i

2019 Level I Mock Exam (C) PM

The afternoon session of the 2019 Level I Chartered Financial Analyst Mock ®
Examination has 120 questions. To best simulate the exam day experience, candidates
are advised to allocate an average of one and a half minutes per question for a total
of 180 minutes (3 hours) for this session of the exam.
Questions Topic Minutes

1–19 Ethical and Professional Standards 28.5

20–31 Quantitative Methods 18
32–43 Economics 18
44–61 Financial Reporting and Analysis 27
62–73 Corporate Finance 18
74–80 Portfolio Management 10.5
81–93 Equity 19.5
94–106 Fixed Income 19.5
107–113 Derivatives 10.5
114–120 Alternative Investments 10.5
Total: 180

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to
currently registered CFA candidates. Candidates may view and print the exam for personal exam prepara-
tion only. The following activities are strictly prohibited and may result in disciplinary and/or legal action:
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© 2019 CFA Institute. All rights reserved.
ii 2019 Level I Mock Exam (C) PM

2019 LEVEL I MOCK EXAM (C) PM

1 Which of the following statements most likely reflects one of the six compo-
nents of the CFA Code of Ethics? Candidates must:
A place the integrity of the investment profession above their own interests.
B promote the viability of the global capital markets for their employer’s
benefit.
C ignore unprofessional conduct displayed by others within the profession.
2 Tamlorn Mager, CFA, is an analyst at Pyallup Portfolio Management. CFA
Institute recently notified Mager that his CFA Institute membership was sus-
pended for a year because he violated the CFA Code. A hearing panel also came
to the same conclusion. Mager subsequently notified CFA Institute that he does
not accept the sanction or the hearing panel’s conclusion. Which of the follow-
ing actions by Mager is most consistent with the CFA Institute Standards of
Professional Conduct Program?
A Presenting himself to the public as a CFA charterholder.
B Providing evidence for his position to an outside arbitration panel.
C Using his CFA designation upon expiration of the suspension period.
3 Yip Wai Yin, a CFA candidate, is an independent mutual fund sales agent. For
every front-­end load product she promotes, Yip receives a portion of the front-­
end fee as commission at the time of sale. For every back-­end load fund she
sells, Yip receives a smaller commission paid at the end of the year. Yip always
informs her clients that she is paid a commission as an agent, but does not
provide details of the compensation structure. When pitching her favored front-­
end load product line she tells clients 20% of her commission is always invested
in the same fund as proof of her confidence in the fund she recommends.
Which CFA Code and Standards with regard to Conflicts of Interest does Yip
least likely violate?
A Referral Fees.
B Disclosure of Conflicts.
C Priority of Transactions.
4 Lewis McChord, CFA, a research analyst at an investment bank, covers the auto
industry. McChord recently read a report on an auto manufacturing com-
pany written by Pierce Brown. Brown’s report provided extensive coverage of
the company’s newly launched products indicating that sales volume, not yet
publicly available, would raise future profits. Intrigued by the report, McChord
called a senior executive at the company whom she has known personally
for years. The officer gave her specific details on new vehicle sales, indicating
that profits would double in the current quarter. McChord added this data
to Brown’s report and then circulated it within her firm as her own report.
McChord least likely violated which of the following CFA Institute Standards of
Professional Conduct?
A Misrepresentation
B Preservation of Confidentiality
C Material Nonpublic Information
5 Abe Seneca, CFA, supervises a team of analysts who create index funds for
institutional investors. When Seneca makes sales demonstrations without his
colleagues to potential clients simulating the fund’s performance, the scenarios
2019 Level I Mock Exam (C) PM iii

