1

2020 Level I Mock Exam (A) PM

The 2020 Level I Chartered Financial Analyst® Mock Examination has 120 questions.
To best simulate the exam day experience, candidates are advised to allocate an average
of one and a half minutes per question for a total of 180 minutes (3 hours) for this
session of the exam.

1 In cases where applicable local laws governing calculation and presentation of

investment performance conflict with the GIPS standards, firms are:
A unable to claim GIPS compliance in cases where local regulations prohibit
accurate calculation.
B required to calculate and maintain two sets of performance data in order to
claim GIPS compliance.
C required to comply with local regulations and make full disclose of the con-
flict to claim GIPS compliance.
2 After a firm presents a minimum required number of years of GIPS-­compliant
performance, the firm must present an additional year of performance each
year, building up to a minimum of:
A 10 years of GIPS-­compliant performance.
B 5 years of GIPS-­compliant performance.
C 15 years of GIPS-­compliant performance.
3 According to the GIPS standards, a verification report confirms all of the fol-
lowing except whether:
A specific composite presentations are accurate.
B a firm has complied with all firm-­wide composite construction
requirements.
C processes and procedures are designed to calculate and present compliant
performance results.
4 Reiko Kimisaki, CFA, is an investment advisor for a national social security fund
in a frontier market with a very limited and illiquid capital market. The labor
force is young with an investment time horizon of 25 to 30 years. She has been
asked to suggest ways to increase the investment return of the overall portfolio.
After careful assessment of the fund’s previous investment history and available
asset classes, she considers investment in private equity. What is Kimisaki’s low-
est priority to avoid any Code of Ethics and Standards of Professional Conduct
violations prior to making this investment recommendation?
A Assess the risk tolerance of the fund.
B Analyze the expected returns of private equity in the market.

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2 2020 Level I Mock Exam (A) PM

C Determine if the Investment Policy Statement allows for alternative

investments.
5 James Simone, CFA, the CFO of a publicly listed company, seeks to improve the
quality of his company’s communication with institutional fund managers. He
holds an investor briefing with this group the evening before the company earn-
ings are announced. The company’s quarterly earnings are broadcast in a press
release the next day before the market opens. The earnings information in the
investor briefing is identical to that in the press release. Did Simone most likely
violate the CFA Institute Standards of Professional Conduct?
A Yes
B No, because investor briefing and press release information are identical.
C No, because the company releases information while the market is closed.
6 Robin Herring, CFA, is a government bond research analyst at an independent
credit rating agency. A competitor credit rating agency just downgraded the
bonds of a government Herring follows. Herring notes that all of the informa-
tion in the competitor’s report was covered in his analysis published last week.
In the past, Herring has been slow to downgrade bonds, so he starts to doubt
his own analysis after seeing the competitor’s report. Herring decides to reissue
his credit rating of this government bond and match the competitor’s down-
grade. In his revised report, Herring states that new information has been made
available to justify the downgrade. Herring posts the revision on the credit
rating agency’s website and provides it by e-­mail to all clients who received the
original. Herring’s rating change least likely violated which of the following CFA
Institute Code of Ethics and Standards of Professional Conduct?
A Fair Dealing
B Communication with Clients
C Diligence and Reasonable Basis
7 Which of the following is least likely part of the CFA Institute Standards of
Professional Conduct, Standard II–Integrity of Capital Markets? Members and
candidates:
A must promote the integrity and viability of the global capital markets for the
ultimate benefit of society.
B who possess material nonpublic information that could affect the value of an
investment must not act or cause others to act on the information.
C must not engage in practices that distort prices or artificially inflate trading
volume with the intent to mislead market participants.
8 If a firm restructures and wants to remain compliant with the GIPS standards,
it should most likely:
A maintain the historical performances for all composites.
B alter the historical performances within existing composites.
C create all new composites with proper disclosures regarding the
reorganization.
9 Victoria Christchurch, CFA, is a management consultant currently working
with a financial services firm interested in curtailing its high staff turnover, par-
ticularly amongst CFA charterholders. In recent months, the company lost 5 of
its 10 most senior managers, all of whom have cited systemic unethical business
practices as the reason for their leaving. To curtail staff turnover by encouraging
ethical behavior, it would be leastappropriate for Christchurch to recommend
the company to do which of the following?
A Implement a whistleblowing policy.
2020 Level I Mock Exam (A) PM 3

B Encourage staff retention with increased benefits.

