Level 2 mock exam question and answers 2009

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to registered CFA candidates.. By accessing this mock exam, you agree to the following te

Trang 1

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to registered CFA candidates Candidates may view and print the exam for personal exam preparation only The

currently-2009 Level II Mock Exam: Morning Session

The morning session of the 2009 Level II Chartered Financial Analyst® Mock Examination has

60 questions To best simulate the exam day experience, candidates are advised to allocate an average of 18 minutes per item set (vignette and 6 multiple choice questions) for a total of 180 minutes (3 hours) for this session of the exam

1-6 Ethical and Professional Standards 18

13-18 Financial Statement Analysis 18

Trang 2

Questions 1 through 6 relate to Ethical and Professional Standards

Sang-Gyung Jun Case Scenario

Sang-Gyung Jun is enrolled in an MBA program and serves as an unpaid intern for Portree Investment Services During his internship, Jun’s supervisor at Portree, Barbara Fantine, teaches him several stock valuation techniques Jun hopes his unpaid internship will eventually result in full-time employment with Portree, and he enthusiastically recruits a number of wealthy clients, most of whom are members of Jun’s family Fantine praises his efforts, remarking that “these clients are the foundation on which you can build your career at Portree.”

Despite his success, Jun’s internship remains unpaid even after he receives his MBA degree and passes the CFA® Level III examination Jun seeks full-time employment with Upsala Financial Corp which specializes in serving high net worth individuals

When interviewing for the position at Upsala, Jun informs his interviewer that “I need to obtain only one more year of work experience before I will receive the CFA charter After the

interview, Jun contacts the clients he has recruited at Portree to ask if they would become his clients at Upsala None of these clients accept this offer

When Fantine learns of Jun’s plans to leave Portree, she informs Jun, “You are not permitted to use any of the valuation techniques I have taught you because they belong to me.”

Jun subsequently accepts the position at Upsala and informs Fantine On the same day, Fantine receives news about the departure of another Portree employee, Jasmine Velez, CFA Velez is leaving to start an investment firm that will directly compete with Portree Velez has not

contacted any potential clients, but during non-work hours she has incorporated her new firm and obtained the necessary licenses

On Jun’s first day of work at Upsala, he receives and reviews a copy of the firm’s compliance policy, excerpts of which appear in Exhibit 1

Trang 3

currently-Exhibit 1 Upsala Financial Corp

Compliance Policy

Independent Practice

Employees of Upsala may enter into independent practice only in business segments not already targeted by Upsala, and only in roles clearly leading to improvements in employee skill and expertise that can be used beneficially by Upsala

Priority of trades

Transactions for employers must have priority over transactions in securities or other

investments of which a member or candidate is the beneficial owner The interests of outside clients must be given priority over accounts registered in the name of Upsala itself Moreover, all personal trades by employees of Upsala firm will be pre-cleared in accordance with the firm’s compliance policies

Jun also receives new business cards which read “Sang-Gyung Jun, CFA, Investment

Consultant.” Jun mails letters of introduction with the business cards to contacts and potential clients

In his first meeting with new colleagues Jun, wanting to create a favorable image states, “I passed all three CFA examinations on the first try, which places me in an elite category of

exceptional charterholders.”

Jun later impresses his supervisor at Upsala with his knowledge of stock valuation techniques

He does not inform his supervisor that he learned the techniques from Fantine at Portree

Several months later, Jun receives an offer of part-time consulting work from a family friend who needs assistance marketing investment services to high-net-worth individuals in Korea Jun reviews the firm’s policy on independent practice and confirms that Upsala does not conduct business in Korea Jun is convinced that the consulting work will improve his skills and thus benefit Upsala

He accepts the consulting work which requires approximately three hours of late-night work on Mondays and Wednesdays Since Jun only requires 4-6 hours of sleep he does not feel that this night work will interfere with his responsibilities Jun then sends an email to his supervisor informing him of the consulting offer, its requirements, duration, compensation, and the skills he expects to develop from the work

Trang 4

1 Did Jun’s actions immediately following his interview with Upsala most likely violate the

CFA Institute Standards of Professional Conduct?

A Yes

B No, because he no longer owes a duty of loyalty to Portree

C No, because the Portree clients have not accepted the offer to move

2 When using the stock valuation methods at Upsala, does Jun violate any CFA Institute Standards of Professional Conduct?

A No

B Yes, because he does not have Fantine’s permission

C Yes, because he does not inform his supervisor of the source of his knowledge

3 When preparing to establish an investment firm, does Velez violate the CFA Institute Standard relating to Duty to Employer?

A No

B Yes, because she plans to compete directly with Portree

C Yes, because she incorporated the firm before leaving Portree

4 To make Upsala’s statement on Priority of Trades consistent with CFA Institute

Standards, Jun’s most appropriate recommendation is to revise it so that:

A the interests of clients must be given priority over accounts in which Upsala’s

employees are beneficial owners

B the interests of clients must be given priority over family accounts and accounts registered in the name of Upsala itself

C transactions for clients and then employers have priority over transactions in

securities or other investments of which a member or candidate is the beneficial owner

Trang 5

currently-6 When accepting the part-time consulting position, does Jun most likely violate any CFA

Institute Standards?

