progress inventory relative to sales is likely to result from firms increasing production because ...

Back 16

An increase in work-in-progress inventory relative to sales is likely to result from firms increasing production because they expect an increase in demand.

Front 17

An increase in finished goods inventories relative to sales would be more likely to indicate a decrease in ...... caused by .....

Back 17

An increase in finished goods inventories relative to sales would be more likely to indicate a decrease in demand that may be caused by obsolete inventory or a business cycle peak.

Front 18

What must be done to interest costs incurred when constructing assets over multiple periods for firm use or for sale? Is this for IFRS or GAAP?

aka as Construction interest

Back 18

under BOTH IFRS AND GAAP

interest costs incurred must be capitalized to either balance sheet asset value(if for firm use) or to inventory(if for sale), then recognized over time as dep. or as COGS

Front 19

How do you depreciate intangible assets?

Back 19

Purchased intangible assets w/ finite lives (patents and franchises) are reported on Balance Sheet @ fair value then depreciated over their economic lives by amortization (just like depreciation of a physical asset)

Intangibles that do not have finite lives (i.e. goodwill) or can be renewed at minimal cost (trademarks) are not depreciated, but must be checked periodically for impairment

Front 20

How can a firm use goodwill to manipulate earnings

Back 20

Allocating a larger portion of the aquisition price paid out to goodwill than to tangible assets, since goodwill is not depreciated. That means less assets to depreciate, which means less yearly expense, higher income

Front 21

In a period of rising prices and rising inventory levels, _______ results in the highest net income

Back 21

In a period of rising prices and rising inventory levels, FIFO results in the highest net income (lowest COGS).

Front 22

Capitalizing AN EXPENSE has what effect on Leverage ratios?

Back 22

Makes them lower ( less expense hitting income statement, means higher income, Means higher assets & equity, means lower leverage

DEBT/EQUITY

Front 23

Finance lease (Capitalized LEASE) effect on

Current Ratio

Working Capital

Asset turnover

Return on assets

Return on equity

Debt/equity

Back 23

Current Ratio (CA/CL) - Lower

Working Capital (CA - CL) - Lower

Asset turnover (Sales/Assets) - Lower

Return on assets(Net Income / Assets) - Lower

Return on equity (Net Income/Equity) - Lower

Debt/equity - Higher

Front 24

XYZ Corp acquired Cobra Co. five years ago. As a part of the acquisition, XYZ reported goodwill of $750,000. For the year just ended:

•Fair value of Cobra$5,000,000

•Carrying value of Cobra (including goodwill)$5,200,000

•Identifiable net assets of Cobra at fair value$4,500,000

How do you know if goodwill is impaired, What is the impairment loss, how do you calculate the impliedfair value of goodwill if there is an impairment

Back 24

IF Carrying Value of purchase (Including GOODWILL) is greater than purchase Fair Value, then GOODWILL is impaired

Impairment loss is Goodwill carrying Value (original purchase price) - Implied fair value of goodwill

Implied fair value of good will is the difference between the fair value of Purchase and the Identifiable net assets of Cobra at fair value

Answer: impaired and a loss of $250,000 is recognized.

Front 25

What causes differences in the effective and statutory tax rate?

Back 25

Permanent differences.

Front 26

Companies that use the direct method must provide a disclosure that reconciles what?

Back 26

Companies that use the direct method must provide a disclosure that reconciles net income with cash flow from operations, similar information to what would be presented under the indirect method.

Front 27

An argument in favor of using the indirect method is that it links ____________ ____________ ____________ ____________by focusing on the differences between ____________ and ____________

Back 27

An argument in favor of using the indirect method is that it links the income statement with the cash flow statement by focusing on the differences between net income and operating cash flow.

Front 28

Shelby Enterprises recently entered into a new $500 million revolving credit facility. WHat is the effect on her interest costs?

