2007 schweser answers explanations of book 6 exam 2 pm

Further, Standard IA requires that members and candidates must not knowingly participate in violations of applicable laws and Standards.. Question 2 #45213 Your answer: B was correct!.

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Schweser Printable Answers Book 6 Exam 2 PM

Test ID#: 1365276

Question 1 #45212

Your answer: B was correct!

Standard I(A) Knowledge of the Law This Standard requires candidates and memberscomply with all applicable rules and regulations, including the CFA Standards of Practice

Further, Standard I(A) requires that members and candidates must not knowingly participate

in violations of applicable laws and Standards Even though local law permits purchasingshares for personal accounts before purchasing IPO shares for client accounts, StandardVI(B) Priority of Transactions does not The analyst knowingly violated the Code and

Standards and thus violated Standard I(A) Since the analyst was unaware of the deceit in thevaluation of the IPO stock (a violation of Standard I(D) Misconduct), her participation inpublishing the research did not constitute a violation

Question 2 #45213

Burke and the analyst violated Standard V(B) Communication with Clients and ProspectiveClients by not identifying expected volatility as an important factor in the model, and StandardV(A) Diligence and Reasonable Basis by not having a reasonable basis for the

recommendation, since volatility had changed The analyst also violated Standard I(C)

Misrepresentation which states that members and candidates must not guarantee clients aspecific return on investments The analyst 抯 report essentially guarantees that the returnearned in the previous year will be earned in the upcoming year

Question 3 #45214

Your answer: C was correct!

Standard I(C) Misrepresentation All sources used in an analyst 抯 report should be

referenced as to the source, author, and publisher 梩 he only exception being factual

information published by recognized financial and statistical reporting services

Question 4 #45215

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Standard III(C) Suitability Members and candidates should carefully consider the needs,circumstances, and objectives of clients before taking investment action However, somemembers and candidates are merely executing specific instructions for retail clients In thiscase, since Wells believes the trade is unsuitable, Wells should confirm that the client isaware the action is unsuitable before executing the trade or refrain from making the trade

Question 5 #45216

Your answer: A was correct!

Standard I(C) Misrepresentation James has acted inappropriately in asking Jones to

plagiarize the report and may have violated several Standards, including Standard IV(C)Responsibilities of Supervisors However, he has not violated the prohibition against

plagiarism in Standard I(C) Jones, on the other hand, even if acting on the request of hersupervisor, will violate Standard I(C) Misrepresentation Making minor changes to a reportdoes not make it your own

Question 6 #45217

According to Standard II(B) Market Manipulation, members and candidates should not

engage in any practice that would artificially inflate trading volume or distort prices However,this Standard does not prohibit transactions done for tax purposes In this case, there was nointent to mislead market participants as to the stock price of Safety Airlines, and the tradeswere undertaken to take advantage of a legitimate tax strategy Thus there has been noviolation of Standard II(B) or any other Standard

Question 7 #45218

Your answer: D was correct!

Standard I(B) Independence and Objectivity allows investorpaid research but requires thatmembers and candidates limit the type of compensation they accept for writing a researchreport so that it is not dependent on the conclusions of the research report Best practice isfor analysts to only accept a flat fee for such companypaid research reports Such researchshould also include complete disclosure of the nature of the compensation received for writingsuch a report so that investors will not be misled as to the relationship between the analystand the company

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Question 8 #45219

Standard V(C) Record Retention In the absence of regulatory requirements, Standard V(C)recommends maintaining records supporting investment recommendations and actions andrecords of investmentrelated communications with clients for at least seven years Here,there is regulatory guidance and seven years is a recommendation, not a requirement, in anycase Records can be maintained in electronic or hard copy format

Question 9 #45220

Total firm assets must include all accounts whether discretionary or not and whether feepaying or not

Question 10 #45221

Standard III(B) Fair Dealing Changes from 揃 uy?to 揝 ell?should be disseminated, at aminimum, to clients the broker knows have purchased and held the security based on theearlier recommendation, and to persons placing orders contrary to the firm 抯 current

recommendation

Question 11 #45222

Standard VI(B) Priority of Transactions Members and candidates must give transactions forclients and employers priority over their personal transactions In this instance, James did notadversely affect the client 抯 interest because the client 抯 trades were executed beforeJames copied them He has not acted fraudulently or deceitfully Reasonable basis applies toinvestment recommendations and actions taken for clients