he prepares show outcomes based on assumptions reflecting upside bias and

positive risk assessments. Gail Tremblay, CFA, an analyst in Seneca’s group,
observes that the actual performance of these index funds is less than indicated
in the scenario outcomes shown in the sales meetings. Seneca least likely vio-
lated which of the following CFA Institute Standards of Professional Conduct?
A Loyalty
B Performance Presentation
C Responsibilities of Supervisors
6 Eileen Fisher, CFA, has been a supervisory analyst at SL Advisors for the past
ten years. Recently, one of her analysts was found to be in violation of the
CFA Institute Standards of Professional Conduct. Fisher has placed limits on
the analyst’s activities and is now monitoring all of his investment activities.
Although SL did not have any compliance procedures up to this point, to avoid
future violations, Fischer has put in place procedures exceeding industry stan-
dards. Did Fisher most likely violate any CFA Institute Standards of Professional
Conduct?
A Yes.
B No, because she has taken steps to ensure the violations will not be repeated
by the analyst.
C No, because she is taking steps to implement compliance procedures that
are more than adequate.
7 Elbie Botha, CFA, an equity research analyst at an investment bank, disagrees
with her research team’s buy recommendation for a particular company’s rights
issue. She acknowledges that the recommendation is based on a well-­developed
process and extensive research but feels the valuation is overpriced based on
her assumptions. Despite her contrarian view, her name is included on the
research report to be distributed to all of the investment bank’s clients. To avoid
violating any CFA Institute Standards, it would be least appropriate for Botha to
undertake which of the following?
A Leave her name on the report.
B Insist her name is removed from the report.
C Issue a new report based on her conclusions.
8 Colleen O’Neil, CFA, manages a private investment fund with a balanced global
investment mandate. Her clients insist that her personal investment portfo-
lio replicate the investments within their portfolio to ensure them that she is
willing to put her money at risk. By undertaking which of the following simul-
taneous investment actions for her own portfolio would O’Neil most likely be in
violation of Standard VI(B)–Priority of Transactions?
A Sale of a listed US blue chip value stock.
B Participation in a popular frontier market IPO.
C Purchase of a UK government bond in the primary market.
9 Tammi Holmberg is enrolled to take the Level I CFA examination. While taking
the CFA examination, the candidate on Holmberg’s immediate right takes a
stretch break and a piece of paper from his pocket falls onto Holmberg's desk.
Holmberg glances at the paper and realizes there is information written on the
paper, which includes a formula Holmberg needs for the question she is work-
ing on. Holmberg had not memorized this formula and could not complete the
question without this information. Holmberg pushes the paper off her desk and
uses the formula to complete the question. According to the CFA Institute Code
of Ethics and Standards of Professional Conduct, Holmberg most likely:
iv 2019 Level I Mock Exam (C) PM

A compromised her exam.

B was free to act on the information that fell on her desk.
C is responsible for notifying exam proctors of her neighbor’s violation.
10 Praful Chandarana, CFA, is starting a new business to offer investment con-
sulting services to pension fund trustees in response to a new regulation that
requires all pension fund Investment Policy Statements (IPS) to be reviewed
and approved by an independent CFA charterholder. Prior to starting the new
business, he meets with the pension fund regulator to clarify if the CFA char-
terholder undertaking the IPS review should be a licensed financial advisor by
the capital markets regulator. The capital markets regulator requires and grants
licenses to those giving investment advice to clients. The pension regulator
states that they do not require the CFA charterholder to hold a financial advi-
sor’s license, despite financial-­related advice being given to the pension funds
during any IPS review. Chandarana therefore starts his new business to under-
take IPS reviews without obtaining a financial advisor’s license from the capital
markets regulator. Subsequently, when clients of his former employer contact
him he informs them of his new company and the services he offers. Does
Chandarana most likely violate the CFA Code and Standards?
A No.
B Yes, with regard to Professionalism.
C Yes, with regard to Duties to Employer.
11 At the conclusion of the afternoon section of the Level I CFA examination, the
exam proctor instructs all candidates to stop writing and put their pencils down
immediately. Krishna Chowdary sees other candidates in front of him continue
to fill in their answer sheets. Chowdary has two questions left to complete so he
randomly fills in one of the ovals on his answer sheet before putting his pencil
down on the table. Did Chowdary’s actions most likely violate the CFA Institute
Code of Ethics and Standards of Professional Conduct?
A Yes.
B No, because other candidates continued writing.
C No, because he randomly answered one question.
12 Upon receiving notification that he passed his Level III CFA exam, Paulo
Garcia updates his educational background on his social media site by adding
“completed the CFA course.” Does Garcia most likely violate the CFA Institute
Standards of Professional Conduct?
A No.
B Yes, because it could imply he has obtained the charter.
C Yes, because he doesn’t describe the certification process.
13 Jackson Barnes, CFA, works for an insurance company providing financial plan-
ning services to clients for a fee. Barnes has developed a network of specialists,
including accountants, lawyers, and brokers, who contribute their expertise
to the financial planning process. Each of the specialists is an independent
contractor. Each contractor bills Barnes separately for the work he or she
performs, providing a discount based upon the number of clients Barnes has
referred. What steps should Barnes take to be consistent with the CFA Institute
Standards of Professional Conduct?
A Have his independent contractors approved by the insurance company
B List the consideration he receives from the specialists on monthly client
invoices
2019 Level I Mock Exam (C) PM v

