2007 schweser answers explanations of book 6 exam 1 am

Question 2 #44787 Your answer: A was correct!. Question 3 #44788 Your answer: A was correct!. Question 4 #44789 Your answer: D was correct!. The correct answer was D Standard IIIA Loy

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Schweser Printable Answers Book 6 Exam 1 AM

Test ID#: 1364808

Question 1 #44786

Your answer: C was correct!

Standard VI(C) Referral Fees Members and candidates shall disclose to clients and

prospects any consideration or benefit received by the member or delivered to others for therecommendation of any service to the client or prospect This allows the client to evaluate anypartiality shown in making referrals

Question 2 #44787

Your answer: A was correct!

Standard IV(C) Responsibilities of Supervisors explicitly states that speaking to the employee

to determine the extent of the violations and receiving assurances that it will not be repeated

is not enough Finley must take positive steps to insure that the violation will not be repeatedincluding promptly launching an investigation and limiting the employee 抯 activities and/orincreasing supervision of the employed until the results of the investigation are known

Question 3 #44788

Stein violated Standard I(C) Misrepresentation by presenting material developed by anotherwithout acknowledgement

Question 4 #44789

Your answer: D was correct!

Standard V(A) Diligence and Reasonable Basis The recommendation reflects the consensus

of the group and not necessarily the opinion of the member or candidate If the consensusopinion has a reasonable basis, the member does not have to dissociate from the report butshould document the difference of opinion

Question 5 #44825

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Standard IV(C) Responsibilities of Supervisors If Klein clearly cannot discharge supervisoryresponsibilities because of an inadequate compliance system, he should decline in writing thesupervisory responsibility until the firm adopts reasonable procedures to allow him to

adequately exercise such responsibility

Question 6 #44826

Your answer: C was incorrect The correct answer was D)

Standard III(A) Loyalty, Prudence, and Care Crocker is essentially using a softdollar

arrangement to pay for research used in managing her clients?accounts Crocker may payhigher fees without violating her fiduciary duty as long as (1) the commission paid is

reasonable in relation to the research and execution of services received and (2) the researchbenefits the firm 抯 clients

Question 7 #44827

Standard IV(A) Loyalty The standard does not prohibit former employees from contactingclients of their pervious firm so long as the contact information does not come from therecords of the previous employer or violate a noncompete agreement

Question 8 #44828

Standard I(A) Knowledge of the Law Chambers resides in and does business in Botwari and

is bound by the stricter of local law and the Standards The Standards permit referral fees thatare properly disclosed to clients and do not prohibit gifts to clients in return for business

Question 9 #44829

Standard VI(A) Disclosure of Conflicts Members and candidates must make full disclosure ofall matters that could impair their independence Sellside members and candidates shoulddisclose to their clients any ownership in a security that they are recommending

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Question 10 #44832

Your answer: B was correct!

According to Standard IV(B) Additional Compensation Arrangements, members and

candidates must obtain written permission from their employer before accepting an offer ofcompensation (for the performance of work done for their employer) in addition to what theyreceive from their employer and that is contingent on future performance Such contingentadditional compensation is judged to be reasonably expected to impair the employee 抯independence and objectivity

Question 11 #44833

Your answer: A was incorrect The correct answer was D)

Compliance requires that the firm follow local law and disclose the conflict between local lawand GIPS

Question 12 #44834

Standard III(D) Performance Presentation requires that statements about performance be notonly accurate, but also fair and complete While Vance 抯 statement may be accurate in atechnical sense, it is neither fair nor complete, and it seems intended to mislead prospectsabout Vance 抯 track record in managing equities accounts and/or selecting equity securities.While compliance with GIPS and its methods of composite construction are recommended,they are not required by the Standard

Question 13 #44835

Standard V(B) Communication with Clients and Prospective Clients Brief communicationsmust be supported by background reports or data that can be made available to the client ifrequested Drake should have given the client a more detailed analysis of the investmentwhen the client called to request such information Drake did not violate Standard III(C)because he 搕 horoughly?read and evaluated the analysis and determined that the structuredproduct was in line with his client 抯 objectives before recommending the product to his client

