Edge

FIT – CFA FOUNDATIONS

MOCK EXAM 2 - SOLUTIONS
120 marks
Time allocation: 120 minutes

CHAPTER 1: QUESTIONS 1-6
CHAPTER 2 - 3: QUESTIONS 7 - 18
CHAPTER 4 -8: QUESTIONS 19 - 42
CHAPTER 9 – 12: QUESTIONS 43 - 66
CHAPTER 13 – 15: QUESTIONS 67 - 90
CHAPTER 16 - 17: QUESTIONS 91- 96
CHAPTER 18 – 20: QUESTIONS 97- 120

No: Question: Solution Explanation

1. These are also called deposit-taking institutions or B Banks are also called deposit-taking
depository institutions? institutions or depository institutions because
they take deposits.
A. Societies
B. Banks
C. Retailers

2. The 2 main types of insurance companies are? A There are two main types of insurance
companies:
A. Property & Casualty and Life Insurers
B. Property & Casualty • Property and casualty insurers that cover
C. Short and Long Term insurers assets, such as homes, cars, and businesses,
and legal liability.
• Life insurers that pay out a sum of money
upon death or serious injury of the person
insured.

3. Which of the following statements is most likely B The investment industry

accurate? • It is a subset of the financial services
industry
A. The Investment industry is not a subset of the • It is composed of the participants that are
financial services industry instrumental in helping savers invest their
B. The Investment industry is composed of the money and helping spenders raise capital
participants that are instrumental in helping savers
in financial markets.
invest their money and helping spenders raise
capital in financial markets. • It provides numerous benefits to the
C. The Investment industry provides no benefits to the economy.
economy • the efficient allocation of scarce
resources, and
• better information about investment
opportunities, products and services
that are appropriate for providers and
users of capital, and liquidity

4. The financial services industry comprises: C Financial Services Industry

A. The investment Industry • Investment Industry
B. Oher industries • Other Industries (banking, insurance, etc.)
C. The investment industry and other industries

 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

5. Which of the below is not an economic benefit for C Economic benefits provided by the investment
provided by the investment industry? industry

A. Contributes to the efficient allocation of resources • Contributes to the efficient allocation of
B. Provides liquidity resources
C. Does not package investment opportunities that • Provides and processes information about
satisfy the needs of investors investment opportunities
• Packages investment opportunities that
satisfy the needs of investors
• Provides liquidity

6. Brokers: A Brokers: Act as agents connecting buyers and

sellers
A. Act as agents connecting buyers and sellers
B. Act as principals by trading their own capital
C. Confirm and settle trades

7. Which of the below is not a conflict of interest? A Examples of conflicts of interest

• Efforts to generate excessive commissions
A. An effort to generate a fair commission • Insider Trading: Attempts to benefit from
B. Attempts to benefit from material non-public material non-public information
information
• Front Running: Placing a personal order
C. Placing a personal order ahead of a client’s order ahead of a client’s order

8. Which of the below statements is part of the Code of A CFA institute code of ethics
Ethics? Members of CFA Institute (including CFA
charterholders) and candidates for the CFA
A. Act with integrity, competence, diligence, respect, designation (“Members and Candidates”) must:
and in an ethical manner with the public, clients,
prospective clients, employers, employees, • Act with integrity, competence, diligence,
colleagues in the investment profession, and other respect, and in an ethical manner with the
participants in the global capital markets. public, clients, prospective clients,
B. Place the ethical conduct of the investment employers, employees, colleagues in the
profession and the interests of clients above their investment profession, and other
own personal interests. participants in the global capital markets
C. Promote the competence and viability of the global • Place the integrity of the investment
capital markets for the ultimate benefit of society. profession and the interests of clients
above their own personal interests.
• Use reasonable care and exercise
independent professional judgment when
conducting investment analysis, making
investment recommendations, taking
investment actions, and engaging in other
professional activities.
• Practice and encourage others to practice
in a professional and ethical manner that
will reflect credit on themselves and the
profession.
• Promote the integrity and viability of the
global capital markets for the ultimate
benefit of society.
• Maintain and improve their professional
competence and strive to maintain and
improve the competence of other
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

investment professionals.

9. Which of the below is not part of the principles guiding A Principles guiding the standards of
the standards of professional conduct? professional conduct

A. Make simple disclosures • Make full and fair disclosure
B. Engage in fair dealing • Engage in fair dealing
C. Protect confidential information • Protect confidential information

10. Which of the below is a benefit of ethical conduct? C Benefits of ethical conduct

A. Honesty • Stability of the Financial System
B. Integrity • Investor’s Trust
C. Stable financial system • Increased Market Participation and
Efficiency

11. Which of the below is not an objective of regulation? B Objectives of regulation

A. Protect Consumers 1. Protect Consumers
B. Provide economic regulation 2. Foster Capital Formation and Economic
C. Enhance efficiency Growth
3. Support Economic Stability
4. Ensure Fairness
5. Enhance Efficiency
6. Improve Society

12. Which of the below is an objective of regulation? B Objectives of regulation

A. Ensure compliance 1. Protect Consumers
B. Improve Society 2. Foster Capital Formation and Economic
C. Support Guidance and recommendations Growth
3. Support Economic Stability
4. Ensure Fairness
5. Enhance Efficiency
6. 6. Improve Society

13. Which of the below is not a classification of regulatory C Classification of regulatory regimes
regimes?
• Principles Based
A. Rules Based • Rules Based
B. Disclosures based • Merit Based
C. Regulations Based • Disclosure based

14. Which of the below belong to the Gatekeeping Rules for C Gate Keeping Rules
types of regulations? • Personnel
• Financial Products
A. Personnel and Net Capital Rules
B. Handling of customer assets and Financial Products Operational Rules
C. Personnel and Financial Products • Capital Rules
• Handling of customer assets

