CFA Program Level I for February 2024

MOCK 4 SESSION 1
1/ Q. Ashley Brown, CFA, applies for a new job. In her application letter, she states, "As a CFA
charterholder, I provide the best value in trade execution." Further, she states, "I passed all three CFA
Program examinations in three consecutive years." Has Brown violated the Standards?

A. No

B. Yes, by stating, "As a CFA charterholder, I provide the best value in trade execution"

C. Yes, by stating, "As a CFA charterholder, I provide the best value in trade execution and by stating, "I
passed all three CFA Program examinations in three consecutive years"

2/ Q. Michael Cane, CFA, is an investment manager. Cane's proxy voting policy includes a provision
that voting proxies may not be required in all instances if they do not benefit clients. The proxy voting
policy is disclosed to his clients only upon request. Has Cane most likely violated the Standard relating
to loyalty, prudence and care?

A. Yes, only because the voting of proxies is required in all instances

B. Yes, only because the proxy voting policy is disclosed to his clients only upon request

C. Yes, both because the voting of proxies is required in all instances and because the proxy voting policy
is disclosed to his clients only upon request

3/ Q. Which of the following is a recommended procedure for compliance with the standard relating
to responsibilities of supervisors? Once a violation in the form of wrongdoing from an employee is
discovered, a supervisor should do which of the following?

A. Avoid increasing supervision of the wrongdoer until the investigation is concluded

B. Place appropriate limitations on the wrongdoer pending the outcome of the investigation

C. Rely on an employee's statement about the extent of a violation of the law if the employee gives
written assurance that the wrongdoing will not reoccur

4/ Q. Which of the following is a requirement for compliance with the GIPS standards?

A. The GIPS standards must be applied on a firm-wide basis

B. A firm must represent partial compliance by stating it is "in compliance with the GIPS standards except
for..."

C. A firm must refer to its performance calculation methodology as being "in compliance with the GIPS
standards

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CFA Program Level I for February 2024

5/ Q. Jessica Jayson, CFA, lives in a country without requirements to keep client information
confidential. Her firm requires only keeping information regarding current clients confidential, Jayson
discusses charity donations with one of her friends and shares an email address of a former client who
was involved in charity work. Has Jayson most likely violated the Standards?

A. No

B. Yes, the Standard relating to fair dealing

C. Yes, the Standard relating to knowledge of the law

6/ Q. Mary Lawrence, CFA, is a research analyst. She archives her research notes for recommendation
changes and discards her research notes for cases in which recommendations do not change. She also
discards third-party research reports used to support her analysis. Lawrence has most likely violated
the Standards:

A. only by discarding third-party research reports used to support her analysis.

B. only by discarding her research notes for cases in which recommendations do not change.

C. both by discarding third-party research reports used to support her analysis and by discarding her
research notes for cases in which recommendations do not change.

7/ Q. Robert Dowling, CFA, is part of a research team. Dowling's team has recommended a "buy"
rating on a company, but Dowling does not agree with the recommendation. To comply with the
Standard relating to diligence and reasonable basis, Dowling:

A. must decline to be identified with the report.

B. must ensure that the report reflects his opinion.

C. may continue to be identified with the report as long as the recommendation has a reasonable basis.

8/ Q. According to the Standard relating to preservation of confidentiality, if local laws require

investment personnel to maintain confidentiality, is a member permitted to share confidential client
information?

A. No

B. Yes, if the information concerns activities of a former client

C. Yes, if the information is provided in support of an investigation by the CFA Institute Professional
Conduct Program into the member's conduct

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CFA Program Level I for February 2024

9/ Q. Monique Gretta, CFA, is a research analyst at East West Investment Bank. Previously, Gretta
worked at a mutual fund management company and has a long-standing client relationship with the
managers of the funds and their institutional investors. Gretta often provides fund managers, who
work for Gretta's former employer, with draft copies of her research before disseminating the
information to all of the bank's clients. This practice has helped Gretta avoid several errors in her
reports, and she believes it is beneficial to the bank's clients, even though they are not aware of this
practice. Regarding her research, Gretta least likely violated the Standards because:

A. her report is a draft.

B. this practice benefits all clients.

C. the long-standing client relationships are not disclosed.

10/ Q. Which of the following actions violate the Standard relating to market manipulation?

Action 1 Entering large buy and sell trades between multiple proprietary accounts of the
firm with the intent to increase trading volume.
Action 2 Securing a dominant position in a financial instrument with an intent to
influence the price of a related derivative.
Action 3 Exploiting perceived market inefficiencies through aggressive trading strategies.
A. Action 1 and Action 2 only

B. Action 1 and Action 3 only

C. Action 2 and Action 3 only

11/ Q. Alice Chan, CFA, a portfolio manager, does comprehensive research and concludes that First
Automobile Company's (FAC) stock is suitable for all of her firm's clients. To avoid potential conflict,
Chan buys FAC's stock for other clients first and then for her sister's fee-paying account in which she
has no beneficial interest. She makes no disclosure to clients about her sister's account. The price of
FAC's stock declines significantly after three months, causing substantial losses to all her clients. Chan
has violated the Standard relating to:

A. disclosure of conflicts.

B. priority of transactions

C. diligence and reasonable basis.

12/ Q. Regarding ethical standards in the investment industry, which of the following is most accurate?
CFA Institute:

A. requires charterholders to engage in their professional communities.

B. aims to build market integrity by calling for regulations that align the interests of firms and clients.

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CFA Program Level I for February 2024

C. promotes the highest standards of ethics, education, and professional excellence for the ultimate
benefit of shareholders,

13/ Q. Which of the following statements relating to the GIPS standards is accurate?

Statement 1 Verification improves the consistency of a firm's GIPS-compliant presentations.

Statement 2 Verification provides assurance to clients that specific composite presentations made

by a firm are accurate.

A. Statement 1 only

B. Statement 2 only

C. Both Statement 1 and Statement 2

14/ Q. 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

15/ Sisse Brimberg, CFA, is responsible for performance presentations at her investment firm. The
presentation that Sisse uses states that when making performance presentations her firm: deducts all
fees and taxes;

• uses actual and simulated performance results; and

bases the performance on a representative individual account.

Q. Based only on the this information, which of the following is the most appropriate
recommendation to help Brimberg meet the CFA Institute Standards of Professional Conduct in her
performance presentations? She should present performance based on:

A. a gross of fee basis.

B. actual not simulated results.

C. a weighted composite for all similar discretionary portfolios.

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CFA Program Level I for February 2024

16/ Q. According to the Standard relating to suitability, which of the following is correct?

A. An appropriate suitability determination will prevent some investments from losing value

B. Members must judge the suitability of investments in the context of the client's total portfolio

C. The higher the expected investment return, the lower the need to determine the investment's
suitability

17/ Q. According to the Standards, members who plan to engage in independent practice for
compensation must notify their employers and describe which of the following items regarding the
services they will render to prospective independent clients?

Item 1 The types of services

Item 2 The expected duration of the services

Item 3 The compensation for the services

A. Only Item 1

B. Only Item 1 and Item 2

C. Item 1, Item 2, and Item 3

18/ Q. David Jacobs, CFA, and Megan Amari, CFA, work for Global Investment Inc. and receive fees for
client referrals. Prior to signing service agreements with clients, Jacobs informs his clients about the
referral fee arrangement without providing an estimated dollar value. Amari discloses all details of the
arrangement, including the estimated dollar value, to her clients only after the service agreements are
signed. Who has violated the Standards?

A. Amari only

B. Jacobs only

C. Both Amari and Jacobs

19/ Q. Jennifer Ducumon, CFA, is a portfolio manager for high-net-worth individuals 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
most appropriate action for Ducumon is to:

A. ignore the request.

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CFA Program Level I for February 2024

B. recommend the shares after additional analysis.

C. follow the request as soon as the share price declines.

20/ Q. Yao Tsang, CFA, has a large percentage of his net worth invested in the Australian mining
company Outback Mines, which he has held for many years. Tsang is in the process of moving to a new
employer where he is responsible for initiating research on mining companies. Shortly after his move,
Tsang is asked to complete a research report on Outback. In order to meet the CFA Institute Standards
of Professional Conduct concerning his stock holding, which of the following actions is most
appropriate for Tsang to take?

A. Disclose his stock holding to his employer and to clients

B. Sell his stock holdings to eliminate any potential conflict of interest

C. Refuse to write the report and ask his employer to assign another analyst to complete the analysis

21/ Q. According to the Standard relating to misrepresentation, a member is most likely required to:

A. disclose his intended use of an external manager.

B. always provide a benchmark for investment strategies.

C. provide attribution to a member who is no longer with the firm when issuing a report.

22/ Q. Manpreet Grewal, CFA, is a wealth manager and also teaches underprivileged children at a
school on holiday weekends. The school pays Grewal a nominal fee for his services. Grewal does not
disclose this arrangement to his employer. Has Grewal violated the Standards?

A. No

B. Yes, the Standard relating to disclosure of conflicts

C. Yes, the Standard relating to additional compensation arrangements

23/ Q. Which of the following can claim compliance with the GIPS standards?

A. Only asset owners

B. Only asset owners and consultants who advise investment funds

C. Asset owners, consultants who advise investment funds, and software vendors

24/ Q. Which of the following is a key concept relating to the GIPS standards? The GIPS standards:

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CFA Program Level I for February 2024

A. address every aspect of performance measurement.

B. require firms to adhere to certain calculation methodologies to allow for comparability across firms.

C. require the inclusion of all discretionary and non-discretionary segregated accounts in at least one
composite.

25/ Q. Which of the following is among the recommended procedures for compliance with the
Standard relating to misconduct?

Procedure 1 Disseminate to all employees a list of past violations together with disciplinary actions.

Procedure 2 Check references of potential employees to ensure that they are of good character.

A. Procedure 1 only

B. Procedure 2 only

C. Both Procedure 1 and Procedure 2

26/ Q. Millicent Plain has just finished taking Level II of the CFA examination, Upon leaving the
examination site, she meets with four Level III candidates who also just sat for their exams. Curious
about their examination experience, Plain asks the candidates how difficult the Level III exam was and
how they did on it. The candidates say the essay portion of the examination was much harder than
they had expected and they were not able to complete all questions as a result. The candidates go on
to tell Plain about broad topic areas that were tested and complain about specific formulas they had
memorized that did not appear on the exam. The Level III candidates least likely violated the CFA
Institute Standards of Professional Conduct by discussing:

A. specific formulas.

B. broad topic areas.

C. the examination essays.

27/ Q. Mike Leung, CFA, is a research analyst at an investment firm. Leung does comprehensive
analysis and identifies several stocks that are undervalued. Leung posts a recommended stock list on
social media which is accessible to all clients, stating that additional information will be available upon
request. Has Leung violated the Standards?

A. No

B. Yes, by posting only a recommended stock list

C. Yes, by using social media to communicate his recommendations to clients

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CFA Program Level I for February 2024

28/ Q. Private contracts, such as bank loan agreements, are most likely to provide an effective
disciplinary mechanism to ensure high financial reporting quality because:

A. lenders monitor managers and pay close attention to the firm's financial reports.

B. loan covenants require the firm to meet specific financial ratios in order to renew the loan.

C. loan covenants may allow the lender to recover all or part of their investment if certain financial
conditions are triggered.

29/ Q. A corporate takeover mechanism by which shareholders are persuaded to vote for a group
seeking a controlling position on a company's board of directors best defines a:

A. tender offer.

B. proxy contest.

C. hostile takeover.

30/ A company reporting under US GAAP has production facilities with a net book value of $28.4
million. Recently, several competitors have entered its market, and the company now estimates that
its production facilities will be able to generate cash flows of only $3 million per year for the next
seven years. The firm has a cost of capital of 10%.

Q. Based on these recent events related to its production facilities, the company's financial statements
will most likely report a:

A. $13.8 million reduction in operating cash flows.

B. $13.8 million impairment loss on the income statement.

C. $7.4 million reduction in the balance sheet carrying amount.

31/ Q. Which of the following statements best describes the effect of finance leases on financial
statements?

A. Balance sheet effects differ based on whether the lease is a direct financing lease or a sales-type lease

B. The lessor reports a profit on the sale of the leased asset on the income statement in the case of a
sales-type lease

C. A lessee reports the interest portion of the lease payment as operating cash flow under IFRS and
financing cash flow under US GAAP

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CFA Program Level I for February 2024

32/ Q. In which of the following business structures do owners share all risk and business liability?

A. Corporations

B. Limited partnerships

C. General partnerships

33/ Q. Assuming wages and prices are stable, which of the following policy combinations most likely
leads to an increase in the private sector's share of GDP?

A. Easy fiscal and easy monetary policy

B. Tight fiscal and easy monetary policy

C. Easy fiscal and tight monetary policy

34/ Q. Inventory values are recorded at the lower of cost or:

A. market.

B. net realizable value.

C. estimated selling price.

35/ Q. A crucial requirement for a central bank to be effective is to:

A. maintain reasonable inflation targets.

B. maintain independence from the government.

C. preserve the confidentiality of its economic views.

36/ An analyst gathers the following information (in € millions) about a company's land that is valued
under the model:

Purchase cost 20

Carrying amount after first revaluation at 31 December Year 1 18

Carrying amount after second revaluation at 31 December Year 2 23

Q. As a result of the second revaluation, the revaluation surplus increases (in € millions) by:

A. 2.

B. 3.

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CFA Program Level I for February 2024

C. 5.

37/ The following table summarizes income statement data for a manufacturing company:

Year 2 Year 1

(in € Thousands) (in € Thousands)

Net revenue 2,611 2,325

Cost of goods sold 1,700 1,550

Gross profit 930 775

Selling, general & administrative expense 295 260

Operating income. 635 515

Interest expense 55 55

Pre-tax income 580 460

Income tax 155 120

Net income 425 340

Q. Compared with Year 1, the Year 2 common-size income statement most likely indicates:

A. a lower tax rate.

B. sale of a new, differentiated product.

C. cost cutting in selling, general and administration.

38/ Q. If an economy has a long-term growth potential of 2% per year and the central bank's inflation
target is 3% per y the neutral rate of interest is most likely:

A. 1%.

B. 3%.

C. 5%.

39/ Q. An analyst is reviewing the property, plant, and equipment disclosure related to a company's
warehouse. Under the revaluation model, the analyst would least likely be able to determine:

A. the original date of acquisition.

B. how the fair value was obtained.

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CFA Program Level I for February 2024

C. the carrying amount under the cost model.

40/ An investor observed the following hedge fund return data.

Year Beginning of Year Net Return of the Fund

Account Balance

1 $30 million 10%

2 $40 million -5%

3 $30 million -5%

Q. The money-weighted return is closest to

A. -1.523%

B. -0.749%

C. -0.524%

41/ Q. Which of the following is most likely a leading indicator for an economy?

A. Change in unit labor costs

B. Average weekly hours, manufacturing

C. Employees on non-agricultural payrolls

42/ Q. Which of the following changes to compensation packages would most likely result in
management becoming more risk averse in its corporate decision making?