Question 12 #45223

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The circumstances of the bankruptcy did not involve fraudulent or deceitful business conduct,

so therefore there is no violation of Standard I(D) Misconduct Hart 抯 bankruptcy does notcompromise his professional reputation or the integrity of the CFA designation

Question 13 #45224

Under the Code and Standards, Marshall has an obligation to disclose that she receivesspecial compensation based on the amount of client trading volume Standard VI(A)

Disclosure of Conflicts requires members to disclose to clients and prospects all matters thatcould potentially impair the member 抯 ability to make investment decisions that are (and togive investment advice that is) objective and unbiased

Question 14 #45225

Standard VI(A) Disclosure of Conflicts Matlock must disclose (1) special relationships 梔irectorships and consultancies, (2) investment banking, (3) underwriting and financial

relationships, (4) broker dealer market making activities, and (5) material beneficial ownership.The fact that Matlock 抯 son works for King Company is not a conflict requiring disclosure toclients and prospects since his son is not a manager of the firm, in which case it could be

Question 15 #45226

Under Standard III(E) Preservation of Confidentiality, members and candidates should

maintain the confidentiality of information received in the course of their professional servicerelating to both current and former clients In the case of illegal activity, however, Reilly mayhave a legal obligation to report the activity Ideally, he should consult with his employer firstabout what actions he may be required to take Of the choices given, seeking the advice ofoutside counsel as to whether he has such an obligation under local law and whether theactivity is indeed illegal is the one permitted under the Standard

Question 16 #45227

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Standard II(A) Material Nonpublic Information requires that members and candidates whopossess material nonpublic information not act or cause others to act on the information.Putting the stock on a restricted list, refusing the trade, or sharing the information with hissupervisor, are all potential violations of this Standard since they involve acting or causingothers to act on the nonpublic information he possesses Dean should seek to have EastStreet make the information public If public dissemination is not made, he is not allowed toact on the information Refusing to make the trade he was instructed to make would be 揳cting?on the information in this case The obligation here is to the integrity of financial

markets

Question 17 #45228

A firm can include noncompliant performance data for the period just prior to the period ofcompliant performance data, as long as no noncompliant data for periods after January 1,

2001 is included, all noncompliant data are identified, and the ways in which the data arenoncompliant are disclosed Firms must supply a list of composites and composite

descriptions only to clients and prospects that request it Firms must add one year of

compliant performance information each year until a total of ten years data are reported

Question 18 #45229

The CFA Institute 抯 GIPS require that, to claim compliance, firms must present GIPScompliant performance information for a minimum of five years, or since inception if in

existence less than five years

Question 19 #45230

This problem involves determining the present value of an annuity followed by finding thepresent value of a lump sum Enter PMT = 10,000, N = 10, and I/Y = 14 Compute PV =52,161.16 That is the present value of the 10year annuity, 4 years from today Next, weneed to discount that back to present for 4 years to find the amount of the investment today.Enter FV = 52,161.16, N = 4, I/Y = 14, PMT = 0 Compute PV = 30,883.59

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The cumulative absolute frequency of the fourth interval is 80, which is the sum of the

absolute frequencies from the first to the fourth intervals

Question 21 #45232

In this situation, the coefficient of determination (R2) is the percentage of total variation in thedependent variable (company sales) explained by the variation in the independent variable(industry sales)

total variation (SST) = unexplained variation (SSE) + explained variation (SSR)

So, the coefficient of determination can be expressed as:

An R2of 0.25 indicates that the variation in industry chip sales explains 25% of variation insales of Tasty Chips For a simple regression (one independent variable) the square root ofthe R2is the correlation between the variables,

Question 22 #45233

The average annual compound growth rate is calculated as:

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Mean = 120/10 = 12, median = 10, and mode = 10 The distribution is skewed to the right, sothe mean is greater than the median and mode Generally, for positively skewed distributions,the mode is less than the median, which is less than the mean In this case, the mode andmedian are equal because the number of observations is small.