C Create, implement, and monitor a corporate code of ethics.
10 When a client asks her how she makes investment decisions, Petra Vogler, CFA,
tells the client she uses mosaic theory. According to Vogler, the theory involves
analyzing public and nonmaterial nonpublic information including the evalu-
ation of statements made to her by company insiders in one-­on-­one meetings
where management discusses new earnings projections not known to the
public. Vogler also gathers general industry information from industry experts
she has contacted. Vogler most likely violates the CFA Institute Standards of
Professional Conduct because of her use of:
A industry expert information.
B one-­on-­one meeting information.
C nonmaterial nonpublic information.
11 Based on his superior return history, Vijay Gupta, CFA, is interviewed by the
First Faithful Church to manage the church’s voluntary retirement plan’s equity
portfolio. Each church staff member chooses whether to opt in or out of the
retirement plan according to his or her own investment objectives. The plan
trustees tell Gupta that stocks of companies involved in the sale of alcohol,
tobacco, gambling, or firearms are not acceptable investments given the objec-
tives and constraints of the portfolio. Gupta tells the trustees he cannot reason-
ably execute his strategy with these restrictions and that all his other accounts
hold shares of companies involved in these businesses because he believes they
have the highest alpha. By agreeing to manage the account according to the
trustees’ wishes, does Gupta violate the CFA Institute Standards of Professional
Conduct?
A No.
B Yes, because the manager was hired based upon his previous investment
strategy.
C Yes, because the restrictions provided by the Trustees are not in the best
interest of the members.
12 Jennifer Ducumon, CFA, is a portfolio manager for high-­net-­worth individu-
als at Northeast Investment Bank. Northeast holds a large number of shares
in Babyskin Care Inc., a manufacturer of baby care products. Northeast
obtained the Babyskin shares when they underwrote the company’s recent
IPO. Ducumon has been asked by the investment banking department to
recommend Babyskin to her clients, who currently do not hold any shares in
their portfolios. Although Ducumon has a favorable opinion of Babyskin, she
does not consider the shares a buy at the IPO price nor at current price levels.
According to the CFA Institute Code of Ethics and Standards of Professional
Conduct the mostappropriateaction for Ducumon is to:
A ignore the request.
B recommend the shares after additional analysis.
C follow the request as soon as the share price declines.
13 Heidi Halvorson, CFA, is the Chief Investment Officer for Tukwila Investors, an
asset management firm specializing in fixed-­income investments. Tukwila is in
danger of losing one of its largest clients, Quinault Jewelers, which accounts for
nearly one third of its revenues. Quinault recently told Halverson that Tukwila
would be fired unless the performance of Quinault’s portfolio improves sig-
nificantly. Shortly after this conversation, Halvorson purchases two corporate
bonds she believes are suitable for any of her clients based upon third party
research from a reliable and diligent source. Immediately after the purchase,
4 2020 Level I Mock Exam (A) PM

one bond increases significantly in price while the other bond declines sig-
nificantly. At the end of the day, Halvorson allocates the profitable bond trade
to Quinault and the other bond to two of her largest institutional accounts.
Halvorson most likely violated the CFA Institute Standards of Professional with
regards to:
A client suitability.
B trade allocations.
C third party research.
14 Manuel Tacqueria, CFA, is a sole proprietor investment adviser managing
accounts for a diversified group of clients. Tacqueria obtains his investment
research through a subscription service with Alpha Services, a large financial
services organization. Tacqueria notes that the research reports are sound
because they are extremely detailed and comprehensive. As a result, Tacqueria
feels comfortable relying solely upon this research when making recommenda-
tions to clients. Tacqueria should most likely do which of the following in order
to conform to the CFA Institute Code of Ethics and Standards of Professional
Conduct?
A Utilize additional sources of third-­party research
B Undertake and add his own research to the existing reports
C Conduct additional due diligence on Alpha Services
15 Merchant Capital Partners, a regional investment bank, acts as a market maker
for Vital Link Health Services and other small firms listed on an over-­the-­
counter exchange. For those shares for whom Merchant acts as market maker, it
trades for its own book as well as engaging in risk arbitrage trading. Merchant
allows staff members to trade in shares once clients and the company have
traded. Merchant recently obtained material nonpublic information regarding
Vital’s planned reverse takeover of a publicly listed competitor. In order to be in
compliance with the CFA Institute Code and Standards, which type of trading
in Vital shares should Merchant least likely suspend?
A Personal
B Risk arbitrage
C Passive proprietary
16 If you are seeking guidance from the firm’s code of ethics or written policies,
your actions most likely reflect which phase of an ethical decision-­making
framework?
A Decide
B Reflect
C Consider
17 Which of the following is least likely sufficient to meet recommended or
required procedures for compliance with CFA Institute Standard III(A): Loyalty,
Prudence, and Care?
A Disclose any existing conflicts of interest.
B Establish a regular client meeting schedule.
C Seek best execution when trading on behalf of clients.
18 Which of the following statements is most accurate? Ethical principles are sets
of beliefs centered around:
A societies’ views on what is considered good or bad conduct.
B acceptable conduct based on the direct and indirect consequences on
others.
2020 Level I Mock Exam (A) PM 5