 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

15. Which of the below belong to the disclosure Rules for B Gate Keeping Rules
types of regulations? • Personnel
• Financial Products
A. Handling of customer assets and Financial Products
B. Corporate Issuers, Market Transparency and Operational Rules
Disclosure Triggers • Capital Rules
C. Personnel and Net Capital Rules • Handling of customer assets

Disclosure Rules
• Corporate Issuers
• Market Transparency
• Disclosure Triggers

16. Which of the below belong to the Sales Practice Rules A Gate Keeping Rules
for types of regulations? • Personnel
• Financial Products
A. Restrictions on self-dealing and Suitability
standards Operational Rules
B. Corporate Issuers, Market Transparency and • Capital Rules
Disclosure Triggers • Handling of customer assets
C. Personnel and Net Capital Rules
Disclosure Rules
• Corporate Issuers
• Market Transparency
• Disclosure Triggers

Sales Practice Rules

• Restrictions on self-dealing
• Suitability Standards
• Advertising
• Fees
• Information Barriers

17. Which of the below belong to the Trading Rules for B Trading Rules
types of regulations?
• Market Standards
A. Market standards and Market Trading • Market Manipulation
B. Market Standard and Market Manipulation • Insider Trading
C. Insider Trading and Market Trading • Front Running
• Brokerage Practices

18. ___________ are what the company must do to achieve a B • Policies are principles of action adopted by
desired outcome? a company.
• Procedures are what the company must do
A. Plans
to achieve a desired outcome
B. Procedures
C. Policies

19. Which of the below statements is accurate C Economics is the study of production,
distribution, and consumption, or the study of
A. Economics is the study of production, distribution, choices in the presence of limited or scarce
and consumption, or the study of choices in the resources
presence of unlimited resources
B. Economics is the study of selling and buying, or the
study of choices in the presence of limited or scarce
resources
C. Economics is the study of production, distribution,
and consumption, or the study of choices in the
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

presence of limited or scarce resources

20. Which of the following statements is correct A • Microeconomics deals with what factors
affect decisions made by firms and
A. Microeconomics deals with factors that affect individuals
decisions made by firms and individuals.
• Macroeconomics deals with what factors
B. Macroeconomics deals with factors that affect
decisions made by firms and individuals. affect the economy as a whole?
C. Microeconomics deals with factors that affect the
economy as a whole.


21. Which of the below statements is correct B Law of Demand: Quantity demanded and price
of a product are usually negatively related
A. Law of Demand: Quantity demanded and price of a
product are usually positively related
B. Law of Demand: Quantity demanded and price of a
product are usually negatively related
C. Law of Demand: Quantity demanded and price of a
product are usually not related

22. Which of the below statements is accurate C • Income Increases – Demand Increases =
Normal product
A. If income increases and the demand increases the • Income Increases – Demand decreases =
product is an inferior product inferior product
B. If income increases and the demand does not
change the product is an normal product
C. If income increases and the demand increases the
product is a normal product

23. Which of the below are not factors affecting quantity B Factors affecting quantity demanded
demanded?
• Future Prices
A. Future prices and General Tastes and preferences • General Tastes and preferences
B. Past process and Future prices
C. General Tastes and Preferences

24. Accounting profit is calculated as: C Accounting Profits = Revenues – Explicit costs

A. Revenues + expenses
B. Revenues – Explicit and Implicit Expenses
C. Revenues – Explicit Expenses

25. In a perfect competition industry structure: A Perfect Competition

A. Many buyers and sellers trading a uniform • Many buyers and sellers trading a uniform
commodity commodity
B. Few buyers and sellers trading a uniform • Little or no barriers to entry
commodity • No single buyer or seller can affect the
C. High barriers to entry market price

26. GDP is defined as: B GDP: Value of All Final Products and Services

A. Value of all goods and services
B. Value of All Final Products and Services
C. Only the value of tangible goods.

27. Nominal GDP: A Nominal GDP, which reflects the current

market value of products and services
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

A. Reflects the current market value of products and unadjusted for price changes, may overstate or
services unadjusted for price changes may understate actual economic growth.
overstate or understate actual economic growth.
B. Is Real GDP adjusted for changes in price levels
C. Is Real GDP + a risk premium

28. Which of the below is not a factor affecting economic C Economic growth is affected by:
growth:
• Growth of labour force
A. Availability of capital • Productivity Gains
B. Growth of labour force • Availability of capital
C. Availability of investments

29. Which of the following is not a phase in the business B The phases of the business cycle:
cycle:
• Expansion
A. Expansion • Peak
B. Inflation • Contraction
C. Contraction • Trough/Recovery

30. Which of the below is an economic indicator: B • Lagging Indicator

• Coincident Indicator
A. Controlling Indicator • Leading Indicator
B. Leading Indicator
C. Consumer Indicator

31. Which of the below is not an inflation indicator: C Inflation indicators

A. PPI • Producer Price Index (PPI): Measures the
B. Inflation Rates and Price indices average selling price of products in the
C. CPI economy
• Inflation Rates and Price Indices: Different
indices can produce different inflation
measures
• Implicit GDP Deflator: Nominal GDP
divided by real GDP

32. Which of the below is not a time lag limitation of fiscal B Time Lags
policy
• Recognition
A. Recognition • Decision
B. Unexpected Responses • Implementation
C. Implementation • Responses

