CFA Level 2 Mock Exam

300Hours.com​ ​300Hours: CFA Level 2 Mock Exam​ ​ his Chartered Financial Analyst (CFA®) Mock Exam has 44 item set questions, courtesy of Salt​ T ​Solutions.​ ​ o best simulate the exam day experience, candidates are advised to allocate a total of 2 hours​ T ​12 minutes for this session of the exam.​ ​ nce completed, please submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ O ​performance benchmark and answer explanations.​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​1​ ​300Hours.com​ ​Questions 1-4 relate to Equity Investments.​ ​ ngelica Markham, a technology sector analyst with Biltmore Investments, has prepared a​ A ​report covering the current state of the industry. The report covers three of the industry’s leading​ ​firms: Consort Technologies (CST), Regal Industries (RGI), and Flintoff Computers (FTC).​ ​ oth companies have sustainable dividend policies. The board of directors for RGI has​ B ​established and adheres to a policy of retaining 40% of earnings. By contrast, CST's board seeks​ ​to achieve a pattern of increasing dividends by the same absolute amount each year, resulting in​ ​a fluctuating dividend payout ratio. Markham chooses to use a dividend discount model to value​ ​both companies.​ ​ GI posted earnings of $1.10 last year and both colleagues are expecting the company to pay a​ R ​dividend of $0.75 per share next year. Markham estimates the stock’s beta to be 0.95. The​ ​risk-free rate is 4.0% and there is a 6.0% market risk premium.​ ​ o value FTC, Markham chooses the Gordon growth model, citing the following advantages of​ T ​this method in her report:​ -​ Advantage 1: "The Gordon growth model can be used to value companies with negative​ ​dividend growth rates."​ -​ Advantage 2: "No other dividend discount model can be used to infer an implied dividend​ ​growth rate."​ ​ arkham gathers the data required as inputs for the Gordon growth model valuation. FTC​ M ​shares are currently trading at $88.60 and paid a dividend of $5.46 per share from earnings of​ ​$8.40 last year. The company is expected to maintain a 35% retention rate while paying a $5.72​ ​dividend next year. Investors require an 11% return on equity.​ ​1. Markham's use of the dividend discount model is​​most likely​​:​ ​ .​ a A ​ ppropriate for both CST and RGI.​ ​B.​ ​appropriate for CST and inappropriate for RGI.​ ​C.​ ​inappropriate for CST and appropriate for RGI.​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​2​ ​300Hours.com​ ​2. RGI's no-growth value per share is​​closest​​to:​ ​ .​ $ A ​ 7.73.​ ​B.​ ​$11.34.​ ​C.​ ​$12.89.​ ​ . What is the​​most​​accurate assessment of the Gordon growth model's advantages as​ 3 ​identified by Markham?​ ​ .​ A A ​ dvantage 1 and Advantage 2 are both correct​ ​B.​ ​Advantage 1 is correct and Advantage 2 is incorrect​ ​C.​ ​Advantage 1 is incorrect and Advantage 2 is correct​ ​ . Given the market's expectations, the per share present value of FTC's growth opportunities​ 4 ​implied by its current price is​​closest​​to:​ ​ .​ $ A ​ 8.60.​ ​B.​ ​$12.24.​ ​C.​ ​$36.60.​ ​Questions 5-8 relate to Fixed Income.​ ​ reg Tallon, a junior fixed-income analyst with Polestar Investments, has been asked to forecast​ G ​the term structure of interest rates over the next two years. He arranges a meeting with Lynne​ ​Aubrey, a senior analyst who has significant experience with various term structure models.​ ​ t the beginning of the meeting, Tallon explains that he has not yet chosen a model, but he has​ A ​narrowed his options down to the Vasicek model and the Cox-Ingersoll-Ross (CIR) model.​ ​During their conversion, Aubrey makes the following comparisons of these two models:​ -​ Comparison 1: "Both models assume that all yield curve movements are attributable to a single​ ​observable factor."​ -​ Comparison 2: "Both models use the same drift term, but the Vasicek model includes multiple​ ​stochastic drivers."​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​3​ ​300Hours.com​ -​ Comparison 3: "Both models must be parameterized to produce bond prices that match​ ​current market prices."