A. Decreasing the length of management tenure

B. Eliminating stock grants and options from management compensation

C. Tying management compensation to the size of the company's business

43/ Q. Unaudited financial statements are most likely presented in a(n):

A. annual report.

B. quarterly report,

C. proxy statement.

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CFA Program Level I for February 2024

44/ A project has the following annual cash flows:

Year 0 Year 1 Year 2 Year 3

-$606,061 $2,151,515 -$2,542,424 $1,000,000

Q. Which discount rate most likely provides a positive NPV?

A. 15%

B. 18%

C. 21%

45/ Q. The effectiveness of infrastructure spending as a near-term fiscal stimulant would be least
constrained by the:

A. action lag.

B. impact lag.

C. recognition lag.

46/ Q. The demand curve of a perfectly competitive firm is:

A. vertical.

B. horizontal.

C. downward sloping.

47/ Q. An exchange rate regime based on an explicit legislative commitment to exchange domestic
currency for a specified foreign currency at a fixed exchange rate is best described as a.

A. monetary union.

B. fixed parity system.

C. currency board system.

48/ An analyst gathers the following exchange rate information:

USD/EUR spot rate 1.0993

USD/EUR 6-month forward points 11.7

USD/EUR is the amount of USD per 1 EUR.

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CFA Program Level I for February 2024

Q. The USD/EUR 6-month forward rate is closest to:

A. 1.0981.

B. 1.1005.

C. 1.2279.

49/ An analyst gathers the following information (in € millions) about a company for a given year:

Net income 300

Depreciation expense 35

Increase in inventory 20

Decrease in accounts receivable 30

Increase in accounts payable 25

Q. Cash flow from operating activities (in € millions) for the year is:

A. 300

B. 320

C. 370

50/ Q. A hypothesis test fails to reject a false null hypothesis. This result is best described as a:

A. Type I error.

B. Type II error.

C. test with little power.

51/ Q. An investment makes ten payments of $10,000 per year, with the first payment today. If the
annual discount rate is 6%, the present value of the investment is closest to:

A. $72,098

B. $73,601

C. $78,017

52/ Q. Which of the following is most likely an objective of fiscal policy?

A. Maintaining price stability

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CFA Program Level I for February 2024

B. Achieving an exchange rate target

C. Distributing income and wealth among different segments of the population

53/ An analyst gathers the following information about a company:

Company value ($ billions) 1.5

Value of debt ($ billions) 0.6

Marginal tax rate 30%

Q. Based on Modigliani and Miller's Proposition I with taxes, if the company issues common stock to
repay outstanding debt, the value of the unlevered company will be closest to:

A. $0.9 billion.

B. $1.3 billion.

C. $1.5 billion.

54/ Q. Which of the following is most likely a primary source of liquidity?

A. Regular credit lines

B. Sale of operating assets

C. Renegotiation of supplier contracts

55/ Q. If a company raises its prices to consumers, which of the following is most likely to result in an
increase in total revenue of the company?

A. The company's products are price elastic

B. The company is in a competitive industry

C. The company has a fragmented consumer base

56/ Q. Which type of market structure best describes many firms supplying differentiated products?

A. An oligopoly

B. Perfect competition

C. Monopolistic competition

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CFA Program Level I for February 2024

57/ An analyst gathers the following information about a company:

Cash flow from operating activities €600,000

Preferred dividends declared and paid €30.000

Total dividends declared and paid €120,000

Number of common shares outstanding 100,000

Q. The company did not issue or repurchase common shares during the year. If the company reports
total dividends paid as cash flows used in operating activities, cash flow per share is:

Α. €5.70.

Β. €6.30.

C. €6.90.

58/ Q. For an analyst estimating a company's target capital structure, which of the following methods
is most appropriate?

A. Apply the company's current capital structure at book value weights

B. Use the average capital structure of a diversified group of companies

C. Infer the target capital structure by analyzing management statements on capital structure policy

59/ Q. A construction company enters into a 2-year building contract. Payment of the consideration
will be at the end of the building contract when all performance obligations are met. Costs incurred
provide an appropriate measure of progress towards completing the contract. The construction
company has incurred 30% of the costs during the first year. Assuming it is highly probable that
revenue will not be subsequently reversed, at the end of Year 1, the construction company should
most likely recognize a:

A. receivable.

B. contract asset.

C. contract liability.

60/ Q. A form of economic integration that allows free movement of goods, services, and factors of
production among member countries and has a common trade policy against non-members best
describes a:

A. free trade area.

B. customs union.

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CFA Program Level I for February 2024

C. common market.

61/ Q. As a result of an inventory write-down, which of the following financial ratios most likely
decreases?

A. Quick ratio

B. Current ratio

C. Payables turnover ratio

62/ Q. A company's purchases can be estimated as cost of sales plus:

A. ending inventory less beginning inventory.

B. beginning inventory less ending inventory.

C. the average level of inventory for the period.

63/ A discrete random variable X has the following probability function:

X Probability
0 0.5
1 0.5
Q. The variance of X is closest to:

A. 0.25.

B. 0.50.

C. 1.00.

64/ Q. Which of the following represents the difference between the observed value of a statistic and
the q intended to estimate as a result of using subsets of a population?

A. Standard error

B. Sampling error

C. Standard deviation

65/ Q. An investor will receive $50,000 at the end of Year 10. If the discount rate is 5%, the present
value of the cash flow at the end of Year 5 is closest to:

A. $30,696.

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CFA Program Level I for February 2024

B. $37.311.

C. $39,176.

66/ Q. According to Jensen's free cash flow hypothesis:

A. internal financing is preferable to debt issuance.

B. debt reduces management opportunities to misuse cash.

C. debt issuance signals confidence about a company's prospects.

67/ Q. The archetype of country behavior most likely characterized by globalization and cooperation
is:

A. hegemony

B. bilateralism

C. multilateralism

68/ An investor earns the following annual returns over a 4-year period:

Year Annual Return

1 12.2%

2 -8.5%

3 6.7%

4 -3.3%

Q. The geometric mean annual return is closest to:

A. 1.45%

B. 1.78%

C. 5.93%

69/ Q. In capital investment decisions, project sequencing is most likely a type of:

A. timing option.

B. flexibility option.

C. fundamental option.

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CFA Program Level I for February 2024

70/ According to the converged standards for revenue recognition, a receivable is recognized
on the seller's balance sheet when
A. a contract is signed
B. all performance obligations have been met except for payment
C. consideration is received in advance of transferring goods or services

71/ Q. If a company purchases, at a premium, bonds that it expects to hold until maturity, they are
most likely measured on the balance sheet at:

A. fair value.

B. historical cost.

C. amortized cost.

72/ Q. Earthquakes most likely expose a country to:

A. event risk.

B. thematic risk.

C. exogenous risk.

73/ An analyst gathers the following information about a company's capital structure, cost of capital
and marginal tax rate:

Market value of debt $1,000 million

Market value of equity $500 million

Book value of debt $900 million

Book value of equity $300 million

Pre-tax cost of debt 4%

Cost of equity 6%

Marginal tax rate 30%

Q. If interest is fully tax deductible, the WACC is closest to:

A. 3.6%.

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CFA Program Level I for February 2024

B. 3.9%.

C. 4.7%.

74/ An analyst gathers the following information about two companies in the same industry:

Company 1 Company 2

ROE 12% 18%

Average total assets/Average shareholders' equity 2 3

Revenue/Average total assets 1 2

Q. Based only on this information, Company 2:

A. is less efficient than Company 1.

B. has a higher ROA than Company 1.

C. has a lower net profit margin than Company 1.

75/ An analyst gathers the following information for a company's fiscal year ended 31 December

Net income €80,000

Common dividends declared are paid €16,000
Preferred dividends declared and paid €10,000
Weighted average common shares outstanding 150,000
Common shares outstanding at year end 130,000
Basic EFS is closest to
A. €0.36
B. €0.47.
c. €0.54.

Q. If the convertible debt was outstanding for the entire year and is convertible into 2,000,000
common shares, reported diluted EPS is closest to:

Α. €0.93.

Β. €0.98.

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CFA Program Level I for February 2024

C. €1.02.

76/ Q. Firms in monopolistic competition most likely have:

A. no pricing power.

B. some pricing power.

C. substantial pricing power.

77/ Q. Which of the following statements about the acquisition of a target company with tax loss
carryforwards is most accurate? If the acquirer is profitable:

A. its current tax rate will have no impact on the acquisition price.

B. the acquirer would theoretically be willing to pay more than another acquirer with a lower tax rate.

C. the acquirer would theoretically be willing to pay more than another acquirer with a higher tax rate.

78/ An analyst computes the following analysis of variance (ANOVA) table for a simple linear
regression:

Source Sum of Squares Degrees of Freedom Mean Square

Regression 144 1 144

Error 48 4 12

Total 192 5 ….

Q. The standard error of the estimate for the regression is closest to:

A. 3.5.

B. 6.9.

C. 12.0.

79/ Q. An analyst gathers the following sample: 0, 2, 3, 4, 6. The value of the fourth quintile is:

A. 4.0.

B. 4.8.

C. 5.6.

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CFA Program Level I for February 2024

80/Q. Which of the following statements about machine learning is most accurate? Machine learning:

A. does not have a broad application in Big Data analysis.

B. still requires human judgment in understanding the underlying data.

C. performs well even when insufficient data are available to train and validate the model.

81/ Q. A portfolio has a mean return of 2.2% and a standard deviation of returns of 2.5%. If the
specified minimum target return is 2.2%, the sample target semideviation is:

A. less than 2.5%.

B. equal to 2.5%.

C. greater than 2.5%.

82/ Q. Members of a company's board of directors are most likely required to:

A. report to the company's CEO.

B. display loyalty to the company.

C. work for the company or the industry in which the company operates.

83/ Q. With respect to a simple linear regression, the F-distributed test statistic is most appropriate to
use when testing if:

A. the intercept is significantly different from zero.

B. the independent and dependent variables are significantly positively correlated.

C. there is a significant linear relationship between the dependent and independent variables.

84/ Q. Which of the following strategies is most common in business-to-business markets where the
universe of potential customers is relatively small and easily reached?

A. Direct sales

B. Omnichannel

C. Traditional channel

85/ Q. Which of the following statements about bootstrap resampling is most accurate?

A. Multiple samples are taken from the population

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CFA Program Level I for February 2024

B. In each resample, items are drawn without replacement

C. The randomly drawn sample is treated as if it were the population

86/ An analyst collects the following information about a company and its capital structure:

Proportion of debt 40%

Proportion of equity 50%

Proportion of preferred shares 10%

Before-tax cost of debt 8%

Cost of equity 16%

Cost of preferred shares 10%

Marginal tax rate 25%

Q. If interest expense is tax deductible, the company's WACC is closest to:

A. 11.2%.

B. 11.4%.

C. 12.2%.

87/ Q. A zero correlation between two variables implies the absence of:

A. a linear relationship between the variables only.

B. a non-linear relationship between the variables only.

C. both a linear relationship and a non-linear relationship between the variables.

88/ An analyst gathers the following information (in € thousands) about an electronics manufacturing
company:

Year 2 Year 1

Cost of sales 1,000 800

Cost of ending inventory 150 120

Net realizable value of inventory 125 160

Q. Changes to the allowance for inventory obsolescence have already been reflected in cost of sales.
The days of inventory on hand (based on average inventory and 365-day year) for Year 2 is closest to:

22
CFA Program Level I for February 2024

A. 45.

B. 49.

C. 52.

89/ Q. The amount of time that elapses from the point when a company invests in working capital
until the point at which the company collects cash is:

A. net operating cycle.

B. defensive interval ratio.

C. number of days of sales outstanding.

90/ Q. In company analysis, which of the following is most likely a solvency ratio?

A. Quick ratio

B. Current ratio

C. Interest coverage ratio

23
CFA Program Level I for February 2024

MOCK 4 SESSION 2
1/ Q. Which of the following statements is most accurate?

A. The value of a swap fluctuates as market: conditions change

B. The price and the value of a swap are the same al expiration

C. The price of a swap at initiation is zero as there is no initial outlay of cash

2/ Q. With respect to the portfolio management process, the execution step most likely includes

A. asset allocation.

B. portfolio monitoring.

C. developing the investment policy statement.

3/ Q. Which of the following types of mutual funds most likely places the highest pressure on the
portfolio manager to manage liquidity?

A. A load closed-end fund

B. A no-load open-and fund

C. A no-load closed-end fund

4/ Q. A limit order is an example of a(n):

A. validity instruction.

B. clearing instruction.

C. execution instruction.

5/ Q. Jensen's alpha is most appropriate in measuring portfolio performance when:

A. idiosyncratic risk is relevant for an investor.

B. evaluating the performance of real estate against equity investments.

C. the investor holds a well-diversified portfolio with negligible diversifiable risk.

1
CFA Program Level I for February 2024

6/ Q. The bond equivalent yield for a semiannual pay bond is most likely

A. equal to the effective annual yield.

B. more than the effective annual yield.

C. equal to double the yield per semiannual period.

7/ Q. As compared to exchange-traded derivative markets, over-the-counter derivative markets are

typically more:

A. liquid.

B. flexible.

C. transparent.

8/ Q. In which form of market efficiency do security prices fully reflect private information?

A. Weak-form efficient

B. Semi-strong-form efficient

C. Strong-form efficient

9/ An investor sells a European put option with the following characteristics:

Fut price $40

Exercise price $1,500

Q. If the price of the underlying at expiration is $1,550, the profit or loss for the seller is:

A. –S10

B. $40

C. $50

10/ An analyst gathers the following information about a security and the market for a 12-month
period:

Realized Return Beta

Security 10.5% 0.8

Market 12.0% 1.0

2
CFA Program Level I for February 2024

Q. The risk-free rate is 2.0%. According to the market model, the security's abnormal return for the
period is closest to:

A. –1.1%

B. 0.5%

C. 2.5%

11/ Q. Following an increase in interest rates, the point in time at which a bondholder's gain on
reinvested coupons equals the loss on the sale price is best measured by:

A. effective duration.

B. modified duration.

C. Macaulay duration.

12/ Q. Which of the following best describes the risk of having to make a significant price concession
when selling an asset?

A. Liquidity risk

B. Solvency risk

C. Settlement risk

13/ Q. Using put-call parity, a long call can best be replicated by going:

A. long the put, short the asset, and long the bond.

B. short the put, long the asset, and short the bond.

C. long the put, long the asset, and short the band.

14/ A portfolio manager plans to add three securities with the following characteristics to a well-
diversified portfolio:

• Security 1 has the highest Jensen's alpha,

• Security 2 has the highest information ratio;

• Security 3 has the lowest nonsystematic variance.

Q. To maximize the portfolio's risk-adjusted return, the manager should assign the highest relative
weight to:

3
CFA Program Level I for February 2024

A. Security 1.

B. Security 2.

C. Security 3.

15/ Q. With respect to an investment policy statement, which of the following is most closely linked to
the client's distinctive needs?

A. The evaluation and review section

B. The objectives and constraints sections

C. The statement of duties and responsibilities

16/ Q. An annual-pay bond with a £1,000 face value has a coupon rate of 4% and matures in three
years. If the yield to maturity is 3%, the current value of the bond is closest to:

Α. £972.