Question 14 #44836

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Standard VI(B) Priority of Transactions Client transactions must take precedence overmembers?or candidates?trades He should have submitted his personal trade order only aftertrading for his client Standard III(B) Fair Dealing requires that Farley deal fairly with all clientswhen recommending securities or taking investment action Since the endowment fund isFarley 抯 only account, he has not disadvantaged any other client by only taking action on thebehalf of the endowment

Question 15 #44837

Standard III(A) Loyalty, Prudence, and Care Members and candidates must comply with theirfiduciary duty to those persons and interests by whom the duty is owed Specifically,

members must always act for the benefit of their clients and place clients?interests beforetheir own Murphy 抯 actions in directing trades to Casanova violate the fiduciary duty owed

to Wellington & Worrel 抯 clients, as he appears to be selecting Casanova for the discountsreceived on personal securities transactions Casanova charges higher commission rates anddelivers poorer execution than other brokers used by the firm By using Casanova, Murphyviolates his fiduciary duty by failing to act in the clients?best interest Alternatively, the

arrangement with Cedrock appears to comply with Murphy 抯 fiduciary duty, as the firmreceives investment research used in managing client portfolios (a softdollar arrangement)and achieves better execution for client trades Because the trading arrangement with

Cedrock benefits clients, it does not violate Standard III(A)

Question 16 #44838

Your answer: B was incorrect The correct answer was C)

Dodd has most likely violated Standard III(B) Fair Dealing by giving Phillips an overgenerousallocation of the oversubscribed (揾 ot? new issue The issue is not that he is offering

compensation to a client to resolve a dispute, but that by over allocating the IPO shares toPhillips he is not treating his other clients fairly Standard III(B) Fair Dealing requires thatcandidates and members not use shares of 揾 ot issues?as an incentive to achieve a reward

or benefit The benefit in this case is that the dispute will 揼 o away.?/SPAN>

Question 17 #44839

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The eight major sections of the CFA Institute Global Investment Performance Standards areFundamentals of Compliance, Input Data, Calculation Methodology, Composite Construction,Disclosures, Presentation and Reporting, Real Estate, and Private Equity.

Question 18 #44840

Standard III(C) Suitability requires that the client portfolio fit the client risk and return

objectives as stated in the investment policy statement, and that seems to be the case here.The proper focus of risk analysis is on the entire portfolio and need not be applied on anissuebyissue basis There appears to be no violation of V(A) Diligence and ReasonableBasis since his previous analysis indicated the portfolio was suitable and his records

supported that conclusion

Question 19 #44841

With no interest paid on the original $5,000 loan, at 6% in five years the loan balance will be:New loan balance = $5,000(1.06)5= $6,691.13 or PV = 5,000; I/Y = 6; N = 5; PMT = 0; CPT

→ FV = ?6,691.13 $6,691.13 is the loan that has to be retired over the next five years Thefinancial calculator solution is: PV = 6,691.13; I/Y = 6; N = 5; CPT → PMT You obtain PMT =

A and B describe a histogram, and D describes a frequency polygon

Question 22 #44846

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holding period return (HPR) =

Question 23 #44847

range = maximum value ?minimum value = 55 ?15 = 40 Calculate the mean:

To get the mean absolute deviation, sum the deviations aroundthe mean (ignoring the sign), and divide by the number of observations

Note that the units of variance here are percent squared Using decimals rather than wholepercent yields 0.0250

Question 24 #44848

Question 25 #44849

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For the positively skewed distribution, the mode is less than the median, which is less thanthe mean

Question 26 #44850

Your answer: B was incorrect The correct answer was A)

The nominal increase in industrial production is expected to be Thus the

real change is expected to be Given the regression equation, ourforecast is 9,397.54 = 8,950 + 395(1.133)

Question 27 #44851

The first year account return was The second year return was

weighted return Since only one asset was involved, also gives the timeweighted return To calculate the moneyweighted return, use the cash flow function with Cf0