​ ​ allon decides to use the CIR model after hearing Aubrey list some of its advantages relative to​ T ​the Vasicek model.​ ​5. Aubrey's claim in Comparison 1 is​​most likely​​:​ ​ .​ ​correct.​ A ​B.​ ​incorrect with respect to the Vasicek model only.​ ​C.​ ​incorrect with respect to both the Vasicek model and the CIR model.​ ​6. Aubrey's claim in Comparison 2 is​​most likely​​:​ ​ .​ ​correct.​ A ​B.​ ​incorrect with respect to the drift term.​ ​C.​ ​incorrect with respect to stochastic drivers.​ ​7. Aubrey's claim in Comparison 3 is​​most likely​​:​ ​ .​ ​correct.​ A ​B.​ ​incorrect with respect to the CIR model only.​ ​C.​ ​incorrect with respect to both the Vasicek model and the CIR model.​ ​8. Compared to the Vasicek model, the​​most likely​​advantage of the CIR model is that it:​ ​ .​ c A ​ an derive prices for interest rate options.​ ​B.​ ​avoids the possibility of negative interest rates.​ ​C.​ ​models the curvature of the yield curve more accurately.​ ​Questions 9-12 relate to Ethical and Professional Standards.​ ​ ason Fung, CFA is an investment advisor with Terramark Securities. In addition to his work with​ J ​Terramark, Fung serves in a volunteer capacity on the board of the Diamond Foundation, which​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​4​ ​300Hours.com​ ​ rovides scholarships for underprivileged children. He has not disclosed his work with the​ p ​Diamond Foundation to his supervisor because the time commitment is manageable and the​ ​nature of his volunteer work does not conflict with his duties at Terramark. Aware that many of​ ​his clients make regular charitable donations, Fung includes a brief announcement of the​ ​Diamond Foundation’s annual fundraising campaign in his latest newsletter for clients.​ ​ ung has been considering leaving Terramark to open his own firm. He arranges to go to lunch​ F ​with Rita Hay, who he worked with closely at Terramark before she retired three years ago. After​ ​listening to Fung’s plans, Hay mentions that she has not paid her CFA Institute membership​ ​dues in either of the past two years. Although she continues to include the letters “CFA” after her​ ​name in the signature that she uses for her personal email account, she does not present​ ​herself as an active member of CFA Institute in conversations with financial professionals.​ ​ pon returning to the office after his lunch with Hay, Fung receives a call from David Hawking,​ U ​the Diamond Foundation's CEO, informing him that a member of its investment committee has​ ​taken a one-year leave of absence from the position after being diagnosed with an illness.​ ​Hawking asks Fung if he can fill this role on an interim basis and assures him that the time​ ​commitment will not be burdensome - he will only be expected to attend one weekend of​ ​meetings per quarter to discuss and vote on the foundation's investment strategy. In the past,​ ​investment committee members have received tablet computers as gifts from one of the​ ​foundation's benefactors as an expression of appreciation for their service. Fung accepts​ ​Hawking's offer on the condition that he will not receive any kind of payment or other​ ​consideration that may be given to other members of the investment committee. Fung does not​ ​disclose his revised role with the Diamond Foundation to his supervisor at Terramark.​ ​ hree months later, Fung decides to form Fung Capital Partners. After leaving Terramark on​ T ​good terms with his former employer, he authorizes the printing of some marketing materials​ ​and arranges for these to be distributed to prospective clients. Rita Hay receives these materials​ ​and notices that Fung’s performance with Terramark has been misstated. Hay informs Fung,​ ​who verifies that the version of the materials that he approved contained inaccurate​ ​information.​ ​ ung contacts the owner of the printing house, who accepts responsibility for the error. Fung​ F ​ceases distribution of all materials in which his performance is misstated and orders the​ ​printing and distribution of new materials that contain accurate information to all prospective​ ​clients who have not already received the marketing materials. Other than this correction, the​ ​new materials are identical to those that have already been distributed.