C Inform potential clients about his arrangement with the contractors before
they agree to hire him
14 Linda Chin, CFA, is a member of a political group advocating lower govern-
mental regulation in all aspects of life. She works in a country where local
securities laws are minimal and insider trading is not prohibited. Chin’s politics
are reflected in her investment strategy where she follows her country’s manda-
tory legal and regulatory requirements. Which of the following actions by Chin
is most consistent with the CFA Institute Standards of Professional Conduct?
A Follow the CFA Code and Standards.
B Continue her current investment strategy.
C Disclose her political advocacy to clients.
15 Priscilla Moab, CFA, is the director of marketing at Red Lantern Investments.
Red’s investment approach uses technical and fundamental analysis as well as
portfolio construction to minimize risk. Moab plans to market an online invest-
ment newsletter to retail clients. Moab decides to let prospective clients have
access to Red’s buy and sell recommendation list by posting this information on
a social media site. The posting also provides information on Red’s basic invest-
ment process and logic. To avoid violating the CFA Institute Code of Ethics and
Standards of Professional Conduct, Moab should most likely:
A describe the investment approach in detail.
B update investment process changes annually.
C indicate that additional information and analysis are available.
16 The Global Investment Performance Standards (GIPS) least likely require:
A non-­discretionary portfolios to be included in composites.
B non–fee-­paying portfolios to be excluded in the returns of appropriate
composites.
C composites to be defined according to similar investment objectives and/or
strategies.
17 CFA Institute support of a local country sponsor to drive the adoption of the
GIPS standards seeks to:
A provide a link between the governing body and the local markets.
B promote the standards as mandatory.
C translate the standards into the local language for use as the official govern-
ing version.
18 Under what circumstances could a client possibly win a lawsuit against a
financial adviser despite the financial adviser abiding by all regulatory and legal
requirements?
A The adviser benefiting more from the relationship than the client
B The adviser not being subject to a code of ethics
C The adviser violating his employer’s published code of ethics
19 Can an individual most likely cause the public to lose confidence in the global
financial markets?
A Yes.
B No, a negative event would need to be considered systemic.
C No, a single person does not have enough influence.
20 A stock’s expected price movement over the next two periods is as follows:
vi 2019 Level I Mock Exam (C) PM

Time = 0 Time = 1 Time = 2

S0 = 80 Su = 88 Suu = 96.80
Sd = 72 Sud,du = 79.20
Sdd = 64.80

The initial value of the stock is $80. The probability of an up move in any given
period is 75%, and the probability of a down move in any given period is 25%.
Using the binomial model, the probability that the stock’s price will be $79.20 at
the end of two periods is closest to:
A 37.50%.
B 56.25%.
C 18.75%.
21 An equally weighted portfolio is composed of four stocks. An analyst knows the
mean and variance for each of the four stocks. In order to estimate the portfolio
mean and variance, the analyst will require the stocks’:
A skewness.
B pairwise correlations.
C kurtosis.
22 If a stock’s continuously compounded return is normally distributed, then the
distribution of the future stock price is best described as being:
A normal.
B a Student’s t.
C lognormal.
23 A US Treasury bill (T-­bill) has 90 days to maturity and a bank discount yield of
3.25%. The effective annual yield (EAY) for the T-­bill is closest to:
A 3.29%.
B 3.32%.
C 3.36%.
24 An analysis of US share prices determines that there is consistent underpric-
ing by $0.02 with a p-value of 0.0012. Assuming an average transaction cost of
$0.05, which statement is most accurate? The underpricing result is:
A statistically significant and indicates a possible arbitrage opportunity.
B not economically meaningful.
C not statistically significant.
25 The total probability rule is used when an analyst is interested in:
A all potential outcomes.
B a set of events.
C a single outcome.
26 An analyst develops a set of criteria for evaluating distressed credits.
Companies that do not receive a passing score are classed as likely to go bank-
rupt within the next year. The analyst concludes the following:
●● Forty percent of the companies tested will go bankrupt within a year: P(non-­
survivor) = 0.40.
●● Fifty-­five percent of companies tested will pass: P(pass test) = 0.55.
●● There is an eighty-­five percent probability that a company will pass the test
given that it survives a year: P(pass test | survivor) = 0.85.
2019 Level I Mock Exam (C) PM vii

Using the total probability rule, the probability that a company passed the test
given that it goes bankrupt can be determined. The P(pass test | non-­survivor) is
closest to:
A 0.22.
B 0.35.
C 0.10.
27 The sampling error is best described as the:
A sample standard deviation divided by the square root of the sample size.
B difference between the observed value of a statistic and the quantity it is
intended to estimate.
C sum of squared deviations from the mean divided by the sample size minus
one.
28 Use the following values from a student’s t-distribution to establish a 95%
confidence interval for the population mean given a sample size of 10, a sample
mean of 6.25, and a sample standard deviation of 12. Assume that the pop-
ulation from which the sample is drawn is normally distributed and that the
population variance is not known.
Degrees of
Freedom p = 0.10 p = 0.05 p = 0.025 p = 0.01