A No, because he does not need consent

B Yes, because he does not provide adequate disclosure to Upsala

C Yes, because the work requirements will interfere with his duties to Upsala

Trang 6

Questions 7 through 12 relate to Quantitative Methods

Jacques Nordique Case Scenario

Jacques Nordique is a quantitative analyst at Brimford Investment Management One of the firm’s managing partners asks Nordique to collect and analyze data as part of a project to explain and to forecast the behavior of price/earnings (P/E) ratios Nordique wants to examine time-series models of P/E behavior and begins by collecting 15 years of monthly data on market P/E ratios

After considering several different time-series models, Nordique estimates a regression equation

of the form:

(P/E) = + (P/E)t–1 + ε Equation 1

and obtains the results shown in Exhibit 1 Nordique believes the time series is mean reverting and given the estimated coefficients, he calculates the mean-reverting level of the market P/E ratio to be 13.3

Exhibit 1 Regression Results Dependent Variable is the Market Price/Earnings (P/E) Ratio Regression Statistics

Standard Error of Estimate 0.988 Number of Observations 179 Durbin-Watson Statistic 2.115

Coefficients Standard Error

Nordique shares his time-series results with his supervisor, Amy Beloit She is interested in the

Trang 7

currently-Exhibit 2 Critical Values of Selected Test Statistics

t-statistic Durbin-Watson Statistic One-tailed Probabilities α = 0.05, K = 1 Degrees of freedom p = 0.05 p = 0.025

= 1.65 = 1.69

2

120+

2.92 1.66

4.30 1.98

7 Nordique’s most appropriate action to determine if Equation 1 correctly fits the time

series is to examine the:

A R-squared value and F-statistic

B autocorrelation between the error terms

C correlation between the squared error terms and the independent variable

8 To determine whether Beloit’s first concern is valid, Nordique’s most appropriate action

would be to:

A perform the Dickey-Fuller test

B regress the squared residuals from Equation 1 on the squared residuals lagged one period

C test whether the variance of the error in one period depends on the variance of the error in successive time periods

9 Which of the following models is most appropriate to determine if Beloit’s second

concern is justified?

A (P/E)t – (P/E)t–1 = + (P/E)t–1 + ε

B (P/E)t – (P/E)t–1 = + [(P/E)t – (P/E)t–1] + ε

C (P/E)t – (P/E)t–1 = + [(P/E)t–1 – (P/E)t–2] + ε

Trang 8

10 If Beloit’s second concern about the time-series results in Exhibit 1 is correct, Nordique’s

most appropriate action is to:

A do nothing

B re-estimate the regression using the form: (P/E) = + (P/E)t-1 + (P/E)t-2 + ε

C re-estimate the regression using the form: [(P/E)

.– (P/E)t-1 ] = + [(P/E)t-1 – (P/E)t-2 ] + ε

11 If Nordique’s belief about the behavior of the time series is correct, which of the

following is most appropriate?

A Underweight stocks if the P/E is above its historical average

B Overweight stocks if the P/E is above its mean reversion level

C Underweight stocks if the P/E is above its mean reversion level

12 If Nordique’s model is correctly specified, and the market P/E ratio is 22.50 in June 2008,

the estimate of the market P/E ratio for August 2008 is closest to:

A 21.39

B 22.04

C 22.27

Trang 9

currently-Question 13 through 18 relate to Financial Statement Analysis

Greg Fannerson (ACI) Case Scenario

Greg Fannerson, CFA, is a financial analyst with Alchemy Consolidated Industries, Inc (ACI) ACI is a U.S corporation involved in several industry sectors and, in addition, has a significant portfolio of intercorporate investments ACI follows U.S GAAP when preparing its financial statements Fannerson’s supervisor, Charles Wilmington, has requested that Fannerson provide

an update on ACI’s existing equity investments Fannerson has developed Exhibit 1, containing information about the companies

Exhibit 1 ACI Inc Portfolio A Equity Investments (amounts in millions)

Investees’

Investment Ownership

Percentage

Cost Basis ($U.S.)