​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​5​ ​300Hours.com​ ​ . Has Fung​​most likely​​violated the Standards by including information about the Diamond​ 9 ​Foundation’s fundraising campaign in the newsletter sent to his clients?​ ​ .​ N A ​ o​ ​B.​ ​Yes, with respect to preservation of confidentiality​ ​C.​ ​Yes, with respect to communication with clients and prospective clients​ ​10. Which of the following statements is​​most​​accurate? Hay has:​ ​ .​ v​ iolated the Standards by using the CFA designation in her email signature.​ A ​B.​ ​violated the Standards by failing to pay her membership dues on a timely basis.​ ​C.​ ​not violated the Standards because she does not present herself as an active member of​ ​CFA Institute in conversations with financial professionals.​ ​ 1. Has Fung​​most likely​​violated the Standards with respect to his work for the Diamond​ 1 ​Foundation?​ ​ .​ N A ​ o​ ​B.​ ​Yes, regarding disclosure of conflicts only​ ​C.​ ​Yes, regarding both disclosure of conflicts and additional compensation arrangements​ ​ 2. In responding to the distribution of marketing materials that have misstated his​ 1 ​performance, does Fung​​most likely​​violate the Standards?​ ​ .​ Y A ​ es​ ​B.​ ​No, because the owner of the printing house has accepted responsibility for the error​ ​C.​ ​No, because he has ordered the distribution of new materials that contain correct​ ​information​ ​Questions 13-16 relate to Quantitative Methods.​ ​ mma Bratton, a technical analyst with a macroeconomic consulting firm, is attempting to​ E ​forecast gross domestic product for the nation of Contador. Based on her view that the​ ​country's economy is heavily influenced by external trade, Bratton has formulated a linear​ ​regression model that uses exports as a share of GDP (EXP) and imports as a share of GDP​ ​(IMP) as independent variables to explain the variance of the country’s GDP growth rate (GDP).​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​6​ ​300Hours.com​ ​ ratton has collected quarterly data for a 40-year period dating back to before Contador entered​ B ​a Regional Free Trade Agreement (RFTA). In the years after joining the RFTA, Contador's​ ​economy changed significantly as domestic producers were forced to operate more efficiently​ ​in the face of increased international competition.​ I​n a call with one of her fellow analysts, Richard Whaley, Bratton mentions that she has used​ ​several tests to determine if her model adheres to the linear regression assumptions. She​ ​specifically mentions that she has used the Durbin-Watson test to assess whether her model​ ​exhibits serial correlation. Whaley notes that the Durbin-Watson test has a significant limitation​ ​and urges Bratton to use an alternative test, adding: “The Breusch-Pagan test is a one-tailed,​ ​right-sided test that can be used to determine the presence of serial correlation.”​ ​ ratton also tells Whaley that she is considering whether to refine her model by adding net​ B ​exports as a share of GDP (NEX) as a third independent variable. Whaley cautions Bratton that​ ​this addition would violate one of the linear regression assumptions.​ ​ 3. Bratton's use of a dataset that includes periods before and after Contador's entry into the​ 1 ​RFTA is​​most likely​​to result in misspecified functional form due to inappropriate:​ ​ .​ p A ​ ooling of data.​ ​B.​ ​form of variables.​ ​C.​ ​scaling of variables.​ ​14. A key limitation of the Durbin-Watson test is​​most likely​​that it:​ ​ .​ c A ​ annot be used to detect negative serial correlation.​ ​B.​ ​can only be used to detect first-order serial correlation.​ ​C.​ ​can only be used if the dependent variable is a lagged value of the independent variable.​ ​15. Is Whaley’s description of the Breusch-Pagan test​​most likely​​correct?​ ​ .​ Y A ​ es​ ​B.​ ​No, because the Breusch-Pagan test is two-sided​ ​C.