Level I of CFA Program 1 Mock Exam June 2020 Revision 1

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Level I of CFA® Program
1st Mock Exam
June 2020
Revision 1
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Level I of CFA® Program Mock Exam 1 – Solutions (AM)
FinQuiz.com – 1st Mock Exam 2020 (AM Session)
Questions Topic Minutes

1-18 Ethical and Professional Standards 27
19-28 Quantitative Methods 15
29-40 Economics 18
41-58 Financial Reporting and Analysis 27
59-70 Corporate Finance 18
71-83 Equity Investments 19.5
84-90 Derivative Investments 10.5
91-103 Fixed Income Investments 19.5
104-110 Alternative Investments 10.5
111-120 Portfolio Management 15
Total 180
FinQuiz.com © 2020 - All rights reserved. 2

Questions 1 through 18 relate to Ethical and Professional Standards
1. Overconfidence bias makes adherence to ethical conduct difficult as investment

professionals are more likely to overestimate the morality of their:
A. clients.
B. industry.
C. own behavior.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 1, LOS-c.
One of the challenges that makes adherence to ethical conduct difficult is

‘Overconfidence Bias’, a common behavioral bias where people tend to believe
that they are ethical people and their ethical standards are higher than average. As
a result of overconfidence bias, investment professionals fail to consider
important inputs and variables needed to form the best decision from an ethical
perspective.
2. Alonzo Myers manages accounts at GRTY Securities. Jerry Reed, one of his
clients, e-mailed Myers to buy 300 shares in the IPO of JJKS Corp’s stock. Few
days later, despite being a hot issue, Myers succeeded prorating 500 shares of
JJKS Corp. for his clients. After purchasing 500 shares for his clients and 300
shares for Reed as per request, he purchased remaining 200 shares for his wife.
Myers:
A. did not violate the standards by purchasing 200 shares for his wife and 300
shares for Reed.
B. violated the standards by purchasing 200 shares for his wife and only 300
shares for Reed.
C. violated the standards by purchasing 200 shares for his wife but is in
compliance for purchasing 300 shares for Reed as per his request.
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.

In context of IPOs member or candidates are prohibited from purchasing

securities for their own benefit and their duty of loyalty and fairness to clients
cannot be overridden by client consent to patently unfair allocation procedure. If
the IPO is suitable for clients and is a hot issue, he should allocate shares to all his
clients on a pro-rata basis.
3. McKinney Alpha is an accredited research firm that only hires experienced and
competent analysts offering them training and financial courses from time to time.
The firm allows analysts to either prepare their own research or rely on secondary
sources. Tyler Klein, an analyst at McKinney uses a research report prepared at
Gemma Brokerage. If Klein will use that report, he will:
A. violate Standard I-C ‘Misrepresentation’ by relying on work not prepared

by himself for his clients.
B. violate Standard IV-A ‘Loyalty to employers’ as he is not allowed to use
the report prepared by Gemma Brokerage.
C. not violate any standard if he makes reasonable efforts to determine that
research is sound and uses the information in good faith.
Correct Answer: B
Reference:
Klein will violate Standard IV-A ‘Loyalty to employers’ because the firm only
allows secondary research (research prepared by another employee at the same
firm). Using a report prepared by another firm is considered third party research ,
which is not allowed by McKinney Alpha.
4. By complying with GIPS standards firms cannot:
A. eliminate the need for in-depth due diligence on the part of the investor.
B. participate in competitive bids against other compliant firms throughout
the world.
C. assure prospective clients that the reported historical track record is
complete and fairly presented.
Correct Answer: A

Reference:
CFA Level I, Volume 1, Study Session 1, Reading 4, LOS-a.
By complying with GIPS standards, firms:
• participate in competitive bids against other compliant firms throughout

the world.
• assure prospective clients that the reported historical track record is
complete and fairly presented.
• strengthen its internal control over performance related processes and
procedures.
However, GIPS standards certainly do not eliminate the need for in-depth due
diligence on the part of the investor.
5. In conversation with a prospective client, a portfolio manager stated

“I cannot guarantee that you will earn 18% on equities this year but I can provide
you a range within which your return will lie. My range is quite popular among
my clients and has a history of ten years. Each year, I develop the range by using
financial models, economic forecasts and accredited reports. Based on the CFA
Institute Standards, the portfolio manager:
A. did not violate any standard.

B. violated standard I-C ‘Misrepresentation’.
C. violated standard III-D ‘Performance Presentation’.
Correct Answer: B
Reference:
The portfolio manager violated standard I-C ‘Misrepresentation’ by providing a

range. The standards prohibit manager from guaranteeing clients any specific
return or even a range. Equity investments contain some elements of risks that
make their returns inherently unpredictable. Providing a range is misleading to
investors.

6. Eleanor Chavez, CFA is a senior analyst at W&W Securities (W&WS) and is

responsible for managing the High Beta Mutual Fund (HBMF). Curtis Fowler,
aged 56 and dependent on his portfolio returns, is W&WS’s client. His portfolio
will now be managed by Chavez, who has been asked to invest 20% of his
portfolio funds in HBMF. Chavez fills the request forms and immediately
purchases shares of HBMF for Fowler. Is Chavez in compliance with codes and
standards, and if not, what should be the recommended course of action for
Chavez?
A. Yes, she is in compliance with codes and standards.

B. No, she should consult Fowler’s existing investment policy statement
(IPS) and should judge the suitability of his investments in the context of
his total portfolio.
C. No, she should make reasonable inquiry about Fowler’s risk and return
objectives and financial constraints prior to taking investment action
requested by Fowler.
Correct Answer: A
Reference:
According to Standard III-C ‘Suitability’, when members and candidates are

responsible for managing a portfolio to a specific mandate, strategy or style they
are not responsible for determining the suitability of the fund as an investment for
the investors who may be purchasing shares.
7. Gilbert Love worked as financial analyst at Milton Securities. During his

employment at Milton, Love covered Indigo Corp and developed detailed
financial models, assumptions and supporting reports. When Milton switched his
job, his new employer assigned him to analyze Indigo Corp. Milton developed a
new model with improved assumptions and specifications and re-created the
supporting records by gathering data from the covered company. Has Milton
violated any CFA Institute Code and Standards?
A. No, he is in compliance with the Code and Standards.

B. Yes, he has violated Standard V-C ‘Record Retention’ by re-creating the
supporting records.
C. Yes, he violated ‘Misrepresentation’ and ‘Record Retention’ by
developing the model and re-creating the supporting records for Indigo
Corp.

Correct Answer: A
Reference:
Milton did not violate any CFA Institute code or standard because he developed a
new model and re-created supporting records by directly gathering information
from Indigo Corp.
8. According to Standard II-A ‘Material Non-Public Information’, if a member or

candidate determines that information is material he should make reasonable
efforts to:
A. achieve public dissemination of the information.

B. alter current investment recommendations for clients.
C. protect information from those who can possibly act on that information.
Correct Answer: A
Reference:
If a member or candidate determines that information is material, the member or

candidate should make reasonable efforts to achieve public dissemination of the
information.
9. Lauren Sims, marketing director of Karma Advisors, planned a brief performance

presentation in five different U.S. states where majority of the firm’s clients are
located, in celebration of Karma’s five years of success. In his presentation, Sims
clearly includes references to the information presented and also prepared a
detailed information report to support his brief presentation. At the conclusion,
Sims provided the report only to the clients who requested it. By failing to
provide the report to all the clients who attended the session, Sims:
A. violated Standard III-B ‘Fair Dealing’

B. violated Standard III-D ‘Performance Presentation’.
C. did not violate any CFA Institute codes and standards.
Correct Answer: C

Reference:
According to Standard III-D ‘Performance Presentation’ if the performance

information presented by the member or candidate is brief, the member of
candidate must make available to client and prospects on request the detailed
information supporting the communication. Best practice dictates that the brief
presentation include a reference to the limited nature of the information provided.
10. Mathew Chambers manages individual accounts, including his father’s, at Harvey
Securities. During a Sunday lunch at a restaurant with his friend Neil Rojas,
Chambers noticed the directors of Navarro Motors sitting at the adjacent table.
Rojas stated, “I believe Navarro has hired a new CEO as the firm is undertaking
many positive amendments in its production process”. On Monday Chambers
noticed a $1 increase in Navarro’s share price and purchased 500 shares for his
father’s account. Chambers least likely violated:
A. Standard VI-B ‘Priority of Transactions’.

B. Standard II-A ‘Material Non-public Information’.
C. Standard V-A ‘Diligence and Reasonable Basis’.
Correct Answer: B
Reference:
An opinion of his friend without actual knowledge does not make the information
material. Chambers violated Standard V-A ‘Diligence and Reasonable Basis’
because he purchased the stocks of Navarro without appropriate research and
investigation. Chambers also violated Standard VI-B ‘Priority of Transactions’ by
purchasing stocks for his father’s account only and treating the account differently
from his other clients’ accounts.

11. Blanco Shell Investments (BSI) is a small family owned investment bank and its
shares are relatively illiquid. In a casual meeting Brett Palmer, managing director
at BSI, told his friend, Leon Fox, that BSI is going to earn substantial profits in
its commodities business. In the next few days Fox purchases BSI shares while
Palmer disposes his position in BSI and switches his job. Two months later BSI
announces huge losses in its commodities business and the share price decreases
by $2. Palmer has violated the CFA Institute Standards of Professional Conduct
concerning
A. ‘Market Manipulation’ only.