Market Value

31 December

2008

Reported Net Income

2008

Total Dividends Paid by Investees in

2008

Dividends Received

In addition to the equity investments in Exhibit 1, Fannerson was asked to evaluate two recently acquired debt holdings, which have been classified as held-to-maturity Information about these securities is shown in Exhibit 2

Exhibit 2 ACI Inc Portfolio B Debt Securities (amounts in millions)

(Purchased at Par Value)

Trang 10

Wilmington mentions that the economic circumstances regarding the two debt securities has deteriorated significantly and asked Fannerson’s opinion on how the way in which these

securities had been classified affected ACI’s performance

Fannerson has gathered the following additional information:

• At time of purchase the market value of the net assets of Columbus were equal to their book values

• The number of seats that ACI holds on the respective Boards of its’ equity

investments is shown in Exhibit 3

• De Soto is a joint venture between ACI and two other partners

• Marco has a majority holder that exercises control over Marco’s operations

• ACI has been unhappy with the performance of the Le Vaca investment for some time and has been attempting to divest its holding with no success

• ACI does not classify equity securities as held-for-trading securities

Exhibit 3 Seats on the Board held by ACI in its Investee Companies

Company Total Number

13 The incremental effect on ACI’s net income ($ millions) from its investment in

Columbus is closest to:

A 39

B 45

C 65

Trang 11

currently-14 If ACI were to use the IFRS (International Financial Reporting Standards) recommended method to account for De Soto instead of U.S GAAP, which of the following will be the

item most likely to increase for ACI?

16 The equity income from investments that should be reported on ACI’s 2008 income

statement (in $-millions) is closest to:

B Marco and Viking

C De Soto, Marco and Viking

18 If ACI had classified the debt securities in Portfolio B as available-for-sale securities, its

pre-tax income ($-millions) for 2008 would have most likely been:

A 9 lower

B 4 lower

C unchanged

Trang 12

Question 19 through 24 relate to Financial Statement Analysis

Erika Wong Case Scenario

Erika Wong, an analyst with Montreal Investments, is forecasting 2008 results for Garrison Inc Garrison has two wholly owned European subsidiaries: Catlette and Heren Wong has prepared individual forecasts for the parent company (before consolidating the subsidiaries) in U.S dollars and for the two subsidiaries in their local currency (the Euro) She wants to determine how the translation of subsidiary results will affect the consolidated results of operations, using the

following additional information:

• Both Catlette and Heren use the FIFO method for inventory

• Catlette’s results will be translated into dollars using the all-current method

• Heren’s results will be remeasured into dollars using the temporal method

Wong’s forecasted exchange rates for the U.S dollar and Euro are shown in Exhibit 1 along with historical rates Her forecasted financial data for Catlette Company are presented in Exhibits 2 and 3

Wong is particularly concerned about whether the choice of translation methods will distort Garrison’s financial ratios relative to the ratios in local currencies She plans to translate the forecasted financial statements for the subsidiaries into U.S dollars using the methods which Garrison is expected to use

Exhibit 1 Exchange Rates

Rate when Catlette’s fixed assets were acquired 0.85 Euro = 1.00 US dollar

Rate when Catlette acquired

Year-end 2007 inventory 0.82 Euro = 1.00 US dollar

Year-end 2008 inventory 0.75 Euro = 1.00 US dollar

Trang 13

currently-Exhibit 2 Catlette Company Forecasted Balance Sheet

31 December 2008 (in millions of Euro)

19 Considering the translation method chosen, Garrison most likely designated the Euro as

the functional currency for:

A Heren only

B Catlette only

C both Heren and Catlette

Trang 14

20 When Garrison consolidates Heren’s results, it will ignore exchange rate translation gains and losses on:

A monetary items if unrealized

B nonmonetary items if realized

C nonmonetary items if unrealized

21 The translation method used by Garrison for Catlette is best justified if:

A Catlette is a sales outlet for the parent’s products

B Catlette is a self-contained independent operating entity

C Garrison’s reporting currency is used as the functional currency for Catlette

22 When Garrison consolidates Catlette’s results, unrealized exchange rate translation gains

or losses on monetary assets will be:

A unreported

B reported in non-operating earnings

C reported in equity as a cumulative translation adjustment

23 When Wong converts her forecasted balance sheet for Catlette into U.S dollars, total

assets at 31 December 2008 (in $ millions) will be closest to:

A 1,038

B 1,510

C 1,667

24 When Wong converts her forecasted income statement data for Catlette into U.S dollars,

gross profit margin for 2008 will be closest to:

A 27.2%

Trang 15

currently-Question 25 through 30 relate to Corporate Finance

MFT Plc Case Scenario

MFT Plc is a money management firm based in the U.K One of MFT’s funds invests in

companies with effective corporate governance and conservative capital structures Rollo

Martin, a newly hired analyst, prepares a presentation for the MFT investment committee

Before screening potential investment opportunities, Martin asks his supervisor Hugh Crabbin how to identify effective corporate governance structures and systems Crabbin states that Martin should look for the following corporate governance attributes:

• Transparency in disclosures;

• Measurable performance accountabilities;

• Directors identifying strongly with managers’ interests

Martin gathers information on a potential investment, France-based TML S.A The company’s website provides details of its corporate governance, some of which is presented in Exhibit 1

Exhibit 1 Extract from TML S.A.’s Corporate Governance Information

Board Responsibilities

1 Acquire adequate training so that members are able to adequately perform their duties

2 Hire the chief executive officer, determine the compensation package, and periodically evaluate the officer’s performance

3 Establish corporate values and governance structures for the company to ensure that the business is conducted in an ethical, competent, fair, and professional manner