​ ​No, because the Breusch-Pagan test is used to test for heteroskedasticity​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​7​ ​300Hours.com​ ​ 6. By adding the NEX variable to her model, Bratton would *most likely* violate the regression​ 1 ​assumption with respect to:​ ​ .​ H A ​ omoskedastic error terms​ ​B.​ ​Independence of observations​ ​C.​ ​Independence of independent variables​ ​Questions 17-20 relate to Derivatives.​ ​ elissa Stone is a pricing analyst at a hedge fund called Volatility Partners, LLP which​ M ​specializes in trading liquid options. Stone works with her colleague, Gregory Park, who has​ ​created Black-Scholes-Merton (BSM) models of options within spreadsheets.​ ​ efore delving into specific details, Park asks Stone to identify some of the assumptions on​ B ​which the BSM model is based. Stone states the following list:​ -​ Assumption 1: Short selling the underlying asset is prohibited​ ​- Assumption 2: The options allow for early exercise​ ​- Assumption 3: The continuous percentage change in the price of the underlying asset is​ ​normally distributed​ ​ tone informs Park that only one of these assumptions is consistent with the assumptions of​ S ​the BSM model. After Park corrects his models to reflect the correct assumptions supporting​ ​the BSM model, Stone asks him to value call and put options based on the shares of Acme​ ​Technologies. As a relatively young company, Acme has not yet paid any dividends to​ ​shareholders.​ ​Exhibit 1: Data used to price options on Acme’s stock​ ​Price of underlying​ ​168.54​ ​Exercise price​ ​168.00​ ​Risk-free rate​ ​2.06%​ ​Volatility​ ​18.43%​ ​Years to expiration​ ​0.5437​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​8​ ​300Hours.com​ ​d​1​ ​ ​0.1740​ ​N(d​​1​)​ ​ ​0.5691​ ​N(-d​​1​​)​ ​0.4309​ ​d​2​ ​ ​0.0381​ ​N(d​​2​)​ ​ ​0.5152​ ​N(-d​​2​​)​ ​0.4848​ ​ ased on her analysis of Acme's performance in recent years, Stone believes that the company​ B ​may begin paying a regular dividend. She asks Park how his BSM models would differ for Acme​ ​if they assumed a 1% annual dividend rate for its underlying stock.​ ​ olatility Partners also trades options on futures, interest rate options, and swaptions, which​ V ​requires the firm to apply the Black option valuation model.​ ​ tone asks Park to value call options on futures of the Total Technology Index (TTI), of which​ S ​Acme is a component. Park provides the following data on TTI futures expiring in six months.​ ​Exhibit 2: Data used to price options on TTI futures​ ​Spot price of underlying​ ​8,954​ ​Price of six-month futures​ ​9,013​ ​Exercise price​ ​8,904​ ​Risk-free rate​ ​2.06%​ ​Sigma​ ​Years to expiration​ ​15%​ ​0.5​ ​N(d​​1​)​ ​ ​0.5667​ ​N(d​​2​)​ ​ ​0.5246​ ​N(-d​​1​​)​ ​0.4333​ ​N(-d​​2​​)​ ​0.4754​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​9​ ​300Hours.com​ ​ 7. Which of the assumptions stated by Stone is​​most likely​​consistent with the assumptions of​ 1 ​the BSM model?​ ​ .​ A A ​ ssumption 1​ ​B.​ ​Assumption 2​ ​C.​ ​Assumption 3​ ​ 8. Assuming that Acme continues to not pay dividends, the initial trading strategy that​​most​ 1 ​likely​​replicates the payoff of a put option is to:​ ​ .​ b A ​ uy 0.4309 units of stock and short sell 0.5152 units of zero-coupon bonds.​ ​B.​ ​short sell 0.4309 units of stock and buy 0.4848 units of zero-coupon bonds.​ ​C.​ ​short sell 0.5691 units of stock and buy 0.5152 units of zero-coupon bonds.​ ​ 9. Assuming that the dividend yield for Acme stock is 1%, which of the following statements is​ 1 ​most​​accurate? The BSM model call value is the:​ ​ .​ s A ​ tock price times e​​–rT​ ​N(d​​1​​) minus the exercise price times e​​–0.01T​​N(d​​2​)​ .​ ​B.​ ​stock price times e​​–0.01T​ ​N(d₁) minus the exercise price times e⁻ʳᵀ N(d₂).​ ​C.​ ​stock price times e​​–0.01T​ ​N(–d​​1​)​ minus the exercise price times e​​–rT​​N(–d​​2​​).​ ​ 0. Which of the following statements about how the Black model is used to value a call option​ 2 ​on a TTI futures contract is​​most​​accurate? The call value is the present value of the difference​ ​between:​ ​ .​ t​ he exercise price times 0.4333 and the spot price times 0.5667.​ A ​B.