33. Which of the below statements is correct: B • Imports are products and services that are
produced outside a country’s borders and
A. Exports are products and services that are then brought into the country.
produced outside a country’s borders and then • Exports are products and services that are
brought into the country. produced within a country’s borders and
B. Imports are products and services that are then transported to another country.
produced outside a country’s borders and then
brought into the country.
C. Imports are products and services that are
produced within a country’s borders and then
transported to another country.
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

34. Which of the below is not a benefit of international C Benefits of international trade:
trade:
• Gain Access to Resources
A. Improve Quality and/or Reduce Prices • Improve Quality and/or Reduce Prices
B. Create Additional Demand for Products and • Create Additional Demand for Products
Services and Services
C. Limited Access to Resources • Provide Greater Choice to Customers

35. Which of the below declarations is accurate C The balance of payments shows the flow of
money in and out of a country as a result of
A. The Current account shows the flow of money in exports and imports of products and services.
and out of a country as a result of exports and It also reflects financial transactions and
imports of products and services. It also reflects financial transfers between resident and non-
financial transactions and financial transfers resident economic entities.

between resident and non-resident economic
entities.
B. The Capital and financial account shows the flow of
money in and out of a country as a result of exports
and imports of products and services. It also reflects
financial transactions and financial transfers
between resident and non-resident economic
entities.
C. The balance of payments shows the flow of money
in and out of a country as a result of exports and
imports of products and services. It also reflects
financial transactions and financial transfers
between resident and non-resident economic
entities.

36. The financial account includes all of the below expect: A Capital Account:

A. Capital Transfers • Capital transfers
B. Direct Investments
C. Portfolio Investments
Financial Account:

• Direct investments
• portfolio investments
• Other investments, and
• The reserve account

37. Which of the below is not a factor affecting exchange B Factors affecting exchange rates
rates:
• Balance of payments: A current account
A. Level of inflation deficit tends to lead to a depreciation of the
B. Balance of imports domestic currency.
C. Level of interest rates • Level of inflation: High inflation tends to
lead to a depreciation of the domestic

currency.
• Level of interest rates: Higher interest
rates tend to lead to an appreciation of the
domestic currency

 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

38. Which Audit report below would you like to get as a B Unqualified or Clean Opinion: Means that the
company: financial statements are prepared in
accordance with the applicable accounting
A. Qualified standards
B. Unqualified
C. Adverse Adverse Opinion: Indicates that the financial
statements do not comply with the accounting
standards and, therefore, do not provide a fair
representation of the company’s performance.

39. Another name for this financial statement is the B Balance sheet - also called statement of
statement of financial condition financial position or statement of financial
condition It is at a point in time!
A. Income statement
B. Balance Sheet
C. Cash Flow statement

40. Which of the below is not a non-current asset C Current Assets

A. Property, Plant and Equipment • Cash
B. Goodwill • Accounts Receivable
C. Accounts Receivable • Inventory

Non-Current Assets

• Property, Plant and Equipment
• Intangible assets
• Goodwill
• Financial assets

41. Which ratio below is not a measure of liquidity? B Liquidity ratio’s

A. Current ratio • Current ratio
B. Return on assets • Quick Ratio
C. Quick ratio

42. When comparing investments we need to take into C Comparing investments

account all of the following except:
• Discount rates
A. Timing of cash flows • Size of cash flows
B. Size of cash flows • Timing of cash flows
C. Market Effects

43. Which of the below statements is likely to be incorrect? A • The borrower (issuer) may be a company
or a government, and the investors may be
A. Companies may also raise capital by buying equity individuals, companies, or governments.
securities. • Companies may also raise capital by
B. Companies may also raise capital by issuing issuing (selling) equity securities.
(selling) equity securities.
C. The borrower (issuer) may be a company or a
government, and the investors may be individuals,
companies, or governments.

44. The Par value is: B Par Value

A. Promised interest rate • Amount paid at maturity
B. Also called principal or face value • Also called principal or face value
C. Typically 30 years or less


 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

45. Which of the below statements is accurate? C • The primary market is where new
securities are issued and sold to investors.
A. The secondary market is where new securities are • In the secondary market, investors trade
issued and sold to investors. with other investors.
B. In the primary market, investors trade with other
• Bonds are often categorised by their
investors.
coupon rates: fixed rate bonds, floating-
C. Bonds are often categorised by their coupon rates: rate bonds, and zero-coupon bonds.
fixed rate bonds, floating-rate bonds, and zero-
coupon bonds.

46. Which of the below statements in accurate: B For most inflation-linked bonds, the par value,
not the coupon rate, of the bond is adjusted at
A. For most inflation-linked bonds, the coupon rate, each payment date to reflect changes in
not the par value, of the bond is adjusted at each inflation (which is usually measured via a
payment date to reflect changes in inflation (which consumer price index).

is usually measured via a consumer price index).
B. For most inflation-linked bonds, the par value, not
the coupon rate, of the bond is adjusted at each
payment date to reflect changes in inflation (which
is usually measured via a consumer price index).
C. For most inflation-linked bonds, the maturity of the
bond is adjusted at each payment date to reflect
changes in inflation (which is usually measured via
a consumer price index).

47. Zero-Coupon Bonds: C Zero-Coupon Bonds

A. Are issued at a premium • Have no periodic interest payments
B. The issue price is returned back at maturity • Are issued at a discount
C. Are issued at a discount • Par Value Returned at Maturity


48. Which of the below is incorrect: A • Par Value + Call Premium = Call Price
• A callable bond provides the issuer with
A. Par Value – Call Premium = Call Price the right to buy back (retire or call) the
B. Par Value + Call Premium = Call Price bond from bondholders prior to the
C. A callable bond provides the issuer with the right to maturity date at a pre specified price
buy back (retire or call) the bond from bondholders referred to as the call price.
prior to the maturity date at a pre specified price
referred to as the call price.