9 1.383 1.833 2.262 2.821

10 1.372 1.812 2.228 2.764
11 1.363 1.796 2.201 2.718

The 95% confidence interval is closest to a:

A lower bound of –2.20 and an upper bound of 14.70.
B lower bound of –0.71 and an upper bound of 13.21.
C lower bound of –2.33 and an upper bound of 14.83.
29 Which of the following statements is most accurate? The first quintile generally
exceeds the:
A first quartile.
B median.
C first decile.
30 The process of looking for inflection points in one market that may signal a
trend change in a related market is best described as:
A capital market cycle analysis.
B relative strength analysis.
C momentum analysis.
31 Assume the following:
●● The real risk-­free rate of return is 3%.
●● The expected inflation premium is 5%.
●● The market-­determined interest rate of a security is 12%.
The sum of the default risk premium, liquidity premium, and maturity premium
for the security is closest to:
A 10%.
B 4%.
C 8%.
viii 2019 Level I Mock Exam (C) PM

32 Given stable aggregate supply, which of the following changes in aggregate

demand is most likely to cause economic expansion?
A An increase in corporate income tax
B An increase in foreign currency per unit of domestic currency
C An increase in capacity utilization
33 Assume the percentage increases in each of the following listed items:
Percentage Increase

Real domestic exchange rate (USD/EUR) 5

Eurozone price level 2
US price level 1.5

The predicted change in the nominal US spot exchange rate is closest to:
A 4.5%.
B –0.5%.
C 5.5%.
34 The production capabilities of two countries for computers and phones is as
follows:
Output per Worker per Year
Country Computers Phones

X 600 900
Y 400 800

Country X is best described as having a comparative advantage over Country Y

for producing:
A computers.
B phones.
C phones and computers.
35 A country’s international transactions accounts data for last year are presented
in its domestic currency:
Transaction Amount

Exports of goods and services 10,000

Import of goods and services 14,216
Investment income payments made to foreigners 2,519
Investment income received from foreigners 3,409
Net change in assets owned abroad 1,548
Net change in foreign-­owned assets domestically 4,989
Unilateral current transfers received 346
Unilateral current transfers paid 1,107
Statistical discrepancy 646

The current account balance is closest to:

A –4,087.
B –4,216.
C –4,345.
2019 Level I Mock Exam (C) PM ix

36 Which of the following statements regarding the characteristics of money is

correct?
A Compared to a barter economy, an economy in which money is the medium
of exchange has more prices.
B Money as a medium of exchange depends on shared beliefs about its value.
C Money’s low value relative to its weight enhances wealth portability.
37 If a central bank reduces the money supply, this move will most likely lead to a:
A rise in nominal interest rates and a decline in aggregate price level.
B rise in nominal interest rates and a rise in aggregate price level.
C decline in nominal interest rates and a rise in aggregate price level.
38 According to the Fisher effect, an increase in expected inflation will most likely
increase:
A the real interest rate.
B both nominal and real interest rates.
C the nominal interest rate.
39 The primary monetary policy goal of most major central banks is best charac-
terized as:
A maintaining price stability.
B stimulating economic growth.
C maintaining low interest rates.
40 Assume that two firms in a duopoly enter into a collusive agreement in an
attempt to form a cartel and restrict output, raise prices, and increase profits.
According to the Nash equilibrium, a low price is most likely charged by:
A only one firm.
B both firms.
C neither firm.
41 Assume the following consumption basket and prices over 2011 and 2012 (in
US dollars):
2011 2012
Item Price Quantity Price Quantity

Meat $12/kg 30 kg $12.2/kg 35 kg

Rice $1/kg 55 kg $1.1/kg 50 kg
Milk $1.5/liter 65 liters $1.6/liter 65 liters
Fuel $1/liter 95 liters $1.2/liter 85 liters

The Fisher index is closest to:

A 106.1.
B 105.4.
C 105.8.
42 Cost–push inflation is least likely to be affected by an increase in:
A employee wages.
B finished goods prices.
C commodity prices.
43 All else remaining equal, a decline in the average duration of unemployment
most likely indicates that an economic:
x 2019 Level I Mock Exam (C) PM

A upturn is beginning.
B upturn has already occurred.
C downturn is forthcoming.
44 The following table provides selected ratios for a company’s two main operating
segments during the past two years:
Profit Margin
(%) EBIT/Assets Asset Turnover Debt/Assets
Asset
Growth
Segment (%) Current Prior Current Prior Current Prior Current Prior

1 12 18.0 19.0 64.8 76.0 3.6 4.0 0.55 0.43

2 15 23.0 26.0 66.7 88.4 2.9 3.4 0.62 0.51

Which of the following statements is most appropriate? The segment:

A that is currently most efficient is also financed the most conservatively.
B that had the lowest profit margin experienced the most aggressive
expansion.
C that earned the most per dollar invested last year failed to do so again in the
current year.
45 Operating segments are most likely reportable if they constitute 10% or more of
the total for all operating segments of which financial metrics?
A Assets, profit/loss, or revenue
B Capital expenditures, liabilities, or profit/loss
C Amortization expense, assets, or revenue
46 Accounting choices within GAAP that decrease reported performance in the
current period and may increase performance in later periods are most likely
examples of:
A aggressive accounting.
B conservative accounting.
C earnings that are not sustainable.
47 Which of the following items is a non-­GAAP financial measure?
A Net income after taxes
B Income from operations
C EBITDA
48 Which of the following best describes a responsibility of the SEC?
A Overseeing the Public Companies Accounting Oversight Board (PCAOB)
B Prosecuting analysts who disseminate conclusions based on non-­material
non-­public information
C Promoting the adoption of global financial reporting standards
49 The convergence of global accounting standards has advanced to a degree that
the Securities and Exchange Commission in the United States now mandates
that foreign private issuers who use IFRS may report under:
A US GAAP or under IFRS with a reconciliation to US GAAP.
B US GAAP or under IFRS.
C US GAAP with voluntary supplemental reporting under IFRS.
2019 Level I Mock Exam (C) PM xi

50 The joint conceptual framework project of the International Accounting

Standards Board (IASB) and the Financial Accounting Standards Board (FASB)
guides the development of standards that are best described as:
A integrated with local legal and economic norms.
B comprehensive, complex rules designed to increase uniformity.
C based on principles that limit the range of acceptable approaches.
51 A cell phone manufacturer has switched to high-­margin premium-­priced
products with the most innovative features as part of its product differentia-
tion strategy. Which of the following other changes is most consistent with this
strategy?
A An increase in inventory levels
B A decrease in research and development expenditures
C An increase in advertising expenditures
52 A credit rating agency uses “scale and diversification” as one of its metrics to
assess credit risk. Which of the following would most likely be included in that
category?
A Purchasing power with suppliers
B Cost structure
C Operating cash flow less dividends
53 A company purchased equipment in 2013 for £25,000. The year-­end values of
the equipment for accounting purposes and tax purposes are as follows:
Year Ending: 2014 2013

Carrying amount for accounting purposes £20,000 £22,500

Tax base for tax purposes £16,000 £20,000
Tax rate 25% 30%

Which of the following statements best describes the effect of the change in the
tax rate on the company’s 2014 financial statements? The deferred tax liability:
A decreases by £800.
B increases by £250.
C decreases by £200.
54 One reason that the last-­in, first-­out (LIFO) inventory valuation method is
widely used in the United States is most likely that it:
A results in higher reported gross profit.
B is available under both US GAAP and International Financial Reporting
Standards.
C results in higher operating cash flows.
55 Depreciation expense under which of the following methods is least likely
affected by the estimate of the useful life of the asset?
A Double declining balance method
B Straight-­line method
C Units-­of-­production method
56 A company that reports in accordance with IFRS does not use the cost model to
value its investment properties and property, plant, and equipment. Information
related to an investment property and a plant is as follows:
xii 2019 Level I Mock Exam (C) PM

End of Year
€ thousands Carrying Value Fair Value

Investment property 1,000 1,100

Plant 1,000 1,200

The impact on its net income for the year will most likely be a gain (in thou-
sands) of:
A €100.
B €300.
C €200.
57 The following is selected balance sheet data for a company along with informa-
tion about its financial and operating lease obligations.
As of 31 December 2014 (€ millions)

Long-­term debt 1,347

Total shareholder’s equity 11,268
Total assets 20,097

Note 18. Finance and Operating Leases

A. Finance Leases

The implicit interest rate on finance leases for 2014 was 6.0%.

B. Operating Lease Commitments as of 31 December 2014 (€ millions)

Due 1 January 2015 130

Due 1 January 2016 130
Due 1 January 2017 130
Due 1 January 2018 130
Due 1 January 2019 80
Total of future lease payments thereafter* 240
Total commitments 840

* After 2019, all lease payments are assumed to be the same as in 2019.