B. ‘Material Nonpublic Information’ only
C. ‘Market Manipulation’ and ‘Material Nonpublic Information’.
Correct Answer: A
Reference:
Palmer has violated ‘Market Manipulation’ by sharing false and misleading

information with Fox.
12. After 5-years of service with Jacob Securities as a financial planner, Shane
Alvarado planned to start his own practice in his hometown. He informed his
employer through email three days before starting his independent practice. The
employer was on a business trip for a week and on his return he accepted his
resignation. Alvarado always maintained his personal records related to training
programs that he conducted at Jacob Securities, and he used that material in his
new project. Alvarado:
A. is in compliance with standards regarding timely notification and using his

own personal records.
B. violated the standards by rendering services without receiving consent
from his employer and by using records.
C. violated the standards by using records but is in compliance with standards
in notifying his employer regarding his independent practice.
Correct Answer: B

Reference:
Alvarado violated the standard IV-A ‘Loyalty’. Members and candidates should
not render services until they receive consent from their employer to all of the
terms of the arrangement. All the work performed on behalf of the firm is the
property of the firm and should be erased or returned to the employer unless the
employer gives permission to keep those records after the cessation of
employment.
13. During the morning section of the CFA Level 1 exam, when the proctor made the
final 5 minutes announcement, Enrique, a candidate next to Rachael noticed and
told Rachael that she was not filling her answers on the sheet provided. Rachael
immediately started transferring answers on to the answer sheet. When the proctor
made the final announcement Rachael succeeded filling 100 circles and by the
time proctor reached at her table, she had only 5 circles left to fill. Rachael
instantly handed her sheet to the proctor. Is Rachael or Enrique in violation of the
standard relating to conduct as members and candidates in the CFA Program?
A. Only Enrique is in violation.

B. Only Rachael is in violation.
C. Both Rachael and Enrique are in violation.
Correct Answer: C
Reference:
Both Enrique and Rachael violated the Standard VII-A ‘Conduct as members and
candidates in the CFA Program’ Enrique violated the standard by assisting
Rachael on the CFA examination. Rachael disregarded the rules and regulations
related to the CFA program by writing after the final announcement was made.

14. Dan Fisher is an investment manager at Rotterdam Securities and often uses
Topaz brokerage services for his clients. Corey Foster, Fisher’s client, has
directed him to use the services of Luna Brokerage House for him. Fisher believes
that Topaz offers best price and better research reports compared to Luna. The
best course of action for Fisher is to use the services of:
A. Topaz for all of his clients as he is obligated to seek best price and best
execution.
B. Luna for Foster and should disclose to him that he may not be getting best
execution.
C. Topaz for all his clients as brokerage commission is the asset of the
Rotterdam and will be used to maximize the value of client’s portfolio.
Correct Answer: B
Reference:
Brokerage commission is an asset of the client and is used to benefit the client.
Although members and candidates are obligated to seek best price and best
execution, in the case of client directed brokerage arrangements, the client directs
the manager to use services of a specific broker. The member or candidate should
disclose to the client if the member or candidate believes that the brokerage is not
offering best price and/or execution.
15. Reginald Fuller manages institutional portfolios on behalf of BDY Advisors.

Fuller also manages an account of a trust company named SOTO Trust. The trust
offered Fuller a $50,000 cash gift if he succeeded in achieving a 20% return this
year. The best practice for Fuller includes:
A. refusing the offer of SOTO trust to avoid a conflict of interest with his
employer.
B. accepting the offer and achieving the target without compromising his
objectivity towards other clients.
C. making an immediate written report to his employer specifying the$50,000
cash offer proposed by the trust
Correct Answer: C

Reference:
According to the recommendations of Standard IV-B ‘Additional Compensation

Arrangements’, members and candidates should make an immediate written
report to their employer specifying any compensation they propose to receive for
services in addition to the compensation or benefits received from their employer.
16. GIPS standards least likely resolve misleading practices related to:
A. survivorship bias.
B. varying time periods.
C. analyst financial statement adjustments.
Correct Answer: C
Reference:
Misleading practices resolved by following GIPS standards include (but are not
limited to):
• survivorship bias,
• varying time periods and
• representative accounts.
17. Sullivan Investments, an asset management firm, complied with the GIPS
standards on 1 January 2006. Can Sullivan link its non-GIPS compliance
performance for periods beginning on or after 1 January 2000 with its GIPS
compliance performance?
A. No.
B. Yes.
C. Only if it discloses periods of non-compliance.
Correct Answer: A
Reference:

Firms must not link its non-GIPS compliant performance for periods beginning on
or after 1 January 2000 to GIPS complaint performance.
Firms may link non-GIPS compliant performance to their GIPS compliant

performance provided that only GIPS compliant performance is presented for
periods after 1 January 2000 and the firm discloses the periods of non-
compliance.
18. Which of the following statements is most likely correct regarding the major
sections of GIPS standards?
A. According to Section 4 ‘Disclosures’, firms are required to make negative

assurance disclosures.
B. According to Section 3’Composite Construction’, a composite return is the
asset weighted average of the performance of all portfolios in the
composite.
C. According to section 5 ‘Presentation and Reporting’, firms cannot include
in GIPS-compliant presentations information not addressed by the GIPS
standards.
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 5, LOS-d.
According to Section 4 ‘Disclosures’, firms are not required to make negative

assurance disclosures i.e. if the firm does not use leverage, no disclosure of the
use of leverage is required.
According to Section 3’Composite Construction’, the composite return is the

asset-weighted average of the performance of all portfolios in the composite.
According to section 5 ‘Presentation and Reporting’, when appropriate, firms

have the responsibility to include in GIPS-compliant presentations information
not addressed by the GIPS standards.

Questions 19 through 28 relate to Quantitative Methods
19. Three friends Sam, Patricia and Robert will receive equal dollar amounts in two
years from their maturing investments, however, they invested in such a way that:
• the interest rate offered to Patricia and Sam is same but compounding for
Patricia is monthly and for Sam is quarterly.
• compounding for Robert and Patricia is same but the interest rate offered
to Robert is higher.
The present value of whose investment would be the lowest?
A. Sam.
B. Robert.
C. Patricia.
Correct Answer: B
Reference:
For a given discount rates, the greater the number of periods the smaller will be
the present value. (The present value of Patricia’s will be lower than Sam’s).
For a given number of periods, the higher the discount rate the smaller will be the
present value. (The present value of Robert’s will be lower than Patricia’s).
20. The efficiency of an unbiased estimator is measured by its:
A. variance.
B. sample size.
C. mean value.
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 10, LOS-g.

Efficiency of an unbiased estimator is measured by its variance. An unbiased

estimator is efficient if no other unbiased estimator of the same parameter has a
sampling distribution with smaller variance.
21. A property and potential benefit of using arithmetic mean is its ability to:
A. handle extreme values.

B. focus on the relative positions of the ranked observations.
C. use all the data about the size and magnitude of the observations.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 2, Reading 7, LOS-e.
C is correct. An advantage of arithmetic mean is that it uses all the information

about the size and magnitude of the observations.
A is incorrect. A potential drawback of arithmetic mean is that it is highly

sensitive to extreme values. As all observations are used to compute arithmetic
mean, any extreme large or small observation can sharply increase or decrease the
mean value.
B is incorrect. A property of the median is that it does not use on all the
observations, rather focuses only on the relative positions of the ranked
observations.

22. An analyst calculated the expected value of Howe Inc.’s EPS as $5.91 based on
the probability distribution of Howe’s EPS for the current fiscal year.
Probability distribution for Howe’s EPS

Probability EPS ($)
0.12 7.75
0.45 6.20
0.33 5.50
0.10 3.75
The standard deviation of the Howe’s EPS for the current fiscal year is closest to:
A. 0.9662.
B. 0.9829.
C. 2.8816.
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 2, Reading 8, LOS-l.
s2 =∑./01(𝑃𝑟𝑜𝑏. ) × (𝑋 − 𝐸(𝑋))-
s2 =(0.12)x(7.75-5.91)2+(0.45)x(6.20-5.91)2+(0.33)x(5.5-5.91)2+(0.10)x(3.75-
5.91)2
S.D. s = √s2 = 0.9829

23. A professor is practicing a new method of teaching and is unsure about its impact
on students’ performance. His students generally maintained an average 3.2 GPA
throughout the semester. He selects a sample of 25 students with a mean GPA of
3.0 and standard deviation of 0.62. The professor is concerned whether the sample
results are consistent with the average GPA results of 3.2.
Exhibit: T-Table
df. p = 0.05 p = 0.10
24 1.711 1.318
25 1.708 1.316
Determine whether the null hypothesis is rejected or not at the 0.10 level of
significance.
A. The null hypothesis is rejected as the t-value of 1.6129 is > 1.318 at the
0.10 significance level.
B. The null hypothesis is not rejected as -1.6129 does not satisfy either t >
1.711 or t < -1.711.
C. The null hypothesis is not rejected as the calculated t value of 0.322 is less
than 1.318 at the 0.10 significance level.
Correct Answer: B
Reference: CFA Level I, Volume 1, Study Session 3, Reading 11, LOS-b.
Ho : µ = 3.2 versus. Ha : µ≠ 3.2
This is a two tailed test therefore we will use 0.05 column and 24 degrees of
freedom.
343.-
t24 = 5.67 = -1.6129
√79
-1.6129 does not satisfy either t > 1.711 or t < -1.711 and we do not reject the null
hypothesis.