After reviewing this information, Martin is concerned about TML management’s ability to receive excessive compensation

In addition to TML’s corporate governance, Martin analyzes the company’s capital structure He observes that it has a low debt-to-equity ratio relative to its peers Martin determines the

unlevered value for TML to be €2,000,000,000 He makes the estimates shown in Exhibit 2 to assess the impact of leverage on TML’s capital structure

Trang 16

Exhibit 2 Selected Leverage Scenarios for TML S.A

Present Value of Costs of Financial

Weighted Average Cost of Capital 11.00% 10.50% 10.00% 11.00%

Carol Reed, MFT’s chief investment officer, is interested in TML’s dividend policy TML uses

a longer-term residual dividend approach and currently earnings are near the cyclical high Martin explains that in the past the company has kept its cash dividend stable despite rising earnings Moreover, he believes that the recent increase in earnings is only temporary In addition to paying cash dividends, the company has a share repurchase program

Reed does not agree that much of the increase in TML’s earnings is temporary She wants to know from Martin what the expected dividend of TML would be if the company used a 5-year period to adjust the dividend towards a target payout ratio of 40 percent Martin uses TML’s regular dividend per share of €0.50, last year’s earnings of €2.50 per share, and current year’s anticipated earnings of €3.0 per share to calculate the expected dividend

25 Crabbin’s list of corporate governance attributes, given in response to Martin’s question,

is least appropriate with regard to:

A transparency

B identification

C measurability

26 Is each of the responsibilities of the board of directors listed in Exhibit 1 a component of

an effective corporate governance system?

A Yes

Trang 17

currently-27 Martin’s concern about management most accurately reflects:

A asset risk

B accounting risk

C strategic policy risk

28 Assuming static trade-off theory holds and using the information in Exhibit 2, TML’s value is:

A unaffected by capital structure

B highest under the low leverage scenario

C highest under the medium leverage scenario

29 Given TML’s dividend policy and Martin’s assessment of its earnings, TML’s most likely

course of action would be to:

A reduce share repurchases

B increase the cash dividend

C maintain the current cash dividend

30 If TML were applying the proposed target payout ratio its expected dividend would be

closest to:

A €0.54

B €0.70

C €0.74

Trang 18

Question 31 through 36 relate to Economics

Faye Kennant Case Scenario

Faye Kennant, an equity analyst, is preparing a research report on Svensoft Oyj, which sells application software to large financial services firms and is based in Helsinki, Finland Kennant plans to conduct an industry analysis, consider several valuation alternatives, and select an appropriate valuation tool for stock selection

Her first step is to consider whether Svensoft is in an attractive industry and to gauge whether Svensoft has a strong position within the industry She prepares the following industry analysis:

• Industry structure and rivalry

•

: The application software industry is dominated by two companies: Waldoware and Meteor The founders of Waldoware and Meteor are long-term rivals and the two firms compete brutally for every customer Svensoft has

historically avoided competition with the two by focusing on the needs of large financial services providers and segmenting its offerings Waldoware recently acquired a small financial services software firm and has committed significant resources to it for

competing more effectively Meteor, on the other hand, has developed its own offering, which many customers consider superior to Svensoft’s offering

Threat of new entry

•

: The dominant positions enjoyed by existing players have resulted in significant barriers to entry into the software industry which in turn enabled the existing players to maintain high profitability Prominent features of barriers to entry in this industry are: low customer switching costs, high supply-side economies of scale,

incumbency advantages, and high capital requirements

Demand: Application software has largely penetrated its target customer base and

Trang 19

currently-Given the consolidation that has already taken place in the industry, Kennant believes Svensoft could be acquired She considers several potential valuation models to determine Svensoft’s potential takeover value Further, in regard to the process of valuing stocks, Kennant believes the following:

1 Apply appropriate valuation models well grounded in traditional intrinsic value and discounting concepts; the most important factor in determining a security’s intrinsic value is a forecast of “earning power” and it should be determined independent of market price

2 As Graham and Dodd stipulated, growth stocks should be purchased at bargain prices, whereas cyclical stocks should be purchased at prices within a range of their intrinsic value

31 According to Kennant’s industry analysis, which of the following is the least attractive

competitive force for the software industry?

A Customer power

B Threat of new entry

C Threat of substitutes

32 In regard to the prominent threat of new entry factors that Kennant has included in her

industry analysis, she is least accurate with respect to:

A incumbency advantages

B customer switching costs

C supply-side economies of scale

33 The industry analysis model for Svensoft pays least attention to:

A demand

B profitability

C external factors

Trang 20

34 Which life cycle phase best describes the application software industry?

A Mature

B Growth

C Declining

35 Which of the following is the least attractive factor with regard to the pricing power in

the applications software industry?