Back 28

Companies enter into revolving credit facilities to reduce their interest cost

Front 29

On December 31, Pinto Company redeems its $1,000,000, 8% bonds at 101% of par and reports an extraordinary loss of $12,000. Assuming Pinto's tax rate is 40%,

When redeeming bonds when does a loss occur?

the carrying value of the bonds on call date are.....

Back 29

Extraordinary loss is net of tax, so actual loss was $20,000.

A loss occurs on bond redemption if reacquisition cost exceeds carrying value (if you pay more to acquire it than it is worth on your balance sheet.

given the reacquisition price of $1,010,000 ($1,000,000 × 101%), the carrying value must have been $990,000 ($1,010,000 - $20,000).

Front 30

How is construction interest recognized under IFRS/GAAP?

Back 30

Both IFRS and U.S. GAAP require interest that accrues during the construction of a long-lived asset to be capitalized as part of the asset's cost, and not recognized as interest expense during the construction period.

Front 31

What effect does capitalization of construction interest have on income statement, Cash Flows

Back 31

Income Statement - lowers interest expense and increases depreciation or COGS depending on if the long lived asset is for firm use or for sale

Cash Flows - The interest expense eating away at CFO is lower so CFO is higher and the capitalized interest is treated as an CFI outflow and lowers CFI

Front 32

How should a analyst account for construction interest when trying to better measures interest coverage (EBIT/Interest expense)

Back 32

Add the capitalized interest to interest expense

increase EBIT by adding depreciation expense from previously capitalized interest

Front 33

How do you calculate the Country Risk Premium?

Back 33

YSsov= Spread between soverign debt and tbill

Front 34

Benson's board of directors tabulates the results of all proxy votes, which are recorded and maintained by an independent third party. Why is this likely to not be in shareholders best interests?

Benson has two classes of common shares. Each Class 2 share has one-tenth the ownership interest and one-tenth the voting power of a Class 1 share. Why is this okay for shareholders?

Back 34

Board tabulating results is a conflict of interest. Third party should tabulate, record, and maintain every portion of proxy vote

These difference classes of common shares each have the same proportion of ownership interest and voting power

Front 35

Paying cash to shareholders as dividends reduces _____________and ______________

Back 35

Paying cash to shareholders as dividends reduces current assets (cash) and shareholders' equity (retained earnings)

Front 36

The effect using debt for a share repurchase has on earnings per share

and

Calculating cost of equity by Bond yield + Equity Risk premium

Which uses pre-tax cost of debt and which uses after

Back 36

After-tax cost of debt is used to calculate the effect on EPS of share repurchase

Pre-Tax cost of debt used to find cost of equity

Front 37

Nominal return is greater than Real return when inflation is __________

Real return is greater than Nominal Return when inflation is __________

Leverage return magnifies gains and losses

Back 37

Nominal return is greater than Real return when inflation is Positive (inflation)

Real return is greater than Nominal Return when inflation is negative (deflation)

Front 38

Does a short seller have to provide collateral to the brokerage house?

Back 38

YES

The short seller must post some collateral or margin (usually the proceeds of selling the stock).

Front 39

Enterprise value equals the.....

Enterprise value is interpreted as .....

Back 39

Enterprise value equals the market value of a firm's common stock and debt minus its cash and short-term securities

Enterprise value is interpreted as the amount that would be needed to take over a firm.

Front 40

What is the difference between an offensive and defensive strategy?

i.e. offensive cost leadership stratgy

Back 40

Offensive is to steal market share away (increase market share)

Defensive is to defend market share(Protect market share)

Front 41

An analyst is evaluating an annual-pay bond with a yield to maturity of 7.0%. The yield of this bond on a semiannual-bond basis is:

What is the formula for Semi Annual Bond Basis?

How do you find the Semi Annual Discount rate

Back 41

6.88%

Semi-annual bond basis = 2*Semiann Disc. Rate

SA Disc Rate = Semi Annual Rate compounded twice to get the Annual YTM (Square root of 7%)

Front 42

in the cash flow yield approach for Bond Portfolios, what does it generate? What is a shortcoming in this approach?