24. An analyst gathered the following information about return distributions of two
portfolios.
Kurtosis Skewness
Portfolio A 2.5 -3.7
Portfolio B 1.3 +4.2
Which of the following statements is most likely correct regarding portfolio A and
B?
A. Portfolio A is more peaked than normal distribution.

B. For portfolio B, mean value is higher than median value.
C. Distribution of portfolio A has frequent small losses and few large gains.
Correct Answer: B
Reference: CFA Level I, Volume 1, Study Session 2, Reading 7, LOS - j & k.
Option B is correct.
Portfolio B is positively skewed. A distribution with frequent small losses and

few large gains has positive skew (long tail on the right side). If a distribution is
positively skewed with mean greater than its median, then more than half of its
deviations from the mean are negative and less than half are positive.
Portfolio A is less peaked (platykurtic) than normal distribution and is negatively

skewed.
25. Which of the following least accurately outlines a property of the normal
distribution function? It:
A. has a symmetrical shape.

B. has a skewness of 0 and kurtosis of 3.
C. is completely described by using variance and standard deviation of
returns.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 9, LOS j

C is correct. The normal distribution is completely described by two parameters,

the mean and variance of returns. It can also be described using the mean and
standard deviation of returns.
The normal distribution is characterized by a symmetrical shape.
A normal distribution function is characterized by a skewness of 0 and kurtosis of

3.
26. Intergenerational data mining involves using:
A. using an extensive search of variables in an international database.

B. info established by preceding researchers to guide current research.
C. info that might not be become publicly available until sometime in the
future.
Correct Answer: B
Reference
CFA Level I, Volume 1, Study Session 2, Reading 10.
B is correct. Intergenerational data mining involves using information developed

by previous researchers using a dataset to guide current research using the same
or related dataset.
C is incorrect. A test design in subject to look ahead bias if it is uses information

that was not available on the test date. Such information become publicly
available until sometime in the future.
27. A lognormal distribution:
A. is bounded below by 1 and has a long right tail.

B. is not completely described by two parameters i.e. the mean and the
variance.
C. describes a stock price whose continuously compounded returns follow a
normal distribution.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 9, LOS-o.

A lognormal distribution:
• is bounded below by 0 and has long right tail.

• is completely described by two parameters i.e. the mean and the variance
like normal distribution.
• describes a stock price whose continuously compounded returns follow a
normal distribution.
28. Which of the following statements is most likely correct regarding parametric and
non-parametric tests?
A. Parametric tests are relatively unaffected by violations of assumptions.

B. In a parametric test, observations are converted into ranks according to
their magnitude.
C. Nonparametric tests are considered distribution-free methods because they
do not rely on any underlying distribution assumption.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 11, LOS-k.
• Parametric tests are relatively unaffected by violations of assumptions.

• In nonparametric tests, generally observations are converted into ranks
according to their magnitude.
• Nonparametric tests are considered distribution-free methods because they
do not rely on any underlying distribution assumption.

Questions 29 through 40 relate to Economics
29. Under perfect competition, a firm:
A. is a price taker at any quantity supplied to the market.

B. breaks even when marginal revenue equals average variable cost.
C. should shut down production when marginal revenue is less than average
fixed cost.
Correct Answer: A
Reference:
CFA Level I, Volume 2, Study Session 4, Reading 12, LOS-i.
Option A is correct. Under perfect competition, a firm is a price taker at any

quantity supplied to the market.
Option B & C are incorrect. Under perfect competition, a firm breaks even when
marginal revenue equals average total cost. A firm should should down
production when marginal revenue is les than average variable cost.
30. An analyst gathered the following national data (in millions of U.S dollars) for a
country for the year 2013.
Exhibit:
Consumer $461,580 Personal disposable $555,790
spending (m) income
Government $392,676 Interest paid by $13,400
spending consumers
Personal $906,230 Consumer transfers to $1,500
Income foreigners
Using the data provided in exhibit 1, the household saving (in millions) is closest
to:
A. $37,074.
B. $68,904.
C. $79,310.
Correct Answer: C

Reference:
Household saving = Personal disposable income – (consumption

expenditures + interest paid by consumers + personal
transfer payments to foreigners)
Household saving = $555,790 – ($461,580 + $13,400 + $1,500)

= $79,310.
31. Which of the following is most likely common among the assumptions of the
Ricardian model and Heckscher-Ohlin model?
A. Labor is a variable factor of production.

B. Capital is not a variable factor of production.
C. There are homogenous products and homogenous inputs.
Correct Answer: A
Reference:
Ricardian model assumes labor is a variable factor of production.

Heckscher-Ohlin model assumes labor and capital are variable factors of
production.
32. In 2016, a firm earned $500,000 for selling 1,000 units. However, if 1,500 units
were sold, revenue would be total $720,000. The marginal revenue per unit
associated with selling 1,500 units instead 1,000 units would be closest to:
A. $440
B. $480
C. $500
Correct Answer: A
Reference:
∆ /. <= $A-B,BBB4$DBB,BBB $--B,BBB

Marginal revenue = ∆ /. >
= 1,DBB41,BBB
= DBB
= $440

33. Aggregate demand (AD) curve will be flatter if:
A. saving is highly sensitive to income.

B. investment expenditure is highly sensitive to interest rates.
C. money demand is highly sensitive to income and interest rates.
Correct Answer: B
Reference:
The AD curve will be flatter if:
• Investment expenditure is highly sensitive to interest rates.

• Saving is insensitive to income.
• Money demand is insensitive to income and interest rates.
34. Which of the following indicator measures the price of the basket of goods and
services produced within an economy in a given year?
A. GDP deflator.
B. Producer price index.
C. Consumer price index.
Correct Answer: A
Reference:
GDP deflator measures the price of the basket of goods and services produced
within an economy in given year.

35. Which of the following is least likely a consequence of a period of hyperinflation?
A. Too much money in circulation.

B. Reduced supply of money but increased velocity of money.
C. People are eager to change their cash into real goods.
Correct Answer: B
Reference:
Hyperinflation is a result of too much money in circulation i.e. increased velocity

of money. During hyperinflation people are eager to change their cash into real
goods because prices are rising very fast.
36. To determine the impact of changes in exchange rates on trade balance, the
‘absorption approach’ most likely exhibits the:
A. effect of changing the relative price of domestic and foreign goods.

B. effect of exchange rates on aggregate expenditure or saving decisions.
C. microeconomic view of the relationship between exchange rates and trade
balance.
Correct Answer: B
Reference:
CFA Level I, Volume 2, Study Session 6, Reading 18, LOS-j.

The impact of changes in exchange rates on the trade balance can be analyzed
through two different approaches:
i. Elasticities approach
ii. Absorption approach.
The Absorption approach focuses on the impact of exchange rates on aggregate

expenditure/savings decisions.
The Elasticities approach focuses on the effect of changing the relative price of
domestic and foreign goods. Thus it exhibits a microeconomic view of the
relationship between exchange rates and trade balance.
37. Over the last week, the Japanese yen has appreciated 15.7% against pound
sterling (GBP). The depreciation of GBP against the Japanese yen will be closest
to:
A. 14.4%
B. 15.7%.
C. 18.6%
Correct Answer: C
Reference:
The depreciation of GBP will simply be the inverse of the 15% appreciation of the
1
Japanese yen. In this case, E(14B.1DA)F − 1 = 18.62%
38. Leading economic indicators (LEI) are variables that:
A. change before nominal GDP of economy changes.

B. provide information regarding economy’s past condition.
C. are useful for predicting economy’s near-term future state.
Correct Answer: C
Reference:

Leading indicators are variables that change before real GDP changes. They are
useful for predicting the economy’s future state, usually near-term.
39. Which of the following characteristics most likely demonstrates that the firm is
operating in monopolistic competition?
Entry Barriers Sellers Long-run profits

A. Low Many None
B. High Few Positive
C. Low Few None
Correct Answer: A
Reference:
Monopolistic competition is characterized by:
• low barriers to entry

• many sellers
• zero long-run profit
40. To deal with short-run stabilization, as compared to monetary policy, fiscal policy
is most likely:
A. less effective as it is very time consuming.

B. more effective as it is easy to implement.
C. equally effective as both policies work well in combination.
Correct Answer: A
Reference:
CFA Level I, Volume 2, Study Session 5, Reading 16, LOS-s.
Fiscal policy is less effective than monetary policy to deal with short-run
stabilization fiscal policy as it is very time consuming to implement and it is
politically easier to loosen fiscal policy than to tighten it.

Questions 41 through 58 relate to Financial Reporting and Analysis
41. On 1st January 2011, Arnold Inc. purchases a machine for $325,000 and
immediately leases the machine through a direct finance lease that requires five
annual payments of $80,498 starting from 1st January 2011. The carrying amount
is equal to its purchase price and the relevant discount rate is 12%.
On 1st January 2012, the reduction in lease receivable is closest to:
A. $51,158.
B. $79,720.
C. $112,000.
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 29, LOS-h.
Reduction in lease receivable each year

= Annual lease payment less Accrued interest
At 1st January 2011

Reduction in lease receivable:
= $80,498 – 0
= $80,498
Value of lease receivable:

= $325,000 – 80,498
= $244,502
At 1st January 2012

Reduction in lease receivable
= $80,498 – ($244,502 x 12%)
= $51,158
Value of lease receivable

= $244,502 – $51,158
= $193,344.

