CFA Level I Workshop 1 Study Session 1 Ethical and Professional Standards Study Session 2 Quantitative Methods: Basic Concepts

Transcription

1 CHARTERED FINANCIAL ANALYST CFA Level I Workshop 1 Study Session 1 Ethical and Professional Standards Study Session 2 Quantitative Methods: Basic Concepts 1

2 CHARTERED FINANCIAL ANALYST Questions 2

3 Question 1 of 15 [120516] Martindale, CFA, is an equity analyst with Grey Brothers. He has developed a very good relationship with Jellicoe Laboratories in the past. He has enjoyed access to management and has had active participation in conference calls. Lately, Martindale has become convinced that the stock is overpriced, but worried about concluding strongly on this in a research report that is coming up for publication in case management retaliate, and deny him access to information, as they have a reputation for aggressive treatment of analysts. Martindale has issued a report that has an unfavourable recommendation on Jellicoe s stock. Jellicoe s management have reacted strongly to this report and have warned Martindale that his recommendation should improve next time or they will withdraw his access to the conference calls. How should Martindale react to these threats? Martindale should: A. Make sure that in his next report he tempers his language so that his recommendations are ambiguous and so the management of Jellicoe will not be so aggressive in their responses next time B. Stress that his report is objective and that all research he has conducted is based on company fundamentals C. Request to his supervisors that he stops having responsibility for covering Jellicoe 3

4 Question 2 of 15 [120517] Sally Golding, CFA, is an investment analyst covering the automobile industry. As part of her research, she has been invited by a client, Palmine Metals to take a trip to a remote location to tour a palladium mine. The supply of the metal will have an immediate effect on several other companies she analyzes. There is no public transportation to the mine and so Palmine Metals have organized a corporate jet for the analysts on the trip. Palmine has also booked and paid for a nearby motel to accommodate the analysts on the trip as there are few other hotels nearby. Sally is most likely to be in: A. Full compliance with the standards B. Breach of the standards for accepting benefits that would compromise her independence C. Breach of the standards because she will use information from this trip to aid her analysis of companies other than Palmine 4

5 Question 3 of 15 Which of the following are required to comply with the Code of Ethics and Professional Standards? [120518] A. CFA members only B. CFA members and candidates C. CFA members, candidates, and firms who employ members and candidates 5

6 Question 4 of 15 [120519] A member has been investigated by a Designated Officer, who has proposed disciplinary sanctions. The member has chosen to reject the sanctions. Which one of the following is most likely to happen once a member rejects sanctions? A. The member would lose membership of the CFA Institute B. The matter would be referred to a panel of CFA Institute members for a hearing C. There would be condemnation by the member s peers 6

7 Question 5 of 15 A CFA proctor reports an exam violation by a Level I delegate to the Professional Conduct staff at the CFA Institute. Which of the following are the Professional Conduct department least likely to do in immediate response to this report? [120520] A. Interview the candidate concerned B. Issue a warning letter for future exams C. Request an explanation in writing from the candidate 7

8 Question 6 of 15 James receives a five-year $100 annuity and interest rates are 5%. Which of the following is closest to the PV of the annuity, firstly assuming the payments are received at the start of each year, and then secondly, at the end of each year? [120515] A. $433 and $455 respectively B. $455 and $433 respectively C. $423 and $445 respectively 8

9 Question 7 of 15 Which of the following statements least accurately describes the methods of internal rate of return (IRR) and net present value (NPV)? [120526] A. The NPV and IRR methods assumes that a project s cash flows will be reinvested at the cost of capital B. The discount rate that when used gives a NPV of zero is known as the IRR C. If a situation arises where the IRR and NPV methods give conflicting decisions for a project, the NPV method should be used 9

10 Question 8 of 15 A 120 day T-bill is priced at $97,500. Its bank discount and money market yields are respectively closest to: [120527] A. 2.5% and 7.5% B % and 7.5% C. 7.5% and 7.692% 10

11 Question 9 of 15 A client has estimated that college tuition for her new-born child will be approximately $25,000 per year. She would like to ensure that she has saved for four years college tuition by the time her son is 18 and be able to make the first $25,000 payment on his 18th birthday, the second on his 19th birthday, etc. She believes interest rates in the long run will average 5%. What amount does she need to save each year to ensure that after 18 payments, starting on her child's first birthday, she has reached her objective? [120528] A. $3, B. $3, C. $3,

12 Question 10 of 15 An investor has three stocks in their portfolio: 200 shares of stock A priced at $12 each 300 shares of stock B priced at $15 each 400 shares of stock C priced at $16 each The weighted mean price for a stock in this portfolio is closest to: [120522] A. $14.33 B. $14.78 C. $

13 Question 11 of 15 For negatively skewed data, which of the following is most likely to be correct? [120521] A. The mean will be greater than the median which will be greater than the mode B. The mode will be greater than the mean which will be greater than the median C. The mode will be greater than the median which will be greater than the mean 13

14 Question 12 of 15 A security has achieved the following returns over the last seven years: [120523] 14%, 6%, 3%, 9%, 12%, 22% and 24% The median and the geometric mean of these returns is closest to: A. 9% median and 12.63% geometric mean B. 12% median and 12.86% geometric mean C. 12% median and 12.63% geometric mean 14