Back 42

Generates an IRR but wont work for a portfolio containing bond with embedded call options

Front 43

Bond with lower duration but more yield volatility could have more ________

Term stucture of Yield volatility plots what?

Back 43

Price Risk

Yield Volatility on Y axis and maturity on X axis

Front 44

Other things equal, convexity is greater for bonds with ___________ maturities and ________ coupon rates.

Back 44

Other things equal, convexity is greater for bonds with longer maturities and lower coupon rates.

Front 45

Short Holding Period

which type of interest rate risk is greater

if YTM increases, what is the effect on your realized yield relative to your YTM at Issuance

Back 45

Short Holding Period

Market Price Risk > Reinvestment Risk

if YTM goes up, your realized yield will be less than your YTM @ issuance

Front 46

The effect of rating changes on a bond may be estimated using ....

Back 46

credit duration

Front 47

What kind of bond has future cash flows that depend on the path of interest rate changes

Back 47

A bond with an embedded option

Front 48

This type of Asset Backed Security features credit tranching in which subordinated tranches are the first to absorb credit losses.

Back 48

Commercial MBS

Front 49

This type of Asset Backed Security has tranches that have different levels of exposure to contraction and extension risk

it is backed by:

Back 49

Collateralized Mortgage obligations

backed by MBS'

Front 50

Penalty points, defeasence, yield maintenence charges are all __________ for a Commercial MBS?

Back 50

Loan Level call protection for a Commerical MBS

Front 51

Planned Amortization Class CMO

PAC CMO's

What feature do they have?

Back 51

More predictable principle payments to one PAC Classes, then the contraction and extension risk is absorbed by support tranches if prepayment rate remains within initial PAC collar range

Front 52

With a protective put strategy the upside potential is unlimited, but the maximum loss is equal to

Back 52

the maximum loss is equal to the stock price plus the put premium minus the exercise price of the put option.

Front 53

For an underlying asset with no holding costs or benefits, the noarbitrage forward price equals the future value of the spot price.

Back 53

With no costs or benefits to holding the underlying asset, the no-arbitrage forward price is the future value of the spot price, compounded at the risk-free rate over the term of a forward contract.

Front 54

The put-call parity relationship shows that a protective put (long put, long underlying asset) has the same future payoff as a ....

Back 54

The put-call parity relationship shows that a protective put (long put, long underlying asset) has the same future payoff as a fiduciary call (long call, long risk-free bond).

Front 55

Futures traders post margin because

Back 55

Future traders post margin as security to the clearinghouse and it serves to ensure traders will fulfill their obligations.

Front 56

The asset-based approach provides an estimate of the net asset value of REITs by subtracting......

The income-based approach uses either funds from operations (FFO) or adjusted funds from operations (AFFO) to compute cash flows. FFO is calculated ......

AFFO is FFO with ....

Back 56

The asset-based approach provides an estimate of the net asset value of REITs by subtracting total liabilities from the total value of the real estate assets and dividing by the number of shares outstanding.

FFO is calculated from net income with depreciation added back and with gains from property sales subtracted and losses on property sales added.

AFFO is FFO with recurring capital expenditures subtracted.

Front 57

What are Event Driven Hedge Fund Strategies?

MA

DD

R
AS

SS

Back 57

Merger Arbitrage

Distressed Debt/Restructuring

Activist Shareholder

Special Situations

Front 58

What are Relative Value Hedge Fund Strategies?

CA

ABFI

GFI

V

MS

Back 58

Convertible Arbitrage

Asset Backed fixed income

General Fixed Income

Volatility

Multi-Strategy

Front 59

What are Equity Hedge Fund Strategies?

MN

FG

FV

QD

SB

Back 59

Market Neutral

Fundamental Growth

Fundamental Value

Quantitative Directional

Short bias