C rules established by a government with regard to what is acceptable

behavior.
19 The probability of Event A is 40%. The probability of Event B is 60%. The joint
probability of AB is 40%. The probability (P) that A or B occurs, or both occur,
is closest to:
A 40%.
B 84%.
C 60%.
20 Assume that a stock’s price over the next two periods is as shown below.
Time = 0 Time = 1 Time = 2

S 0 = 100 Su = 110 Suu = 121

Sd = 92 Sud , du = 101.20
Sdd = 84.64

The initial value of the stock is $100. The probability of an up move in any given
period is 40%, and the probability of a down move in any given period is 60%.
Using the binomial model, the probability that the stock’s price will be $101.20
at the end of two periods is closest to:
A 48%.
B 24%.
C 16%.
21 In setting the confidence interval for the population mean of a normal or
approximately normal distribution, and given that the sample size is small,
Student’s t-distribution is the most appropriate approach when the variance is:
A known.
B large.
C unknown.
22 A two-­tailed t-test of the hypothesis that the population mean differs from zero
has a p-value of 0.0275. Using a significance level of 5%, the most appropriate
conclusion is:
A to accept the null hypothesis.
B that the chosen significance level is too high.
C to reject the null hypothesis.
23 A bank offers an effective annual rate (EAR) of 12%. Assuming quarterly com-
pounding, the stated annual interest rate is closest to:
A 11.66%.
B 12.55%.
C 11.49%.
24 With Bayes’ formula, it is possible to update the probability for an event given
some new information. Which of the following most accurately represents
Bayes’ formula?
P (Information | Event)
A P(Event | Information) = P (Event)
P (Information)
P (Information)
B P(Event | Information) = P (Event)
P (Information | Event)
6 2020 Level I Mock Exam (A) PM

P (Information | Event)
C P(Event | Information) = P (Information)
P (Event)
25 Using a discount rate of 5%, compounded monthly, the present value (PV) of
$5,000 to be received three years from today is closest to:
A $4,319.
B $4,305.
C $4,250.
26 The stated (quoted) annual interest rate on an automobile loan is 10%. The
effective annual rate (EAR) of the loan is 10.47%. The frequency of compound-
ing per year for the loan is closest to:
A quarterly.
B monthly.
C weekly.
27 A graphical depiction of a continuous distribution shows the left tail to be lon-
ger than the right tail. The distribution is best described as having:
A negative skewness.
B leptokurtosis.
C positive skewness.
28 The returns of a fund are as follows:
Year Return (%)

1 −20.60
2 15.00
3 0.50
4 9.80
5 4.60

The mean absolute deviation (MAD) of returns for the fund is closest to:
A 13.69%.
B 9.53%.
C 11.91%.
29 Which of the following is most likely to be an explanation of the power of a test?
The power of a test is the probability of:
A rejecting the null when it is false.
B not accepting the alternative when it is false.
C a Type I error.
30 A company forecasts that net income next year will range from a loss of
$4,000,000 to a gain of $12,000,000. The graph shows the probability density
function for this continuous distribution.
2020 Level I Mock Exam (A) PM 7

Net Income Distribution Function ($ million)

f(x)
0.07
0.0625
0.06

0.05

0.04

0.03

0.02

0.01

0
–4.0 –3.0 –2.0 –1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0
x

Which of the following statements is correct?

A The probability of avoiding a loss is 0.25.
B The expected net income is $8,000,000.
C The probability of incurring a loss of $2,000,000 is 0.
31 The market structure in which a firm sells all of the product it produces at the
market equilibrium price is best described as:
A oligopoly.
B perfect competition.
C monopolistic competition.
32 With regard to the aggregate demand (AD) curve and an increase in one of its
associated factors, which of the following relationships is leastaccurate?
Shifts the
Relationship Increase in Factor AD Curve Reason

1 Stock prices Rightward Lower investment

2 Consumer Rightward Higher consumption
confidence
3 Exchange rate* Leftward Lower exports and higher
imports

* Exchange rate is foreign currency per unit of domestic currency

A Relationship 3
B Relationship 1
C Relationship 2
33 The following information is available for 2011:
New Zealand Canada
  Jan 1 Dec 31 Jan 1 Dec 31

Price index 1,137 1,158 117.8 119.9

Nominal exchange rate: NZD/CAD 1.2844 1.2589

The change in the real exchange rate (in NZD/CAD terms) is closest to:
8 2020 Level I Mock Exam (A) PM

A –2.05%.
B –1.92%.
C +1.96%.
34 A market structure characterized by homogeneous/standardized product differ-
entiation is best described as:
A perfect competition and oligopoly.
B monopolistic competition.
C monopoly.
35 Three countries produce tables and chairs, and the output per worker per day in
each country as follows:
Country Tables Chairs