42. DCT Inc. sells an asset with a historical acquisition cost of $7.8 million and an
accumulated depreciation of $1.6 million and reports a loss on the sale of $0.5
million. The sale price of the asset is closest to:
A. $5.7 million.
B. $6.7 million
C. $7.3 million.
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 27, LOS-l.
Gain or Loss on sale = Sale Price less carrying amount

Carrying Amount = Historical cost less accumulated depreciation
By rearranging the above equation:

Sale Price = $7.8 million – $1.6 million – $0.5 million = $5.7 million
43. Which of the following statements is most likely correct regarding the audit of
financial statements?
A. Disclaimer of opinion occurs when an auditor issues an opinion despite

scope limitations.
B. When an auditor has concerns regarding some unreported pending
contingent liabilities he might issue a qualified opinion.
C. Auditors can provide absolute assurance about the accuracy and precision
of financial statements if the opinion is unqualified.
Correct Answer: B
Reference:

• Independent auditors cannot provide an absolute assurance about the

accuracy and precision of financial statements even if the opinion is
unqualified.
• An auditor might issue a qualified opinion when he has concerns
regarding:
i. going concern assumption of the company.
ii. some unreported pending contingent liabilities.
iii. valuation of certain items on the balance sheet
• Disclaimer of opinion occurs when an auditor is unable to issue an opinion
for reasons including scope limitation.
44. When securities are classified as ‘available for sale’ securities in U.S. GAAP
unrealized gains and losses are:
A. reported in the income statement.

B. not reported in the income statement but are recognized in equity.
C. neither reported in the income statement nor recognized in equity.
Correct Answer: B
Reference:
When securities are classified as ‘available for sale’ securities in U.S. GAAP (or
securities measured at fair value through ‘other comprehensive income’ in IFRS)
unrealized gains and losses are not reported in the income statement rather they
are recognized in equity

45. An analyst gathered the following information from a company’s 2013 financial
statements.
Net income = $24 million

Non-cash charges = $6 million
Cash flow from operations = $12 million
After tax interest paid = $2.6 million
Capital expenditure = $9.5 million
Tax rate = 35%
The free cash flow for the firm (FCFF) is closest to:
A. $5.1 million.
B. $8.7 million.
C. $11.1 million.
Correct Answer: A
Reference:
FCFF = CFO + After tax interest – CFInv.
= $12 million + $2.6 million – $9.5 million = $5.1 million.
46. Earnings smoothing can result from conservative choices to:
A. overstate earnings in periods when a company’s operations are struggling.

B. understate earnings in periods when a company’s operations are
struggling.
C. understate earnings in periods when a company’s operations are
performing well.
Correct Answer: C
Reference:

Understatement of earnings volatility is called smoothing the earnings. Earnings

smoothing can result from two ways:
• By using conservative choices to understate earnings in periods when a

company’s operations are performing well.
• By using aggressive choices to overstate earnings in periods when a
company’s operations are struggling.
47. Which of the following is least likely an (International Organization of Securities

Commissions) (IOSCO) principle for issuers? Issuers should:
A. prepare their financial statements using internationally acceptable

accounting standards.
B. timely, fully and accurately disclose financial results, risks and other
material information to investors.
C. make consistent choices with respect to accounting standards and their
financial statements should be comparable.
Correct Answer: C
Reference:
Two principles of IOSCO for issuers are:
• Issuers should timely, fully and accurately disclose financial results, risks
and other material information to investors.
• Issuers should prepare their financial statements using internationally
acceptable accounting standards.
48. The elements directly related to measurement of financial performance least likely
include:
A. liabilities.
B. expenses.
C. capital maintenance adjustments.
Correct Answer: A

Reference:
The elements directly related to measurement of financial performance are:
• Income
• Expenses
• Capital maintenance adjustments
The elements directly related to measurement of financial position are:
• Assets
• Liabilities
• Equity
49. An analyst gathered the following information for a firm:
Net income for the year = $8 million

Beginning shareholders’ equity = $25 million
Unrealized gain on trading securities = $1.5 million
Unrealized loss on available for sale securities = $2 million
Foreign currency translation gain = $1.5 million
Cash dividends for the year = $1 million
The ending shareholders’ equity of the company is closest to:
A. $30.0 million.
B. $31.5 million.
C. $33.0 million.
Correct Answer: B
Reference:

Ending shareholders’ equity = Beginning shareholder’s equity + Net income –

cash dividends – net unrecognized gains/losses
= $25 million + $8 million - $1million - $0.5 million = $31.5 million
Unrecognized gains/losses include:
• Unrealized loss on available for sale securities = -$2 million

• Foreign currency translation gain = $1.5million
Net unrecognized gains/losses = -$0.5 million
50. An analyst observed the following percentage changes in Hunt PAL Inc.’s
financials from 2012 to 2013:
Revenue +33%
Net Income +38%
Assets +27%
If the major portion of the growth in net income is attributed to non-recurring

items, the analyst will least likely conclude that Hunt PAL Inc.:
A. has increased its efficiency.

B. has failed to increase its profitability.
C. cannot easily attract equity capital.
Correct Answer: C
Reference:

Option C is the correct.
Based on the data the analyst can conclude that the firm:
• has increased its efficiency.

• has failed to improve its profitability.
If the growth rate of revenue is greater than assets growth rate it may indicate that
company is increasing efficiency.
When net income is growing at a faster rate than revenue it may indicate that
company’s profitability is increasing but as the major portion of net income is due
to non-recurring items then it means company has failed to improve its
profitability.
When a company grows at a rate greater than that of overall market in which it
operates it is regarded as positive sign and indicates that the company is easily
able to attract equity capital. There is insufficient market data to arrive at this
conclusion.
51. The financial leverage ratio of a firm, whose total debt ratio is 54% and debt-to-
equity is 1.15, is closest to:
A. 0.47.
B. 0.62.
C. 2.13.
Correct Answer: C
Reference:
Total debt ratio x Financial leverage = Total debt-to-equity
Financial leverage = Total debt-to-equity/Total debt ratio

= 1.15/0.54
= 2.13

52. An investor asked two questions from an analyst regarding the goodwill of a
company.
Question 1: Which goodwill is reflected in the stock price of a company?
Question 2: Which goodwill is recognized when an acquisition takes

place?
The most appropriate response of the analyst to questions 1 and 2, respectively,

is:
Question 1: Question 2:
A. Economic Accounting
B. Accounting Economic
C. Economic & Accounting Economic
Correct Answer: A
Reference:
Option A is correct.
Accounting Goodwill:
It is based on the accounting standards and is recognized only when acquisitions
take place.
Economic Goodwill:
It is based on the economic performance of the company. It is not reflected on the
balance sheet rather it is reflected in the stock price of the company (at least
theoretically).

53. In 2012, the cost of ending inventory reported by T&M, a manufacturer of office
equipment, was $22 million. T&M compiles its financial statements in accordance
with IFRS.
Exhibit1
Replacement $20.5 million
cost
NRV $21.2 million
NRV less $19.7 million
profit margin
Based on the data shown in Exhibit 1, T&M would most likely write its inventory
down by:
A. $0.8 million.
B. $1.5 million.
C. $2.3 million.
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 26, LOS-f.
Under IFRS T&M would write down its inventory to $21.2 million and record f
$0.8 million as an expense in the income statement.
54. A publishing firm contributed $250,000 to support some philanthropic projects.

The firm immediately expensed that amount in its income statement for the
current fiscal year. According to applicable tax legislation such contributions are
not tax-deductible.
Which of the following statements is most likely correct?
A. A temporary difference of $250,000 gives rise to a deferred tax liability.

B. A deferred tax asset arises, as taxable income is greater than accounting
profit.
C. The treatment of $250,000 for accounting and tax purposes represents a
permanent difference.
Correct Answer: C

Reference:
As contributions are not tax deductible, no temporary difference results from the
$25,000 contribution. This constitutes a permanent difference and thus no
deferred tax asset or liability will be recognized.
55. Under IFRS the definitional criteria for identifiable intangible assets most likely
includes:
A. the cost of the asset can be reliably measured.

B. it is probable that the expected future economic benefits of the asset will
flow to the company.
C. the asset must be identifiable, under the control of company and expected
to generate future economic benefits.
Correct Answer: C
Reference:
Under IFRS identifiable intangible asset must meet three definitional criteria.
The asset must be:
i. identifiable,
ii. under the control of company and
iii. expected to generate future economic benefits.
In addition the following two recognition criteria which must be met is:
i. it is probable that the expected future economic benefits of the asset will
flow to the company and
ii. the cost of the asset can be reliably measured.