A Key supply inputs

Trang 21

currently-Question 37 through 42 relate to Equity Investments

Robert Davenport case Scenario

Robert Davenport, CFA, is reviewing the report on Fashion Wire that his firm issued last year Fashion Wire is a U.S company operating in the appliance industry

Selected data from the 31 December 2008 balance sheet and the 2008 income statement are shown in Exhibits 1 and 2 The data from the financial statements were adjusted as follows:

• Assets and liabilities are at fair value

• Depreciation expense reflects the economic obsolescence of assets

• Non-recurring items have been removed

• Clean surplus accounting applies

Exhibit 1 Fashion Wire Adjusted Selected Data from Balance Sheet

as of 31 December 2008 (U.S $ millions)

Fixed Assets (net of depreciation) 4,584

Trang 22

Exhibit 2 Fashion Wire Adjusted Selected Data from Statement of Income

Year Ended 31 December 2008 (U.S $ millions except for dividends and share data)

Operating Income (EBIT) 1,633 Interest Expense

Income before Taxes

240 1,393 Taxes (30%)

Net Income

418

975

Number of shares outstanding (millions) 812

Davenport also gathers the following information:

• The current stock price is $10.00 per share

• The required return on equity capital (

• The company’s before-tax and after-tax weighted average cost of capital (WACC) respectively are 11.8 percent and 10.1 percent

) is 12.0 percent

Davenport is deciding whether the next report on Fashion Wire should include residual income and related measures of valuation He first wants to support his belief that shareholders are better informed with the economic value added (EVA) measure than with traditional net income measure He also wants to show how residual income is calculated

Fashion Wire has already announced several new projects that will greatly increase the size of the company Davenport has decided to use value-based measures, specifically EVA, to

illustrate his concern that shareholder value for Fashion Wire may decrease despite the new projects and larger company size

Dev Raj, Davenport’s supervisor, presents the following scenario for Rajasthan Appliances, a Fashion Wire competitor, and asks him to provide a valuation of the competitor’s stock using a residual income valuation model:

• Return on equity (ROE) is 14 percent and the growth rate of earnings is 7 percent;

Trang 23

currently-(1) Firms where cash flows are unpredictable

(2) Firms that do not pay dividends or when dividends are not predictable

In responding to Raj, Davenport expresses his concern regarding the differences in accounting practices that could result in misleading valuations when using residual income models

Specifically, Davenport makes the following two statements:

1 The residual income model will underestimate the value of the company if it chooses to capitalize an expenditure rather than expensing it

2 Accounting for changes in the value of investments considered to be “available-for-sale” biases the valuation by incorrectly stating both book value of equity and ROE

In closing, Raj asks Davenport to take the above accounting issues into consideration when valuing companies using residual income models

37 The best support for Davenport’s belief about the economic value added (EVA) measure

and the traditional net income measure is that EVA:

A uses cash flow data while net income uses accounting data

B deducts the dollar cost of capital from the net operating profit after taxes while net income does not

C deducts the interest charge on debt from the net operating profit after taxes while net income does not

38 Fashion Wire’s residual income in 2008 is closest to:

A -$168

B $ 0

C $154

Trang 24

39 Which of the following results from value-based metrics would best support Davenport’s

concern about Fashion Wire’s shareholder value, new projects, and larger company size?

A Dollar cost of total capital > Net operating profit after taxes

B Return on equity (ROE) > return on equity capital required by investors (

C Strategic investments that are not expected to generate a return immediately

)

40 Based on the scenario provided to Davenport by his supervisor, the intrinsic value of

Rajasthan Appliances’ stock using the residual income valuation model is closest to:

A $15.27

B $19.53

C $23.33

41 In regard to the appropriateness of firm characteristics for using residual income models,

Raj is most accurate with respect to:

A dividends only

B cash flows only

C both cash flows and dividends

42 In regard to Davenport’s response to Raj, it is most accurate to state that he is correct with

respect to:

A statement 1 but not 2

B statement 2 but not 1

C neither statement 1 nor 2

Trang 25

currently-Questions 43 through 48 relate to Fixed Income Investments

Madden Roarke Case Scenario

Madden Roarke, CFA, is a fixed income analyst for Goldrick & Kildow PLC (GK), an

investment management firm Roarke has been asked to provide an analysis of Windmiller, Ltd.,

a manufacturer of automobile components GK’s bond portfolio has a large holding of

Windmiller bonds and its manager, Elizabeth Ferguson, is worried that the rating agencies may lower their ratings on the debt

In order to learn more about Windmiller, Roarke reviews recent news reports From these, he learns that the firm’s CEO is 83 years old and in poor health The reports note that the CEO is widely credited for Windmiller’s recent turnaround, but that industry insiders are surprised that there is no evidence of succession planning in place

Roarke gathers balance sheet information from Windmiller’s most recent financial reports, which

he summarizes in Exhibit 1

Exhibit 1 Windmiller Balance Sheet Information

Plant & equipment 43.8 36.7

Total liabilities + equity 83.0 70.1

The Windmiller bonds held in the GK portfolio are currently rated A by the major rating

agencies Using information from Windmiller’s balance sheets and income statements for the