49. Pool of assets includes all of the below except: B Pool of Assets

A. Mortgages • Mortgages
B. Government Bonds • Credit Card Receivables
C. Auto Loans • Auto Loans
• Corporate Bonds

 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

50. Which of the below is most likely correct A • A warrant is an equity-like security that
entitles the holder to buy a specified
A. A warrant is an equity-like security that entitles the amount of common stock of the issuing
holder to buy a specified amount of common stock company at a specified price per share
of the issuing company at a specified price per • Convertible Bonds can be converted into
share shares of common stock
B. Convertible bonds cannot be converted into shares
of common stock
C. Convertible bonds Can be converted into shares of
preferred stock

51. Which of the below is least likely correct B • Preferred stock is called preferred because
owners of preferred stock will receive
A. Preferred stock is called preferred because owners dividends before common shareholders
of preferred stock will receive dividends before and will have a higher claim on the
common shareholders and will have a higher claim company’s assets if the company ceases
on the company’s assets if the company ceases operations
operations. • Preferred stock is typically issued with an
B. Preferred stock is called preferred because owners assigned par value that, along with a stated
of preferred stock will not receive dividends before fixed dividend rate, defines the amount of
common shareholders and will have a higher claim the annual dividend.
on the company’s assets if the company ceases
operations.
C. Preferred stock is typically issued with an assigned
par value that, along with a stated fixed dividend
rate, defines the amount of the annual dividend.

52. Which of the below is not a goal of warrants: C Warrants: Options to Buy Shares

A. Raise Capital Goals:
B. Employee Compensation
C. Employer Motivation • Raise Capital
• Employee Compensation

53. Which of the below is least likely correct: B • Common Stock has lowest priority
• Preferred Stock has middle priority
A. Common Stock has lowest priority
• Debt Security has highest priority
B. Debt Security has middle priority
C. Preferred Stock has middle priority

54. Which is the most risky security: A • Common Stock: Highest risk, highest
expected return
A. Common Stock • Preferred Stock: Middle risk, middle
B. Debt Securities expected return
C. Preferred Stock
• Debt Securities: Lowest risk, lowest
expected return
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

55. Which of the below statements is accurate: C DCF Valuation:

A. Relative Valuation estimates the value of a security • Estimates the value of a security as the
as the present value of all future cash flows that the present value of all future cash flows that
investor expects to receive from the security. the investor expects to receive from the
B. DCF valuation relies on the use of price multiples, security.
such as the price-to-earnings ratio, of comparable, • Common shareholders expect to receive
publicly traded companies or an industry average. two types of cash flows from investing in
C. Relative Valuation relies on the use of price equity securities: dividends and the
multiples, such as the price-to-earnings ratio, of proceeds from selling their shares
comparable, publicly traded companies or an
industry average.
Relative Valuation:

• Relies on the use of price multiples, such as
the price-to-earnings ratio, of comparable,
publicly traded companies or an industry
average

56. Asset-Based Valuation: A Asset based Valuation:

A. Estimates the value of common equity by • Estimates the value of common equity by
calculating the difference between the value of a calculating the difference between the
company’s total assets and its outstanding liabilities value of a company’s total assets and its
B. Relies on the use of price multiples, such as the outstanding liabilities
price-to-earnings ratio, of comparable, publicly • Should be based on market values and
traded companies or an industry average. includes intangible items
C. Estimates the value of a security as the present
value of all future cash flows that the investor
expects to receive from the security.

57. Which of the below is not a disadvantage of an IPO: B IPO

A. Requires Greater Disclosure and Transparency Advantages
B. Raises Visibility and Awareness
C. Increased Regulatory Requirements • Improves Liquidity
• Easier to Attract Talent
• Raises Visibility and Awareness
• Easier to Raise Capital

Disadvantages

• Requires Greater Disclosure and
Transparency
• Increased Regulatory Requirements
• Expensive

58. Which of the below statements is correct: B Dividends + Share Repurchases = Cash
returned to shareholders
A. Dividends = Cash returned to shareholders
B. Dividends + Share Repurchases = Cash returned to
shareholders
C. Dividends - Share Repurchases = Cash returned to
shareholders

 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

59. Which of the below is not a use of a derivative: B Uses of derivatives

A. Speculation Risk Management
B. Valuation
C. Hedging • Speculation
• Hedging

60. Which of the below declarations is correct: B Forward Contracts:

A. A forward contract has no counterparty risk • A forward contract is for delivery in the
B. A futures contract has no counterparty risk future with set terms.
C. A forward contract is a standardised contract • It is traded in the over-the-counter market.
• There is counterparty risk that the other

side cannot deliver or pay.
• No payment on the contract is required by
either party prior to delivery.

Futures Contracts:

• They are standardised contracts that trade
on an exchange as an intermediary
between buyers and sellers to reduce
counterparty risk
• Because they are traded on an exchange,
they are liquid.
• Margin requirements are determined by
the volatility of the underlying asset.
• Positions are marked to market daily. If a
position loses money, the customer can be
required to add money or the position is
closed.

61. Which of the below statements is incorrect: B • Call Option: The buyer of the option has
the right (but not the obligation) to buy the
A. A call option: The buyer of the option has the right underlying at the fixed price (exercise
(but not the obligation) to buy the underlying at the price).
fixed price (exercise price). • Put Option: The buyer of the option has the
B. A put option: The buyer of the option has the right right (but not the obligation) to sell the
(but not the obligation) to buy the underlying at the underlying at the fixed price (exercise
fixed price (exercise price). price).
C. A put option: The buyer of the option has the right
(but not the obligation) to sell the underlying at the
fixed price (exercise price).