56. Knin Inc. issued a 6 year, 7% annual-coupon paying bond with a face value of
$10 million on 1st January 2011 when the market interest rate was 7.7%. Using
the effective interest rate method, the interest expense on bonds reported in 31
December 2012 is closest to:
A. $700,000.
B. $744,854.
C. $748,308.
Correct Answer: C
Reference:
The bonds were issued at discount and sales proceeds were $9,673,432 (see
below). Under the effective interest rate method, interest expense is calculated as:
bonds’ carrying value x market interest rate.
Sales proceeds (PV of bond issue):

N= 6; I/Y = 7.7%; PMT = $700,000; FV = $10,000,000; CPT PV = - $9,673,432
Interest expense for the year ended 2011 is $9,673,432 x 7.7% = $744,854.
Interest expense for the year ended 2012 is $9,718,286 x 7.7% = $748,308.
Carrying value $9,718,286 in year 2012 is derived as {9,673,432 + ($744,854 -

$700,000)}.
57. A lessor will record interest income if a lease is classified as:
A. an operating lease.
B. either capital or operating lease.
C. either direct financing or sales-type lease.
Correct Answer: C
Reference:

C is correct. A portion of the payment as capital lease (either direct financing or

sales-type) is reported as interest income. With an operating lease, all revenue is
reported as rental revenue.
58. An investor uses simple stock screen criteria based on a P/E ratio of less than 5
and financial leverage ratio of less than 0.5. The investor will least likely exclude
stocks of companies:
A. with poor profitability.

B. with excessive financial risk.
C. that are expensive for good reason.
Correct Answer: A
Reference:
Simple criteria based on a P/E ratio of less than 5 may result in the selection of
stocks with lower prices justified by reasons including lower profitability and/or
higher financial leverage. However, the limitation of financial leverage serves as a
check on financial risk. In order to avoid stocks of poor profitability the investor
should further include a check on positive net income, i.e. NI/Sales> 0.

Questions 61 through 72 relate to Corporate Finance
59. The cash flows of projects A and B are given below:
Year Cash flows

Project A Project B
0 -1,500 -1,500
1 400 500
2 300 500
3 600 500
4 800 500
For a 12% discount rate, as compared to project B, the discounted payback period
of project A is approximately:
A. equivalent.
B. 0.93 years higher.
C. 1.25 years higher.
Correct Answer: A
Reference:
The discounted payback period for project A and B are almost equal. The
calculations are given below:
For Project A
Year 0 1 2 3 4
Cash flow (CF) -1500 400 300 600 800
Cumulative CF -1500 -1100 -800 -200 600
Discounted CF -1500 357.14 239.15 427.07 508.41
Cumulative -1500 -1142.86 -903.71 -476.64 31.77
discounted CF
Discounted Payback Period = 3 + 476.64/508.41 = 3 + 0.9347 = 3.94

For Project B
Year 0 1 2 3 4
Cash flow (CF) -1500 500 500 500 500
Cumulative CF -1500 -1000 -500 0 500
Discounted CF -1500 446.43 398.60 355.89 317.76
Cumulative -1500 -1053.57 -654.97 -299.08 18.68
discounted CF
Discounted Payback Period = 3 + 299.08/317.76 = 3 + 0.94 = 3.94
60. Net present value method assumes that cash flows are reinvested at the:
A. internal rate of return.

B. accounting rate of return.
C. opportunity cost of capital.
Correct Answer: C
Reference:
Net present value method assumes that cash flows of a project are reinvested at
‘r’, that is the opportunity cost of capital, which is a more realistic discount rate.
61. Compute the cost of trade credit if terms are 1/10 net 30 and the account is paid
on the 30th day?
A. 13.01%
B. 20.13%
C. 44.32%
Correct Answer: B
Reference:
O69
B.B1 L N
75
Cost of trade credit if paid on day 30 = L1 + 14B.B1N − 1 = 20.13%

62. An analyst gathered the following information to estimate the cost of equity for JI
Inc. located in Fiji.
Exhibit 1
Risk free rate 3.2%
Market risk premium 5.5%
Beta 1.3
U.S. 10-year T-bond yield 2.84%
Fiji’s 10-year dollar denominated Govt. 10.81%
bond yield
Annualized SD of Fiji’s stock market 44%
Annualized SD of Fiji’s dollar 37%
denominated bond
The sovereign yield spread and JI Inc.’s cost of equity are closest to:
A. 7.97% and 18.51% respectively.

B. 9.48% and 19.83% respectively.
C. 7.97% and 22.67% respectively.
Correct Answer: C
Reference:
Sovereign yield spread:

= Fiji’s Govt. Bond yield - U.S T-Bond yield
= 10.81% - 2.84%
= 7.97%
Country risk premium= 𝑠𝑜𝑣𝑒𝑟𝑒𝑖𝑔𝑛 𝑦𝑖𝑒𝑙𝑑 𝑠𝑝𝑟𝑒𝑎𝑑 ×

]..^_`/abc de fg bh^/ij /.cbk
]..^_`/abc de fg cf``_l cb.fm/._ibc nfoblb/p. qf.c m_lrbi
= 7.97% x 44%/37% = 9.48%
JI Inc.’s cost of equity:

= RF + b (ERP + country RP)
= 3.2 + 1.3 (5.5% + 9.48%)
= 22.67%

63. Which of the following statements is most likely correct regarding ‘uncommitted
lines of credit’?
A. An uncommitted line is very unstable and is only as good as a bank’s

desire to offer it.
B. Uncommitted lines require compensation, typically, in the form of
commitment fee.
C. Uncommitted lines of credit are the form of bank line of credit that most
companies refer as regular line of credit.
Correct Answer: A
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 36, LOS-g.
Option A is correct. An uncommitted line is very unstable and is only as good as a

bank’s desire to offer it. Therefore, companies should not rely very much on
uncommitted line.
Option B is incorrect. The primary attraction of uncommitted line is that they do

not require any compensation other than interest.
Option C is incorrect. Committed line of credit are the form of bank line of credit
that most companies refer as regular line of credit.
64. When a reliable current market price for a firm’s debt is not available, the cost of
debt can be estimated using the:
A. matrix pricing model.

B. coupon rate of the same bonds.
C. interest expense of the firm’s income statement.
Correct Answer: A
Reference:
When a reliable current market price for a company’s debt is not available, the
cost of debt can be estimated using the current rates based on the bond rating we
expect when we issue new bonds. This approach is referred to as matrix pricing.

65. A manager is computing the cost of trade credit for the terms 2/10 net 30 and the
account is paid on 20th day. The cost of trade credit is closest to:
A. 24.69.
B. 44.59%.
C. 109.05%.
Correct Answer: C
Reference:
O69
-% 75st5
Cost of trade if credit paid on 20th day = E1 + 14-%F – 1 = 109.05%
66. An analyst gathered the following financial information from Daniel Inc.
2013 Expected 2014

Units Sold 1300 1400
Revenue ($) 130,000 140,000
Operating income ($) 38,000 52,000
Interest cost ($) 12,000 12,000
Other financing cost ($) 8,000 8,000
Tax ($) 6300 11,200
Net Income ($) 11,700 20,800
The degree of operating leverage of Daniel Inc. from 2013 to expected 2014 is
closest to:
A. 2.11.
B. 3.68.
C. 4.78.
Correct Answer: C
Reference:

Degree of operating leverage (DOL)
= % D in operating income/% D in units sold

97,555sOu,555
Ou,555
= t,v55st,O55 = 4.78
t,O55
67. Mike Dolan is evaluating potential impact of changes in economy and health care
conditions on Hi-Pharm Corp, a firm in the pharmaceutical business. Hi-Pharm’s
uncertainty with respect to the price and quantity of drugs produced is referred as:
A. sales risk
B. financial risk
C. operating risk
Correct Answer: A
Reference:
A is correct. The uncertainty with respect to price and quantity of goods or

services produced is referred as sales risk.
B is incorrect. Financial risk is the risk associated with how a business finance its
operations.
C is incorrect. Operating risk is the risk with respect to operating cost structure of
a business.
68. Seth Shelton, a financial analyst at UII Advisors is assessing the capital structure
of BenChip Corp. Seth observed that the company is also using capital and
operating leases as a source of capital along with debt and equity.
Which of the following statements is least likely correct with regards to the
treatment of company’s capital and operating leases? Seth should:
A. include the cost of these leases in the BenChip’s cost of capital.

B. not consider these leases as BenChip’s debt with option-like feature.
C. treat these leases similar to the BenChip’s other short-term borrowings.
Correct Answer: C

Reference:
C is correct. Capital and financial leases are not treated as the company’s short-
term borrowings.
If the company uses leases as a source of capital, the cost of these leases should
be included in the cost of capital. The cost of these forms of borrowings is similar
to the company’s other long-term borrowing.
Operating and financial leases are not considered as company’s debt with option-
like features.
69. Clothers is a U.S. based company that manufactures garments. The Clothers
number of days of inventory for year 2018 is 81 days whereas the Clothers’
historic average inventory turnover ratio is 5.2.
It appears that Clothers(‘):
A. allowance for bad debt has increased.