Trang 26

last two years, Roarke has calculated the values of a variety of financial ratios In addition, he has determined the median values for these ratios for bonds of various ratings and provides the information in Exhibit 2

Exhibit 2 Selected Windmiller Ratios and Median Ratio Values by Rating Windmiller

EBIT interest coverage 5.51 5.72 5.41 3.75

Pretax return on capital 13.94% 14.70% 14.18% 10.43%

Operating income/Sales 16.61% 18.57% 16.40% 13.84%

Funds from operations/

Ferguson is considering adding asset backed securities to the portfolio and asks Roarke to

compare the rating process for asset backed securities to the rating process for corporate bonds Roarke makes three statements:

Statement 1: Collateral typically plays a much greater role in a securitization’s rating than in a

bond’s rating

Statement 2: In the typical securitization, there are few operational or business risks to consider

relative to those found in a corporation

Statement 3: The servicer’s quality plays a much greater role in determining an asset-backed

security’s rating than the firm’s management quality does for a bond

43 Ferguson’s concern is best described as:

A default risk

B downgrade risk

C credit spread risk

Trang 27

currently-45 Using standard ratio analysis and the balance sheet information in Exhibit 1, the change

in Windmiller’s short-term solvency from 2007 to 2008 is best described as:

A unclear

B improved

C deteriorated

46 What characteristic of Windmiller’s balance sheet most clearly suggests that its debt has

an investment grade rating rather than a junk (high yield) bond rating?

A The level of inventory and its change from 2007 to 2008

B The level of bank loans and its change from 2007 to 2008

C The level of retained earnings and its change from 2007 to 2008

47 Given the information provided in Exhibit 2, the most likely outcome is that Windmiller’s

bonds:

A will be downgraded

B will retain their current rating

C will be placed on negative outlook

48 Which of Roarke’s statements regarding the ratings process is most likely false?

A Statement 1

B Statement 2

C Statement 3

Trang 28

Questions 49 through 54 relate to Derivative Investments

Ravi Baloo Case Scenario

Ravi Baloo is a portfolio manager with Springtree Investments, a U.S.-based asset management firm Baloo is considering using derivatives to enhance returns and manage risk He asks his junior analyst, Thomas Monk, to help him

In Exhibit 1, Monk summarizes the relationship between an increase in the value of each of the listed inputs and the value of a European-style call option, holding all else constant

Exhibit 1 Effect of Increasing Input Values on European Call Option Values

Call Option Value

Volatility of the underlying Increase

Monk wonders about the delta and gamma of a long call option position Monk makes the following statements:

Statement 1: “The delta of an out-of-the-money call moves towards 0 as expiration

approaches even if the price of the underlying does not change

Statement 2: Gamma is smaller when there is more uncertainty about whether the option

will expire in- or out-of-the-money

Statement 3: Delta is a more precise measure of the change in the option’s value when

the gamma of the option is larger.”

Baloo asks Monk to assist him in analyzing the following transactions:

Transaction 1: Arbitrage Strategy on Acuriva Ltd (ACT) Equity Exhibit 2 provides current market prices and data of selected instruments related to ACT equity

Trang 29

currently-Exercise price of options $35.00 Annualized risk-free rate 6.00%

Monk determines that the value of a synthetic call option expiring in 3 months with an exercise price of $35.00 is $2.58

Transaction 2: Purchase of a European put option on Tekvonix (TVX) equity Monk uses a period binomial model to calculate the value of a one-year put option on TVX equity Details of the put option are given in Exhibit 3

one-Exhibit 3 European Put Option on TVX Equity

Time to expiration 1 year

Model predicted up move 15%

Model predicted down move 20%

Annualized risk-free rate 6.00%

Transaction 3: Equity swap to gain exposure to the Russell 2000 index Springtree enters into a two-year equity swap in which it will receive the rate of return on the Russell 2000 Index and will pay a fixed interest rate equal to 4.99 percent The swap has annual payments The Russell

2000 Index is at 757.09 at the beginning of the swap and the notional principal of the swap is

$100 million

Transaction 4: Baloo expects to enter a pay-fixed position in a 4-year interest rate swap in six months He asks Monk to explain how a swaption can be used to protect Springtree from an adverse change in interest rates Monk makes the following statements:

Statement 4: “Springtree should purchase a payer swaption

Statement 5: The swaption fixes the rate that Springtree will pay on its swap

Statement 6: A swaption can be settled in cash at expiration.”

Monk considers a scenario in which the Russell 2000 Index falls to 723.86 in 100 days and the term structure of interest rates is as presented in Exhibit 4

Exhibit 4 Term Structure of LIBOR Interest Rates 100 Days Later

Note: Calculations are on a 360-day basis T = Time to expiration;

(T) = LIBOR rate to time T; (T) = Discount factor of $1 from time

T to the present

Trang 30

Monk states, “The value of this equity swap is the amount of money that is exchanged on the annual payment date.”