Question 24 #45235

The coefficient of variation, CV = standard deviation/arithmetic mean, is a common measure

of relative dispersion (risk) CVW= 0.4/0.5 = 0.80; CVX= 0.7/0.9 = 0.78; CVY= 4.7/1.2 = 3.92;and CVZ= 5.2/1.5 = 3.47 Because a lower CV means lower relative risk, Security X has thelowest relative risk and Security Y has the highest relative risk

Question 25 #45236

The Sharpe measure for a portfolio is calculated as the (mean portfolio return ?mean return

on the riskfree asset)/portfolio standard deviation The Sharpe measures for the four mutualfunds are:

Subjective probability is based on personal judgment A random variable is a quantity whose

outcomes are uncertain

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A joint probability is a probability that two or more events happen concurrently An a priori

probability is one based on logical analysis rather than on observation or personal judgment.

An empirical probability is calculated using historical data A conditional probability is the

probability of one event happening on the condition that another event is certain to occur

Question 27 #45238

This problem involves the joint probability, which is the probability of both events happening.P(value and previous portfolio manager) [P(value)] [P(previous portfolio manager)] =

(0.4)(0.7) = 0.28

Question 28 #45239

This problem involves the addition rule for probabilities, which is the probability that at leastone of two events will occur P(value or selected by the previous portfolio manager) = P(value)+ P(previous portfolio manager) ?P(value and previous portfolio manager) = 0.40 + 0.76

?0.28 = 0.88 or 88% Note: P(previous manager) = (0.7)(0.4) + (0.8)(0.6) = 0.76 Alternatively,

the probability that a growth stock was selected by the previous manager is 0.6 × 0.8 = 0.48.P(value) + P(growth and previous manager) = 0.40 + 0.48 = 0.88 or 88%

Question 29 #45240

The standard normal distribution has a mean of 0 and a standard deviation of 1.

Question 30 #45241

Selected by the Previous Portfolio Manager

Selected by the Current Portfolio Manager

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The 95% confidence interval is 10% ?1.96(4%) or from 2.16% to 17.84%.

Question 31 #45242

the chance of getting zero or less return (losing money) is 1 ?0.9772 = 0.0228% or 2.28% Analternative explanation: the expected return is 10% To lose money means the return must fallbelow zero Zero is about two standard deviations to the left of the mean 50% of the time, areturn will be below the mean, and 2.5% of the observations are below two standard

deviations down About 97.5% of the time, the return will be above zero Thus, only about a2.5% chance exists of having a value below zero

Question 32 #45243

According to the central limit theorem, the sample mean for large sample sizes will be

distributed normally regardless of the distribution of the underlying population

Question 33 #45244

The crowdingout effect refers to a reduction in private borrowing and spending as a result ofhigher interest rates generated by budget deficits that are financed by borrowing in the privateloanable funds market

Question 34 #45245

Aggregate hours measures the total number of hours worked in a year by all employedpeople Aggregate hours takes account of both the level of employment and the averageworkweek, making it superior to either of those measures as an indicator of total labor

performed Total labor compensation is a measure of real wage rates that includes wages,salaries, and employerpaid benefits

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Question 35 #45246

where r is the nominal riskfree rate Hence, The nominalrate in the U.S is 5% = 2 + 3 The result is that

Using (1.02)(1.03) ?1 = 0.0506 for the U.S nominalrate produces a result of 4.12%

Question 36 #45247

Open market operations are the U.S Federal Reserve 抯 most often used tool for changingthe money supply

Question 37 #45248

The demand for labor is a derived demand When the demand for the final good or serviceincreases, the price of that final good or service increases That increase in price will lead tothe firm employing more of the resources used in production at each resource price, includinglabor

Question 38 #45249

In the short run, an increase in the money supply will increase aggregate demand The newshortrun equilibrium will be at a higher price level and a greater level of real output (GDP)

Question 39 #45250

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The law of diminishing returns states that at some point, as more of a resource is used in aproduction process, holding other inputs constant, output increases at a decreasing rate Thisaccounts for the upward slope of the SRMC curve beyond that point Returns to scale

determine the shape of the longrun cost curves

Question 40 #45251

Under perfect competition, each firm faces a flat demand curve This means the price isconstant and the marginal revenue line is flat A company will continue to produce as long as