B. is losing sales as a result of stock-outs.
C. management is projecting sales growth in 2019.
Correct Answer: C
Reference:
Convert the turnover ratio to a number of days of inventory

3wD
Clothers’s historic average number of days of inventory = D.-
= 70.19 ≅
70 𝑑𝑎𝑦𝑠
Clothers number of days of inventory for 2018 = 81 days
Clothers number of days of inventory is higher than the average.
Or
Convert the number of days of inventory to inventory turnover

Clothers historic average inventory turnover = 5.2
3wD
Clothers inventory turnover for 2018 = {1
= 4.5

Clothers inventory turnover is lower than the average.
C is correct. A possible reason for Clothers low inventory turnover or high days
of inventory is that the company’s management is projecting sales growth in
future years and as a result has increased production.
A is incorrect. There no any link between inventory and allowance for bad debt.
B is incorrect. A high inventory turnover or lower number of days may indicate

that the company is losing sales due to stock-outs.
70. Aiden Inc. is planning to borrow $2 million from Next Bank as an asset-based
loan. The loan is secured using Aiden Inc.’s inventory as collateral. Under the
arrangement, Next Bank requires Aiden Inc. to certify that the goods are
segregated and held in trust, with proceeds of any sale remitted to the lender
immediately. However, there is no involvement of 3rd party to supervise the
inventory.
The arrangement type between Aiden and Next Bank is most likely:
A. inventory blanket lien

B. trust receipt arrangement
C. warehouse receipt arrangement
Correct Answer: B
Reference:
B is correct. The arrangement between Aiden and Next Bank is trust receipt
arrangement, in which the lender requires to certify that the goods are segregated
and held in trust, with proceeds of any sale remitted to the lender immediately.
Warehouse receipt arrangement is similar to trust receipt arrangement but

involves 3rd party (a warehouse company) that supervises the inventory.

Questions 70 through 83 relate to Equity
71. For short selling purposes, if a security is extremely hard to borrow, the short
rebate rate may be:
A. very high.
B. negative or very low.
C. 10 basis points more than the overnight rate.
Correct Answer: B
Reference:
For short selling purposes if a security is hard to borrow, the rebate rate may be
very low or even negative. Such securities are said to be on special. Otherwise
rebate rate is usually 10 basis points less than the overnight rate in the interbank
funds market.
72. Which of the following statements is most likely correct regarding the
fundamental weighting method?
A. It is not biased towards shares of firms with largest market capitalization.

B. It is similar to momentum investment strategy where securities’ weights
are reduced when their relative investment values are increased.
C. It is biased towards highest priced stocks as they receive highest weights
in the index.
Correct Answer: A
Reference:
Option A is correct and both options B and C are incorrect. A fundamental

weighting method is similar to contrarian investment strategy i.e. whenever the
portfolio is rebalanced, weights of securities that have increased in relative value
are reduced and weights of securities that have fallen in relative value are
increased. Fundamental weighting is not biased towards the shares of firms with
largest market capitalization.

73. Smith owns 500 shares of Wood Craft Inc. and the firm is going to elect 10 board
directors. Under statutory voting Smith can cast:
A. 500 votes to members in any desired proportion.

B. a maximum of 500 votes only for each member of board.
C. 5,000 votes and can spread them across candidates in any proportion.
Correct Answer: B
Reference:
Under a statutory voting, each share represents one vote therefore Smith can cast
maximum of 500 votes for each candidate i.e. he has to allocate his voting rights
evenly among all candidates.
74. An investor placed a market buy order for thinly traded shares of G.Z.T Inc. The
main drawback for the investor would be that:
A. the order may be filled at a low price.

B. it would be very difficult to execute the order.
C. the trade would be very expensive to execute.
Correct Answer: C
Reference:
Market orders generally execute immediately if other traders are willing to take
other side of the trade, however they can be very expensive to execute especially
when the order is placed in the market for a thinly traded security or when the
order is large relative to normal trading activity. In such cases market buy order
may fill at high prices.

75. The performance of commodity indices can be quite different from their
underlying commodities because
A. commodity returns are more volatile than commodity index returns.

B. returns of commodity indices are influenced by more than one factor.
C. commodity indices are relatively illiquid and depict less information
transparency.
Correct Answer: B
Reference:
The performance of commodity indices can be quite different from their

underlying commodities because:
• indices are based on future contracts on the commodities instead of actual

commodities.
• returns of indices include i)returns from changes in future prices ii)
collateral return and iii) roll yield.
76. Which of the following statements is most likely correct? Enterprise value:
A. is incapable of reflecting the real economic value of a company.

B. is prone to the negative earnings problem because of the use of EBITDA.
C. is applicable to the comparisons of companies with significantly different
capital structures.
Correct Answer: C
Reference:
Option C is correct. It is appropriate to use EV for comparing companies with

significantly different capital structures.
Options A and B are incorrect. EV reflects the real economic value of a company
and does not have the negative earnings problem because EBITDA is usually
positive.

77. A firm will start paying dividends four years from now and thereafter that will be
expected to grow 5% into perpetuity. Expected dividend in year 4 is $5. If an
investor’s required rate of return is 7%, the intrinsic value of the stock is closest
to:
A. $200.
B. $204.
C. $227.
Correct Answer: B
Reference:
The value of the firm can be calculated through two methods:

Method 1
D(1~D%)
V4 = (A%4D%) = 262.50
-w-.D
Part 1: V0 = (1~A%)v = 200.26
D
Part 2: V0 = (1~A%)v = 3.81
Sum of part 1and 2 = 200.26 + 3.81 = 204.07
Method 2
D
V3 = (A%4D%) = 250
-DB
V0 = (1~A%)O = 204.07
78. Which of the following is least likely a macroeconomic influence that affects an
industry’s growth? Changes in:
A. inflation.
B. interest rates.
C. technologies.
Correct Answer: C
Reference:

The five influences that affect an industry’s growth, revenues and profits are:
i. Macroeconomic influences
ii. Technological influences
iii. Demographic influences
iv. Governmental influences
v. Social influences
Macro-economic variables that affect industry growth are:
• GDP
• Interest rates
• Inflation
• Availability of credit
79. Which of the following most accurately illustrates the pricing rule used by the
type of order driven market?
Uniform Discriminatory Derivative

pricing rule pricing rule Pricing rule
A. Call market Continuous market Crossing network

B. Continuous market Call market Crossing network
C. Crossing network Call market Continuous market
Correct Answer: A
Reference:

Option A is correct.
• Call markets generally use uniform trading rule where all trades execute at
the same price.
• Continuous trading markets use discriminatory pricing rule. Under this

rule limit price of the order or the quote that first arrived determines the
trade price.
• Crossing networks use derivative pricing rule because the price is derived
from another market.
80. Asset based valuation models work well for companies that do not have a high
proportion of:
A. intangibles.
B. fixed assets.
C. current assets.
Correct Answer: A
Reference:
Asset based valuation models work well for companies that do not have a high
proportion of intangibles or off the book assets and that have a high proportion of
current assets and current liabilities.

81. An investor holds 500 shares of Siena Inc. for one year on margin. Both the
interest on loan and dividends on shares are paid at the end of the year. The other
details are as follows:
Purchase price $45/share

Sale price $42/share
Dividend $1/share
Commission $0.1/share
Leverage ratio 1.5
Call money rate 4%
The investor’s total loss is closest to:
A. 7%.
B. 9%.
C. 10%.
Correct Answer: B
Reference:
Investor’s total loss in percentage =
(% change in market price x Leverage ratio) + other net change in % (due to

dividend, interest and commission)
(-6.667 x 1.5) + 1% = -9%
Total purchase price = 500 x 45 = $22,500

Equity Portion = 1/1.5 x 22,500 = 15,000
Loan = 22,500 – 15,000 = 7,500
Dividends received = $1 x 500 =500
Commission paid = $0.1 x 500 = 50
Interest paid = 4% x 7,500 = 300
•-4•D
Change in market price = •D
= -6.667%
Other adjustments (dividend, interest & commission)= 500 – 50 – 300 = 150
Other adjustments % =other $ adjustments/equity = 150/15,000 = 1%

82. The £40 par value of a non-callable non-convertible preferred stock with maturity
in two years and £5 semi-annual dividend is trading for £53.22. If the required
rate of return for the investor is 7%, the preferred stock is:
A. over-valued.
B. fairly valued.
C. under-valued.
Correct Answer: B
Reference:
Preferred stocks are treated like fixed income securities. The intrinsic value can
be calculated through calculator as:
r =7/2 =3.5 n = 2x2 = 4 Dividend PMT = 5

FV= 40
Calculate PV = 53.22
As the preferred stock is trading at a price equal to its intrinsic value therefore the
stock is fairly valued.
83. A wheat farmer is worried that wheat prices will be lower than expected when his
wheat will be ready for sale hence, he entered into a forward contract with a baker
to sell his wheat of a specified quantity at a specified price on a specific future
delivery date.
Which of the following is most likely the primary purpose of the farmer to arrange
this trade?
A. to manage risk
B. to trade on information
C. to save money for the future
Correct Answer: A
Reference:

The farmer’s major concern is the future sale price of the wheat as the farmer
doubts that the wheat prices might be lower than expected when his wheat would
be ready for sale. The farmer entered into a forward contract is to eliminate his
exposure to changing wheat prices.

Questions 84 through 90 relate to Derivatives
84. Value of a forward contract at expiration is the value of the asset:
A. plus the forward price.

B. minus the forward price.
C. minus the present value of the forward price.
Correct Answer: B
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 49, LOS-c
Value of a forward contract at expiration is the value of the asset minus
85. Which of the following factors least likely reduce the value of a European call
option on a stock?
A. Larger dividends
B. Lower exercise price
C. Less time to expiration
Correct Answer: B
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 49, LOS-o
Both larger dividends and less time to expiration reduce the value of a call option
whereas, lower exercise price increase the value of a call option.
86. Derivative price least likely depends on:
A. risk free rate.

B. investor’s risk aversion.
C. characteristics of the underlying.
Correct Answer: B
Reference:

The derivative price depends on the characteristics of the underlying, the

characteristics of the derivative and the risk-free rate. The derivative price does
not depend on investor’s risk aversion.
87. A type of credit derivative in which credit protection buyer makes a series of
regularly scheduled payments to credit protection seller while the seller makes no
payment until a credit event occurs is categorized as a:
A. total return swap.