If the company were to capitalize its long-­term leases, its adjusted long-­term
debt-­to-­assets ratio as of the end of December 2014 would be closest to:
A 9.9%.
B 10.2%.
C 10.4%.
58 A company that provides cruise ship vacations uses term loans to finance the
acquisition of new cruise ships. Which of the following is most likely a negative
covenant for the loans? The company must:
A ensure the ships are insured.
B seek lender approval to pay dividends.
C maintain a minimum level of working capital.
2019 Level I Mock Exam (C) PM xiii

59 A company issued bonds in 2012 that mature in 2022. The measurement basis
that will most likely be used on the 2012 balance sheet for the bonds is:
A amortized cost.
B market value.
C historical cost.
60 A firm reports sales of €50,000 for the year ended 31 December 2012. Its
accounts receivable balances were €6,000 at 1 January 2012 and €7,500 at 31
December 2012. The company’s cash collections from sales for 2012 is closest
to:
A €48,500.
B €51,500.
C €42,500.
61 Which of the following best describes a component of the income statement?
A Amounts that a company owes its vendors for purchases of goods and
services
B Outflows or depletions of assets in the course of a business's activities
C Obligations from past events that are expected to result in an outflow of
economic benefits
62 The post-­audit performed as part of the capital budgeting process is least likely
to include the:
A provision of future investment ideas.
B rescheduling and prioritizing of projects.
C indication of systematic errors.
63 Which of the following is most consistent with good corporate governance
practices?
A All stakeholders should have the right to participate in the governance of
the firm.
B An audit committee that benefits from the direct guidance of management.
C Appropriate controls and procedures to effectively manage the firm should
be in place.
64 Based on good corporate governance practices, independent board members
most likely:
A are pre-­approved by management before being nominated.
B have a “lead” director when the board chair is not independent.
C hold large equity positions but have never worked at the company.
65 Given the following information about a firm:
●● debt-­to-­equity ratio (D/E) of 50%
●● tax rate of 40%
●● cost of debt of 8%
●● cost of equity of 13%
the firm’s weighted average cost of capital (WACC) is closest to:
A 8.9%.
B 7.5%.
C 10.3%.
66 Which of the following is most likely considered an example of matrix pricing
when determining the cost of debt?
xiv 2019 Level I Mock Exam (C) PM

A Debt-­rating approach only.

B Yield-­to-­maturity approach only.
C Both the yield-­to-­maturity and the debt-­rating approaches.
67 A company recently issued a 10-­year, 6% semiannual coupon bond for $864.
The bond has a maturity value of $1,000. If the marginal tax rate is 35%, the
after-­tax cost of debt (%) is closest to:
A 3.9%.
B 5.2%.
C 2.6%.
68 A company has an equity beta of 1.4 and is 60% funded with debt. Assuming a
tax rate of 35%, the company’s asset beta is closest to:
A 0.98.
B 1.01.
C 0.71.
69 Which of the following situations is the least likely reason why the marginal
cost of capital schedule for a company rises as additional funds are raised?
A The company seeks to issue less senior debt because it violates the debt
incurrence test of an existing debt covenant.
B The cost of additional funds from various sources rises as higher levels of
financing are achieved.
C The company deviates from its target capital structure because of the econo-
mies of scale associated with flotation costs and market conditions.
70 An inventory system that reduces average inventory without affecting sales will
most likely reduce the:
A quick ratio.
B inventory turnover.
C cash conversion cycle.
Income Statement Millions ($)

Revenues 10.2
Variable operating costs 4.6
Fixed operating costs 2.0
Operating income 3.6
Interest 1.2
Taxable income 2.4
Tax 1.0
Net income 1.4

71 The degree of financial leverage (DFL) is closest to:

A 2.6.
B 1.5.
C 1.7.
72 If a 90-­day $10,000 US Treasury security is selling for $9,870, the discount-­basis
yield is closest to:
A 5.27%.
B 5.34%.
C 5.20%.
2019 Level I Mock Exam (C) PM 15

73 The annual cost of trade credit assuming a 365-­day year for terms 3/10 net 40 is
closest to:
A 43.3%.
B 44.9%.
C 32.0%.
74 Which of the following types of investment clients most likely have the lowest
liquidity needs?
A Insurance companies
B Banks
C Endowments and foundations
75 ABC Company has an obligation to pay a certain amount each month to each of
its employees after they retire. This obligation is most likely known as a(n):
A endowment.
B defined-­contribution pension plan.
C defined-­benefit pension plan.
76 With respect to the portfolio management process, the execution step most
likely includes:
A portfolio monitoring.
B asset allocation.
C developing the investment policy statement.
77 If Investor A has a lower risk aversion coefficient than Investor B, on the capital
allocation line, will Investor B’s optimal portfolio most likely have a higher
expected return?
A Yes
B No, because Investor B has a higher risk tolerance
C No, because Investor B has a lower risk tolerance
78 A portfolio contains equal weights of two securities having the same standard
deviation. If the correlation between the returns of the two securities was to
decrease, the portfolio risk would most likely:
A increase.
B remain the same.
C decrease.
79 Information for Stock A and the market appear in the following table:
Standard deviation of Stock A’s return 40%
Standard deviation of the market’s return 20%
Correlation of Stock A with the market 85%