B. £1,028.

C. £1,142.

17/ An investor makes the following statements:

Statement 1 "Swaps are contingent claims."

Statement 2 "Swaps are characterized by a series of cash flows."

Q. Which of the statements is correct?

A. Statement 1 only

B. Statement 2 only

C. Both Statement 1 and Statement 2

18/ Q. Which of the following measures is an example of a top-down driver for forecasting a firm's
revenue?

A. Same-store sales growth

B. Growth relative to GDP growth

C. Volumes and average selling prices

4
CFA Program Level I for February 2024

19/ Q. The money duration of a bond is best defined as:

A. the bond's Macaulay duration times the bond's full price.

B. the estimated change in the bond's full price in currency units for a given change in the annual yield to
maturity.

C. one half of the difference in the bond's full prices given a 1 basis point decrease and 1 basis point
increase in yield- to-maturity.

20/ Q. All else being equal, forward and futures prices are equal when:

A. futures prices and interest rates are negatively correlated.

B. futures prices and interest rates are uncorrelated.

C. futures prices and interest rates are positively correlated.

21/ An analyst gathers the following information about a company's common stock:

Dividend per share - Year 1 $2.00

Dividend per share - Year 2 $2.10

Annual dividend per share Year 3 and beyond $2.21

Q. If the required rate of return is 10%, the intrinsic value per share is closest to:

A. $21.82

B. $22.10

C. $27.31

22/ Q. A company's cost of equity is a proxy for the:

A. company's intrinsic value.

B. company's accounting return on equity.

C. minimum required rate of return of investors in the company's equity.

23/ Q. The focus strategy is most likely used to defend against which of Porter's five forces?

A. Industry rivalry

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CFA Program Level I for February 2024

B. Threat of new entrants

C. Bargaining power of suppliers

24/ Q. Which of the following is most likely a high-risk infrastructure investment?

A. An asset with a history of steady cash flows

B. A brownfield asset leased back to a government

C. A greenfield project without guarantees of demand upon completion

25/ Q. An example of a negative bond covenant is a:

A. promise to pay required taxes.

B. limit on the issuance of additional debt.

C. requirement to comply with existing laws and regulations.

26/ An investor collects the following information about a call option:

Spot price of the underlying $10.50

Strike price of the option $9.40

Option premium $1.15

Q. At expiration, if the price of the underlying is $9.35, the profit to the call seller is:

A. S0

B. $1,10

C. $1.15

27/ Q. For a given currency and tenor, a bond's yield spread over the standard swap rate is best
described as the:

A. I-spread.

B. G-spread.

C. Z-spread.

6
CFA Program Level I for February 2024

28/ An analyst gathers the following information about a hedge fund:

Beginning-of-year assets under management (AUM) $350 million

Management fee, based on year-end AUM before fees 2%

Incentive fee 20%

Hard hurdle rate 5%

Annual return before fees 10%

Q. If the incentive fee is based on returns net of management fees, the incentive fee (in $ millions) is:

A. 1.96

B. 5.46

C. 7.00

29/ Q. The methodology used by a credit rating agency to adjust a specific bond issue rating is best
described as:

A. notching.

B. cross-default.

C. structural subordination.

30/ Q. Regarding distribution methods in alternative investments, which of the following is most
advantageous to the general partners?:

A. A European waterfall

B. An American waterfall

C. A whole-of-fund waterfall

31/ Q. Security market indexes can be used to calculate alphas, which are best described as:

A. a measure of market sentiment.

B. the systematic risk of a security, using the index as a proxy for the entire market.

C. the difference between the return of the actively managed portfolio and the return of the passive
portfolio.

7
CFA Program Level I for February 2024

32/ An analyst gathers the following information about a margin transaction:

Initial stock price $80

Leverage ratio 2.5

Q. If the first margin call occurs at a stock price below $60, the maintenance margin is closest to:

A. 15.0%

B. 20.0%

C. 46.7%

33/ Q. Which of the following is an underlying assumption of yield to maturity as a measure of

expected return for a bond?

A. The credit quality of the issuer remains the same

B. The bond is sold at the same price as the purchase price

C. Coupons are reinvested at the same rate as the yield to maturity at purchase

34/ A manager gathers the following information about two non-dividend paying stocks that
constitute a market- capitalization weighted index:

Stock Market Capitalization Price per Share

1 $100 million $90

2 $200 million $30

Q. If there are no other securities in the index and the price of each stock increases by 10%, the index's
return will most likely be:

A. less than the return of an equal-weighted index.

B. equal to the return of an equal-weighted index.

C. greater than the return of an equal-weighted index.

35/ Q. A trader buys 500 shares of a stock on margin at $36 a share using an initial leverage ratio of
1.66. The maintenance margin requirement for the position is 30%. The stock price at which the
margin call will occur is closest to:

A. $20.57

B. $25.20

8
CFA Program Level I for February 2024

C. $30.86

36/ Q. Two private equity funds doubled the value of their investments. All else being equal, if Fund 1
achieved this return in less time than Fund 2, the multiple of invested capital (MOIC) of Fund 1 is:

A. lower than that of Fund 2.

B. the same as that of Fund 2.

C. higher than that of Fund 2.

37/ Q. At maturity, the buyer faces the counterparty credit risk of the seller in:

A. a profitable long forward position only.

B. an in-the-money long call option position only.

C. both a profitable long forward position and an in-the-money long call option position.

38/ Q. With respect to an IPS, which of the following best describes an absolute risk objective for a
client's portfolio?

A. An annual tracking risk of less than 2 percent

B. A twelve-month 95% value at risk of less than €1,000,000

C. Maintaining at least €10,000 in cash for planned monthly withdrawals

39/ Q. Which of the following sections of an IPS most likely explains the steps to be taken to keep the
IPS current?

A. Procedures

B. Investment Guidelines

C. Statement of Duties and Responsibilities

40/ Q. The value of bitcoin is most likely based on:

A. underlying cash flows only.

B. expected price appreciation only.

C. both underlying cash flows and expected price appreciation.

9
CFA Program Level I for February 2024

41/ Q. Which of the following types of private debt is expected to be the riskiest?

A. Mezzanine debt

B. Infrastructure debt

C. Senior direct lending

42/ Q. Which of the following securities is most likely subject to the highest prepayment risk?

A. Covered bond

B. Mortgage pass-through security

C. Credit card receivable asset-backed security

43/ Q. A bond has a modified duration of 5 and a convexity statistic of 75. If the bond's yield-to-
maturity decreases 50 bps, the expected percentage price change is closest to:

A. 2.41%

B. 2.59%

C. 2.69%

44/ Q. Buying the stock of a company being acquired while going short the stock of the acquiring
company best describes a(n):

A. activist strategy.

B. merger arbitrage strategy.

C. distressed/restructuring strategy.

45/ Q. Commodity futures prices are most likely in backwardation when:

A. interest rates are high.

B. storage costs are high.

C. the convenience yield is high.

10
CFA Program Level I for February 2024

46/ An analyst gathers the following information about a company's non-callable, non-convertible
preferred stock:

Par value per share €55

Estimated intrinsic value per share €75

Maturity 5 years

Q. If the required rate of return is 7.2%, the company's semiannual dividend on the preferred stock is
closest to:

Α. €3.96

Β. €4.40

C. €5.40

47/ Q. According to the capital asset pricing model (CAPM), the difference in the expected returns for
two securities is determined by the securities":

A. total risk.

B. systematic risk only.

C. nonsystematic risk only.

48/ An equity fund manager is considering a market index as the benchmark for his portfolio, and has
the following preferences:

•the index should have a contrarian effect;

• shares held by controlling shareholders should be included;

• dividends should be included in the weighting of constituent securities; and

•the weights of constituent securities should not be arbitrarily determined by the index provider.

Q. Which of the following weightings of indexes best meets the fund manager's preferences?

A. Equal

B. Fundamental

C. Float-adjusted market capitalization

11
CFA Program Level I for February 2024

49/ Q. Which of the following best describes a feature unique to the co-investing method? A limited
partner:

A. participating in an investment fund alongside the general partner.

B. participating in an investment fund alongside other limited partners.

C. making an investment alongside a fund in a deal the fund has identified.

50/ Q. A bond portfolio manager is considering three bonds 1, 2, and 3-for his portfolio. Bond 1 allows
the issuer to call the bond before the stated maturity, Bond 2 allows the investor to put the bond back
to the issuer before the stated maturity, and Bond 3 contains no embedded options. The bonds are
otherwise identical. The manager tells his assistant, "Bond 1 and Bond 2 should have larger nominal
yield spreads to a US Treasury than Bond 3 to compensate for their embedded options. Is the manager
most likely correct?

A. Yes

B. No, because Bond 1's nominal yield spread should be less than Bond 3's

C. No, because Bond 2's nominal yield spread should be less than Bond 3's

51/ An analyst gathers the following information:

Time to Maturity Yield to Maturity

Bond 1 4 years 3.3%

Bond 2 7 years 5.1%

Q. Based only on this information, the estimated market discount rate for a 6-year bond with similar
credit quality is:

A. 3.9%

B. 4.2%

C. 4.5%

52/ A portfolio manager holds the following three option-free bonds

Bond Par Value Owned Market Value Owned Duration

1 $8 million $12 million 3

2 $8 million $6 million 7

3 $4 million $6 million 6

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CFA Program Level I for February 2024

Q. The portfolio's duration is closest to:

A. 4.15

B. 5.20

C. 5.33

53/ Q. Which of the following attributes is least likely to be a requirement for the existence of riskless
arbitrage? The underlying security:

A. is relatively liquid.

B. can be sold short.

C. is a financial asset.

54/ Q. Exercise of a European put option is most likely justified if

A. the option is out of the money.

B. the exercise value is negative.

C. the exercise price exceeds the value of the underlying.

55/ Q. Short positions have the potential for:

A. unbounded gains only.

B. unbounded losses only.

C. both unbounded gains and unbounded losses.

56/ Q. With respect to behavioral finance, an explanation for the overreaction anomaly is:

A. risk aversion.

B. loss aversion.

C. sudden changes in economic fundamentals.

57/ An analyst gathers the following information about two assets:

Asset Expected Return Standard Deviation of Returns

1 5% 2

13
CFA Program Level I for February 2024

2 5% 8%

Q. If the correlation between the two assets' returns is -1, the standard deviation of returns for an
equally weighted portfolio of the assets is closest to:

A. 0%.

B. 2%.

C. 4%.

58/ Q. The two-fund separation theorem states that all investors will hold a combination of the:

A. risk-free asset and the optimal risky portfolio.

B. risk-free asset and the global minimum-variance portfolio.

C. optimal risky portfolio and the global minimum-variance portfolio.

59/ Q. All else being equal, credit spreads most likely widen:

A. in periods of heavy new issue supply.

B. with expectations of a stronger economy.

C. with increased demand for corporate bonds.

60/ An analyst gathers the following information (in $ millions) about three companies:

Company 1 Company 2 Company 3

Total Debt 1,125 1,360 1,562

EBITDA 590 680 750

Interest Expense 71 60 63

Q. Which company's leverage contributes most adversely to its credit risk?

A. Company 1

B. Company 2

C. Company 3

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CFA Program Level I for February 2024

61/ Q. If the correlation between assets in a two-asset portfolio is less than one, the standard
deviation of the portfolio is:

A. less than the weighted average standard deviation of the individual assets.

B. equal to the weighted average standard deviation of the individual assets.

C. greater than the weighted average standard deviation of the individual assets.

62/ Q. The pass-through rate of a mortgage-pass through security is:

A. lower than the mortgage rate on the underlying pool.

B. equal to the mortgage rate on the underlying pool.

C. greater than the mortgage rate on the underlying pool.

63/ Q. Which of the following are most likely traded in traditional investment markets?

A. Commodities

B. Securitized debts

C. Shares in pooled investment vehicles that hold publicly traded debts

64/ Q. If poorly reasoned decisions with positive results are remembered as brilliant tactical moves,
the cognitive error most likely being exhibited is:

A. hindsight bias.

B. confirmation bias.

C. overconfidence bias.

65/ Q. If ten board directors are to be elected, under statutory voting, the maximum number of votes
a shareholder owning ten shares can cast in favor of a single candidate is:

A. 1.

B. 10.

C. 100.

15
CFA Program Level I for February 2024

66/ Q. In the binomial model, if the probability of an upward movement in an underlying increases,
the value of a put option:

A. decreases.

B. remains unchanged.

C. increases.

67/ Q. Zet Bank has entered into a contract with Louly Corporation in which Zet agrees to buy a 2.5%
US Treasury bond maturing in ten years and promises to sell it back next month at an agreed-on price.
From Zet Bank's perspective, this contract is best described as a:

A. repo.

B. reverse repo.

C. collateralized loan.

68/ Q. Individual investors most likely bear investment risk when participating in:

A. defined benefit pension plans only.

B. defined contribution pension plans only.

C. both defined benefit pension plans and defined contribution pension plans.

69/ Q. With respect to risk management, determining how risk is taken by an organization best
describes:

A. risk tolerance.

B. risk mitigation.

C. risk budgeting.

70/ Q. Convenience yield provides a possible explanation as to why the current spot price of a
commodity is:

A. lower than the market's expectation of the future spot price of the commodity.

B. equal to the market's expectation of the future spot price of the commodity.

C. higher than the market's expectation of the future spot price of the commodity

16
CFA Program Level I for February 2024

71/ Q. The sensitivity of a bond's price to a change in the benchmark yield curve is best described as:

A. effective duration.

B. modified duration.

C. the price value of a basis point.

72/ A hedge fund raised initial capital under the following terms:

Beginning-of-year assets under management (AUM) $100 million

Management fee based on end-of-year AUM 2%

Incentive fee 20%

Annual gross performance 30%

Q. If the incentive fee is calculated net of management fees, total fees earned by the manager are:

A. $6.00 million.

B. $8.08 million.

C. $8.60 million.

73/ Q. Which of the following best describes the intrinsic value of a security? The intrinsic value of a
security is:

A. the price at which the security can be bought or sold.

B. represented by the intersection of supply and demand for the security.

C. the value placed by investors based on a complete understanding of the security's investment
characteristics.

74/ Q. Which of the following duration measures is most appropriate for a callable bond?

A. Effective duration

B. Modified duration

C. Macaulay duration

75/ Q. Price multiples for relative comparisons are most likely used for.

A. time-series analyses only.

17
CFA Program Level I for February 2024

B. cross-sectional analyses only.

C. both time-series analyses and cross-sectional analyses.

76/ Q. Which of the following best describes an advantage of the EV/EBITDA multiple for valuing
equity? An advantage is that:

A. the multiple must be positive.

B. EBITDA is a proxy for operating cash flow.

C. it does not require the market value of debt.

77/ Q. The slope of the capital allocation line is the:

A. beta of the market.

B. market price of risk.

C. market risk premium.

78/ Q. Regarding hedge fund fee calculations, a high-water mark:

A. represents the return on gains that are not yet fully realized.

B. protects the client from paying twice for the same performance.

C. is the rate of return that the general partner must exceed in order to earn a performance fee.

79/ Q. In the private debt market, a hybrid loan structure that combines secured and unsecured debt
into a single loan with a blended interest rate is best described as:

A. unitranche debt.

B. mezzanine debt.

C. a leveraged loan.

80/ Q. The financial systems that are operationally efficient are most likely characterized by:

A. security prices that reflect fundamental values.

B. the use of resources where they are most valuable.

C. liquid markets with low commissions and order price impacts.

18
CFA Program Level I for February 2024

81/ Q. Which of the following statements about real estate assets is most accurate?