A 60 80
B 40 60

Assume that Country C produces 10% more tables than Country B and 10%
fewer chairs than Country A. Which country most likely has the greatest com-
parative advantage for producing tables? Country
A C
B B
C A
36 Assume that an economy is composed of two products, X and Y, with the fol-
lowing details:
Quantity Quantity
Produced in Produced in Product Unit Product Unit
Product 2012 2013 Prices in 2012 Prices in 2013

X 351.0 352.0 13.3 13.8

Y 179.0 182.5 unknown 11.1

Assuming 2012 is the base year for measuring GDP and the GDP deflator for
the economy in 2013 is 102.4, the unit price of Y in 2012 is closest to:
A 11.2.
B 10.8.
C 11.5.
37 The primary goal of both monetary and fiscal policy focuses on balancing eco-
nomic growth and:
A income distribution.
B inflation.
C employment.
38 The central bank of a developing country wants to effectively import the infla-
tion experience of the United States. The developing country’s economy is most
likelyto experience:
A interest rates similar to those in the United States.
B economic growth similar to that of the United States.
C more volatile domestic money supply.
39 If the domestic country desires to reduce a current account surplus, the most
likely outcome is that it will:
2020 Level I Mock Exam (A) PM 9

A lend to foreign countries.

B encourage foreign direct investment.
C have a lower gross domestic product (GDP) than if it were a closed
economy.
40 Which of the following is most likely a characteristic of a country that follows
the dollarization exchange rate regime? The country:
A is able to monetize its domestic debt.
B has the currency credibility of the US dollar.
C has a term structure similar to that of the United States.
41 A man earns $3,000 per month and allocates $300/month for bus travel to visit
his children three times per month. The bus company lowers the cost such that
he can now take four trips a month for $320, which he decides to do. His deci-
sion to visit his children more often is most likely due to which economic effect?
A Income effect alone
B Substitution effect alone
C Income and substitution effects combined
42 When considering the long-­run aggregate supply curve, the long run is best
described as the time required for which of the following combinations of items
to become variable?
A Wages and prices
B Wages, prices, and expectations
C Wages, prices, expectations, and physical capital
43 Which of the following statements is most accurate about the responsibilities of
an auditor for a publicly traded firm in the United States? The auditor must:
A state that the financial statements are prepared according to generally
accepted accounting principles.
B ensure that the financial statements are free from error, fraud, or illegal acts.
C express an opinion about the effectiveness of the company’s internal control
systems.
44 For which of the following assets is it most appropriate to test for impairment at
least annually?
A Land
B A patent with a legal life of 20 years
C A trademark with an indefinite expected life
45 The common shareholders’ equity reported on a company’s balance sheet is sel-
dom an appropriate measure of the market or intrinsic value of the company’s
common shares. The most likely reason for this fact is that the balance sheet:
A evaluates a company’s financial position spanning a period of time.
B recognizes items only when future economic benefits are reasonably certain.
C fails to include all aspects of a company’s ability to generate future cash flow.
46 Other comprehensive income is least likely to include gains or losses on:
A the sale or disposal of discontinued operations.
B derivative contracts accounted for as hedges.
C the translation of foreign currency–denominated subsidiary financial
statements.
10 2020 Level I Mock Exam (A) PM

47 The role of the International Organization of Securities Commissions (IOSCO)

is best described as:
A promoting cross-­border cooperation and uniformity in securities regulation.
B enforcing financial reporting requirements for entities participating in capi-
tal markets.
C promoting the use of International Financial Reporting Standards (IFRS)
and the convergence of national accounting standards.
48 A company uses the straight-­line method to depreciate its assets. One of its
assets is accounted for under the revaluation model. At the end of Year 1, a
revaluation gain is recorded for this asset in other comprehensive income. If
there is no further revaluation in Year 2, what is the most appropriate deprecia-
ble base for the asset in Year 2?
A No depreciation expense will be recorded under the revaluation model
B The asset’s value including the revaluation gain
C The asset’s original cost
49 All else being equal and ignoring tax effects, compared with using the straight-­
line method of depreciation, the use of an accelerated method of depreciation
in the early years of an asset’s life would most likely result in a decrease in the
firm’s:
A asset turnover ratio.
B shareholders’ equity.
C cash flow from operations.
50 The most appropriate statement about financial ratio analysis is that it has lim-
ited use as an analytical tool for:
A providing insights into microeconomic relationships within a company that
help analysts project earnings.
B evaluating management.
C comparing companies that use different accounting methods.
51 On 1 January 2014, the market rate of interest on a company’s bonds is 5%, and
it issues a bond with the following characteristics:
Face value €50 million
Coupon rate, paid annually 4%
Time to maturity 10 years (31 December 2023)
Issue price (per €100) €92.28