62. A Call Option that is in the money: A Call Option Put Option
In the MP > EP MP < EP
A. Market Price > Exercise Price money
B. Market Price = Exercise Price At the MP = EP MP = EP
C. Market Price < Exercise Price money
Out the MP < EP MP > EP

money
63. Which of the following is not an advantage of alternative A Advantages of alternative investments
investments:
• Enhanced portfolio returns
A. Increased portfolio risk • Reduced Portfolio Risk
B. Enhanced portfolio returns
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

C. Reduced Portfolio Risk

64. Which of the following is not a limitation of alternative B Limitations of alternative investments
investments:
• Less Regulation and Less Transparency
A. Illiquidity • Illiquid: Difficult to Sell Quickly
B. Easy to Value • Difficult to Value
C. Less Regulation and Less Transparency



65. Which of the below statements is least likely correct B Venture Capital:
about venture capital:
• A private equity investment strategy that
A. A private equity investment strategy that consists consists of financing the early stage of
of financing the early stage of companies that have companies that have an innovative
an innovative business idea business idea
B. Considered the least riskiest type of private equity • Considered the riskiest type of private
investment strategy because many more companies equity investment strategy because many
fail than succeed more companies fail than succeed
C. Considered the riskiest type of private equity
investment strategy because many more companies
fail than succeed

66. Which of the below is most likely correct with regards A Commodities, such as precious and base
to commodity prices and inflation: metals, energy products, and agricultural
products, tend to rise in price with inflation.
A. Commodities, such as precious and base metals,
energy products, and agricultural products, tend to
rise in price with inflation.
B. Commodities, such as precious and base metals,
energy products, and agricultural products, tend to
drop in price with inflation.
C. Commodities, such as precious and base metals,
energy products, and agricultural products, tend to
not be related to a rise in price with inflation.

67. Financial planners help their clients understand all of A Financial planners help their clients
the below except: understand:

A. Their past financial needs • Their current and future financial needs
B. The risks they face when investing, • The risks they face when investing
C. Their preferences for capital preservation versus • Their ability to tolerate investment risks,
capital growth and
• Their preferences for capital preservation

versus capital growth.

68. Asset allocation: C • Asset Allocation The proportion of a

portfolio that should be invested in various
A. Involves estimating the fundamental value of asset classes to help meet financial goals.
potential investments and identifying attractive • Investment Analysis Involves estimating
securities and assets the fundamental value of potential
B. Requires investment managers to invest in the investments and identifying attractive
attractive securities and assets they identified securities and assets. An investment’s
through their investment analysis, taking into fundamental value, also called intrinsic
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

account the client’s requirements and appropriate value, indicates the price that investors
asset allocation. would pay for the investment if they had a
C. The proportion of a portfolio that should be complete understanding of the
invested in various asset classes to help meet investment’s characteristics.
financial goals • Portfolio Construction Requires
investment managers to invest in the
attractive securities and assets they
identified through their investment
analysis, taking into account the client’s
requirements and appropriate asset
allocation.

69. A Passive investor: B • Willing to Accept Market Rates of Return -

Passive Investment Management
A. Wants to “Beat the Market” • Wants to “Beat the Market”- Active
B. Is willing to Accept Market Rates of Return Investment Management
C. Is willing to accept low returns

70. Which of the below is incorrect regarding credit rating C Credit Rating Agencies
agencies:
• Credit rating agencies specialize in
A. They specialize in providing opinions about the providing opinions about the credit quality
credit quality of bonds and of their issuers. of bonds and of their issuers.
B. Corporate issuers pay rating agencies to rate their • Most rating agencies do not charge
securities because ratings generally make securities investors for their ratings, although they
more marketable. may charge them for the detailed reports
C. No conflict of interest arises. on which the ratings are based
• Instead, corporate issuers pay rating

agencies to rate their securities because
ratings generally make securities more
marketable.
• An obvious conflict of interest thus arises
because issuers are likely to direct their
business to those agencies that will
provide high ratings.

71. Many data vendors provide current and accurate data C Many data vendors provide current and
about companies and market conditions, including all of accurate data about companies and market
the following, except: conditions, including the following:

A. Macroeconomic data information • Macroeconomic data information about
B. Accounting data information economic activity and international trade
C. Microeconomic data information • Accounting data information about a
company’s financial statements, including
the balance sheet, income statement, and
cash flow statement
• Historical market data information about
past market prices and trading volumes
• Newsfeeds provide real-time news about
companies and markets that investors
need to know because such news may
affect the value of the companies’
securities
• Market data feeds provide real-time
information about market quotes and
orders, as well as recent trades, that is
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

helpful for investors who want to trade

72. Block Brokers: B Block brokers help investors who want to trade
large blocks of securities by finding a
A. Refers to a bundle of services that brokers provide counterparty willing to buy or sell a large
to some of their clients, usually investment number of securities
professionals engaged in trading.
B. Help investors who want to trade large blocks of
securities by finding a counterparty willing to buy
or sell a large number of securities.
C. Do not help investors who want to trade large
blocks of securities by finding a counterparty
willing to buy or sell a large number of securities

73. Primary Dealers: C Primary dealers are dealers with which central
banks trade when conducting monetary policy.
A. Refers to a bundle of services that brokers provide
to some of their clients, usually investment
professionals engaged in trading.
B. Help investors who want to trade large blocks of
securities by finding a counterparty willing to buy
or sell a large number of securities
C. Are dealers with which central banks trade when
conducting monetary policy.