A. Real estate assets are homogeneous

B. Commercial property represents the majority of real estate assets by value

C. Private real estate has historically had low correlations with other asset classes

82/ An analyst observes the following series of 1-year forward rates:

Time Period Forward Rate

0y1y 0.1%

1y1y 0.3%

2y1y 0.6%

Q. Based on only this information, the price per 100 of par value of a 3-year 0.2% annual coupon bond
is closest to:

A. 97.64

B. 98.82

C. 99.60

83/ Q. All else being equal, a stock dividend most likely:

A. decreases the share price.

B. has no impact on the share price.

C. increases the share price.

84/ Q. Analytical duration:

A. assumes that government bond yields and spreads are independent variables.

B. is lower than empirical duration for high-yield bonds under market stress scenarios.

C. uses statistical methods and historical bond prices to derive the price-yield relationship for bond
portfolios.

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CFA Program Level I for February 2024

85/ Q. In contrast to investors in otherwise-similar mortgage-backed securities, investors in covered

bonds most likely:

A. face higher credit risks.

B. are exposed to prepayment risks.

C. have recourse against the issuing financial institution.

86/ Q. In order to take advantage of short-term capital market expectations, a fund manager holds less
of her portfolio in equities than the policy weights prescribe. This action is best described as:

A. security selection.

B. portfolio rebalancing.

C. tactical asset allocation.

87/ Q. Enterprise value equals the market value of a company's debt and equity reduced by the
company's:

A. debt.

B. cash.

C. preferred stock.

88/ Q. The value of a European put option is inversely related to the:

A. risk free rate.

B. exercise price.

C. volatility of the underlying.

89/ Q. If the forward price of a stock is equal to the current spot price, the price of an at-the-money
put option applying put- call parity will be:

A. lower than the price of at-the-money call option.

B. equal to the price of at-the-money call option.

C. higher than the price of at-the-money call option.

20
CFA Program Level I for February 2024

90/ An analyst gathers the following information about a company:

ROA 8%

Leverage ratio 1.2

Dividend payout ratio 35%

Q. The sustainable growth rate is closest to:

A. 3.4%

B. 5.2%

C. 6.2%

21
CFA Program Level I for February 2024

ANSWER MOCK 4 SESSION 1

1/ Solution

A. Incorrect because according to Standard VII (B), Reference to CFA Institute, the CFA Designation, and
the CFA Program, Brown violated the Standards by directly implying that superior performance can be
expected of someone with the CFA designation.

B. Correct because according to Standard VII (B), Reference to CFA Institute, the CFA Designation, and
the CFA Program, Brown violated the Standards by directly implying that superior performance in trade
execution can be expected of someone with the CFA designation. Statements referring to CFA Institute,
the CFA designation, or the CFA Program that overstate the competency of an individual or imply, either
directly or indirectly, that superior performance can be expected from someone with the CFA
designation are not allowed under the standard.

C. Incorrect because according to Standard VII (B), Reference to CFA Institute, the CFA Designation, and
the CFA Program, the second statement is allowed, member may state that all principals passed the
three examinations on the first try as long as this statement is true, but it must not be linked to
performance or imply superior ability.

2/ Solution

A. Incorrect because according to Standard III (A), Loyalty, Prudence and Care, the member is in violation
as the proxy voting policies should be disclosed to the clients not only upon request, as described in the
response rationale for the correct answer.

B. Correct because according to Standard III (A), Loyalty, Prudence and Care, part of a member's or
candidate's duty of loyalty includes voting proxies in an informed and responsible manner. Proxies have
economic value to a client, and members and candidates must ensure that they properly safeguard and
maximize this value. An investment manager who fails to vote, casts a vote without considering the
impact of the question, or votes blindly with management on nonroutine governance issues (e.g., a
change in company capitalization) may violate this standard. Voting of proxies is an integral part of the
management of investments. A cost-benefit analysis may show that voting all proxies may not benefit
the client, so voting proxies may not be necessary in all instances. Members and candidates should
disclose to clients their proxy voting policies. Therefore members should disclose their proxy voting
policies to clients, not only upon request.

3/ Solution

A. Incorrect because according to Standard IV (C), Responsibilities of Supervisors, once a violation is

discovered, a supervisor should increase supervision or place appropriate limitations on the wrongdoer
pending the outcome of the investigation.

1
CFA Program Level I for February 2024

B. Correct because according to Standard IV (C), Responsibilities of Supervisors, once a supervisor learns
that an employee has violated or may have violated the law or the Code and Standards, the supervisor
must promptly initiate an assessment to determine the extent of the wrongdoing. Relying on an
employee's statements about the extent of the violation or assurances that the wrongdoing will not
reoccur is not enough. Reporting the misconduct up the chain of command and warning the employee
to cease the activity are also not enough. Pending the outcome of the investigation, a supervisor should
take steps to ensure that the violation will not be repeated, such as placing limits on the employee's
activities or increasing the monitoring of the employee's activities.

4/ Solution

A. Correct because the GIPS standards requirements for the fundamentals of compliance include that
the GIPS standards must be applied on a FIRM-wide basis. Compliance cannot be achieved on a single
product or composite.

B. Incorrect because the GIPS standards requirements for the fundamentals of compliance include that,
if firms do not meet all the requirements of the GIPS standards, firms must not represent or state that "it
is in compliance with the GIPS standards except for or make any other statements that may indicate
partial compliance with the GIPS standards.

C. Incorrect because the GIPS standards prohibits statements referring to the calculation methodology as
being in accordance, in compliance, or consistent with the Global Investment Performance Standards.

Introduction to the Global Investment Performance Standards (GIPS)

• describe the fundamentals of compliance, including the recommendations of the GIPS standards with
respect to the definition of the firm and the firm's definition of discretion

5/ Solution

A. Incorrect because Jayson violated Standard I (A), Knowledge of the Law, as in the response rationale
for the correct answer.

B. Incorrect because Standard III (B), Fair Dealing, requires that Members and Candidates must deal fairly
and objectively with all clients when providing investment analysis, making investment
recommendations, taking investment action, or engaging in other professional activities. In this case,
nothing was done to discriminate clients.

C. Correct because according to Standard I (A), Knowledge of the Law, When applicable law and the Code
and Standards require different conduct, members and candidates must follow the more strict of the
applicable law or the Code and Standards. According to Standard III (E), Preservation of Confidentiality,
Members and Candidates must keep information about current, former, and prospective clients
confidential. In this case, the Code and Standards were stricter so Jayson must not have revealed her
former client's e-mail address.

2
CFA Program Level I for February 2024

6/ Solution

A. Incorrect as described in the response rationale of the correct answer.

B. Incorrect as described in the response rationale of the correct answer.

C. Correct because according to the Standard V(C), record retention, Members and candidates must
retain records that substantiate the scope of their research and reasons for their actions or conclusions.
The retention requirement applies to decisions to buy or sell a security as well as reviews undertaken
that do not lead to a change in position. An example of supporting documentation that assists the
member or candidate in meeting the requirements for retention are outside research reports.

Ethics Application

• explain how the practices, policies, and conduct do or do not violate the CFA Institute Code of Ethics
and Standards of Professional Conduct

7/ Solution

A. Incorrect because according to Standard V (A), Diligence and Reasonable Basis, Dowling does not need
to decline to be identified with the report, as long as he believes the research has a reasonable and
adequate basis.

B. Incorrect because according according to Standard V (A), Diligence and Reasonable Basis, Dowling may
accept the group decision as long as he believes the research is sound and there is no requirement that
he make an effort to have the report reflect his opinion.

C. Correct because according to Standard V (A), Diligence and Reasonable Basis, if a member believes
that the consensus opinion has a reasonable and adequate basis and is independent and objective, the
member or candidate need not decline to be identified with the report. If the member or candidate is
confident in the process, the member or candidate does not need to dissociate from the report even if it
does not reflect his or her opinion. Thus, Dowling may accept the group's decision and may be identified
with the report as long as it has a reasonable basis.

8/ Solution

A. Correct because according to Standard III(E), Preservation of Confidentiality, if applicable law requires
members to maintain confidentiality, even if the information concerns illegal activities on the part of the
client, members ard candidates should not disclose such information.

B. Incorrect because Standard III(E), Preservation of Confidentiality, protects the confidentialty of client
information even if the person or entity is no longer a client of the member or candidate. Therefore,
members and candidates must continue to maintain the confidentiality of client records even after the
client relationship has ended. Therefore, a member is not permitted to share information relating to
former clients.

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CFA Program Level I for February 2024

C. Incorrect because according to Standard III(E), Preservation of Confidentiality, when permissible under
applicable law, members and candidates shall consider the PCP an extension of themselves when
requested to provide information about a client in support of a PCP investigation into their own conduct
Therefore, a member can provide information to the PCP anly if permissible under applicable law

9/ Solution

A. Incorrect because according to Standard III(B), Fair Dealing, research should be disseminated to clients
fairly, not selectively. Simply because the research is in draft form it does not exempt it from being
disseminated fairly.

B. Incorrect because even though the research may benefit from the additional reviews this practice
favors clients who receive the research before others and as a result, the analyst has not treated clients
fairly as required by Standard III(B), Fair Dealing.

C. Correct because the analyst does not violate any of the Standards of Professional Conduct by having
long-standing client relationships and generally is not required to disclose such relationships. However,
the analyst is not treating all clients fairly as required by Standard III(B), Fair Dealing, when disseminating
investment recommendations.

10/ Solution

A. Correct because Standard II(B), Market Manipulation, precludes transaction-based manipulation such
as attempting to buy and sell the stock using the accounts in hopes of raising the trading volume and the
price. So, Action 1 violates the Standard. Also, the Standard precludes other transaction-based
manipulation such as securing a controlling, dominant position in a financial instrument to exploit and
manipulate the price of a related derivative and/or the underlying asset. So, Action 2 also violates the
Standard.

B. Incorrect because Standard II(B), Market Manipulation, precludes transaction-based manipulation

such as attempting to buy and sell the stock using the accounts in hopes of raising the trading volume
and the price. Action 1 violates the Standard. However, the Standard is not intended to preclude
transactions undertaken on legitimate trading strategies based on perceived market inefficiencies. Sc,
Action 3 does not violate the Standard.

C. Incorrect because Standard II(B), Markel Manipulation, precludes other transaction-based

manipulation such as securing a controlling, dominant position in a financial instrument to exploit and
manipulate the price of a related derivative and/or the underlying asset. Action 2 violates the Standard.
However, the Standard is not intended to preclude transactions undertaken on legitimate trading
strategies based on perceived market inefficiencies. So, Action 3 does not violate the Standard.

4
CFA Program Level I for February 2024

11/ Solution

A. Incorrect because according to Standard VI(A), Disclosure of Conflicts, members and Candidates must
make full and fair disclosure of all matters that could reasonably be expected to impair their
independence and objectivity or interfere with respective duties to their clients, prospective clients, and
employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in
plain language, and communicate the relevant information effectively. Chan should treat her sister's fee-
paying account like any other firm account and should not be disadvantaged. It does not have potential
conflict. Therefore, Lau has not violated Standard VI(A).

B. Correct because according to Standard VI(B), Priority of Transactions, family accounts that are client
accounts should be treated like any other firm account and should neither be given special treatment
nor be disadvantaged because of the family relationship. Chan should treat her sister's fee-paying
account like any other firm account and should not be disadvantaged. Therefore, Lau has violated
Standard VI(B).

C. Incorrect because according to Standard V(A), Diligence and Reasonable Basis, even though an
investment recommendation may be well informed, downside risk remains for any investment. Members
and candidates can base their decisions only on the information available at the time decisions are
made. The steps taken in developing a diligent and reasonable recommendation should minimize
unexpected downside events. Chan does comprehensive research and therefore she has not violated
Standard V(A).

Guidance for Standards I-VII

• demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations
involving

12/ Solution

A. Incorrect because the CFA institute encourages, but does not require, charterholders to engage in
their professional communities.

B. Correct because the advocacy efforts of CFA Instituto aim to build market integrity by calling for
regulations that align the interests of firms and clients.

C. Incorrect because CFA Instituto promotes for the ultimate benefit of society. The mission of CFA
Institute is "to load the investment profession globally, by promoting the highest standards of ethics,
education, and professional excellence for the ultimate benefit of society."

Ethics and Trust in the Investment Profession

• describe the need for high ethical standards In Investment management

5
CFA Program Level I for February 2024

13/ Solution

A. Correct because verification may also increase the knowledge of the firm's performance
measurement team and improve the consistency and quality of the firm's GIPS standards-related
performance information. Therefore, Statement 1 is accurate.

B. Incorrect because verification is performed with respect to an entire firm, not or specific composites
or pooled funds. Verification does not ensure the accuracy of any specific performance report.
Therefore, Statement 2 is not accurate.

C. Incorrect because verification is performed with respect to an entire firm, not or specific composites
or pooled funds. Verification does not ensure the accuracy of any specific performance report.
Therefore, Statement 2 is not accurate.

14/ Solution

A. Incorrect because when in possession of material nonpublic information, Standard II(A), Material
Nonpublic Information, requires personal trading to be suspended.

B. Incorrect because when in possession of material nonpublic information, according to Standard II(A),
Material Nonpublic Information, it is prudent to suspend arbitrage trading to prevent profits from insider
trading

C. Correct because according to Standard II(A), Material Nonpublic Information, Recommended

Procedures for Compliance, if Merchant stopped market making, a form of proprietary trading, due to
being in possession of material nonpublic information, it could tip off investors that Vital is likely to be
making a major announcement in the near future. This would be counterproductive to the goals of
maintaining the confidentiality of information and providing market liquidity. The Standard recommends
that market makers remain passive when in possession of material nonpublic information. The Standard
also requires personal trading to be suspended when in possession of material nonpublic information,
and it is prudent to suspend arbitrage trading to prevent profits from insider trading.

Guidance for Standards I-VII

• recommend practices and procedures designed to prevent violations of the Code of Ethics and
Standards of Professional Conduct

15/ Solution

A. Incorrect because either gross or net of fee performance may be disclosed.

B. Incorrect because the use of simulated results is permitted as long as it is disclosed.

C. Correct because in order to meet their obligations under Standard III(D), Performance Presentation,
members should present the performance of the weighted composite of similar portfolios rather than
using a single representative or all accounts.

6
CFA Program Level I for February 2024

Guidance for Standards I-VII

• recommend practices and procedures designed to prevent violations of the Code of Ethics and
Standards of Professional Conduct

16/ Solution

A. Incorrect because according to Standard III (C), Suitability, an appropriate suitability determination will
not, however, prevent some investments or investment actions from losing value.

