Free CFA® Level 1 Exam Questions and Answers

A researcher runs 10,000 Monte Carlo trials to estimate the probability that a portfolio will lose more than 15% in a year. Out of the 10,000 trials, 340 show a loss greater than 15%. The estimated probability of a loss exceeding 15% is:

• AA. 3.40%
• BB. 34.0%
• CC. 0.34%

In hypothesis testing, a Type I error occurs when:

• AA. The null hypothesis is not rejected when it is actually false
• BB. The null hypothesis is rejected when it is actually true
• CC. The test statistic falls within the acceptance region and the null is true

An analyst applies PCA to 20 macroeconomic variables. The first principal component explains 45% of total variance, and the second explains 22%. Which statement about using PCA in this analysis is most accurate?

• AA. All 20 principal components should be retained in the model to avoid any potential loss of explanatory information in the original dataset.
• BB. The first two components capture 67% of total variance and can substantially reduce dimensionality while retaining most information.
• CC. PCA is generally inappropriate for this application because macroeconomic variables are typically not normally distributed in practice.

Marisol opens a margin account and purchases 1,000 shares of Tregaron Industries at $80.00 per share. The initial margin requirement is 60%, and her broker charges 5.5% annual interest on the margin loan. Over the next 12 months, Tregaron pays a single dividend of $1.20 per share, and Marisol sells all shares at $96.00 per share. Her marginal tax rate is 24%. Marisol's leveraged (pre-tax) holding-period return on equity for the 12-month period is closest to:

• AA. 35.8%
• BB. 32.2%
• CC. 29.7%

The price of Product X rises from $50.00 to $55.00, and the quantity demanded per week falls from 200 units to 184 units. Using the simple percent-change method, the own-price elasticity of demand for Product X is closest to:

• AA. +0.80
• BB. -0.80
• CC. -1.25

A leading economic indicator is best described as a variable that:

• AA. Tends to change direction before the overall economy changes direction
• BB. Changes direction after the overall economy has already turned
• CC. Changes direction at the same time as the overall economy

A country that imposes an import quota on steel will most likely experience:

• AA. No change in domestic steel prices if the quota is set above current import levels
• BB. Higher domestic steel prices and increased domestic steel production
• CC. Lower domestic steel prices due to reduced demand for steel

Banks in Avoral are required to hold reserves equal to 8% of deposits. In addition, banks voluntarily hold excess reserves equal to 2% of deposits as a precautionary buffer. Households and firms hold currency outside the banking system equal to 20% of deposits (the currency-to-deposit ratio). The central bank conducts an open-market purchase of $2 billion in government securities directly from commercial banks, expanding the monetary base by that amount. Assuming the banking system fully utilizes its lending capacity and the currency and reserve ratios remain stable, the maximum eventual increase in the broad money supply (currency plus deposits) is closest to:

• AA. $6.7 billion
• BB. $8.0 billion
• CC. $20.0 billion

According to the pecking order theory of capital structure, when a profitable firm requires external financing for a new project, it will most likely prefer:

• AA. issuing new equity before issuing debt.
• BB. issuing convertible securities before either straight debt or equity.
• CC. issuing debt before issuing new equity.

A company has a cost of equity of 12%, a before-tax cost of debt of 6%, a marginal tax rate of 25%, and a target debt-to-capital ratio of 40%. The company's WACC is closest to:

• AA. 9.6%
• BB. 9.0%
• CC. 9.0% if the firm uses book-value weights instead of market-value weights