B. credit linked note.
C. credit default swap.
Correct Answer: C
Reference:
In a CDS (credit default swap), the credit protection buyer makes a series of
regularly scheduled payments to the credit protection seller. The seller makes no
payments until a credit event occurs.
88. The value of a forward contract prior to expiration is:
A. the value of the asset minus the forward price.

B. the value of the forward price minus the value of the asset.
C. the value of the asset minus the present value of the forward price.
Correct Answer: C
Reference:
The value of a forward contract prior to expiration is the value of the asset minus
the present value of the forward price.

89. Information can flow into the derivative market before it gets into the spot market
due to the fact that derivative markets:
A. require less capital.

B. are highly centralized.
C. are operated by more professional traders.
Correct Answer: A
Reference:
By virtue of the fact that derivative markets require less capital, information can
flow into the derivative markets before it gets into the spot market. The difference
may well only be a matter of minutes or seconds, but it can provide the edge to
astute traders.
90. An investor buys a unit of commodity for $45. The risk-free rate is 4 percent and
the price of the commodity is expected to be $45.50 after one year. Which of the
following most likely represent a possible reason for the investor to hold the
commodity?
A. The time value of money

B. Interim cashflows on the asset
C. The commodity is in short supply
Reference:
Correct Answer: C

C is correct. Convenience yield (a non-monetary advantage of holding an asset)

may provide the possible reason for holding the commodity if the expected return
for holding the commodity is lower than the risk-free rate.
The investor can earn $1.80 ($46.8 - $45) by investing $45 in risk-free rate
(45× 1.04). The investor does not earn any meaningful monetary benefit by
holding the commodity for one year as the spot price of the commodity $45 and
the expected price of the commodity in one year is only $45.50.
C is incorrect. Interim cash flows are typically provided by assets such as coupon-
paying bonds or dividends paying stocks.

Questions 91 through 103 relate to Fixed Income
91. Which of the following is the highest ranked unsecured debt?
A. First lien loan.

B. Senior unsecured.
C. Senior subordinated.
Correct Answer: B
Reference:
The highest ranked unsecured debt is senior unsecured debt.
92. A U.S. based firm has a position in a European bond for a par value of €50
million. For a 1 basis point increase in yield the market value of the investment
changes to €49.85 million and for a 1 basis point decrease in yield investment
value changes to €51.23 million. The price value of basis point for the investment
is closest to:
A. 0.013.
B. 0.027.
C. 0.690.
Correct Answer: C
Reference:
The formula for PVBP is:
(€•4)4(€•~) (D1.-3)4(•‚.{D)
PVBP = -
= -
= 0.69
93. In repurchase agreements, repo margin provides a margin of safety to the:
A. dealer, if the lender of the cash defaults.

B. cash lender, if the collateral’s market value declines.
C. security lender, if the collateral’s market value declines.

Correct Answer: B
Reference:
The difference between market value of the security used as collateral and the
value of the loan is known as repo margin. Repo margin allows for some
worsening in market value and provides the cash lender a margin of safety if the
collateral’s market value declines.
94. An investor purchases a 2-year zero-coupon bond with par value of $1,000 at
$960. The implied interest earned on the bond is closest to:
A. $0.
B. $21.
C. $40.
Correct Answer: C
Reference:
Par value of the bond is $1,000 and purchase price is $960. The implied interest
earned in the bond in equal to the difference of par value and purchase price.
95. An analyst observed the profitability and cash flows of firms A and B and
collected the results below.
Firm A Firm B
Earnings before interest and tax 104 million 96.5 million
Free cash flow before dividends -12.5 million 8.5 million
Free cash flow after dividends N/A -0.5 million
The firm(s) not suitable for deleveraging is (are):
A. firm A only.
B. firm B only.
C. firms A and B.
Correct Answer: C

Reference:
Both firm A and B have negative free cash flows after dividends. A firm with
positive free cash flow after dividend can use its cash flow to pay down debt or
build up cash on the balance sheet; either outcome is a form of deleveraging and
is favorable from credit risk stand point.
96. An investor buys a 10-year, 7% annual coupon payment bond and sells the bond
after 3 years. Assuming that the coupon payments are reinvested at 11.5% for 3
years. The interest on interest gain from compounding the coupon payments is
closest to:
A. $2.51.
B. $5.21.
C. $23.5.
Correct Answer: A
Reference:
If all the three coupon payments are reinvested at 11.5%, the future value of
coupon payments is $34.16 as calculated below:
7x(1+11.5%)2 + 7x(1+11.5%)1 + 7 = 23.5076
The interest on interest gain from compounding is 2.51 (23.51 - 21).
97. A recently issued sovereign bond for a given maturity is also referred to as:
A. floating issue.
B. of the run issue.
C. benchmark issue.
Correct Answer: C
Reference:

The latest sovereign bond issue for a given maturity is also referred to as
‘Benchmark Issue.’
98. A high yield bond issuer has offered the ‘change of control put’ to its
bondholders. Under this covenant in the event of acquisition, the bondholder has a
(n):
A. right to put limits on how much secured debt an issuer can have.
B. option to change a certain percentage of his bond value with the equity of
the issuer.
C. right to require the issuer to buy back their debt at par or at some premium
to par.
Correct Answer: C
Reference:
Under the change of control put, in the event of acquisition, bondholders have the
right to require the issuer to buy back their debt often at par or at some premium
to par value.
99. An annual modified duration of a fixed rate bond is 5.75. Although there is no
change in benchmark yields but due to improved financial reporting quality and a
ratings upgrade, the flat price of the bond has increased from 98.10 to 101.65 per
100 of par value. The estimated change in the credit spread of the bond is closest
to:
A. -62.93 bps.
B. -20.75 bps.
C. 361.88 bps.
Correct Answer: A
Reference:

The percentage price increase is 3.62%.

101.65 – 98.10
= 3.6188%
98.10
Given the % price change and annual modified duration, the change in credit
spread (due to change in yield-to-maturity) is 62.93 basis points.
% change in price = -Duration x change in yield
3.6188% = - 5.75 x change in yield
change in yield = 3.6188%/-5.75 = -62.93 basis points
100. Current forward curve for one-year rates is given below:
Time Period Forward Rate

0y1y 1.90%
1y1y 2.25%
2y1y 3.50%
3y1y 4.41%
The three-year implied spot rate is closest to:
A. 2.55%.
B. 3.18%.
C. 4.41%.
Correct Answer: A
Reference:
(1+ 1.9%) x (1+ 2.25%) x (1+ 3.5%) = (1+ z3)3
(1.0190 x 1.0225 x 1.035) = (1+ z3)3
1.0784 = (1+ z3)3
z3 = 2.5477 @ 2.55%

101. For rating agencies, the primary factor in assigning their ratings is:
A. likelihood of default.
B. potential loss severity.
C. priority of payment in the event of a default.
Correct Answer: A
Reference:
For the rating agencies likelihood of default is the primary factor in assigning
their ratings. The secondary factors include the priority of payment in the event of
default and potential loss severity in the event of default.
102. Consider a 2-year 5% semiannual coupon-paying bond and the following

sequence of spot rates:
Term to maturity Spot Rates

6-months 1.00%
12-months 2.50%
18-months 4.00%
24-months 4.50%
The yield to maturity of the bond is closest to:
A. 2.2%.
B. 3.0%.
C. 4.5%.
Correct Answer: C
Reference:

Given spot rates, the 2-year, 5% semiannual coupon paying bond is priced at
101.05 and the yield to maturity is 4.44%.
-.D -.D -.D 1BB~-.D

Bond Price = t.55% t + 7.95% 7 + v.55% O + v.95% v = 101.05
(1~ ) (1~ ) (1~ ) (1~ )
7 7 7 7
The yield to maturity is:

FV= 100 PV = -101.05 PMT = 2.5 (5%/2 x 100) N=4
Calculate r = 2.22 and YTM = 2.22 x 2 = 4.44%.
103. Which of the following statements is most likely correct about floating rate notes
(FRNs)?
A. The higher the issuer’s credit quality, the higher the spread of a floating
rate note.
B. The interest payments of a floating rate note are highly dependent on the
current level of a reference interest rate.
C. The spread of a floating rate note is set when the bond is issued and then
resets periodically during the tenure of the bond.
Correct Answer: B
Reference:
B is correct. The interest payments of a floating rate note are highly dependent on
the current level of a reference interest rate.
A is incorrect. The higher the issuer’s credit quality, the lower the spread of a
floating rate note.
C is incorrect. The coupon rate of a floating rate note has two components:
reference rate + spread. The spread of a floating rate note is set when the bond is
issued based on the issuer’s credit worthiness at issuance and it remains constant.
The reference rate, however, resets periodically.

Questions 104 through 110 relate to Alternative Investments
104. Mezzanine financing is capital provided:
A. for major expansion.

B. to prepare for an IPO.
C. to initiate commercial manufacturing.
Correct Answer: B
Reference:
During period of financial crises, the correlation between hedge funds and
financial market performances may increase.
105. During periods of financial crises, the correlation between hedge funds and
financial market performances may:
A. increase.
B. decrease.
C. become 0.
Correct Answer: A
Reference:
During period of financial crises, the correlation between hedge funds and
financial market performances may increase.
106. The four broad categories of hedge fund strategies identified by HFRI are:
A. Equity-driven, Market neutral, Arbitrage and Hedge strategies.