B. Correct because according to Standard III (C), Suitability, members must judge the suitability of
investments in the context of the client's total portfolio.

C. Incorrect because according to Standard III (C), Suitability, not every investment opportunity will be
suitable for every portfolio, regardless of the potential return being offered.

Guidance for Standards I-VII

• recommend practices and procedures designed to prevent violations of the Code of Ethics and
Standards of Professional Conduct

17/ Solution

A. Incorrect because according to Standard IV(A) Loyalty, all three actions are required.

B. Incorrect because according to Standard IV(A) Loyalty, all three actions are required.

C. Correct because according to Standard IV(A) Loyalty, members and candidates who plan to engage in
independent practice for compensation must notify their employer and describe the types of services
they will render to prospective independent clients, the expected duration of the services, and the
compensation for the services.

Guidance for Standards I-VII

•demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations
involving issues of professional integrity

18/ Solution

A. Incorrect as both Amari and Jacobs violated Standard VI(C), Referral Fees.

B. Incorrect as both Amari and Jacobs violated Standard VI(C), Referral Fees:

C. Correct because according to Standards VI(C), Referral Fees, appropriate disclosure means that
members and candidates must advise the client or prospective client, before entry into any formal
agreement for services, of any benefit given or received for the recommendation of any services
provided by the member or candidate. In addition, the member or candidate must disclose the nature of

7
CFA Program Level I for February 2024

the consideration or benefit, together with the estimated dollar value. Jacobs does not provide the
estimated dollar value and and Amari discloses after the agreement is signed. Therefore, they both
violate Standard VI(C).

Guidance for Standards I-VII

• demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations
involving issues of professional integrity

19/ Solution

A. Correct because Ducumon should refuse to recommend the shares as her opinion of the Babyskin
shares must not be affected by internal pressure. If Ducumon followed the request from the investment
banking department at her company, she would be in violation of Standard I(B), Independence and
Objectivity. Ducumon must refuse to recommend the Babyskin shares until they are an attractive
purchase based on fundamental analysis and market pricing.

B. Incorrect because Ducumon should refuse to recommend the shares, as she must issue only
recommendations that reflect her independent and objective opinion. Ducumon must refuse to
recommend the Babyskin shares until they are an attractive purchase based on fundamental analysis and
market pricing.

C. Incorrect because Ducumon should refuse to recommend the shares, as she must issue only
recommendations that reflect her independent and objective opinion. Ducumon must refuse to
recommend the Babyskin shares until they are an attractive purchase based on fundamental analysis and
market pricing.

20/ Solution

A. Correct because disclosure should be made as required by Standard VI(A), Disclosure of Conflicts. This
standard does not preclude an analyst from owning shares in a covered company but any ownership
needs to be adequately disclosed. As the stock in question has been held for many years it may not be
practical to sell it due to issues such as tax consequences. In addition, since the analyst has been hired to
initiate coverage of mining companies, the firm may not have other analysts that would be as competent
in completing a research report on mining companies

B. Incorrect because the stock in question has been held for many years and it may not be practical to
sell it due to capital gains taxes or other issues. Full disclosure should be made as required by Standard
VI(A), but selling any existing holdings prior to writing a research report is not a requirement of the
standards.

C. Incorrect because Tsang is able to write the report for his employer as long as his ownership is
adequately disclosed.

8
CFA Program Level I for February 2024

21/ Solution

A. Correct because according to Standard I (C), Misrepresentation, members and candidates must
disclose their intended use of external managers and must not represent those managers' investment
practices as their own.

B. Incorrect because Standard I (C), Misrepresentation, does not require that a benchmark always be
provided in order to comply. Some investment strategies may not lend themselves to displaying an
appropriate benchmark because of the complexity or diversity of the investments included.

C. Incorrect because according to Standard I (C), Misrepresentation, research and models developed
while employed by a firm are the property of the firm. The firm retains the right to continue using the
work completed after a member or candidate has left the organization. The firm may issue future reports
without providing attribution to the prior analysts.

Guidance for Standards I-VII

• demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations
involving issues of professional integrity

22/ Solution

A. Correct because Standard IV(B), Additional Compensation Arrangements, requires members and
candidates to obtain permission from their employer before accepting compensation or other benefits
from third parties for the services rendered to the employer or for any services that might create a
conflict with their employer's interest. Since the activity in concern is teaching, there is no conflict with
the employer and hence no approval is needed. Additionally, the teaching is done on holiday weekends
and the pay is nominal. According to Standard VI(A), Disclosure of Conflicts, members and candidates
must make full and fair disclosure of all matters that could reasonably be expected to impair their
independence and objectivity or interfere with respective duties to their clients, prospective clients, and
employer. Grewal teaches on holiday weekends which does not pose any conflict of interest with his
employer and hence no disclosure is necessary. Neither Standard is violated.

B. Incorrect because according to Standard VI(A), Disclosure of Conflicts, members and candidates must
make full and fair disclosure of all matters that could reasonably be expected to impair their
independence and objectivity or interfere with respective duties to their clients, prospective clients, and
employer. Grewal teaches on holiday weekends which does not pose any conflict of interest with his
employer and hence no disclosure is necessary. Standard VI(A) is not violated.

C. Incorrect because Standard IV(B), Additional Compensation Arrangements, requires members and
candidates to obtain permission from their employer before accepting compensation or other benefits
from third parties for the services rendered to the employer or for any services that might create a
conflict with their employer's interest. Since the activity in concern is teaching, there is no conflict with
the employer and hence no approval is needed. Additionally, the teaching is done on holiday weekends
and the pay is nominal.

Guidance for Standards I-VII

9
CFA Program Level I for February 2024

• demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations
involving issues of professional integrity

23/ Solution

A. Correct because according to the GIPS standards, asset owners may comply with the GIPS standards in
the same way as firms if they compete for business. If they don't compete for business but report their
performance to an oversight body, asset owners may choose to comply with the GIPS standards for asset
owners.

B. Incorrect because according to the GIPS standards, Consultants cannot make a claim of compliance
unless they actually manage assets for which they are making a claim of compliance.

C. Incorrect because according to the GIPS standards, Consultants cannot make a claim of compliance
unless they actually manage assets for which they are making a claim of compliance.

Introduction to the Global Investment Performance Standards (GIPS)

• explain why the GIPS standards were created, who can claim compliance, and who benefits from
compliance

24/ Solution

A. Incorrect because the GIPS standards do not address every aspect of performance measurement and
will continue to evolve over time to address additional areas of investment performance.

B. Correct because the GIPS standards require firms to adhere to certain calculation methodologies to
allow for comparability across firms.

C. Incorrect because the GIPS standards firms must include all actual, fee-paying, discretionary
segregated accounts in at least one composite defined by investment mandate, objective, or strategy.

Introduction to the Global Investment Performance Standards (GIPS)

• describe the key concepts of the GIPS Standards for Firms

25/ Solution

A. Incorrect because according to the recommended procedures for compliance with the Standard
relating to misconduct, members should encourage their firms to disseminate to all employees a list of
potential violations and associated disciplinary sanctions. Therefore, it is not a recommended procedure
to disseminate a list of past violations.

B. Correct because according to the recommended procedures for compliance with the Standard relating
to misconduct, members should encourage their firms to check references of potential employees to
ensure that they are of good character.

10
CFA Program Level I for February 2024

C. Incorrect because according to the recommended procedures for compliance with the Standard
relating to misconduct, members should encourage their firms to disseminate to all employees a list of
potential violations and associated disciplinary sanctions. Therefore, it is not a recommended procedure
to disseminate a list of past violations.

26/ Solution

A. Incorrect because Standard VII(A), Conduct as Participants in CFA Institute Programs, was violated by
candidates revealing specific formulas

B. Incorrect because Standard VII(A), Conduct as Participants in CFA Institute Programs, was violated by
candidates revealing portions of the CBOK covered on the exam and portions not covered.

C. Correct because discussing the level of difficulty of the essay portion of the examination is not a
violation of Standard VII(A)-Conduct as Participants in CFA Institute Programs.

Guidance for Standards I-VII

• recommend practices and procedures designed to prevent violations of the Code of Ethics and
Standards of Professional Conduct

27/ Solution

A. Correct because according to Standard V(B), Communication with Clients and Prospective Clients, if
recommendations are contained in capsule form (such as a recommended stock list), members and
candidates should notify clients that additional information and analyses are available from the producer
of the report. In addition, members and candidates using any social media service to communicate
business information must be diligent in their efforts to avoid unintended problems because these
services may not be available to all clients. When providing information to clients through new
technologies, members and candidates should take reasonable steps to ensure that such delivery would
treat all clients fairly and, if necessary, be considered publicly disseminated, Leung posts the
recommended stock list on social media, which is accessible to all of his firm's clients, with additional
information upon request. Therefore, Leung has not violated Standard V(B).

B. Incorrect because according to Standard V(B), Communication with Clients and Prospective Clients, if
recommendations are contained in capsule form (such as a recommended stock list), members and
candidates should notify clients that additional information and analyses are available from the producer
of the report. Leung posts the recommended stock list to all of his firm's clients with additional
information upon request. Therefore, Leung has not violated Standard V(B).

C. Incorrect because according to Standard V(B), Communication with Clients and Prospective Clients,
members and candidates using any social media service to communicate business information must be
diligent in their efforts to avoid unintended problems because these services may not be available to all
clients. When providing information to clients through new technologies, members and candidates
should take reasonable steps to ensure that such delivery would treat all clients fairly and, if necessary,

11
CFA Program Level I for February 2024

be considered publicly disseminated. Because all of Leung's clients have access to the social medium
through which Leung communicated, Leung has not violated Standard V(B).

Guidance for Standards I-VII

• demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations
involving issues of professional integrity

28/ Solution

A. Correct because the monitoring role of lenders is most likely to insure high-quality financial reports
because the lenders inspect financial reports carefully to be sure they are not manipulated.

B. Incorrect because the need to meet specific financial ratios may motivate managers to manipulate
financial reports to achieve the target ratios.

C. Incorrect because the desire to avoid financial triggers may motivate managers to manipulate financial
reports s0 that loan covenants are not violated.

Financial Reporting Quality

• describe mechanisms that discipline financial reporting quality and the potential limitations of those
mechanisms

29/ Solution

A. Incorrect because corporate takeovers can be pursued in several different ways, Managerial teams can
also be displaced through a tender offer, which involves shareholders selling their interests directly to
the group seeking to gain control. A takeover mechanism by which shareholders are persuaded to vote
for a group seeking a controlling position on a company's board of directors describes a proxy contest
and not a tender offer.

B. Correct because corporate takeovers can be pursued in several different ways. One mechanism is the
proxy contest (or proxy fight). In a proxy contest, shareholders are persuaded to vote for a group seeking
a controlling position on a company's board of directors.

C. Incorrect because corporate takeovers can be pursued in several different ways a hostile takeover is an
attempt by one entity to acquire a company without the consent of the company's management. A
takeover mechanism by which shareholders are persuaded to vote for a group seeking a controlling
position on a company's board of directors describes a proxy contest and not a hostile takeover.

30/ Solution

A. Incorrect because the impairment loss is a non-cash item and does not affect cash from operations.

12
CFA Program Level I for February 2024

B. Correct. The company will report an impairment loss of $13.8 million on its income statement. Under
US GAAP, the facilities fail the recoverability test: the net book value cannot be recovered from
undiscounted cash flows (7 years x $3 = $21 < $28.4). Therefore, the asset is impaired and should be
written down to its fair value.

Fair Value is the present value (PV) of future benefits: (N=7; i=10, PM=T3); PV = 14.6

Impairment Loss is Carrying value - Fair value = 28.4-14.6 = 13.8 to be reported on the income
statement.

C. Incorrect because it was determined with no discounting of future benefits, resulting in an incorrect
impairment charge: 28.4-(3x7)=7.4.

31/ Solution

A. Incorrect because the impact on a lessor's balance sheet is the same for both a direct-financing and a
sales-type lease.

B. Correct because a lessor reports a profit on the sale of the asset on the income statement when the
present value of the lease payments exceeds the carrying amount of the leased asset (sales-type lease).

C. Incorrect because the interest portion of the lease payment is either an operating or financing cash
outflow under IFRS, and is an operating cash outflow under US GAAP.

Topics in Long-Term Liabilities and Equity

• explain the financial reporting of leases from the perspectives of lessors and lessees

32/ Solution

A. Incorrect because like a limited partnership, owners in a corporation (and US LLC) have limited
liability, and don't share all risk and business liability,

B. Incorrect because a limited partnership must have at least one general partner with unlimited liability
who is responsible for the management of the business. Remaining partners, called limited partners,
have limited liability, meaning they can lose only up to the amount of their investment in the limited
partnership.

C. Correct because general partnerships have a small number of partners who establish the business by
contributing equal amounts of capital. A key feature of general partnerships is that partners share all risk
and business liability.

Organizational Forms, Corporate Issuer Features, and Ownership

• compare the organizational forms of businesses

13
CFA Program Level I for February 2024

33/ Solution

A. Incorrect, because if both fiscal and monetary policy are easy, then the joint impact will be highly
expansionary leading to lower interest rates (at least if the monetary impact is larger), and growing
private and public sectors, without the private sector's share of GDP growing.

B. Correct because with tight fiscal policy/easy monetary policy: If a fiscal contraction is accompanied by
expansionary monetary policy and low interest rates, then the private sector will be stimulated and will
rise as a share of GDP, while the public sector will shrink.

C. Incorrect, because under easy fiscal policy/tight monetary policy we have higher output and higher
interest rates, and government spending (not the private sector) will be a larger proportion of overall
national income.

Monetary Policy

• explain the interaction of monetary and fiscal policy

34/ Solution

A. Incorrect because inventories are measured at the lower of cost or market under US GAAP

B. Correct because inventories are measured at the lower of cost or net realizable value under IFRS.

C. Incorrect because inventories are measured at the lower of cost or net realizable value under IFRS.
Net realizable value is the estimated selling price less the estimated costs of completion and costs
necessary to make the sale, not just the estimated selling price.

Analysis of Inventories

• describe the presentation and disclosures relating to inventories and explain issues that analysts
should consider when examining a company's inventory disclosures and other sources of information

35/ Solution

A. Incorrect because independence, credibility, and transparency are arguably the crucial ingredients for
an effective central bank, whether they target inflation or not. Thus, maintaining reasonable inflation
targets (or even targeting inflation) is not a crucial requirement for a central bank to be considered
effective.

B. Correct because independence, credibility, and transparency are arguably the crucial ingredients for
an effective central bank, whether they target inflation or not.

C. Incorrect because independence, credibility, and transparency are arguably the crucial ingredients for
an effective central bank, whether they target inflation or not. Additionally, one way of establishing
credibility is for a central bank to be transparent in its decision making. By explaining their views on the
economy and by being transparent in decision making, the independent, inflation-targeting central
banks seek to gain reputation and credibility, making it easier to influence inflation expectations and

14
CFA Program Level I for February 2024

hence ultimately easier to meet the inflation target. Thus, preserving the confidentiality of its economic
views contradicts a crucial ingredient of transparency.