74. Sell-side include all of the following except: B Sell-Side:

A. Dealers • Investment Banks
B. Pension Funds • Brokers
C. Brokers • Dealers

75. This function supports activities by validating, booking C Middle office supports front office activities by
and confirming trades: validating, booking and confirming trades:

A. Back office
B. Front Office
C. Middle Office

76. The Chief investment officer is: B CIO is responsible for any investment advice
that the firm provides to its clients and for the
A. Responsible for the day-to-day management of the investment decisions that the firm makes for
firm. itself and on behalf of its clients.

B. Responsible for any investment advice that the firm
provides to its clients and for the investment
decisions that the firm makes for itself and on
behalf of its clients
C. Responsible for financing the firm and for financial
reporting.
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

77. Which of the below is an advantage of indirect C Advantages of indirect investment vehicles:
investment vehicles:
• They are professionally managed.
A. They are not professionally managed • They allow small investors to use the
B. They allow large investors to use the services of services of professional managers.
professional managers. • They allow investors to share in the
C. They allow investors to share in the purchase and purchase and ownership of large assets,
ownership of large assets, such as skyscrapers such as skyscrapers.
• They allow investors to own diversified

pools of risks and thereby obtain more
predictable, although not necessarily
better, returns.
• They often are substantially less expensive
to trade than the underlying assets.

78. Which of the below is not an advantage of direct A Advantages of direct investment vehicles
investment vehicles:
• Investors can exercise more control over
A. They are professionally managed their investments than investors who hold
B. Investors can exercise more control over their indirect investments.
investments than investors who hold indirect • Investors can choose when to buy or sell
investments their investments to minimise their tax
C. Investors can choose when to buy or sell their liabilities.
investments to minimise their tax liabilities. • Investors can choose not to invest in
certain securities, such as companies that

sell tobacco or alcohol.
• Investors who are wealthy can often obtain
high-quality investment advice at a lower
cost when investing directly rather than
indirectly.

79. Open-End Funds: A Open-End Funds

A. May be no-load or investors may pay sales-loads • Shares issued and redeemed as necessary
B. NAV = Total net value of fund - Number of shares May be no-load or investors may pay sales-
outstanding loads
C. NAV = Total net value of fund X Number of shares • No load: no deposit or redemption fees
outstanding • Sales load: may have to pay sales load
at the time of purchase, at the time of

redemption, or over time, usually 3%
to 9%
• Price equals net asset value (NAV) at close
of trading
• NAV = Total net value of fund ÷ Number of
shares outstanding
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

80. Closed-end funds A Closed-End Funds

A. Unlike open-end funds, closed-end funds do not • Unlike open-end funds, closed-end funds
issue or redeem shares on demand. do not issue or redeem shares on demand.
B. Unlike open-end funds, closed-end funds do issue • They sell shares to the public in initial
or redeem shares on demand. public offerings (IPOs) and then use the
C. They do not sell shares to the public in initial public proceeds to purchase investment
offerings (IPOs) and then use the proceeds to securities or other assets.
purchase investment securities or other assets • After the IPO, investors who want to
buy or sell a closed-end fund do so
through exchanges and dealers.
• Closed-end funds are actively managed
and generally trade at values different
from their NAV.
• Discounts are more common than
premiums.

81. Which of the below is correct regarding Exchanged B Exchanged Traded Funds (ETF’s)
Traded Funds (ETF’s)
• Pooled investment vehicles that are
A. Are pooled investment vehicles that are typically typically passively managed to track a
actively managed to track a particular index or particular index or sector, although an
sector, although an increasing number of ETFs are increasing number of ETFs are actively
actively managed. managed.
B. ETFs are generally managed by investment • ETFs are generally managed by investment
professionals who provide investment, managerial, professionals who provide investment,
and administrative services. managerial, and administrative services.
C. The fees for these services and trading costs are • The fees for these services and trading
high, particularly for ETFs that are passively costs are low, particularly for ETFs that are
managed. passively managed.

82. Management fees: B Management fees:

A. Are high if passively managed for ETF’s • High if actively managed, low if passively
B. Are low if passively managed for ETF’s managed (Open-end)
C. Are low because they are actively managed for • High because actively managed (Closed-
closed-end funds end)
• Low if passively managed (ETF’s)


83. Which of the below statements is correct: B The issuer only receives cash in primary
market transactions
A. The issuer receives cash in primary and secondary
market transactions
B. The issuer only receives cash in primary market
transactions
C. The issuer only receives cash in secondary market
transactions

84. Which of the following declarations is accurate: B • Demand > Supply – Oversubscribed
• Demand < Supply – Undersubscribed
A. Demand > Supply – Undersubscribed
B. Demand < Supply – Undersubscribed
C. Demand = Supply – Oversubscribed
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

85. Which of the below statements is accurate: A The underwriters have strong incentives to
choose a lower price because it reduces the
A. The underwriters have strong incentives to choose risk of the offering being undersubscribed.
a lower price because it reduces the risk of the
offering being undersubscribed.
B. The underwriters have low incentives to choose a
lower price because it reduces the risk of the
offering being undersubscribed.
C. The underwriters have strong incentives to choose
a lower price because it increases the risk of the
offering being undersubscribed.

86. In a rights offering, shareholders can: B Rights Offering:

A. Not exercise their options and maintain their Shareholders can
proportional ownership
B. Sell the rights to offset the dilution of ownership. • Exercise their options and maintain their
C. Buy the rights to offset the dilution of ownership. proportional ownership or
• Sell the rights to offset the dilution of
ownership.