If the company uses International Financial Reporting Standards (IFRS), its

interest expense (in millions) in 2014 is closest to:
A €2.307.
B €2.386.
C €1.846.
52 Information about a company’s historical performance for the last two years
and additional information are summarized in the following table.
($ thousands) 2013 2012

Sales 5,500.0 5,350.0

Cost of goods sold –2,200.0 –2,140.0
Operating expenses –2,350.0 –2,350.0
2020 Level I Mock Exam (A) PM 11

($ thousands) 2013 2012

Gain on sale of short-­term investments 0 140.0
Tax expense –237.5 –325.0
Income (loss) from discontinued operations (net –312.5 112.5
of tax)
Net income 400.0 787.5

Industry sales are expected to increase 5%, and the company expects to main-
tain its current market share and gross profit margin. Operating expenses are
not expected to change with the increase in sales.
The company sold off its portfolio of marketable securities in 2012 and used the
funds to purchase operating assets. In 2012, the company announced its inten-
tion to sell off a division, and that sale was completed in 2013. The results from
the division and the gain or loss incurred on the sale are classified as discontin-
ued operations.
The projected net income (in thousands) for 2014 is closest to:
A $745.
B $836.
C $635.
53 Which of the following statements most accurately describes a valuation allow-
ance for deferred taxes? A valuation allowance is required under:
A both IFRS and US GAAP on deferred tax assets arising from the translation
of foreign operations.
B IFRS on revaluation of a deferred tax asset.
C US GAAP if there is doubt about recovering a deferred tax asset.
54 A company has operated at full capacity throughout the year, and a review
of its inventory records for that period indicate that the following costs were
incurred:
Fixed production overhead $500,000
Direct material and direct labor $300,000
Storage costs incurred during production $25,000
Abnormal waste costs $30,000

The total capitalized costs to inventory during the year are closest to:
A $800,000.
B $855,000.
C $825,000.
55 A company purchased equipment for $50,000 on 1 January 2011. It is depreciat-
ing the equipment over a period of 10 years on a straight-­line basis for account-
ing purposes, but for tax purposes it is using the declining balance method at a
rate of 20%. Given a tax rate of 30%, the deferred tax liability at the end of 2013
is closest to:
A $6,720.
B $2,820.
C $420.
56 The following information was taken from the financial statements and notes to
the financial statements of a company that accounts for its inventory on a LIFO
basis.
12 2020 Level I Mock Exam (A) PM

For Periods Ending December 31,

in $ thousands 2014 2013

Net sales $11,159 $8,895

Net income 178 81
Inventories (LIFO basis) 1,406 2,220
Total assets 5,570 6,288
LIFO reserve $867 $547

The company’s tax rate for the current and all prior years is 33.3%.

If the company had reported on a FIFO basis and the additional tax liability
arising from restatement resulted in an immediate reduction in cash, its 2014
return on assets (using 2014 assets only) would be:
A 6.2%.
B 6.4%.
C 7.7%.
57 Which of the following conditions is most likely associated with decreased earn-
ings quality? Compared with the prior year, the reporting entity’s earnings:
A decreased slightly in response to the introduction of conservative account-
ing policies.
B were similar in magnitude but included a large gain on the sale of a manu-
facturing plant.
C increased slightly because of a reduction in bad debt expense based on
more-­current experiences.
58 A credit analyst is most likelyto place more focus on:
A operating leverage than financial leverage.
B cash flows than accrual income.
C upside potential than downside risk.
59 When the market rate of interest falls after issuance, a company selecting the
fair value option for reporting a liability with a fixed coupon rate will report:
A no change.
B a gain.
C a loss.
60 An analyst gathers the following information from a company’s current finan-
cial statements:

Year Ended 31 December ($ millions)

2016

Revenue 26,430
Cost of goods sold 12,831
Operating expenses 9,802
Income tax expense 1,277
Net Income 2,250
2020 Level I Mock Exam (A) PM 13

Year Ended 31 December ($ millions)

2016 2015

Accounts receivable 1,134 1,072

Accounts payable 4,858 3,724
Inventory 4,462 3,670

If the company uses the direct method to prepare its cash flow statement, the
cash received from customers (in $ millions) will be closest to:
A 26,368.
B 25,296.
C 26,492.
61 The following information is available for a firm:
Market risk premium 7.0%
Risk-­free rate 2.0%
Comparable firm return 10.4%
Comparable firm debt-­to-­equity ratio 1.0
Comparable firm tax rate 40.0%

The firm’s unleveraged beta is closest to:

A 0.75.
B 1.20.
C 1.05.
62 A company has an equity beta of 1.4 and is 60% funded with debt. Assuming a
tax rate of 35%, the company’s asset beta is closest to:
A 0.98.
B 1.01.
C 0.71.
63 The following information is available for a firm:
Revenue £800,000
Variable cost 400,000
Fixed cost 200,000
Operating income 200,000
Interest 60,000
Net income 140,000

The firm’s degree of total leverage (DTL) is closest to:

A 1.43.
B 2.00.
C 2.86.
64 An inventory system that reduces average inventory without affecting sales will
most likely reduce the:
A quick ratio.
B inventory turnover.
C cash conversion cycle.
14 2020 Level I Mock Exam (A) PM

65 The post-­audit performed as part of the capital budgeting process isleast like-
lyto include the:
A provision of future investment ideas.
B rescheduling and prioritizing of projects.
C indication of systematic errors.
66 Which of the following statements describes the most appropriate treatment of
cash flows in capital budgeting?
A Interest costs are included in the project’s cash flows to reflect financing
costs.
B A project is evaluated using its incremental cash flows on an after-­tax basis.
C Sunk costs and externalities should not be included in the cash flow
estimates.
67 In order to maintain an adequate net daily cash position, a company is least
likely to:
A monitor access to borrowing facilities.
B forecast depreciation and accruals.
C predict the business cycles and seasonal effects.
68 Assume a 365-­day year and the following information for a company:
Current Year Previous Year

Sales $12,000 $10,000

Cost of goods sold $9,000 $7,500
Inventory $1,200 $1,000
Accounts payable $600 $600

The firm’s days of payables for the current year is closestto:

A 23.8.
B 18.3.
C 24.9.
69 A 30-­day $10,000 US Treasury bill sells for $9,932.40. The discount basis yield
(DBY) is closest to:
A 8.11%.
B 8.17%.
C 8.28%.
70 If a 90-­day $10,000 US Treasury security is selling for $9,870, the discount-­basis
yield is closest to:
A 5.27%.
B 5.34%.
C 5.20%.
71 Based on best practices in corporate governance procedures, it is most appro-
priate for a company’s compensation committee to:
A link compensation with long-­term objectives.
B include a retired executive from the firm.
C include a representative from the firm’s external auditor.
72 Which of the following is most likely associated with poor corporate
governance?
2020 Level I Mock Exam (A) PM 15

A Reduction in exposure to regulatory actions

B Increased control and compliance monitoring of corporate decisions
C Management of a company to a lower risk profile relative to shareholder
tolerance
73 If the following three stocks are held in a portfolio, the portfolio’s total return
on an equal-­weighted basis is closest to:
Number Beginning of End of Period Dividend per
of Shares Period Price per Price per Share Share during the
Stock Owned Share ($) ($) Period ($)

A 500 40 37 2.00
B 320 50 52 1.50
C 800 30 34 0.00

A 3.28%.
B 5.94%.
C 6.37%.
74 When parties exchange fixed cash payments for payments that depend on the
returns to a stock or a stock index, they are purchasing a(n):
A equity swap.
B index fund.
C stock option.
75 Dark pools are best described as:
A trading venues that exercise little regulatory authority over their subscribers.
B operated by investment dealers that specialize in high-­risk securities.
C certain groups of similar assets that issue securities representing shared
ownership.
76 A security market index that reports returns based on the reinvestment of
income and the change in price of its constituent securities is best described as
which type of index?
A Total return
B Float-­adjusted
C Price return
77 When constructing a list of peer companies to be used in equity valuation,
which of the following would least likely improve the group? Companies in the
same peer group should ideally:
A be exposed to similar stages in the business cycle.
B have similar valuations.
C have the effects of finance subsidiaries minimized.
78 A company has issued only one class of common shares, and it does not pay
dividends on them. It has also issued two types of non-­cumulative preference
shares: one that is putable and the other callable. Which of these securities will
most likely offer the lowest expected return to the investor?
A Putable preference shares
B Common shares
C Callable preference shares
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79 An industry characterized by rising volumes, improving profitability, falling

prices, and relatively low competition among companies is most likely in which
of the following life-­c ycle stages?
A Growth
B Mature
C Embryonic
80 The following market information relates to a company:
Market price per share $37.80
Number of shares outstanding 1,000,000
Net income $5,250,000
Total common equity $35,000,000
Total annual dividend paid $1,512,000
Risk-­free rate 2.60%
Market risk premium 8.00%
Beta 1.05

Using the capital asset pricing model (CAPM), the company’s cost of equity is
closest to:
A 15.0%.
B 12.4%.
C 11.0%.
81 An investor has gathered the following data for a common stock.
Earnings per share, 2013 $2.50
Dividend payout ratio, 2013 60%
Dividend growth rate expected during 2014 and 2015 25%
Dividend growth rate expected after 2015 5%
Investors’ required rate of return 12%