Monetary Policy

•describe tools used to implement monetary policy tools and the monetary transmission mechanism,
and explain the

36/ Solution

A. Incorrect because if a revaluation initially decreases the carrying amount of the asset class, the
decrease is recognised in profit or loss. Later, if the carrying amount of the asset class increases, the
increase is recognised in profit or loss to the extent that it reverses a revaluation decrease of the same
asset class previously recognised in profit or loss. Any increase in excess of the reversal amount will not
be recognised in the income statement but will be recorded directly to equity in a revaluation surplus
account. 2,000,000 which represents the reversal of a revaluation recognized in profit or loss, is reported
on the income statement in Year 2.

B. Correct because if a revaluation initially decreases the carrying amount of the asset class, the
decrease is recognised in profit or loss. Later, if the carrying amount of the asset class increases, the
increase is recognised in profit or loss to the extent that it reverses a revaluation decrease of the same
asset class previously recognised in profit or loss. Any increase in excess of the reversal amount will not
be recognised in the income statement but will be recorded directly to equity in a revaluation surplus
account, In Year 1, a loss of 2,000,000 is recognized in profit and loss, In Year 2, the loss of 2,000,000 is
reversed on the income statement as a gain, and the excess of 3,000,000 (5.000.000-2,000,000) bypasses
profit or loss and goes through OCI to the revaluation surplus.

C. Incorrect because it calculates the change in revaluation surplus as being equal to the entire increase
in FMV from 18,000,000 to 23,000,000. If a revaluation initially decreases the carrying amount of the
asset class, the decrease is recognised in profit or loss. Later, if the carrying amount of the asset class
increases, the increase is recognised in profit or loss to the extent that it reverses are valuation decrease
of the same asset class previously recognised in profit or loss. Any increase in excess of the reversal
amount will not be recognised in the income statement but will be recorded directly to equity in a
revaluation surplus account. 5,000,000 is the total amount reported on the income statement
(2,000,000) plus the revaluation surplus (3,000,000).

37/ Solution

A. Incorrect because the tax rate (which is expressed as tax paid as a percentage of net income)
increased year over year, from 26.1% (€120/€460) to 26.7% (€155/€580). This is also true of tax paid as a
percentage of revenue, which increased from 5.2% (€120/€2,325) to 5.9% (€155/€2,611) year over year.
The company's profitability was reduced because of the higher tax rate.

B. Correct because gross profit margin improved from 33.3% (€775/€2,325) to 35.6% (€930/€2,611). This
may be reflective of selling a new, more highly differentiated product.

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CFA Program Level I for February 2024

C. incorrect because SG&A as a percentage of revenue slightly increased year over year: Year 1 =
€260/€2,325 = 11.2% and Year 2 €295/€2,611 = 11.3%.

Analyzing Income Statements

• evaluate a company's financial performance using common-size income statements and financial ratios
based on the income statement

38/ Solution

A. Incorrect because it is the difference between the inflation target of 3% and the long-term growth
potential of 2% 3%-2%1%

B. Incorrect because it is the inflation rate and ignores the growth potential. As such this would be an
expansionary rate of interest. Neutral rate Trend growth + Inflation target.

C. Correct because the Neutral rate Trend growth + Inflation target = 2% +3% = 5%.

Monetary Policy

• describe qualities of effective central banks; contrast their use of inflation, interest rate, and exchange
rate targeting in expansionary or contractionary monetary policy; and describe the limitations of
monetary policy

39/ Solution

A. Correct because IFRS does not require disclosure of the original date of acquisition.

B. Incorrect because the details of how fair value was obtained must be disclosed by companies using
the revaluation model.

C. Incorrect because under the cost model, the carrying amount must be disclosed by companies using
the revaluation model.

Analysis of Long-Term Assets

• analyze and interpret financial statement disclosures regarding property, plant, and equipment and
intangible assets

40/ Solution

A. Incorrect. It uses CF0= -30, CF1 = -7, CF₂=+8+28.5 = +36.5; IRR=-0.749%.

B. Incorrect. It uses cash flows from the difference of new balance at the beginning of year: CF0 = -30, CF1
= -40+30 =-10, CF2=-30+40=+10, CF3=+28.5; IRR=-1.523%.

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CFA Program Level I for February 2024

C. Correct. Tabulate the annual returns and the investment amounts to determine the cash flows:

Year 1 2 3

Balance from previous year 0 33.00 38.00

New Investment by Maria Delanie 30.00 7.00 0

Withdrawal by Maria Delanie 0 0 -8.00

Net balance at the beginning of the year 30.00 40.00 30.00

Investment return for the year 10% -5% -5%

Investment gain (loss) 3.00 -2.00 -1.50

Balance at the end of the year 33.00 38.00 28.50

CF0=-30, CF1=-7, CF₂=+8, CF=+28.5; IRR=-0.524%

Rates and Returns

• compare the money-weighted and time-weighted rates of return and evaluate the performance of
portfolios based on these measures

41/ Solution

A. Incorrect because change in unit labor costs is a lagging indicator and not a leading indicator.

B. Correct because average weekly hours, manufacturing is a leading indicator. Businesses will cut
overtime before laying off workers in a downturn and increase it before rehiring in a cyclical upturn,
these measures move up and down before the general economy.

C. Incorrect because employees on non-agricultural payrolls is a coincident indicator and not a leading
indicator.

Understanding Business Cycles

•describe how resource use, consumer and business activity, housing sector activity, and external trade
sector activity vary over the business cycle and describe their measurement using economic indicators

42/ Solution

A. Incorrect because when the overall level of board director or manager compensation, or tenure, is
excessive, the result may lead to the avoidance of risk motivated by a vested interest in keeping one's
position. Thus increasing, not decreasing, management tenure could result in more risk averse behavior
by management.

B. Correct because a compensation package relying too heavily on stock grants and options can motivate
risk-taking behavior by management, since option holders participate only in upside share price moves.

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CFA Program Level I for February 2024

Similarly, too little or no use of stock grants and options awarded to managers can lead to the opposite
result. However, managers and directors without a meaningful equity stake in the company are typically
more risk averse in their corporate decision making so they can better protect their long-term
engagement by the company.

C. Incorrect because tying management compensation to the size of the company's business would
increase the risk- taking behavior of management. When director and management compensation are
high and tied to the size of the business, it can also lead to 'growth for growth's sake' in which managers
are motivated to pursue acquisitions and expansion that might not increase shareholder value.

43/ Solution

A. Incorrect because the Auditor's Report is generally provided to shareholders at least annually.

B. Correct because interim reports are also provided by the company either semiannually or quarterly,
depending on the applicable regulatory requirements. Interim reports generally present the four basic
financial statements and condensed notes but are not audited.

C. Incorrect because the Auditor's Report is generally provided to shareholders at least annually.. In
addition, companies also provide information on management and director compensation, company
stock performance, and any potential conflicts of interest that may exist between management, the
board, and shareholders. This information may appear in the company's annual report or other publicly
available documents. Public companies often provide this information in proxy statements, which are
statements distributed to shareholders about matters that are to be put to a vote at the company's
annual (or special) meeting of shareholders. Accordingly, the proxy statement provides other
information and generally does not provide unaudited (or audited) financial statements.

Introduction to Financial Statement Analysis

• describe information sources that analysts use in financial statement analysis besides annual and
interim financial reports

44/ Solution (*)

A. & B Incorrect because a discount rate of 15% and 18% results in a negative NPV.

C. Correct because the NPV at 21% is $14.7, whereas the NPVs at other two discount rates are negative.

Year Cash Flow r = 15% r = 18% г = 21% Calculation

0 -$606,061 -$606.061.00 -$606.061.00 -$606,061.00 -606,061

1 2,151,515 1,870,882.60 1,823,317.80 1,778,111.60 +2,151,515/(1+r)

2 -2,542,424 -1,922,437.80 -1,825,929.30 -1,736,509.80 -2,542,424/(1 + г)²

3 1,000,000 657,516.20 608,630,90 564,473.90 +1,000,000/(1+r)³

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CFA Program Level I for February 2024

45/ Solution

A. Incorrect because the action lag refers to the length of time required to actually implement a policy
action once it has been decided on. In the case of infrastructure spending, it may take several months of
planning before the project is put into action, thereby constraining its near-term stimulative effect.

B. Incorrect because the impact lag refers to the length of time required for a policy action to become
evident in the economy. When spending on an infrastructure project begins, there will be a delay in
judging its effects and making any related adjustments to more effectively stimulate the economy due to
the impact lag.

C. Correct because recognition lag refers to the time required before policymakers realize that a policy
action is required because data appear with a considerable lag and are subject to substantial revision. A
policy action to spend on infrastructure would occur at the conclusion of this lag and, as a result, the
recognition lag is not a constraint on any specific type of policy action.

Fiscal Policy

• explain the implementation of fiscal policy and difficulties of implementation as well as whether a fiscal
policy is expansionary or contractionary

46/ Solution

A. Incorrect because the demand curve that each perfectly competitive firm faces is a horizontal line at
the equilibrium price, even though the demand curve for the whole market is downward sloping.

B. Correct because the demand curve that each perfectly competitive firm faces is a horizontal line at the
equilibrium price, even though the demand curve for the whole market is downward sloping.

C. Incorrect because the demand curve that each perfectly competitive firm faces is a horizontal line at
the equilibrium price, even though the demand curve for the whole market is downward sloping.

The Firm and Market Structures

• explain supply and demand relationships under oligopoly, including the optimal price and output for
firms as well as pricing strategy

47/ Solution

A. Incorrect because a monetary union is a type of arrangement with no separate legal tender. Each
monetary union member uses a common unit as its currency.

B. Incorrect because in a fixed parity system, there is no legislative commitment to maintaining the
specified parity.

C. Correct because the IMF defines a currency board system (CBS) as a monetary regime based on an
explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed

19
CFA Program Level I for February 2024

exchange rate, combined with restrictions on the issuing authority to ensure fulfillment of its legal
obligation.

The Foreign Exchange Market and Capital Flows

• describe exchange rate regimes and explain the effects of exchange rates on countries' intemational
trade and capital flows

48/ Solution

A. Incorrect because it subtracts rather than adds the forwards points to arrive at the forward rate: spot
rate - (forward points/10,000) = 1.0993 – (11.7/10,000) = 1.0981.

B. Correct because the six month forward rate = spot rate + (forward points/10,000) = 1.0993 +
(11.7/10,000) = 1.10047, which is closest to 1.1005.

C. Incorrect because it is the spot rate multiplied by 1 plus the forward points divided by 100 (i.e.
forward points expressed as a percentage). Spot rate * (1+ forward points/100) = 1.0993 × (1+11.7/100)
= 1.2279.

49/ Solution

A. Incorrect because the decrease in working capital is incorrectly subtracted from the sum of net
income and depreciation expense: CFO (in millions) = €300 + €35 -€35 = €300.

B. Incorrect because it subtracts the increase in accounts payable; or CFO (in millions) = €300 + €35-(€20-
€30 +€25) = €320.

C. Correct because CFO = Net income + Depreciation expense - Increase in working capital.

Increase in working capital Increase in inventory + Increase in accounts receivable Increase in accounts
payable. Increase in

50/ Solution

A. Incorrect. Rejection of a true null hypothesis is a Type I error.

B. Correct. Failure to reject a false null hypothesis is a Type II error.

C. Incorrect. The power of a test is the probability of correctly rejecting the null.

Hypothesis Testing

• explain hypothesis testing and its components, including statistical significance, Type I and Type II
errors, and the power of a test.

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CFA Program Level I for February 2024

51/

A. Incorrect because it is the present value of an annuity due with 9 payments instead of 10. Because the
first payment occurs at t = 0, we can separate the annuity into two pieces: an immediate $10,000 that is
received today (t = 0) and an ordinary annuity of $10,000 per year for 8 years.

Using the formula for the present value of the ordinary annuity with 8 payments, we compute PV = A[1-
1/(1+r)N]/r= 10,000×[1-1/(1+0.06)8 ]/0.06 = $62,097.94.

Adding the two pieces, we obtain PV = $10,000 + $62,097.94 = $72,097.94 = $72,098.

Alternatively, using a financial calculator in BGN mode:

N=9: I/Y=6: PMT = 10,000; FV = 0; CPT PV = $72,097.94=$72,098.

B. Incorrect because this is the present value of a regular annuity with 10 payments, whereas the
investment in the example is an annuity due, sing the formula for the present value of the ordinary
annuity, we compute PV = A[1- 1/(1+r)N]/r=10,000 x [1-1/(1+0.06)10]/0.06 = $73.600.87=$73,601.

Alternative solution using a financial calculator in END mode:

N=10, I/Y = 6; PMT = 10,000; FV = 0; CPT PV = $73,600.87~$73,601.

C. Correct because the investment represents an annuity due with 10 payments. Because the first
payment occurs at f = 0, we can separate the annuity into two pieces: an immediate $10,000 that is
received today (t = 0) and an ordinary annuity of $10,000 per year for 9 years.

Using the formula for the present value of the ordinary annuity with 9 payments, we compute PV = A[1-
1/(1+r)N]/ r=$10,000 [1-1/(1+0.06)9]/0.06 = $68.106.92.

Adding the two pieces, we obtain PV = $10,000 + $68,106.92 = $78,106.92~$78,107.

Alternatively, using a financial calculator with END mode:

Compute the present value of the ordinary annuity with N = 9; I/Y = 6; PMT = 10,000; FV = 0; CPT PV =
$68,016.92

Adding them, we obtain PV = $10,000 + $68,016.92 = $78,016.92~$78,017.

Alternatively, using a financial calculator with BGN mode:

N=10; I/Y = 6; PMT =10,000; FV = 0; CPT PV = $78,016.92~$78,017.

Time Value of Money in Finance

• calculate and interpret the present value (PV) of fixed-income and equity instruments based on
expected future cash flows

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CFA Program Level I for February 2024

52/ Solution

A. Incorrect because maintaining price stability is an objective of monetary policy not fiscal policy. There
is one overarching objective of the central bank that most seem to acknowledge explicitly, and that is the
objective of maintaining price stability.

B. Incorrect because targeting the exchange rate is a monetary policy objective not a fiscal policy
objective. Many developing economies choose to operate monetary policy by targeting their currency's
exchange rate, rather than an explicit level of domestic inflation. Such targeting involves setting a fixed
level or band of values for the exchange rate against a major currency, with the central bank supporting
the target by buying and selling the national currency in foreign exchange markets.

C. Correct because tools associated with fiscal policy involve the use of government spending and
changing tax revenue to affect a number of aspects of the economy: Distribution of income and wealth
among different segments of the population.

