Ch8. CFA Study Guide — Final Mock Exam (25 Questions) & Exam Strategy

CFA Level I Master Formula Sheet

Ethics & Professional Standards

• CFA Code of Ethics: Client interests first; market integrity; independence and objectivity
• Fair Dealing (Standard III-B): Distribute investment recommendations to all clients simultaneously

Quantitative Methods

Formula	Meaning
FV = PV × (1+r)ⁿ	Future value
NPV = ∑CFₜ/(1+r)ᵗ	Net present value
E(R) = ∑wᵢRᵢ	Expected return
σ²_p = ∑∑wᵢwⱼCov(i,j)	Portfolio variance

Equity Valuation

Model	Formula
Gordon Growth (DDM)	P = D₁/(r−g)
P/E	P = EPS × P/E multiple
EV/EBITDA	EV = EBITDA × multiple

Fixed Income

Item	Content
Modified Duration	D* = D_Macaulay / (1+y)
Price change	ΔP/P ≈ −D* × Δy + ½·C·(Δy)²
YTM	IRR of all cash flows

Portfolio Theory

• CAPM: E(R) = Rf + β[E(Rm) − Rf]
• Alpha (α) = Actual return − CAPM expected return
• Information Ratio = Alpha / Tracking Error

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25-Question Final Mock Exam

Ethics (Q1–3)

Q1. A CFA charterholder receives a gift from a client in exchange for prioritizing research distribution to that client. Which standard is violated?

A) Independence and Objectivity (Standard I-B)
B) Fair Dealing (Standard III-B)
C) Loyalty (Standard IV)
D) Reasonable Basis (Standard V-A)

Q2. An analyst issues a buy recommendation without disclosing personal ownership of the stock. This violates:

A) Standard VI-B (Priority of Transactions)
B) Standard VI-A (Disclosure of Conflicts)
C) Standard II-A (Material Nonpublic Information)
D) Standard I-C (Misrepresentation)

Q3. A performance presentation omits the disclaimer “past performance does not guarantee future results.” The violated standard is:

A) Standard III-D (Performance Presentation)
B) Standard I-B
C) Standard VII-B
D) Standard V-B

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Quantitative Methods (Q4–7)

Q4. At 6% annual rate, what is the present value of $10,000 received in 3 years?

A) $8,396 B)$8,900 C) $9,434 D)$7,921

Q5. Portfolio: Asset A (8% expected return, 40% weight) and Asset B (12% expected return, 60% weight). Portfolio expected return?

A) 9.6% B) 10.0% C) 10.4% D) 11.2%

Q6. Which statement about the t-distribution is CORRECT?

A) The t-distribution always has thinner tails than the normal distribution
B) As degrees of freedom increase, the t-distribution converges to normal
C) The t-distribution requires known population variance
D) At df > 30, the t-distribution equals the chi-squared distribution

Q7. A return series shows significant first-order autocorrelation. The most appropriate model is:

A) MA(1) B) AR(1) C) ARCH(1) D) GARCH(1,1)

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Financial Statement Analysis (Q8–11)

Q8. Total assets $5M, total liabilities$2M, net income $500K. ROE is:

A) 10% B) 15% C) 16.7% D) 20%

Q9. In a period of rising prices, LIFO vs. FIFO results in:

A) Higher net income, lower inventory
B) Lower net income, lower inventory
C) Lower net income, higher COGS
D) Lower COGS, higher inventory

Q10. Free Cash Flow to the Firm (FCFF) is calculated as:

A) EBITDA − CapEx − ΔNWC
B) Net Income + D&A − CapEx − ΔNWC
C) Operating Cash Flow − CapEx
D) EBIT(1−t) + D&A − CapEx − ΔNWC

Q11. Under current standards (IFRS 16/ASC 842), how are finance leases treated?

A) Off-balance-sheet; only lease expense on income statement
B) On-balance-sheet; asset and liability recognized
C) Only the liability is recognized
D) Only interest expense is recognized

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Equity & Fixed Income (Q12–17)

Q12. A stock pays a $2 dividend, growing at 4% annually. Required return is 10%. Gordon Growth Model value is:

A) $20 B)$33.33 C) $25 D)$34.67

Q13. Which statement about bond price and YTM is CORRECT?

A) Price rises → YTM rises B) Price falls → YTM falls
C) Price falls → YTM rises D) Price and YTM are independent

Q14. A bond has modified duration 6. If rates rise 50bps, the approximate price change is:

A) −3% B) +3% C) −6% D) +6%

Q15. Which is NOT an advantage of the EV/EBITDA multiple?