Using the two-­stage dividend discount model, the value per share of this com-
mon stock is closest to:
A $38.70.
B $31.57.
C $28.57.
82 An investor wants to determine the intrinsic value of the common stock for a
company with the following characteristics:
●● The firm maintains a constant dividend payout ratio.
●● Goodwill and patents account for a high proportion of the firm’s assets.
●● The firm’s revenues and earnings are highly correlated with the business
cycle.
Furthermore, the investor focuses on the firm’s capacity to pay dividends rather
than expected dividends. Considering the characteristics, the investor will most
likely use which of the following valuation models?
A Free cash flow to equity model
B Gordon dividend growth model
C Asset-­based valuation model
83 An investor considering the enterprise value approach to valuation gathers the
following data:
2020 Level I Mock Exam (A) PM 17

Earnings before interest, taxes, depreciation, and amortization $65.8 million

(EBITDA)
Value of debt $90.0 million
Value of preferred stock $25.4 million
Cash and marketable securities $6.9 million
Number of common shares outstanding 12.5 million
Firm’s tax rate 30%
EV/EBITDA multiple 6×

The value per share of the company’s common stock is closest to:
A $13.43.
B $22.35.
C $22.90.
84 Which of the following situations will most likely indicate a reduction of market
efficiency?
A An increase in rules and regulations that promote financial disclosure
B An increase in arbitrage opportunities
C An increase in the number of market participants
85 If markets are only weak-­form efficient, which of the following investment
approaches is least likely to consistently earn abnormal profits?
A Exploiting of non-­public information
B Buying and selling based on fundamental analysis
C Trading based on patterns of prices and volume
86 Present value models follow a fundamental tenet of economics that states that
individuals invest:
A to defer consumption.
B based on the law of one price.
C for the expected future benefits.
87 Which of the following is least likelyto be a type of embedded option in a bond
issue granted to bondholders? The right to:
A put the issue.
B convert the issue.
C call the issue.
88 An investor purchases a 5% coupon bond maturing in 15 years for par value.
Immediately after purchase, the yield required by the market increases. The
investor would then most likely have to sell the bond at:
A a premium.
B a discount.
C par.
89 A 6% 25-­year bond with semiannual payments has a market price of $850.00.
The yield to maturity of this bond is closest to:
A 7.32%.
B 7.91%.
C 5.72%.
90 Which of the following is most likely an example of a Eurobond?
18 2020 Level I Mock Exam (A) PM

A A Canadian borrower issuing British pound–denominated bonds in the UK

market.
B A Japanese borrower issuing US dollar–denominated bonds in the US
market.
C An Australian borrower issuing Canadian dollar–denominated bonds in the
UK market.
91 Which of the following are most likely a kind of supranational bonds? Bonds
issued by the:
A Federal Farm Agency of the United States.
B Government of Malaysia.
C European Investment Bank.
92 During the lockout period for a non-­amortizing asset-­backed security, the prin-
cipal payment of €100 million on a €1 billion face value issue will result in the
security having a total face value of:
A €0.9 billion.
B €1.1 billion.
C €1.0 billion.
93 The weighted average number of years to receipt of the principal and interest
payments that will result in realization of the initial market discount rate on a
bond is best described as:
A effective duration.
B modified duration.
C Macaulay duration.
94 Consider the following information relating to a corporate bond:
Full price of bond (PVFull) $100,367,242
Modified duration (AnnModDur) 8.124 years
Accrued interest $303,218

The money duration of the corporate bond is closest to:

A $812,920,131.
B $815,383,474.
C $817,846,817.
95 The table below shows the debt structures of three companies with identical
corporate family ratings:
Company A Company B Company C

Senior secured 40.00% 60.00% 40.00%

Senior unsecured 30.00% 30.00% 40.00%
Senior subordinated 15.00% 5.00% 10.00%
Subordinated 15.00% 5.00% 10.00%

Which company will most likely exhibit the largest notching adjustment?
A Company A
B Company B
C Company C
96 Selected data for three companies are provided in the table below:
2020 Level I Mock Exam (A) PM 19

Company A Company B Company C

Total Debt ($m) 1,125 1,360 1,562

EBITDA ($m) 590 680 750
Interest Expense ($m) 71 60 63

Which company’s leverage contributes most adversely to its credit risk?