Fiscal Policy

• describe roles and objectives of fiscal policy as well as arguments as to whether the size of a national
debt relative to GDP matters

53/ Solution

A. Incorrect because the marginal tax rate is omitted when calculating the debt tax shield. V V + D, and
therefore, V$1.5 billion $0.6 billion $0.9 billion,

B. Correct because the value of the levered company is greater than that of the all-equity company by an
amount equal to the tax rate multiplied by the value of the debt, also termed the debt tax shield. VL = VU
+ tD, where VL = the value of the levered company. VU the value of the unlevered company, t is the
marginal tax rate and to is the debt tax shield. Therefore, $1.5 billion = VU + 0.30 x $0.6 billion, and VU =
$1.32 billion ~ $1.3 billion.

54/ Solution

A. Correct because primary sources include short-term funds, which can include items such as trade
credit, bank lines of credit, and short-term investment portfolios.

B. Incorrect because the main difference between primary and secondary sources of liquidity is that
using a primary source is not likely to affect the normal operations of the company, whereas using a
secondary source might result in a change in the company's financial and operating positions. Secondary
sources include liquidating assets.

C. Incorrect because the main difference between primary and secondary sources of liquidity is that
using a primary source is not likely to affect the normal operations of the company, whereas using a
secondary source might result in a change in the company's financial and operating positions. Secondary

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CFA Program Level I for February 2024

sources include negotiating debt contracts, relieving pressures from high interest payments or principal
repayments, and negotiating contracts with customers and suppliers.

Working Capital and Liquidity

• explain liquidity and compare issuers' liquidity levels

55/ Solution

A. Incorrect because if products are price elastic, an increase in prices is associated with a decrease in
volume. If demand is relatively price inelastic, revenues will benefit from inflation. If demand is relatively
price elastic (i.e., elasticity is greater than unit price elasticity), revenue can decline even if unit prices are
raised.

B. Incorrect because in the highly competitive consumer goods market, pricing is strongly influenced by
movements in input prices, which can account for half of the COGS. In some time periods, customers'
price sensitivity has resulted in a strong inverse relationship between volume and pricing. An increase in
price reduces the volume, muting the effect on a company's revenue.

C. Correct because in a fragmented consumer base, the consumers have less bargaining power making it
easier for companies to pass on higher costs to the consumers.

Introduction to Financial Statement Modeling

• explain how the competitive position of a company based on a Porter's five forces analysis affects
prices and costs

56/ Solution

A. Incorrect because the oligopoly market structure is based on a relatively small number of firms [not
many firms] supplying the market

B. Incorrect because another extreme is perfect competition which has many firms supplying a similar
product.

C. Correct because in the case of monopolistic competition, there are many firms providing products to
the market and one firm's product is differentiated in some way.

The Firm and Market Structures

• identify the type of market structure within which a firm operates and describe the use and limitations
of concentration measures

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CFA Program Level I for February 2024

57/ Solution

A. Incorrect because it calculates Cash flow per share without adding back total dividends. Accordingly,
Cash flow per share = (CFO – Preferred dividends) / Number of common shares outstanding = (600 -
30)/100 = 5.7.

B. Incorrect because it added back preferred dividends instead of common dividends. Accordingly, Cash
flow per share = (CFO + Preferred dividends)/Number of common shares outstanding (600+30)/100 =
6.3.

C. Correct because Cash flow per share = (CFO - Preferred dividends) / Number of common shares
outstanding. Note that if the company reports under IFRS and includes total dividends paid as a use of
cash in the operating section, total dividends should be added back to CFO as reported and then
preferred dividends should be subtracted. Accordingly, Cash flow per share = [CFO + Total Dividends –
Preferred Dividend]/ Number of common shares outstanding = (600 + 120 – 30)/ 100 = 6.9

58/ Solution

A. Incorrect because book value is used instead of market value. Assume the company's current capital
structure, at market value weights for the components, represents the company's target capital
structure.

B. Incorrect because an analyst can use averages of comparable companies' capital structures [not a
diversified group] as the target capital structure.

C. Correct because an analyst can examine trends in the company's capital structure or statements by
management regarding capital structure policy to infer the target capital structure.

Capital Structure

• describe optimal and target capital structures

59/ Solution

A. Incorrect because when revenue is recognized, a contract asset is presented on the balance sheet. It is
only at the point when all performance obligations have been met except for payment that a receivable
appears on the seller's balance sheet.

B. Correct because when revenue is recognized, a contract asset is presented on the balance sheet. It is
only at the point when all performance obligations have been met except for payment that a receivable
appears on the seller's balance sheet.

C. Incorrect because when revenue is recognized, a contract asset is presented on the balance sheet. It is
only at the point when all performance obligations have been met except for payment that a receivable
appears on the seller's balance sheet. If consideration is received in advance of transferring good(s) or
service(s), the seller presents a contract liability.

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CFA Program Level I for February 2024

60/ Solution

A. Incorrect because free trade areas (FTA) are one of the most prevalent forms of regional integration in
which all barriers to the flow of goods and services among members have been eliminated. However,
each country maintains its own polices against non-members.

B. Incorrect because a customs union does not allow free movement of factors of production. A customs
union extends the FTA by not only allowing free movement of goods and services among members but
also creating a common trade policy against non-members.

C. Correct because a common market is the next level of economic integration that incorporates all
aspects of the customs union (free movement of goods and services, and common trade policy against
non-members) and extends it by allowing free movement of factors of production among members.

International Trade

• explain motivations for and advantages of trading blocs, common markets, and economic unions

61/ Solution

A. Incorrect because the quick ratio does not include inventory and is therefore unaffected by changes in
the inventory carrying amount. Quick ratio (Cash + Short-term marketable investments + Receivables) +
Current liabilities.

B. Correct because the Current ratio decreases as a result of an inventory write down. The Current ratio
= Current assets + Current liabilities. Inventory is classified as current assets, among the current assets'
required line items are cash and cash equivalents, trade and other receivables, inventories, and financial
assets (with short maturities). In the event that the value of inventory declines below the carrying
amount on the balance sheet, the inventory carrying amount must be written down to its net realisable
value and the loss (reduction in value) recognised as an expense on the income statement. This expense
may be included as part of cost of sales or reported separately. The numerator in the Current ratio is
reduced by an inventory write-down and the denominator is unaffected. Therefore, the current ratio
would decrease.

C. Incorrect because an inventory write-down would result in either an increase or unchanged payables
turnover ratio, depending on where the write-down expense was recognized, instead of a decrease. In
the event that the value of inventory declines below the carrying amount on the balance sheet, the
inventory carrying amount must be written down to its net realisable value and the loss (reduction in
value) recognised as an expense on the income statement. This expense may be included as part of cost
of sales or reported separately.

When the inventory write down is included in cost of goods sold and cost of goods sold is used as a proxy
of purchases, payables turnover would increase. Payables turnover Purchases Average trade payables.
While payables are not impacted by an inventory write-down, the numerator increases when COGS is
used as an approximation. Note that when calculating payables turnover, cost of goods sold is sometimes

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CFA Program Level I for February 2024

used as an approximation of purchases. When the inventory write down is reported separately and does
not from cost of goods sold, there would be no impact on the payables turnover ratio.

Analysis of Inventories

• describe the measurement of inventory at the lower of cost and net realisable value and its
implications for financial statements and ratios

62/ Solution

A. Correct because if the amount of purchases is not directly available, it can be computed as cost of
goods sold plus ending inventory less beginning inventory. Alternatively, cost of goods sold is sometimes
used as an approximation of purchases.

B. Incorrect because if the amount of purchases is not directly available, it can be computed as cost of
goods sold plus ending inventory less beginning inventory. Alternatively, cost of goods sold is sometimes
used as an approximation of purchases.

C. Incorrect because if the amount of purchases is not directly available, it can be computed as cost of
goods sold plus ending inventory less beginning inventory. Alternatively, cost of goods sold is sometimes
used as an approximation of purchases.

Financial Analysis Techniques

• calculate and interpret activity, liquidity, solvency, and profitability ratios

63/ Solution

A. Correct because the variance of a random variable is the expected value (the probability-weighted
average) of squared deviations from the random variable's expected value. Var(X)=P(0)×(0-0.5)2+P(1)×(1-
0.5)2 = 0.5×0.52+ 0.5x0.52 = 0.25, where expected value of X is E(X) = 0x0.5 + 1×0.5=0.5.

B. Incorrect because it just takes the distance from the expected value of 0.5 to potential outcomes of X
of 0 or 1. It is also the standard deviation of X, i.e. Var(X)=0.250.5 = 0.50.

C. Incorrect because it is just a range of values that X can take = 101. It is also the sum of probabilities
from the probability function of X = 0.5+0.5 = 1.00.

Probability Trees and Conditional Expectations

• calculate expected values, variances, and standard deviations and demonstrate their application to
investment

64/ Solution

A. Incorrect because this is not the definition of standard error, but sampling error, Sampling error is the
difference between the observed value of a statistic and the quantity it is intended to estimate as a

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CFA Program Level I for February 2024

result of using subsets of the population while standard error measures how much inaccuracy of a
population parameter estimate comes from sampling. Also, if we want to find out how precise the
estimate of a population parameter from sampled data is relative to its true value, standard error is the
metric to use.

B. Correct because sampling error is the difference between the observed value of a statistic and the
quantity it is intended to estimate as a result of using subsets of the population.

C. Incorrect because although the standard error is the standard deviation of the sampling distribution of
the parameter, standard deviation' in general and 'standard error' are two distinct concepts, and the
terms are not interchangeable. Simply put, standard deviation measures the dispersion of the data from
the mean, whereas standard error measures how much inaccuracy of a population parameter estimate
comes from sampling. The contrast between standard deviation and standard error reflects the
distinction between data description and inference. If we want to draw conclusions about how spread
out the data are, standard deviation is the term to quote. If we want to find out how precise the
estimate of a population parameter from sampled data is relative to its true value, standard error is the
metric to use.

65/ Solution

A. Incorrect because this is the result if the cash flows are discounted for 10 years instead of 5 years; the
calculation uses (1.05)-10 as the discount factor instead of (1.05)-5.

PV=FVn(1+r)-n=$50,000(1.05)-10 = $30,696.

B. Incorrect because this is the result if the calculation for present value uses (1.05)-6 as the discount
factor instead of (1.05)-5. That is, the cash flows are discounted back to the beginning of Year 5, one
more year than they should be.

PV=FVn (1+r)-n= $50,000(1.05)-6=$37,311.

C. Correct because Year 10 is five years into the future from the end of Year 5, so the present value at the
end of Year 5 is calculated using the formula

PV=FVn(1+r)-n=$50,000(1.05)-6= $39,176.

Rates and Returns

• calculate and interpret annualized return measures and continuously compounded returns, and
describe their appropriate uses

66/ Solution

A. Incorrect because this refers to pecking order theory, not Jensen's free cash flow hypothesis. The
pecking order theory says that managers prefer internal financing. If internal financing is insufficient,
managers next prefer debt, then equity.

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CFA Program Level I for February 2024

B. Correct because according to Michael Jensen's free cash flow hypothesis higher debt levels discipline
managers by forcing them to manage the company efficiently so the company can make its interest and
principal payments and by reducing the company's free cash flow and thus management's opportunities
to misuse cash.

C. Incorrect because this refers to debt signaling, not Jensen's free cash flow hypothesis. Managers can
signal to the market their confidence in a company's prospects through the issuance of debt, which
commits the company to future obligations (so-called "debt signaling").

Capital Structure

• explain factors affecting capital structure and the weighted-average cost of capital

67/ Solution

A. Incorrect because hegemony is characterized by globalization and non-cooperation.

B. Incorrect because bilateralism is characterized by nationalism/anti-globalization and cooperation.

C. Correct because multilateralism is characterized by globalization and cooperation.

Introduction to Geopolitics describe geopolitical risk

68/ Solution

A. Correct because the geometric mean annual return is equal to the product of the mean returns and
then setting the product to the 1/nth power, where n is the number of returns. This translates to:

(1.122 x 0.915×1.067 × 0.967)0.25-1=0.0145 = 1.45%

B. Incorrect. This is the arithmetic mean annual return: (12.2% - 8.5%+6.7%-3.3%)/4 = 1.78%.

C. Incorrect. This is the holding period return: (1.122 × 0.915×1.067×0.967)-1=0.0593=5.93%.

69/ Solution

A. Correct because project sequencing is a type of timing option. Delaying an investment and basing the
decision on hopefully improved information that you might have in, say, a year could help improve the
NPV of the projects selected. Project sequencing options allow the company to defer the decision to
invest in a future investment until the outcome of some or all of a current investment is known.

B. Incorrect because project sequencing is a type of timing option, not a type of flexibility option. Once
an investment is made, operational flexibilities besides abandonment or expansion may be available.
Management may be able to exercise a price-setting option [which is a flexibility option to benefit from
excess demand). There are also production flexibility options which offer the operational flexibility to
alter production when demand varies from what is forecast.

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CFA Program Level I for February 2024

C. Incorrect because project sequencing is a type of timing option, not a type of fundamental option. A
fundamental option exists in cases where the whole investment is essentially an option. The payoffs
from the investment are contingent on an underlying asset, just like most financial options.

Capital Investments and Capital Allocation

•describe types of real options relevant to capital investments

70/

A. A contract is signed. According to the converged standards of revenue recognition, the process
involves five steps:

1. Identify the contract(s) with a customer.

2. Identify the separate or distinct performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations in the contract.

5. Recognize revenue when (or as) the entity satisfies a performance obligation. While entering
into or signing the contract would be covered by steps 1-4, step 5 is required to recognize
revenue. The entity will only recognize revenue when it is able to satisfy the performance
obligation.

B. Correct because it is only when all performance obligations have been met except for payment that a
receivable appears on the seller's balance sheet.

C. Incorrect because it is only when all performance obligations have been met except for payment that
a receivable appears on the seller's balance sheet. If consideration is received in advance of transferring
goods or services, the seller presents a contract liability. Consequently, the seller recognizes a contract
liability rather than a receivable.

71/ Solution

A. Incorrect because under IFRS, financial assets are subsequently measured at amortized cost (not fair
value) if the asset's cash flows occur on specified dates and consist solely of principal and interest, and if
the business model is to hold the asset to maturity.

B. Incorrect because under IFRS, financial assets are subsequently measured at amortized (not historical)
cost if the asset's cash flows occur on specified dates and consist solely of principal and interest, and if
the business model is to hold the asset to maturity.

C. Correct because under IFRS, financial assets are subsequently measured at amortized cost if the
asset's cash flows occur on specified dates and consist solely of principal and interest, and if the business
model is to hold the asset to maturity.

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CFA Program Level I for February 2024

Analyzing Balance Sheets

•explain the financial reporting and disclosures related to financial instruments

72/ Solution

A. Incorrect because event risk evolves around set dates, such as elections, new legislation, or other
date-driven milestones, such as holidays or political anniversaries, known in advance. Political events
often result in changes to investor expectations related to a country's cooperative stance.

B. Incorrect because thematic risks are known risks that evolve and expand over a period of time.
Climate change, pattern migration, the rise of populist forces, and the ongoing threat of terrorism fall
into this category. Cyber threats are another example of thematic risk. Cyber risks include any attempt to
expose, alter, disable, destroy, steal, or gain information through unauthorized access to or unauthorized
use of computer systems.