MR > MC, so the competitive company will produce as long as P > MC It will stop when MC

= MR = P

Question 41 #45252

In the short run, the decision to operate is based on whether price covers average variablecosts In the long run, average fixed costs must be considered as well Sunk costs are

historical costs Sinking funds are established to retire longterm debt The marginal revenuefrom selling an additional unit of output must be at least as great as its marginal cost ofproduction

Question 42 #45253

To convert Mexican peso prices to U.S dollars, divide by 12 Shoes are cheaper in Mexicoversus the U.S (40 versus 50); so are toys (3 versus 4) and hats (8 versus 10) Therefore,the U.S should import all three goods from Mexico

Question 43 #45254

The AUD depreciated because it now takes more AUD to by a USD A cross rate is theexchange rate between two countries derived from their exchange rates with a third country.Direct exchange rates don 抰 necessarily involve the U.S dollar

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Question 44 #45255

A natural monopoly may exist when economies of scale are great The large economies ofscale make it inefficient to have many small producers

Question 45 #45256

Extraordinary items are unusual and infrequent items that are reported separately, net of tax

揵 elow the line.?

Question 46 #45257

This is the direct method, which starts at the top of the income statement with sales and then

works with the individual components of net income directly related to cash flows

Question 47 #45258

Cash collected from customers

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The company bought equipment for $120, which was a cash outflow

Question 48 #45259

Question 49 #45260

When using the direct method of calculating operating cash flows, depreciation and

amortization are not 揳 dded back?(to net income) because we don 抰 begin with net incomeunder the direct method Depreciation and amortization are noncash changes and are notused under the direct method The other statements are true Interest payments on debtaffect cash flow from operations When using the indirect method, an analyst should add anylosses on sales of fixed assets to net income since they are not operating cash flows

Question 50 #45261

In a period of rising prices, LIFO results in higher COGS, lower taxes, lower net income, lowerinventory balances, lower working capital, and higher cash flows due to less taxes paid out In

a falling price environment, it is the reverse Also, FIFO inventory leads to opposite results forboth rising and falling prices

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If equity equals 45% of assets and current liabilities equals 20%, total longterm debt must be35%

CA = 0.1 + 0.15 + 0.20 = 0.45

Question 54 #45265

ROE = EAT / Equity = (0.15)(800) / (0.45)(2,000) = 0.133 or 13.3%

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Question 55 #45267

The switch from FIFO to LIFO during a period of rising prices reduces the value of the

company 抯 inventory and therefore inflates COGS A higher COGS would produce lowerearnings Choice B would tend to reduce annual expenses and increase earnings Choice Cwould clearly increase revenue and net income in a fixed period of time if the practice isfollowed on a regular basis Choice D also reduces expenses and will increase earnings

Question 56 #45266

Question 57 #45268

Shares issued to warrant holders = 100

Warrants generate cash of 100(50) = $5,000

Stock dividends (beginning shares) (10,000)(12) = 120,000

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Question 58 #45269

Only Statement III is false In periods of declining prices, LIFO inventory values will be higher,

leading to higher asset and equity values and lower debttoequity ratios FIFO inventory

values are preferred because they better approximate replacement cost FIFO COGS = LIFOCOGS ?change in LIFO reserve COGS = purchases + beginning inventory ?ending inventory,

so there is a negative relation between COGS and misstatements of ending inventory

Question 59 #45270

Question 60 #45271

Generally, LIFO causes COGS to be large and net income to be small, so switching to FIFOshould reverse this, forcing COGS down and income up So the answer should be positive.The LIFO reserve went up 90 ?85 = +5, so switching to FIFO will decrease COGS by 5,000,which will increase gross profit by 5,000 and net income by (5,000)(1 ?0.28) = +3,600

Question 61 #45272

COGS FIFO = COGS LIFO ?(ending LIFO reserve ?beginning LIFO reserve)

Tiêu đề	2007 Schweser Answers Explanations of Book 6 Exam 2 PM
Tác giả	杨帆
Trường học	Unknown
Chuyên ngành	CFA preparation
Thể loại	Exam answer explanations
Năm xuất bản	2007
Thành phố	Unknown

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