The beta of Stock A is closest to:

A 1.70.
B 2.35.
C 0.43.
80 Which of the following portfolio performance measures are the most appropri-
ate for an investor who holds a fully diversified portfolio?
A Sharpe ratio and Treynor ratio.
B Treynor ratio and Jensen’s alpha.
C M-Squared and Sharpe ratio.
16 2019 Level I Mock Exam (C) PM

81 Which of the following dates in the dividend chronology can fall on a weekend?
The
A payment date.
B record date.
C ex-­date.
82 An investor gathers the following information about a company:
Current earnings per share $5.00
Current dividend per share $3.00
Required rate of return 15.0%
Return on equity (ROE) 17.5%

Using the dividend discount model, the value of the company’s stock is closest
to:
A $40.13.
B $73.67.
C $37.50.
83 Which of the following statements concerning different valuation approaches is
most accurate?
A One advantage of the three-­stage dividend discount model (DDM) model is
that it is equally appropriate to young companies entering the growth phase
and those entering the maturity phase.
B It is advantageous to use asset-­based valuation approaches rather than
forward-­looking cash flow models in the case of companies that have signifi-
cant intangibles.
C The justified forward price-­to-­earnings ratio (P/E) approach offers the
advantage of incorporating fundamentals and presenting intrinsic value
estimations.
84 An industry experiencing intense competitive rivalry among incumbent compa-
nies is best characterized by:
A differentiated products and low exit barriers.
B a small number of competitors and low fixed costs.
C customers basing purchase decisions largely on price.
85 An industry characterized by rising volumes, improving profitability, falling
prices, and relatively low competition among companies is most likely in which
of the following life-­c ycle stages?
A Growth
B Mature
C Embryonic
86 Which of the following statements is most accurate in an efficient market?
A Active strategies will lead to excess risk-­adjusted portfolio returns.
B Securities market prices fully reflect their fundamental values.
C Securities market prices respond over time to changes in economic
information.
87 Which of the following situations will most likely promote an increase in market
efficiency?
A An increase in arbitrage opportunities
B A decrease in trading activity
2019 Level I Mock Exam (C) PM 17

C An increase in information availability

88 A trader is able to obtain persistent abnormal returns by adopting an invest-
ment strategy that purchases stocks that have recently experienced high
returns. This strategy exploits a market-­pricing anomaly best described as:
A data mining.
B momentum.
C the overreaction effect.
89 A market has the following limit orders standing on its book for a particular
stock:
Bid Size Limit Price Offer Size Limit Price
Buyer (# of shares) ($) Seller (# of shares) ($)

1 500 18.5 1 200 20.2

2 300 18.9 2 300 20.35
3 400 19.2 3 400 20.5
4 200 20.1 4 100 20.65
5 100 20.15 5 200 20.7

If a trader submits an immediate-­or-­cancel limit buy order for 700 shares at a

price of $20.50, the average price the trader would pay is closest to:
A $20.35.
B $20.58.
C $20.50.
90 Which of the following is most likely a primary market transaction?
A A private placement of shares
B A market order sale of bonds
C The exercise of an exchange-­traded call option
91 A trader seeking to sell a very large block of stock for her client will most likely
execute the trade in a(n):
A quote-­driven market.
B order-­driven market.
C brokered market.
92 The advantages to an investor owning convertible preference shares of a com-
pany most likely include:
A less price volatility than the underlying common shares.
B an opportunity to receive additional dividends if the company’s profits
exceed a pre-­specified level.
C preference dividends that are fixed contractual obligations of the company.
93 Which of the following statements regarding a commodity index is most
accurate?
A Commodity index returns differ from the changes in the prices of their
underlying commodities.
B Commodity indexes in the same markets will share similar risk and return
profiles.
C Commodity indexes commonly use an equal weighting method.
94 Which of the following products provides protection from inflation?
A Consols
18 2019 Level I Mock Exam (C) PM