= ?2,000, Cf1 = ?5,000, and Cf2 = 54,000 × 2 = 108,000, and compute IRR, which is 7.73%.The moneyweighted return is lower because the amount in the account was greater in thesecond period, when the return was poor

Question 28 #44858

The binomial distribution is a discrete distribution, while the normal distribution is an example

of a continuous distribution Univariate and multivariate distributions can be discrete or

continuous

Question 29 #44859

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About 68% of all observations fall within ? standard deviation of the mean Thus, about 68%

of the values fall between 5 and 25

Question 30 #44860

The central limit theorem holds for any distribution as long as the sample size is large (i.e., n

> 30)

Question 31 #44861

The population variance is known (in this case 100), so the standard error of the sample

mean is

Question 32 #44863

The ttest is used when the sample size is small.

Question 33 #44864

It would decrease, not increase, the profitability of corporate investment projects

Question 34 #44865

The potential deposit expansion multiplier is the reciprocal of the reserve ratio If the reserveratio is 20%, then 1/0.20 = 5

Question 35 #44866

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If the economy is just beginning to come out of a recession, a period of expansion is

beginning In a typical business cycle, this will be followed by a business peak, and a period

of contraction, leading to the next recessionary trough This would complete one cycle fromthe time of the last recession C and D are not appropriate since the question says that theeconomy is coming out of a recession This suggests that the economy is getting better, notworse

Question 36 #44868

An individual is technically unemployed when he or she is actively seeking employment or iswaiting to return to a job from which he or she was just laid off Not all people who are notworking are considered unemployed Examples include household workers, students,

prisoners, and retirees

Question 37 #44869

Your answer: C was incorrect The correct answer was D)

The longrun production decision differs from the shortrun production decision in that fixedcosts can be changed in the long run but not the short run Thus, shortrun cost curves applyfor a given size of a plant, and longrun cost curves can show costs for different size plants

Question 38 #44870

One brand of flour likely has many good substitutes, and elasticity of demand is likely high.The other statements are true Demand elasticity is greater in the long run than in the shortrun The demand for gasoline is likely inelastic Thus, when the price increases, the

percentage change in quantity demanded is less than the percentage change in price Thereare few substitutes for gasoline, especially in the short run For goods that are complements,cross elasticity is negative

Question 39 #44871

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The monopolist faces a downwardsloping demand curve In some cases, a monopolist may

be unable to sell for a profit Price may be insufficient to cover the perunit cost of the

monopolist even when operating at the MR = MC rate of output

Question 40 #44873

These conditions characterize monopolistic competition By contrast, monopolies and

oligopolies have high barriers to entry and involve either a single seller (monopoly) or a smallnumber of interdependent sellers (oligopoly) Similar to monopolistic competition, pure

competition involves a large number of independent sellers With pure competition, productsare homogeneous (not differentiated), no barriers to entry exist (not low barriers to entry), andthe demand schedule is horizontal (not downward sloping) and perfectly elastic (not highlyelastic)

Question 41 #44874

Part of the trading strategy would include selling the foreign or U.S currency forward When

the interest rate is low relative to the hedged U.S interest rate, an investor should borrowdomestic currency, convert the local currency to foreign currency at the current spot rate, lend

at the foreign currency interest rate, and simultaneously sell foreign currency units forward to

hedge or lock in your foreign lendings At the end of the period, the investor should liquidate

foreign lendings and deliver the foreign currency proceeds against the forward contract toconvert foreign loan proceeds back into local currency units The investor then repays

domestic loans and reaps the arbitrage profits

Question 42 #44875

Accounting profit is often an unsatisfactory performance measure from an economic point ofview because accounting costs generally do not include the opportunity costs of equity capital.Accounting costs do reflect the cost of depreciation and taxes

Question 43 #44876

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The current account measures the exchange of merchandise goods, the exchange of

services, the exchange of investment income, and unilateral transfers (gifts to and from othernations)

Question 44 #44878

At a minimum wage above the equilibrium wage, there will be an excess supply of workers.Firms substitute other productive resources for labor and use more than the economicallyefficient amount of capital The result is increased unemployment and a decrease in

economic efficiency Firms may decrease the quality or quantity of the nonmonetary benefitsthey previously offered to workers