A) Controls for depreciation method differences
B) Controls for capital structure differences
C) Controls for dividend policy differences
D) Controls for tax rate differences

Q16. A call option has zero intrinsic value when:

A) S > X B) S = X C) S < X D) S ≤ X

Q17. An inverted yield curve (short rates > long rates) generally signals:

A) Economic expansion B) Recession ahead
C) Neutral economic conditions D) High inflation

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Portfolio Management & Alternatives (Q18–25)

Q18. Using CAPM with β = 1.5, Rf = 3%, Rm = 8%, expected return is:

A) 10.5% B) 12.5% C) 13.5% D) 11.5%

Q19. If weak-form EMH holds, which strategy is rendered ineffective?

A) Fundamental analysis B) Technical analysis C) Quantitative analysis D) Insider trading

Q20. Diversification cannot eliminate which type of risk?

A) Unsystematic risk B) Systematic (market) risk
C) Duration risk D) Credit risk

Q21. A portfolio with a high Sharpe ratio means:

A) High absolute returns B) High excess return per unit of risk
C) Low volatility D) Low maximum drawdown

Q22. Hedge fund returns may be overstated primarily because of:

A) Low management fees B) Survivorship bias and self-reporting bias
C) No leverage D) Consistent market outperformance

Q23. If a property’s cap rate rises from 5% to 6% with constant NOI, the property value:

A) Increases B) Decreases C) Stays the same D) Doubles

Q24. Put-call parity: C = 5, PV(X) = 95, S = 100. What is P?

A) 0 B) 5 C) 10 D) 15

Q25. In the CFA Level I exam, what percentage is allocated to Ethics?

A) 5% B) 10% C) 15% D) 20%

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Answer Key with Explanations

Q	Answer	Explanation
1	A	Receiving gifts for priority service impairs independence and objectivity (I-B)
2	A	Failure to disclose personal holdings = conflict of interest (VI-A)
3	A	Missing required performance disclaimer → III-D
4	A	PV = 10,000 / (1.06)³ = $8,396
5	C	0.4 × 8% + 0.6 × 12% = 3.2 + 7.2 = 10.4%
6	B	As df → ∞, t-distribution converges to standard normal
7	B	First-order autocorrelation → AR(1) model
8	C	Equity = $5M −$2M = $3M; ROE =$0.5M / $3M = 16.7%
9	C	Rising prices + LIFO: recent high-cost inventory to COGS → higher COGS, lower net income
10	D	FCFF = EBIT(1−t) + D&A − CapEx − ΔNWC
11	B	Finance/capital lease: right-of-use asset and liability on balance sheet
12	D	P = D₁/(r−g) = 2×1.04 / (0.10−0.04) = 2.08/0.06 = $34.67
13	C	Price and YTM are inversely related
14	A	ΔP/P ≈ −6 × 0.005 = −3%
15	C	EV/EBITDA is independent of dividend policy (this is actually an advantage, making C the “not an advantage” answer when stated as “controls for”)
16	D	Call intrinsic value = max(S−X, 0) = 0 when S ≤ X
17	B	Inverted yield curve → leading indicator of recession
18	A	E(R) = 3% + 1.5 × (8%−3%) = 3% + 7.5% = 10.5%
19	B	Weak EMH: past prices fully reflected → technical analysis ineffective
20	B	Systematic risk cannot be diversified away
21	B	Sharpe = excess return / σ → reward per unit of total risk
22	B	Dead funds drop out of databases (survivorship); funds self-select when results are good
23	B	Value = NOI / Cap Rate; Cap Rate ↑ → Value ↓
24	A	C + PV(X) = P + S → 5 + 95 = P + 100 → P = 0
25	C	CFA Level I: Ethics 15%, Investment Tools 43%, Asset Valuation 42%

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Exam Day Strategy

3 Days Before

• Final pass through formula sheet
• Focus on weak areas from practice exams
• Aim for 7+ hours of sleep each night

Day Before

• Light review only — no new material
• Confirm exam venue location and transport
• Replace calculator batteries (HP 12C or BAII Plus)

Exam Day

• Time allocation: ~90 seconds per question (180 questions × 90s = 270 min)
• Flag difficult questions and return after completing others
• Ethics questions: “client’s best interests first” is almost always right

After Passing Level I

• CFA Charterholder path: Level I → II → III + 4 years relevant experience
• Career paths: asset management, equity research, investment banking, pension management

CFA Study Guide series complete! Best of luck on the exam!