15 Question 13 of 15 A return distribution is characterized as having frequent small loses, and a few large gains. Is this distribution best described as having: [120524] A. A mean greater than the mode? No A positive skew? Yes B. A mean greater than the mode? Yes A positive skew? Yes C. A mean greater than the mode? Yes A positive skew? No 15

16 Question 14 of 15 In comparison to a normal distribution, a distribution is noted as having a greater percentage of small deviations from the mean, and a greater percentage of extremely large deviations from the mean. This is evidence of a distribution that: [120525] A. Is negatively skewed B. Has negative excess kurtosis C. Is leptokurtic 16

17 Question 15 of 15 Which of the following counting principles is most appropriate in calculating how many 40 stock portfolios can be constructed from the FTSE 100 index? [120514] A. Permutation formula (100 m 40) B. Combination formula (100 s 40) C. Addition rule 17

18 CHARTERED FINANCIAL ANALYST Solutions 18

19 Solution 1 of 15 [120516] B Standard V (A) Diligence and Reasonable Basis Pressure from Jellicoe s management is inappropriate, and should not have a bearing on the report issued by Martindale. Martindale is within his rights to use subtle language in his report, but must not be ambiguous as the standards require that clear, transparent recommendations are made. There is no requirement for Martindale to end his coverage of Jellicoe, this situation is not uncommon, and Martindale should be able to retain his objectivity by making sure he is diligent and thorough in all his research. 19

20 Solution 2 of 15 [120517] A Standard I (B) Independence and Objectivity Golding is not in breach of the standards because the trip was strictly for business, there was no public transport available, and few other hotels nearby, so the provision of transport is not deemed to be lavish in the circumstances. As the mine is remote, this is also not unusual behaviour, and is unlikely to impair Golding s independence or objectivity. 20

21 Solution 3 of 15 [120518] B CFA members and candidates are required to comply with the Code of Ethics and Professional Standards. Firms who employ CFA members and candidates may adopt the Code and Standards, but are not currently required to. 21

22 Solution 4 of 15 [120519] B CFA Institute Professional Conduct Program Once a member rejects sanctions put forward by the Designated Officer, the matter would be referred to a panel of CFA Institute members for a hearing. 22

23 Solution 5 of 15 [120520] B The Professional Conduct officers are likely to investigate the situation before taking any sanctions against a member. Therefore, the immediate responses are likely to be to interview the candidate concerned, and to request an explanation in writing from the candidate rather than to issue a warning. 23

24 Solution 6 of 15 [120515] B If the payments are received at the start of the year, then it is an annuity due. It is probably easiest to switch your calculator to Begin mode and then use the annuity function, with N = 5, I/Y = 5% and PMT = $100. PV of annuity due = $ If the payments are received at the end of the year, then it is an ordinary annuity. Switch your calculator to End mode and then use the annuity function, with N = 5, I/Y = 5% and PMT = $100. PV of ordinary annuity = $ Alternatively, to calculate the PV of the annuity due increase value of ordinary annuity by multiplying its value by 1.05 as all cash flows are received 1yr earlier. 24

25 Solution 7 of 15 [120526] A The IRR method assumes that the cash flows from the project are reinvested at the IRR. 25

26 Solution 8 of 15 [120527] C The return is $100,000-97,500 = $2,500 The bank discount yield is (Return / Face) x (360 / 120) The money market yield is (Return / Cost) x (360 / 120) 26

27 Solution 9 of 15 [120528] B The amount to be saved by her child s 18th birthday is $ (In Begin mode (4 > N; 5 > I/Y: > PMT; CPT PV) Switching your calculator back in to End mode we now have > FV; 18 > N; 5 > I/Y; CPT PMT = $3,

28 Solution 10 of 15 [120522] B Weighting by the number of shares in each stock to the total number of shares: ((200 / 900) x $12) + ((300 / 900) x $15) + ((400 / 900) x $16) = $

29 Solution 11 of 15 [120521] C Negatively skewed data is where there is a chance of a very low value, creating a long tail on the left hand side. The mean will be most affected by this very low value, and the mode the least affected; therefore the mode will be greater than the median, which will be greater than the mean. 29

30 Solution 12 of 15 [120523] C The median is the central value after putting the data in an array 3% 6% 9% 12% 14% 22% 24% 12% is the central value, or the median. The geometric mean is calculated by multiplying all of the seven price relatives together, taking the 7th root and subtracting 1: 1.14 x 1.06 x 1.03 x 1.09 x 1.12 x 1.22 x 1.24 = th root = Subtract the 1: = or 12.63% 30

31 Solution 13 of 15 [120524] B A distribution that has frequent small losses and a few large gains is known as having positive skew. This means a long right-hand tail. For a positive skew distribution; Mean > Median > Mode 31

32 Solution 14 of 15 [120525] C This will be evidence of a leptokurtic distribution that is more peaked, and has fatter tails than a normal distribution. A leptokurtic distribution has positive excess kurtosis. 32

33 Solution 15 of 15 [120514] B We have to consider the number of ways that we can select 40 stocks from a total of 100 stocks where the order of selection does NOT matter. This is a combination pr. 33