A Company A
B Company B
C Company C
97 As interest rates rise and fall, investors in mortgaged-­backed securities most
likely face what type of risk?
A Extension risk and contraction risk
B Single-­month mortality (SMM) risk and contraction risk
C Conditional prepayment rate (CPR) risk and extension risk
98 A sovereign bond will most likely be:
A issued in the local currency.
B backed by the issuer’s taxing authority.
C virtually free of credit risk when issued.
99 An analyst gathers the following information on a bond:
Price 85.4734
Payment frequency Annual
Time to maturity 5 years
Coupon 4%
Macaulay duration 4.5947

Modified duration is closest to:

A 4.2702.
B 4.4180.
C 4.7785.
100 According to put–call parity, if a fiduciary call expires in the money, the payoff
is most likely equal to the:
A difference between the market value of the asset and the face value of the
risk-­free bond.
B market value of the asset.
C face value of the risk-­free bond.
101 A corporation issues five-­year fixed-­rate bonds. Its treasurer expects interest
rates to decline for all maturities for at least the next year. She enters into a
one-­year agreement with a bank to receive quarterly fixed-­rate payments and
to make payments based on floating rates benchmarked on three-­month Libor.
This agreement is best described as a:
A futures contract.
B forward contract.
C swap.
102 During its life, the value of a forward contract is most likely equal to the price of
the underlying minus the price of the:
A forward.
20 2020 Level I Mock Exam (A) PM

B forward, discounted over the original term of the contract.

C forward, discounted over the remaining term of the contract.
103 Which statement best describes the early exercise of non-­dividend paying
American options? Early exercise may be advantageous for:
A both deep-­in-­the-­money calls and deep-­in-­the-­money puts.
B deep-­in-­the-­money calls.
C deep-­in-­the-­money puts.
104 What is the most likely reason why arbitrage will not completely eliminate all
pricing discrepancies for derivatives?
A Differences in risk aversion
B Transaction costs
C Inaccurate forecasts
105 Relative to spot markets, one key feature of derivatives markets is:
A high transaction costs.
B low capital requirements.
C restrictions on short selling.
106 A European call option is in the money whenever the value of the underlying is:
A equal to the exercise price.
B less than the exercise price.
C greater than the exercise price.
107 If an investor uses derivatives to make a long investment in commodities, the
return earned on margin is best described as:
A convenience yield.
B collateral yield.
C price return.
108 Do management fees most likely get paid to the manager of a hedge fund,
regardless of the fund’s performance?
A No, only when the fund’s net asset value exceeds the previous high-­water
mark
B No, only when the fund’s gross return is positive
C Yes
109 Concentrated portfolio strategies are attractive because of their:
A potential to generate alpha.
B ability to track market indices.
C low risk.
110 A commodity market is in contango when futures prices are:
A lower than the spot price.
B the same as the spot price.
C higher than the spot price.
111 Which of the following is least likely to reduce the likelihood of being defrauded
by a dishonest money manager?
A Third-­party custody of assets under management
B Strong and consistent reported investment performance
C Independent verification of investment results
2020 Level I Mock Exam (A) PM 21

112 A private equity firm sells a portfolio company to a buyer that is active in the
same industry as the portfolio company. This transaction is best described as
a(n):
A trade sale.
B secondary sale.
C initial public offering.
113 The market approach to valuing portfolio companies in private equity firms is
most likely based on:
A present value.
B the value of assets minus the value of liabilities.
C multiples.
114 The relative strength index for a stock stands at 75. This reading is best
described as an indication that the stock is
A neutral.
B oversold.
C overbought.
115 Which of the following institutional investors is most likely to have a low toler-
ance for investment risk and relatively high liquidity needs?
A Insurance company
B Defined-­benefit pension plan
C Charitable foundation
116 The risk-­free rate is 5%, and the market risk premium is 8%. If the beta of TRL
Corp. is 1.5, based on the capital asset pricing model (CAPM), the expected
return of TRL’s stock is closest to:
A 17.0%.
B 9.5%.
C 15.5%.
117 An investment policy statement’s risk objective states that over a 12-­month
period, with a probability of 95%, the client’s portfolio must not lose more than
5% of its value. This statement is most likelya(n):
A total risk objective.
B relative risk objective.
C absolute risk objective.
118 Two investors have utility functions that differ only with regard to the coeffi-
cient of risk aversion. Relative to the investor with a higher coefficient of risk
aversion, the optimal portfolio for the investor with a lower coefficient of risk
aversion will most likely have:
A a lower level of risk and return.
B a higher level of risk and return.
C the same level of risk and return.
119 Within a risk management framework, risk tolerance:
A and risk exposure should be kept in alignment.
B includes the qualitative assessment and evaluation of risk.
C is determined as a result of establishing how and where risk is taken.
120 Which of the following statements best describes a potential concern for clients
using robo-­advisers? Robo-­advisers:
22 2020 Level I Mock Exam (A) PM

A must be established as registered investment advisers.

B do not seem to incorporate the full range of investment information into
their recommendations.
C are likely to be held to a similar code of conduct as other investment profes-
sionals in the given region.