87. Alterative trading venues: C • Exchanges- Exercise regulatory authority

• Alternative Trading Venues - Do not
A. Exercise regulatory authority exercise regulatory authority
B. Have no regulatory relationship
C. Do not exercise regulatory authority

88. Continuous markets do all the following except: C Call Markets

A. Arrange and execute trades anytime the market is • Trade only when the market is called at a
open particular time and place
B. Liquidity is dependent on the presence of buyers • Potential to be very liquid when they are
and sellers (or their orders) at the same time called but are completely illiquid between
C. Trade only when the market is called at a particular calls
time and place
Continuous Markets

• Arrange and execute trades anytime the
market is open
• Liquidity is dependent on the presence of
buyers and sellers (or their orders) at the
same time

89. Order-Driven Markets: A Order-Driven Markets

A. Trades are arranged using rules to match buy and • Trades are arranged using rules to match
sell orders buy and sell orders
B. Over-the-counter (OTC) markets • Exchanges and alternative trading systems
C. Assets are infrequently traded and expensive to

carry in inventory
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

90. Long Positions: C Long Positions

A. Securities or assets are borrowed to be sold and • Securities are purchased, giving ownership
then eventually repurchased of securities or assets
B. Gains occur when prices fall • Gains occur when prices rise
C. Gains occur when prices rise

Short Positions

• Securities or assets are borrowed to be
sold and then eventually repurchased
• Gains occur when prices fall

91. A defined contribution plan: B Defined Contribution Plan

A. Employer may need to make additional • Member’s benefit in retirement - Not
contributions defined
B. Member may need to adjust lifestyle or defer • Employer’s contributions – Defined
retirement • Investments are chosen by - The member
C. Members benefit in retirement is not defined. • Risk that investments do not perform as
expected is borne by - The member;

member may need to adjust lifestyle or
defer retirement

92. Endowment funds: A Endowment funds are long-term funds of not-

for profit institutions, such as universities,
A. Are long-term funds of not-for profit institutions, colleges, schools, museums, theatres, opera
such as universities, colleges, schools, museums, companies, hospitals, and clinics.
theatres, opera companies, hospitals, and clinics.
B. Are grant-making institutions funded by gifts and
by the investment income that they produce
C. Governments receive money from collecting taxes
or selling bonds

93. Pooled investment vehicles include all of the below B Pooled investment vehicles include:
except?
• Mutual funds
A. Mutual funds • Hedge funds
B. Fixed Income Funds • Private equity funds.
C. Private equity funds.

94. Total risk = C Systematic Risk + Specific Risk = Total risk

A. Systematic Risk – Specific Risk
B. Systematic Risk
C. Systematic Risk + Specific Risk

95. In strategic asset allocation, we estimate: C Estimate:

A. The rebalancing figure • Expected Returns
B. The allocation figure • Risk Measures
C. The expected Return • Correlations

 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

96. All of the below are factors affecting tactical asset B Tactical Asset Allocation
allocation, except:
• Economic Conditions
A. Central Bank Policies • Political Conditions
B. Past market trends • Central Bank Policies
C. Economic Conditions • Current Valuations vs. Historical
Valuations

• Recent Market Trends

97. Events can be all of the following except: B Events can be:

A. External • External or internal
B. Extreme • Negative or positive.
C. Positive

98. Classification of risks include all of the below expect: A Classification of Risk

A. Comprehensive Risks • Operational Risks
B. Compliance Risks • Compliance Risks
C. Operational Risks
• Investment Risks

99. Response Strategies include: C Response Strategies

A. Treat • Tolerate
B. Transfer • Treat
C. Target
• Transfer

• Terminate

100. Which of the below is not a benefit of risk management? B Benefits of risk management

A. Incorporates risk considerations in all business • Supports strategic and business planning
decisions • Incorporates risk considerations in all
B. Enhances cash flow business decisions
C. Prevents excessive risk taking
• Prevents excessive risk taking

• Brings greater discipline to operations
• Recognises responsibility and
accountability
• Improves performance assessment
• Enhances information flow
• Complements compliance procedures and
audit testing

101. Managing systems includes: C Managing Systems

A. Compliance • System failures
B. Managing the environment • Employee behaviour
C. Information Protection
• Hackers

• Information protection

102. Managing the environment includes all of the below B Managing the Environment
expect:
• Political Risk
A. Legal Risk • Legal Risk
B. Product Risk • Settlement Risk
C. Settlement Risk
 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

103. Which if the below statements is accurate? B Compliance risk is the risk that a company fails
to comply with all applicable rules, laws, and
A. Compliance risk is the risk that a company complies regulations.
with all applicable rules, laws, and regulations.
B. Compliance risk is the risk that a company fails to
comply with all applicable rules, laws, and
regulations.
C. Compliance risk is the risk that a company fails to
comply with procedures of the company

104. Investment risk includes all of the below expect: A Investment Risk

A. Financial Risk • Market Risk
B. Market Risk • Credit Risk
C. Credit Risk
• Liquidity Risk

105. Which of the below statements is correct? B VaR gives an estimate of the minimum loss of
value that can be expected for a given period
A. VaR gives an estimate of the maximum loss of value for a given probability.
that can be expected for a given period for a given
probability.
B. VaR gives an estimate of the minimum loss of value
that can be expected for a given period for a given
probability.
C. VaR gives an estimate of the % amount that a
company will lose.

106. Which of the below is a weakness of VaR: C Weaknesses of VaR

A. VaR gives an estimate of the maximum, but not the • VaR gives an estimate of the minimum, but
minimum, loss of value that can be expected. not the maximum, loss of value that can be
B. VaR guarantees that a loss in excess of VaR will not expected.
happen more frequently.
• VaR does not guarantee that a loss in
C. VaR gives an estimate of the minimum, but not the
maximum, loss of value that can be expected. excess of VaR will not happen more
frequently.
• VaR primarily relies on historical data to
forecast future expected losses, but past
returns may not be a good predictor of
future returns
• VaR often assumes that returns are
normally distributed and follow a bell-
shaped distribution.
• It is worth noting that the weaknesses
related to VaR apply to all measures that
rely on models and is known as model risk.