B. Event-driven, Relative value, Equity hedge and Macro strategies.
C. Event-driven, Equity driven, Relative value and Market neutral strategies.
Correct Answer: B
Reference:

The four broad categories of hedge fund strategies identified by HFRI are:
i. Event-driven
ii. Relative value
iii. Equity hedge
iv. Macro strategies
107. For venture capital investing, later stage financing is the capital provided for a
company:
A. to prepare for an IPO.

B. to plan for major expansion.
C. to initiate commercial manufacturing and sales.
Correct Answer: B
Reference:
Later stage financing in venture capital investing is capital provided for major
expansion.
108. Which of the following is a suitable risk return measure for an analyst wanting to
asses the downside risk of an alternative investment?
A. Sharpe ratio
B. Sortino ratio
C. Standard deviation.
Correct Answer: B
Reference:

Downside risk measure focuses on the left side of the return. Sortino ratio is a
measure of downside risk.
Sharpe Ratio and standard deviation is not an appropriate risk-return measure for
alternative investments because sharpe ratio and standard deviation assume
returns are not normally distributed.
109. Jerry invested $11.25 m in EV Fund of funds (EVFOF) that invested the money
with Tsar Hedge Fund (THF). EV FOF and THF have “1 & 10” and “2 & 20” fee
structures respectively. Management fees are calculated using beginning of period
capital and both management and incentive fees are computed independently.
THF earned 17% annual return before management and incentive fees. Based on
the data provided, net of fees return to Jerry is closest to:
A. 7.08%.
B. 8.90%.
C. 9.44%.
Correct Answer: C
Reference:
Capital invested in THF = $11.25 m
Profit earned by THF = $1.9125 m ($11.25 m x 17%)

THF Management fees = $0.225 m ($11.25 m x 2%)
THF Incentive fees =$0.3825 m ($1.9125 mx 20%)
$1.‚1-D m4$B.--D m4$B.3{-D m
Return to THF investor = $11.-D m
= 11.6%
Profit earned by EV FOF = $1.305 m ($11.25 m x 11.6%)
EV FOF Management fees = $0.1125 m ($11.25 m x 1%)
EV FOF Incentive fees =$0.1305 m ($1.305 m x 10%)
$1.3BD m4$B.11-D m 4$B.13BDm
Return to EV FOF investor = $11.-D m
= 9.44%

110. The returns of which type of investments rely to a great extent on manager skills?
A. Commodity investments
B. Infrastructure investments
C. Private equity investments
Correct Answer: C
C is correct. The returns of private equity investments rely to a great extent on

manager skills.

Questions 111 through 120 relate to Portfolio Management
111. The type of chart drawn on a grid, which consists of column X’s alternating with
column O’s and does not represent time or volume is most likely the:
A. bar chart.
B. candlestick chart.
C. point and figure chart.
Correct Answer: C
Reference:
Point and figure charts are always drawn on graph paper, consist of columns X’s
alternating with column of O’s and neither time nor volume is plotted on the
graph.
112. Which of the following quantifies and allocates the tolerable risk by specific
metrics?
A. Risk tolerance
B. Risk Budgeting
C. Enterprise risk management
Correct Answer: B
Reference:
Risk budgeting quantifies and allocates the tolerable risk by specific metrics. Risk
tolerance on the other hand focuses on the appetite for risk and what is acceptable.
Risk budgeting specifically focuses on how that risk is taken.
113. When an investor’s ability to take risk is above average but willingness is below
average, the investor’s risk tolerance is
A. average.
B. above average.
C. below average.
Correct Answer: C

Reference:
When an investor’s ability to take risk is above average but willingness is below
average, the investor’s risk tolerance is below average.
114. The intercept of security characteristic line (SCL) is:
A. Beta.
B. RM – RF.
C. Jensen’s alpha.
Correct Answer: C
Reference:
The equation of SCL is represented by:
Ri – Rf = a + b (RM – RF)
Intercept = a (Jensen’s alpha )

Slope = b
115. Generating sufficient income and maintaining the real capital value of the fund
are most likely the objectives of:
A. insurance companies.
B. university endowments.
C. investment companies.
Correct Answer: B
Reference:
The primary objectives of endowments and foundations are generating sufficient

income to the fund the objectives and maintaining the real asset value of the fund.

116. An investor earned -0.5% returns in predicting the one-week movement in the
dollar/pound exchange rate from 06/01/13 to 06/07/13. The loss an investor can
suffer by the end of May 2014 keeping the given return as representative of future
losses is closest to:
A. 1.98%.
B. 22.9%.
C. 29.6%.
Correct Answer: B
Reference:
Annualized return for investor = (1 − 0.5%)D- -1 = -22.95%

117. Which of the following two measures are based on the total risk and provide
similar rankings?
A. M2 and Sharpe ratio.

B. Sharpe and Treynor ratios.
C. Treynor ratio and Jensen’s alpha.
Correct Answer: A
Reference:
Both M2 and Sharpe ratio are based on total risk and provide similar rankings to
evaluate portfolio performances.
118. Generating higher returns from security selection most likely depends upon:
A. lower index turnover and passive management.

B. higher informational efficiency and lower index turnover.
C. lower informational efficiency and higher skills of investment managers.
Correct Answer: C
Reference:

Generating higher returns from security selection depends upon two factors:
i. skills of investment managers (greater the skill, higher the value added
from security selection).
ii. informational efficiency (lower information efficiency can easily generate
higher returns from security selection. Higher information efficiency
requires greater level of skill to generate higher returns and passive
management is preferred).
119. Assuming the correlation between an asset and market is 0.67 and the asset and
market have standard deviations of 0.34 and 0.19 respectively, the asset beta
would be closest to:
A. 0.09.
B. 1.00.
C. 1.20.
Correct Answer: C
Reference:
Market’s beta = dm,m x sm /sm = 1

(Any asset’s beta itself is 1, so the beta of market is 1).
B.wA × B.3•
Asset’s beta = di,m x si/sm = B.1‚
= 1.20
120. Which of the following type of stock analysis relies on information that is
external to the market in an attempt to evaluate a security’s value relative to its
current price.
A. Technical analysis
B. Fundamental analysis
C. Relative strength index
Correct Answer: B
Reference:

Option B is correct. Fundamental analysis relies on information that is external to

the market (e.g. economic data, company financial information) in an attempt to
evaluate the security’s value relative to its current price.
Technical analysis relies primarily on information expressed through the

interaction of price and volume. Relative strength index is a type of technical
analysis.

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FinQuiz.com – 1st Mock Exam 2020 (AM Session)

Questions Topic Minutes

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Questions 1 through 18 relate to Ethical and Professional Standards

1. Overconfidence bias makes adherence to ethical conduct difficult as investment

One of the challenges that makes adherence to ethical conduct difficult is

FinQuiz.com © 2020 - All rights reserved. 3

In context of IPOs member or candidates are prohibited from purchasing

A. violate Standard I-C ‘Misrepresentation’ by relying on work not prepared

4. By complying with GIPS standards firms cannot:

FinQuiz.com © 2020 - All rights reserved. 4

By complying with GIPS standards, firms:

• participate in competitive bids against other compliant firms throughout

5. In conversation with a prospective client, a portfolio manager stated

A. did not violate any standard.

The portfolio manager violated standard I-C ‘Misrepresentation’ by providing a

FinQuiz.com © 2020 - All rights reserved. 5

6. Eleanor Chavez, CFA is a senior analyst at W&W Securities (W&WS) and is

A. Yes, she is in compliance with codes and standards.

According to Standard III-C ‘Suitability’, when members and candidates are

7. Gilbert Love worked as financial analyst at Milton Securities. During his

A. No, he is in compliance with the Code and Standards.

FinQuiz.com © 2020 - All rights reserved. 6

8. According to Standard II-A ‘Material Non-Public Information’, if a member or

A. achieve public dissemination of the information.

If a member or candidate determines that information is material, the member or

9. Lauren Sims, marketing director of Karma Advisors, planned a brief performance

A. violated Standard III-B ‘Fair Dealing’

FinQuiz.com © 2020 - All rights reserved. 7

According to Standard III-D ‘Performance Presentation’ if the performance

A. Standard VI-B ‘Priority of Transactions’.

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A. ‘Market Manipulation’ only.

Palmer has violated ‘Market Manipulation’ by sharing false and misleading

A. is in compliance with standards regarding timely notification and using his

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A. Only Enrique is in violation.

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15. Reginald Fuller manages institutional portfolios on behalf of BDY Advisors.

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According to the recommendations of Standard IV-B ‘Additional Compensation

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Firms may link non-GIPS compliant performance to their GIPS compliant

A. According to Section 4 ‘Disclosures’, firms are required to make negative

According to Section 4 ‘Disclosures’, firms are not required to make negative

According to Section 3’Composite Construction’, the composite return is the

According to section 5 ‘Presentation and Reporting’, when appropriate, firms

FinQuiz.com © 2020 - All rights reserved. 13

Questions 19 through 28 relate to Quantitative Methods

The present value of whose investment would be the lowest?

20. The efficiency of an unbiased estimator is measured by its:

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Efficiency of an unbiased estimator is measured by its variance. An unbiased