49 Which of the relationships shown in Exhibit 1 is incorrect?

51 Baloo’s arbitrage strategy in Transaction 1 should include:

A selling the put option in the market and buying the equity

B selling the put option in the market and shorting the equity

C buying the put option in the market and shorting the equity

52 The value of the one-year put option in Transaction 2 is closest to:

Trang 31

currently-54 Which of the statements Monk makes with respect to Transaction 4 is incorrect?

A Statement 4

B Statement 5

C Statement 6

Trang 32

Questions 55 through 60 relate to Portfolio Management

Maria Mendez Case Scenario

Maria Mendez, CFA, is a research analyst at Three-Star Investment Management Mendez is collecting and analyzing data as part of a project to explain and forecast Three-Star’s portfolio returns using arbitrage pricing theory (APT) Mendez begins by collecting 5 years of monthly data including: 1) surprise in GDP growth (GDP) and 2) surprise in inflation (INF) to use in explaining portfolio returns

Mendez estimates a two-factor APT model and obtains the results shown in Exhibit 1

Exhibit 1 Results – Two-factor APT Model Dependent Variable is the Portfolio Return

Portfolio

Sensitivity to GDP Factor

Exhibit 2 Expected Risk-free Rate and Factor Prices

Risk-free Rate of Return 4.5%

Surprise in GDP Growth 3.0%

Surprise in Inflation –2.5%

Trang 33

currently-Exhibit 3 Results – Active Risk Squared Decomposition Active Factor

Portfolio Industry Risk Indexes Total Factor Active Specific Active Risk

Squared

S

T

10.0 2.0

12.0 26.0

22.0 28.0

14

12

36

85 Note: Entries are percent squared

55 The model estimated in Exhibit 1 is most accurately described as a:

A statistical factor model

B factor sensitivity model

C macroeconomic factor model

56 Given the model estimated in Exhibit 1, the expected return on Portfolio P is closest to:

A 4.40%

B 5.50%

C 6.80%

57 Given the model estimated in Exhibit 1, the expected return on Benoit’s new portfolio

combining Portfolios Q and R is closest to:

Trang 34

59 Based on the analysis reported in Exhibit 3, the most appropriate conclusions regarding

the active risk analysis of the two portfolios is that:

A portfolio S assumed higher total factor risk and active specific risk

B portfolio T had higher active bets on the risk indexes and higher total factor risk

C portfolio S had lower active bets on the risk indexes and lower active specific risk

60 Given the information ratios computed by Mendez, the most appropriate conclusion

regarding the performance of the two portfolios is that, relative to Portfolio S, Portfolio T experienced:

A less active risk

B more risk per unit of return

C superior risk-adjusted performance

Trang 35

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to

currently-2009 Level II Mock Exam: Afternoon Session

The afternoon session of the 2009 Level II Chartered Financial Analyst® Mock Examination has

60 questions To best simulate the exam day experience, candidates are advised to allocate an average of 18 minutes per item set (vignette and 6 multiple choice questions) for a total of 180 minutes (3 hours) for this session of the exam

1-6 Ethical and Professional Standards 18

7-12 Alternative Investments 18

Trang 36

Questions 1 through 6 relate to Ethical and Professional Standards

SMC Case Scenario

Ian Sherman, CFA, is a portfolio manager at SMC, an investment advisory firm which offers investment products and services to individual and institutional clients SMC has adopted the CFA Institute Research Objectivity Standards and implemented policies in compliance with the Standards

All of SMC’s investment professionals have earned CFA charters Sherman tells prospective clients, “The CFA charter is the highest credential in the global investment management

industry As charterholders we are committed to the highest ethical standards Completion of the program has dramatically improved the team’s portfolio management knowledge and their ability to achieve better performance results.”

Sherman has earned a reputation for consistently outperforming the market Over the long run, his mutual funds have outperformed their respective market benchmarks by a wide margin For the past 12 months the funds have slightly underperformed the benchmarks Some clients have noticed that Sherman’s fund performance information has not been updated on the advisor’s website in the past six months When clients inquire about fund performance, Sherman provides them with accurate updated information

Annette Martineau, CFA, works as an analyst for Sherman and presents her recently completed research report and sell recommendation on Muryan Corporation, which is held in one of

Sherman’s funds to SMC’s Investment Committee After much debate about the company and its prospects, the committee reaches a consensus recommendation that is contrary to Martineau’s Martineau informs Sherman, “I accept that the committee’s recommendation has a reasonable basis, but I strongly believe that my recommendation is more appropriate I have been diligent in

my research and have a deeper understanding of the industry and its competitive factors.”