107. The performance evaluation process is as follows: C Measure absolute returns, adjust returns for
risk, measure relative returns, Attribute
A. Attribute performance, measure relative returns, performance
adjust returns for risk, measure absolute returns
B. Measure relative returns, , adjust returns for risk,
measure absolute returns, Attribute performance
C. Measure absolute returns, adjust returns for risk,
measure relative returns, Attribute performance

 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

108. The formula for Holding period return is: C HPR = Capital Gain/Loss + Income / Beginning
Value
A. HPR = Capital Gain/Loss – Income / Ending Value
B. HPR = Capital Gain/Loss + Income / Ending Value
C. HPR = Capital Gain/Loss + Income / Beginning
Value

109. Which of the below statements is accurate: B Downside deviation is calculated in almost
exactly the same way as standard deviation,
A. Downside deviation is not calculated in almost but instead of using all the deviations from the
exactly the same way as standard deviation average, positive and negative, downside
B. Downside deviation is calculated in almost exactly deviation is calculated using only negative
the same way as standard deviation deviations or by focusing on outcomes that are
C. Downside deviation is calculated using only less than some specified return target, not
positive deviations or by focusing on outcomes that necessarily the mean
are less than some specified return target, not
necessarily the mean

110. The reward to risk ratio is calculated as: B Reward-to-risk ratio = Measure of portfolio
return / Measure of portfolio risk 
A. Reward-to-risk ratio = Measure of portfolio return
X Measure of portfolio risk 
B. Reward-to-risk ratio = Measure of portfolio return /
Measure of portfolio risk 
C. Reward-to-risk ratio = Measure of portfolio risk /
Measure of portfolio return

111. Which of the below statements is correct: A The higher the value of the reward-to-risk
ratio, the better the risk-adjusted return—that
A. The higher the value of the reward-to-risk ratio, the is, the higher the return per unit of risk.
better the risk-adjusted return—that is, the higher
the return per unit of risk.
B. The lower the value of the reward-to-risk ratio, the
better the risk-adjusted return—that is, the higher
the return per unit of risk.
C. The higher the value of the reward-to-risk ratio, the
better the risk-adjusted return—that is, the lower
the return per unit of risk.

112. The formula for the Sharpe Ratio is: C Sharpe Ratio =Return on portfolio − Risk−free
return/Standard deviation of portfolio returns
A. Sharpe Ratio = Risk on portfolio − Risk−free
return/Standard deviation of portfolio returns
B. Sharpe Ratio = Return on portfolio − Risk−free
return/Return on portfolio
C. Sharpe Ratio = Return on portfolio − Risk−free
return/Standard deviation of portfolio returns

113. The formula for the Treynor Ratio is: B Treynor Ratio = Return on portfolio −
Risk−free return / Beta of portfolio returns 
A. Treynor Ratio = Return on portfolio − Risk−free
return/Standard deviation of portfolio returns
B. Treynor Ratio = Return on portfolio − Risk−free
return/Beta of portfolio returns 
C. Treynor Ratio = Risk on portfolio − Risk−free
return/Beta of portfolio returns 

114. Which of the below statements is correct: A Capital Asset Pricing Model (CAPM), from
which comes the term alpha. This model also
A. CAPM is a measure systematic risk using Beta gave rise to a measure of systematic risk (also
B. CAPM is a measure unsystematic risk using Beta called market risk or non-diversifiable risk):
C. CAPM is a measure of the markets performance beta.

 EDGE FIT – MOCK EXAM 2 – CFA FOUNDATIONS 2018/2019

115. Which of the below statements is correct: A • Internal Uses: Administrative Purposes
• External Uses: Informational Purposes,
A. From a legal perspective, documents establish Limit Risk
proof: proof of existence, authority, activity, and
obligation. • From a legal perspective, documents
B. Documents do not have any objectives establish proof: proof of existence,
C. Internal Uses of documents is for information authority, activity, and obligation.
purposes.

116. Which one of the below is not a document classification C Document classification systems
system
• Origin
A. Level of standardisation • Direction
B. Origin
• Level of standardisation
C. Future Usage

117. Which of the below declarations is accurate: B • Policies: Broadly set the rules
• Procedures: Help apply policies
A. Processes: Broadly set the rules
• Processes: Divide procedures into
B. Procedures: Help apply policies
C. Policies: Divide procedures into manageable actions manageable actions

118. Which process falls under the procedure of Identifying C Identify the highest standards.
the highest standards
• Create a register of all the legal and
A. Check that all employees comply with firm policies. regulatory obligations across all
B. Check that licensed representatives comply with all jurisdictions.
rules, laws, and regulations.
• Monitor changes in legal and regulatory
C. Create a register of all the legal and regulatory
obligations across all jurisdictions. obligations and update the register

119. Which process falls under the procedure to Train B Train employees to mitigate breaches
employees to mitigate breaches
• Conduct compliance training for each new
A. Remedy each breach. employee upon hiring.
B. Conduct compliance training for each new • Conduct annual compliance training for all
employee upon hiring.
employees
C. Review Procedure 2 to identify breaches.





120. Which of the below is not referred to as an unexpected C Some events are expected
event
• Such as regular income in the form of
A. Natural disaster interest from a bond investment, dividends
B. Merger activity from an equity investment, or rental
C. Dividends from an equity investment
income from a commercial real estate

investment.

Unexpected events that lead to external

documentation include the following:

• Merger and acquisition activity
• Bankruptcy
• Natural disaster