B Linkers
C Floaters
95 A South Korean electronics company issued bonds denominated in US dollars
in the United States and registered with the SEC. These bonds are most likely
known as a:
A foreign bond.
B Eurobond.
C global bond.
96 Consider two 10-­year bonds, one that contains no embedded options and the
other that gives its owner the right to convert the bond to a fixed number of
shares of the issuer’s common stock. The convertibility option in the second
bond cannot be exercised for five years. The bonds are otherwise identical.
Compared with the yield on the convertible bond, the yield on the option-­free
bond is most likely:
A the same.
B lower.
C higher.
97 What type of risk most likely affects an investor’s ability to buy and sell bonds in
the desired amounts and at the desired time?
A Market liquidity
B Spread
C Default
98 In a securitization, the seller of the pool of securitized assets is the:
A trustee.
B special purpose entity.
C depositor.
99 Which of the following is least likely a feature of a credit card receivable ABS?
A An early amortization provision
B Amortizing collateral
C A lockout period
100 The market value of an 18-­year zero-­coupon bond with a maturity value of
$1,000 discounted at a 12% annual interest rate with semi-­annual compounding
is closest to:
A $130.04.
B $192.86.
C $122.74.
101 An investor sells a bond at the quoted price of $98.00. In addition, she receives
accrued interest of $4.40. The flat price of the bond is equal to the:
A par value plus accrued interest.
B agreed-­on bond price excluding accrued interest.
C accrued interest plus the agreed-­on bond price.
102 A bond has a 10-­year maturity, a $1,000 face value, and a 7% coupon rate. If the
market requires a yield of 8% on similar bonds, it will most likely trade at a:
A discount.
B premium.
C discount or premium, depending on its duration.
2019 Level I Mock Exam (C) PM 19

103 Holding all other characteristics the same, the bond exposed to the greatest
level of reinvestment risk is most likely the one selling at:
A a premium.
B a discount.
C par.
104 In a low interest rate environment, the effective duration of a callable bond
relative to a comparable non-­callable bond, will most likely be:
A higher.
B lower.
C the same.
105 A bond has a Macaulay duration of 6.0, modified duration of 6.5, and convexity
of 50.25. If the bond’s yield to maturity decreases by 50 bps, the expected per-
centage price change is closest to:
A 3.06%.
B 3.31%.
C 3.25%.
106 A long-­term bond investor with an investment horizon of 8 years invests in
option-­free, fixed-­rate bonds with a Macaulay duration of 10.5. The investor
most likely currently has a:
A positive duration gap and is currently exposed to the risk of lower interest
rates.
B positive duration gap and is currently exposed to the risk of higher interest
rates.
C negative duration gap and is currently exposed to the risk of higher interest
rates.
107 What is the most likely reason why arbitrage will not completely eliminate all
pricing discrepancies for derivatives?
A Differences in risk aversion
B Transaction costs
C Inaccurate forecasts
108 Over time, a forward contract most likely has variable:
A value and constant price.
B price and constant value.
C value and variable price.
109 The underlying in a forward rate agreement is most likely a(n):
A growth rate of an equity index.
B interest rate.
C exchange rate.
110 Which of the following statements best describes a feature of an American
option? Early exercise of an American:
A put option is optimal only if the underlying is dividend paying.
B call option is never optimal if the underlying is dividend paying.
C put option that is deep in the money may be optimal.
111 Which of the following derivatives is least likely to be classified as a contingent
claim?
A A futures contract
20 2019 Level I Mock Exam (C) PM

B A call option contract

C A credit default swap
112 A corporation issues five-­year fixed-­rate bonds. Its treasurer expects interest
rates to decline for all maturities for at least the next year. She enters into a
one-­year agreement with a bank to receive quarterly fixed-­rate payments and
to make payments based on floating rates benchmarked on three-­month Libor.
This agreement is best described as a:
A futures contract.
B forward contract.
C swap.
113 In an efficient market, it is more likely that fundamental value will be reflected
in the:
A underlying spot market before the derivative market.
B derivatives market and the underlying spot market at the same time.
C derivatives market before the underlying spot market.
114 Relative to traditional investments, alternative investments are most likely to be
characterized by higher:
A fees.
B liquidity.
C transparency.
115 In the context of venture capital financing, seed-­stage financing most likely
supports:
A initial commercial production and sales.
B product development and/or marketing efforts.
C transformation of an idea into a business plan.
116 Concentrated portfolio strategies are attractive because of their:
A potential to generate alpha.
B ability to track market indices.
C low risk.
117 Compared with other investment asset classes, an investment in real estate is
least likely to be characterized by:
A homogeneity.
B fixed location.
C basic indivisibility.
118 One hedge fund strategy that involves simultaneously holding short and long
positions in common stock is most likely:
A volatility.
B distressed/restructuring.
C quantitative directional.
119 A private equity firm sells a portfolio company to a buyer that is active in the
same industry as the portfolio company. This transaction is best described as
a(n):
A trade sale.
B secondary sale.
C initial public offering.
2019 Level I Mock Exam (C) PM 21

120 A hedge fund limited partnership agreement describes the general partner’s
total fees for each year as follows: The general partner will measure the fair
value of the fund’s assets at the beginning of the year (net of fees from the
previous year) and the fair value of the fund’s assets at the end of the year. The
general partner will receive 15% of any increase in fair value in excess of the
1-­year US Treasury yield at the beginning of the year. This fee structure most
likely includes a:
A hard hurdle rate.
B management fee.
C high-­water mark provision.