The following week, Martineau prepares for an investment conference, open to the general

public but typically attended only by investment professionals, by reviewing SMC’s policies regarding public appearances The policies state:

Trang 37

currently-dynamics of the target firm She hypothesizes that they would cancel the deal if they did

Concerned that Caruso will eventually cancel the deal, Martineau drafts an updated report and reiterates her sell recommendation on Muryan Since SMCs Investment Committee had

overturned her previous sell recommendation on Muryan she goes into great detail as to why she believes Caruso will not complete the deal She emails the recommendation to Sherman the next afternoon

That evening, Martineau considers what action to take regarding the 5,000 shares of Muryan held

in her husband’s personal account The firm’s policy on personal investments and trading

requires that Martineau receive approval from the compliance department in advance of all trades in securities in subject companies in her assigned industry She is concerned that if

Sherman accepts her recommendation to liquidate all fund holdings of Muryan, the stock price will drop before she receives approval from the compliance department Martineau decides to use derivatives to hedge her husband’s position because these types of trades do not require advance approval from the compliance department

The next morning, on Martineau’s recommendation, Sherman’s trader sells all of SMC’s mutual fund’s entire positions of Muryan for a sizable gain Martineau hedges her husband’s position Several weeks later, as Martineau had hypothesized, Caruso cancels the deal and Muryan’s stock price declines 20 percent Martineau’s derivatives position effectively hedges her husband’s position in the stock

Sherman learns that a wealthy investor in the fund might liquidate his holdings due to doubts about suitability and economic forecasts Sherman carefully reviews the client’s investment objectives, and informs the client, “You should not sell Our fund is still suitable for you You have been invested with us throughout the past 12 years and I urge you to continue to stay fully invested I was just looking at the investment record of a former client who happens to be a relative of mine, Karoll Reeves, who has traded in and out of our funds during that same period Her returns have badly lagged yours.” The client elects to maintain his holdings in Sherman’s fund

A month later, Martineau leaves SMC and starts the Galaxy hedge fund with Anjali Shah as her partner The first client to commit to the hedge fund instructs the Galaxy partners to direct its trades through RLB Securities RLB charges higher-than-average fees, but provides some

unique informational services to investors In return for receiving Galaxy’s trading business, RLB promises to refer potential clients to Galaxy Shah tells Martineau “A larger client base will create economies of scale and will eventually allow Galaxy to lower its expenses for all clients.” Martineau agrees She and Shah explain the directed brokerage arrangement carefully

to prospective clients They require each client to sign a statement that reads, “It is not necessary for Galaxy to seek best price and execution, and I am aware of the consequence for my account

I consent to Galaxy’s trades being executed by RLB Securities.”

Trang 38

1 In which of the following actions does Sherman most likely comply with the requirements

and recommendations of the CFA Institute Standards of Professional Conduct? When he:

A references the CFA program and designation

B provides performance information on the advisor’s website

C references the enhanced portfolio management skills of his team

2 According to CFA Institute Standards, Martineau’s best immediate course of action

regarding her initial research report and recommendation on Muryan is to:

A leave her name on the report and take no further action

B leave her name on the report and document her difference of opinion

C issue her own independent recommendation since she has a reasonable basis

3 Which of SMC’s policies regarding public appearances is least likely consistent with both

the requirements and recommendations of the CFA Institute Research Objectivity

Standards?

A Statement 1

B Statement 2

C Statement 3

4 Martineau’s actions regarding her husband’s account most likely violate the CFA Institute

Research Objectivity Standards because she:

A did not receive advance approval from the compliance department for trades in her assigned industry

B trades within the restricted trading period of at least 5 calendar days prior to and after issuing a research report

C should seek to ensure that trades for immediate family members are not done in advance of or disadvantage investing clients

Trang 39

currently-6 Which of the following actions correctly states why Martineau’s relationship with RLB

Securities would most likely violate CFA Institute Standards?

A Galaxy is prohibited from referring brokers to any client

B Galaxy fails to explain the consequences of average quality execution

C Galaxy should trade client accounts through RLB only if the accounts receive best price and execution

Trang 40

Questions 7 through 12 relate to Alternative Investments

Lundberg Case Scenario

John Lundberg, CFA, is a fixed income manager who is talking to a potential client, Brandy Wing, about asset backed bonds

Wing: I am new to asset backed securities (ABS) and given all of the problems lately with these securities I am trying to figure out who the players are Excluding third parties, who is primarily involved in the securitization?

Lundberg: The three main parties to the transaction are the seller or originator, the servicer, and the insurer

Wing: Can you explain the different characteristics of amortizing and non-amortizing assets in securitizations?

Lundberg: Amortizing assets require periodic payments of principal and interest, while amortizing assets’ periodic payments consist solely of the interest due Collateral for secured amortizing assets does not change in composition, but the composition of collateral for secured non-amortizing assets does change All principal repayments from the collateral are distributed

non-as received to the security holders for amortizing non-assets, but only after the lockout period for non-amortizing assets

Wing: Can you explain credit tranching?

Lundberg: The benefit of credit tranching is that defaults are absorbed by the subordinate

tranche, but any subsequent prepayments are distributed to that tranche in order to recover the loss

Wing: For many years I have invested in muni bonds and would like a bond with credit

enhancement

Lundberg: With an ABS, you have three forms of protection available Insurance provides for

Định dạng
Số trang	179
Dung lượng	1,69 MB