C. Correct because exogenous risk is a sudden or unanticipated risk that impacts either a country's
cooperative stance, the ability of non-state actors to globalize, or both. Examples include sudden
uprisings, invasions, or the aftermath of natural disasters.

Introduction to Geopolitics

• describe the impact of geopolitical risk on investments

73/ Solution

A. Incorrect because this distractor incorrectly uses book values instead of market values to calculate
weights. WACC = Wdrd (1-t)+Wprp+Were ≠ (900/(900+300)) x 0.04×(1-0.30)+(300/(900+300))×0.06 = 0.036
= 3.6%.

B. Correct because WACC = wdrd (1-t) + Wprp + Were

where

wd is the proportion of debt,

rd is the before-tax marginal cost of debt,

wp is the proportion of preferred stock,

rp is the marginal cost of preferred stock,

we is the proportion of equity, and

re is the marginal cost of equity.

Therefore WACC = (1000/(1000+500))×(0.04)(1-0.30) + (500/(1000+500)) x 0.06 =0.03867~3.9%.

C. Incorrect because this response does not take into account the tax deductibility of interest, i.e. WACC
= Wdrd (1-t) + Wprp+ Were≠ (1000/(1000+500))×0.04+ (500/(1000+500)) × 0.06 = 0.04667 = 4.7%.

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CFA Program Level I for February 2024

74/ Solution

A. Incorrect because a low asset turnover can be an indicator of inefficiency or of relative capital
intensity of the business. Company's 2 asset turnover is 2 and larger than Company 1, indicating higher
efficiency.

B. Incorrect because ROE can be written as ROE = ROA x Leverage and thus ROA = ROE/Leverage.
Leverage = average total assets/average shareholders' equity. For Company 1, ROA = 12%/26%. For
Company 2, ROA = 18%/36%. They are equal.

C. Correct because ROE = Net profit margin x Total asset turnover x Leverage and thus Net profit margin=
ROE/(Total asset turnover x Leverage). For Company 1, Net profit margin = 12%/(1 x 2) = 6%, which is
higher than Company 2's Net profit margin = 18%/(2 x 3) = 3%.

Financial Analysis Techniques

• demonstrate the application of DuPont analysis of return on equity and calculate and interpret effects
of changes in its components

75/

A. Incorrect because it reduces net income by the common and preferred dividend account. Basic EPS &
(Net income - Common dividends - Preferred dividends) / weighted average number of shares
outstanding) = (€80.000 - €16,000 - €10,000) / 150 000 = €0.36.

B. Correct because Basic EPS (Net income - Preferred dividends)/(Weighted average number of shares
outstanding) = (€80,000-€10,000)/150.000 = €0.47

C. Incorrect because it uses the common shares outstanding at year end as the denominator. Basic EPS =
€80,000 - €10,000) / 130,000 = €0.54

Financial Statement Analysis: describe how earnings per share is calculated and calculate and interpret
a company's basic and diluted earnings per share for companies with simple and complex capital
structures including those with antidilutive securities.

76/ Solution

A. Incorrect because only under perfect competition do firms have no pricing power. This is due to an
absence of non- price competition combined with a standardized product, unlike monopolistic
competition where firms have a differentiated product and can engage in non-price competition.

B. Correct because firms have some but not considerable pricing power under monopolistic competition.
In this market structure, sellers are able to differentiate their products but at the same time can face a
large number of competitors and low barriers to entry. The result is that firms have more pricing power

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CFA Program Level I for February 2024

than they would have under perfect competition (where there is no product differentiation) but less
pricing power than in an oligopoly where entry barriers are high and there are fewer sellers.

C. Incorrect because firms only have considerable pricing power in oligopolistic or monopoly market
structures. Under monopolistic competition there are still many sellers due to low entry barriers, hence
firms have some but not considerable pricing power.

The Firm and Market Structures

• describe characteristics of perfect competition, monopolistic competition, oligopoly, and pure

monopoly

77/ Solution

A. Incorrect because an acquirer with a high current tax rate would theoretically be willing to pay more
than an acquirer with a lower tax rate.

B. Correct because if an acquiring company is profitable, it may be able to use MU's tax loss
carryforwards to offset its own tax liabilities. The value to an acquirer would be the present value of the
carryforwards, based on the acquirer's tax rate and expected timing of realization. The higher the
acquiring company's tax rate, and the more profitable the acquirer, the sooner it would be able to
benefit. Therefore, an acquirer with a high current tax rate would theoretically be willing to pay more
than an acquirer with a lower tax rate.

C. Incorrect because an acquirer with a high current tax rate would theoretically be willing to pay more
than an acquirer with a lower tax rate.

Analysis of Income Taxes

• analyze disclosures relating to deferred tax items and the effective tax rate reconciliation and explain
how information included in these disclosures affects a company's financial statements and financial
ratios

78/ Solution

A. Correct because from the ANOVA table, we can also calculate the standard error of the estimate
which is also known as the standard error of the regression or the root mean square error. The standard
error of the estimate is the square root of the mean square error. Thus, standard error of the estimate =
120.5 = 3.4641 ~ 3.5.

B. Incorrect because it is a square root of sum of squared errors, and not of the mean square error. Thus,
it calculates standard error = 480.5 = 6.9282 ~ 6.9.

C. Incorrect because it is simply the mean square error, and not the square root of the mean square
error. It is also the square root of the mean square regression = 1440.5 = 12.0.

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CFA Program Level I for February 2024

79/ Solution

A. Incorrect because it is the 4th out of 5 observations in the sample. It is also simply 0.8 x 5 = 4.0.

B. Incorrect because it is the position (not the value) of the 4th quintile: Lao = (5+1) x (80/100) = 6 x 0.8=
4.8. It is also 0.8×(6-0) = 4.8.

C. Correct because the fourth quintile is equivalent to the 80th percentile. To find the yth percentile (Py),
we first must determine its location. The formula for the position of a percentile in an array with n
entries sorted in ascending order is Ly = (n + 1)x(y/100). In this case, n = 5 and y = 80, so L80 = (5+1)x
(80/100) = 6 x 0.8= 4.8. When Ly is not a whole number or integer, Ly lies between the two closest integer
numbers (one above and one below), and we use linear interpolation between those two places to
determine Py Thus, the value of the 4th quintile is P80 = 4+0.8 x (6-4)=5.6.

Statistical Measures of Asset Returns

•calculate, interpret, and evaluate measures of central tendency and location to address an investment
problem

80/ Solution

A. Incorrect because the ability to analyze Big Data using ML techniques, alongside more traditional
statistical methods, represents a significant development in investment research, supported by the
presence of greater data availability and advances in the algorithms themselves. Improvements in
computing power and software processing speeds and falling storage costs have further supported this
evolution, ML techniques are being used for Big Data analysis to help predict trends or market events,
such as the likelihood of a successful merger or an outcome to a political election. Image recognition
algorithms can now analyze data from satellite-imaging systems to provide intelligence on the number of
consumers in retail store parking lots, shipping activity and manufacturing facilities, and yields on
agricultural crops, to name just a few examples. Such information may provide insights into individual
firms or at national or global levels and may be used as inputs into valuation or economic models. Thus,
there is rather broad application of ML in Big Data analysis, which is expected to develop further.

B. Correct because ML (machine learning) still requires human judgement in understanding the
underlying data and selecting the appropriate techniques for data analysis. Before they can be used, the
data must be clean and free of biases and spurious data.

C. Incorrect because ML (machine learning) models also require sufficiently large amounts of data and
may not perform well where there may not be enough available data to train and validate the model.

81/ Solution

A. Correct because the target downside deviation = [Σ (Xi-B)²/(n-1)]0.5, where Xi are the periodic returns
below the target return, B is the target return, and n is the total number of periods. Since the sample has
a standard deviation of 2.5%, it will have values below and above its mean of 2.2%. Since the target
downside deviation ignores the deviations above the mean, it will be less than the standard deviation.

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CFA Program Level I for February 2024

B. Incorrect because the target downside deviation = [Σ (Xi-B)²/(n-1)]0.5, where Xi are the periodic returns
below the target return, B is the target return, and n is the total number of periods. Since the sample has
a standard deviation of 2.5%, it will have values below and above its mean of 2.2%. Since the target
downside deviation ignores the deviations above the mean, it will be less than the standard deviation.

C. Incorrect because the target downside deviation = [Σ (Xi - B)²/(n-1)]0.5, where Xi are the periodic
returns below the target return, B is the target return, and n is the total number of periods. Since the
sample has a standard deviation of 2.5%, it will have values below and above its mean of 2.2%. Since the
target downside deviation ignores the deviations above the mean, it will be less than the standard
deviation.

Statistical Measures of Asset Returns

• calculate interpret and evaluate measures of dispersion to address an investment problem

82/ Solution

A. Incorrect because the the board is also responsible for hiring the CEO. The CEO reports to the board
does not report to the CEO.

B. Correct because directors are required under law to display a high standard of prudence, care, and le
company.

C. Incorrect because most codes addressing corporate governance standards require that board member
diverse mix of expertise, backgrounds, and competencies, with best practice generally dictating at lea
the board be independent.

Investors and Other Stakeholders

• describe a company's stakeholder groups and compare their interests

83/ Solution

A. Incorrect because a f-statistic tests if the intercept is statistically different from zero.

We can test whether the intercept is different from the hypothesized value, Bo, by comparing the
estimated intercept (b0) with the hypothesized intercept and then dividing the difference by the standard
error of the intercept.

B. Incorrect because a t-statistic tests if there is a positive correlation between the dependent and
independent variables, that is, whether the slope coefficient of the linear regression is greater than zero.
We can use the F- statistic to test for the significance of the slope coefficient (that is, whether it is
significantly different from zero), but we also may want to perform other hypothesis tests for the slope
coefficient-for example, testing whether the population slope is different from a specific value or
whether the slope is positive. We can use a t-distributed test statistic to test such hypotheses about a
regression coefficient.

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CFA Program Level I for February 2024

C. Correct because in regression analysis, we can use an F-distributed test statistic to test whether the
slopes in a regression are equal to zero, with the slopes designated as bi, against the alternative
hypothesis that at least one slope is not equal to zero.

84/ Solution

A. Correct because direct sales is a common strategy in B2B markets where the universe of potential
customers is relatively small and easily reached.

B. Incorrect because the common channel strategy in this case is direct sales. Direct sales is a common
strategy in B2B markets where the universe of potential customers is relatively small and easily reached.
With an omnichannel strategy, both digital and physical channels are used to complete a sale.

C. Incorrect because the common channel strategy in this case is direct sales. Direct sales is a common
strategy in B2B markets where the universe of potential customers is relatively small and easily reached.
The traditional channel strategy is typically reflected in the flow of finished goods (e.g., from
manufacturer to wholesaler, retailer, and end customer), each with its own physical facilities and with
the product sold and purchased at each stage.

Business Models

• describe key features of business models

85/ Solution

A. Incorrect because the idea behind bootstrap is to mimic the process of performing random sampling
from a population. The difference lies in the fact that we have no knowledge of what the population
looks like, except for a sample with size n drawn from the population. In other words, only one sample,
not multiple samples, is taken from the population. The subsequent resamples are then taken from the
original sample and not directly from the

population. B. Incorrect because in bootstrap, we repeatedly draw samples from the original sample,
and each resample is of the same size as the original sample. Note that each item drawn is replaced for
the next draw (i.e., the identical element is put back into the group so that it can be drawn more than
once). Hence items are drawn with replacement, not without.

C. Correct because a random sample offers a good representation of the population, therefore we can
simulate sampling from the population by sampling from the observed sample. In other words, the
bootstrap mimics the process by treating the randomly drawn sample as if it were the population.

Estimation and Inference

• describe the use of resampling (bootstrap, jackknife) to estimate the sampling distribution of a statistic

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CFA Program Level I for February 2024

86/ Solution

A. Incorrect because the cost of preferred shares was mistakenly also adjusted with the tax shield. WACC
# wdrd (1-t) +wprp (1-t)+Were = 0.4×0.08 (1-0.25)+0.1×0.1 (1-0.25)+0.5×0.16 = 0.1115~11.2%.

B. Correct because WACC = wdrd (1-t)+Wprp+Were= 0.4×0.08×(1-0.25)+0.1×0.1+0.5 x 0.16 = 0.1140 =

11.4%.

87/ Solution

A. Correct because a correlation of 0 (uncorrelated variables) indicates an absence of any linear (that is,
straight-line) relationship between the variables.

B. Incorrect because a correlation of 0 (uncorrelated variables) indicates an absence of any linear (that is,
straight-line) relationship between the variables. So, a zero correlation between two variables does not
rule out a non-linear relationship between the variables.

C. Incorrect because a correlation of 0 (uncorrelated variables) indicates an absence of any linear (that is,
straight-line) relationship between the variables. So, a zero correlation between two variables does not
rule out a non-linear relationship between the variables.

Statistical Measures of Asset Returns

• interpret correlation between two variables to address an investment problem

88/ Solution

A. Correct because IFRS state that inventories shall be measured (and carried on the balance sheet) at
the lower of cost and net realizable value; Inventory turnover ratio = Cost of sales + Average inventory
and Days of inventory on hand = Number of days in period / Inventory turnover ratio. Accordingly,
Inventory turnover ratio = 1,000/[(125+ 120)/2]~8.163; and Days of inventory on hand = Number of days
in period / Inventory turnover ratio = 365/8.163 = 44.7~45.

B. Incorrect because inventories in both years were measured at cost instead of the lower of cost and
net realizable value. Hence, Inventory turnover ratio = 1,000/[(150+120)/2] = 1,000/135~7.407; and Days
of inventory on hand 365/7.407=49.3~49.

C. Incorrect because inventories in both years were measured at net realizable value instead of the lower
of cost and net realizable value. Hence, Inventory turnover ratio =
1,000/[(125+160)/2)=1,000/142.5~7.018; and Days of inventory on hand = 365/7.018 = 52.0 ~ 52.

Analysis of Inventories

• describe the measurement of inventory at the lower of cost and net realisable value and its
implications for financial statements and ratios

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CFA Program Level I for February 2024

89/ Solution

A. Correct because the net operating cycle indicates the amount of time that elapses from the point
when a company invests in working capital until the point at which the company collects cash.

B. Incorrect because the defensive interval ratio measures how long the company can continue to pay its
expenses from its existing liquid assets without receiving any additional cash inflow.

C. Incorrect because the number of DSO represents the elapsed time between a sale and cash collection,
reflecting how fast the company collects cash from customers to whom it offers credit.

Financial Analysis Techniques

• calculate and interpret activity, liquidity, solvency, and profitability ratios

90/ Solution

A. Incorrect because the quick ratio is a liquidity ratio. Liquidity ratios measure the company's ability to
meet its short- term obligations.

B. Incorrect because the current ratio is a liquidity ratio. Liquidity ratios measure the company's ability to
meet its short-term obligations.

C. Correct because the interest coverage ratio is a solvency ratio. Solvency ratios measure a company's
ability to meet long-term obligations. Subsets of these ratios are also known as "leverage" and "long-
term debt" ratios.

Financial Analysis Techniques

• calculate and interpret activity, liquidity, solvency, and profitability ratios

37