Question 45 #44880

If ultimate payment is assured and the cost estimates are unreliable, the company must usethe completed contract method and thus cannot recognize profits until the end of the contract.Profits in year 2 are zero The other statements are true At the end of year 3, the balance inthe cash account will be equal to the cumulative profits, or 10 ?7.5 = 2.5 Under the

percentage of completion method, the company would recognize $1 million in profits in year 2

The percentage of completion method smooths income,and the profits recognized in year 3 using this method are (2.5 / 7.5) 2.5 = 0.833

Question 46 #44881

cash conversion cycle (CCC) = receivables days + inventory processing days ?payablespayment period

Since the payables payment period increases receivables by 3.32 days and receivables daysincreases by 5, CCC increases by 1.68 days

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Question 47 #44883

Because net income is given, this problem involves using the indirect method

The interest expense is ignored because it is already deducted before net income is

calculated Ignore sales for the same reason; net income incorporates sales

Question 48 #44884

Investing cash flows include buying and selling equipment and land This problem does notinvolve any such cash flows

Question 49 #44885

Total cash flow is the difference between the ending cash balance and the beginning cashbalance In Questions 47 and 48, we calculated cash flow from operations of $12 and cashflow from investing of $0, so we need to calculate cash flow from financing:

Total cash flow is thus $102 If the ending cash balance is $200, the beginning cash balancewas $200 ?$102 = $98

Question 50 #44886

Noncash items: depreciation +2

Change in accounts receivable

Financing cash flows $90

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Note: Do not add back depreciation when using the direct method Dividends are a financing

cash flow

Question 51 #44887

free cash flow (FCF) = cash flow from operations ?net capital expenditures

FCF = $800 ?40 (purchase of plant and equipment) + 30 (sale of land) = $790

Question 52 #44888

A simple numerical example can help Assume CA = 2 and CL = 1 Then note

and Debt is decreased, but equity is unchanged, so D/E isdecreased

Question 53 #44889

Cost of goods sold 牋 ?,000 ?/td>

Increase in inventory 牋 ?00 ?/td>

Increase in accounts payable 牋 +300 ?/td>

Other cash input expenses 牋 ?00 ?/td>

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If the debt ratio (TD/TA) is equal to 40% and the firm has no preferred stock, the percentage

of equity is 1 ?0.40, or 60%

Question 54 #44890

Shares issued postsplit need not be adjusted for the split as they are 搉 ew?shares

Question 55 #44892

Because basic EPS does not adjust for warrants, the adjustment is 0 Diluted EPS uses

average price Since AP > EX,

Question 56 #44893

A is not necessarily true By itself, a low receivables turnover refers to the average time ittakes the company to collect its receivables, not to the level of receivables (which will affect,but not dictate its current ratio) B is not necessarily true; whether a firm 抯 ROA is higherthan its ROE depends on the relation of the cost of debt to its ROA C is incorrect Just thefact that a company has a high gross profit margin does not necessarily mean it will have ahigh net profit margin For example, the company could have very high operating expensesand end up with a low net profit margin

The cash conversion cycle is: (365/6) + (365/9) ?(365/12) = 60.8 + 40.6 ?30.4 = 71 days

Question 57 #44894

In periods of rising prices and stable or increasing inventory quantities, FIFO, compared to

LIFO, results in higher working capital.

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FIFO ending inventory = FIFO INV = LIFO INV + LIFO reserve = 22,000 + 4,000 = $26,000

Question 61 #44898

The total cash flows are equal, but the expensing firm will see lower early year profitabilityrather than higher early year profitability

Question 62 #44899

Impairment must be recognized when there is sufficient evidence to indicate that the value of

an asset carried on the books of a company cannot be recovered Indicators of lack of

recoverability include a significant decrease in market value, adverse changes in legal orbusiness conditions, substantial cost overruns, and a significant decline in an asset 抯 longterm likelihood of generating profit

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