​ ​the futures price time 0.5667 and the exercise price times 0.4333.​ ​C.​ ​the futures price times 0.5667 and the exercise price times 0.5246.​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​10​ ​300Hours.com​ ​Questions 21-24 relate to Financial Statement Analysis.​ ​ ountiful Produce (BTP) is a Chicago-based food distributor with operations that span North​ B ​America. The company prepares its financial statements in accordance with US GAAP.​ ​ arole Thiessen, BTP's Chief Financial Officer, has been overseeing the company's acquisition of​ C ​Ullman Farms (ULF). According to the terms of the deal, BTP will pay $160 million for 80% of​ ​ULF's outstanding shares. Both companies' balance sheets are shown below.​ ​Exhibit 1: Balance sheets​ ​BTP​ ​ULF​ ​Cash​ ​$10,000,000​ ​$3,200,000​ ​Accounts receivable​ ​$25,000,000​ ​$7,500,000​ ​Other current assets​ ​$38,000,000​ ​$18,600,000​ ​$520,000,000​ ​$184,000,000​ ​$17,000,000​ ​$11,000,000​ ​$610,000,000​ ​$224,300,000​ ​$42,000,000​ ​$12,700,000​ ​Long-term debt​ ​$265,000,000​ ​$56,300,000​ ​Total liabilities​ ​$307,000,000​ ​$69,000,000​ ​Capital stock​ ​$140,000,000​ ​$102,800,000​ ​Retained earnings​ ​$163,000,000​ ​$52,500,000​ ​Total equity​ ​$303,000,000​ ​$155,300,000​ ​Total liabilities and equity​ ​$610,000,000​ ​$224,300,000​ ​PP&E (net)​ ​Other non-current assets​ ​Total assets​ ​Current liabilities​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​11​ ​300Hours.com​ ​ hrough the due diligence process, Thiessen has learned that ULF's other current assets have a​ T ​fair value of $22.1 million and that the fair value of the target company's net PP&E is currently​ ​$194.5 million. All other assets and liabilities are currently being carried at fair value.​ ​ erman Ebbing has recently joined BTP after working for several years with a food distributor​ H ​based in Germany. Ebbing's former employer adheres to IFRS and he has closely studied the​ ​differences between the two sets of accounting standards since moving to the United States.​ ​Thiessen has asked Ebbing to analyze the deal. Ebbing's report for Thiessen includes the​ ​following notes:​ -​ Note 1: "BTP would be required to use the acquisition method when accounting for the ULF​ ​transaction under both IFRS and US GAAP."​ -​ Note 2: "All else equal, even if BTP had used the partial goodwill method to account for the​ ​non-controlling interest in ULF, the total book value shareholders' equity for the consolidated​ ​entity would be the same as it was with the full goodwill method."​ -​ Note 3: "Even after BTP completes this acquisition, ULF will continue to issue its own separate​ ​financial reports."​ ​21. The amount of goodwill to be recognized by BTP is​​most​​accurately described as:​ ​ .​ U A ​ LF's fair value less the fair value of its identifiable assets.​ ​B.​ ​ULF's fair value less the fair value of its identifiable net assets.​ ​C.​ ​the amount paid by BTP less the fair value of ULF's identifiable net assets.​ ​22. Is Ebbing's claim in Note 1​​most likely​​correct?​ ​ .​ Y A ​ es​ ​B.​ ​No, because the purchase method is permitted under US GAAP and IFRS​ ​C.​ ​No, because the pooling of interests method is permitted under US GAAP​ ​23. Is Ebbing's claim in Note 2​​most likely​​correct?​ ​ .​ Y A ​ es​ ​B.​ ​No, because equity would be higher under the full goodwill method​ ​C.​ ​No, because equity would be higher under the partial goodwill method​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​12​ ​300Hours.com​ ​24. Is Ebbing's claim in Note 3​​most likely​​correct?​ ​ .​ Y A ​ es​ ​B.​ ​No, because ULF will cease to be a distinct legal entity​ ​C.​ ​No, because ULF's financial performance will be reported as part of BTP's consolidated​ ​financial statements​ ​Questions 25-28 relate to Corporate Issuers.​ ​ arcus Sundstrom is a Stockholm-based consultant specializing in environmental, social, and​ M ​governance (ESG) matters. His clients, mostly institutional investors, seek his advice on how to​ ​incorporate ESG considerations into their traditional analytical methods.​ ​ ue to a series of corporate scandals, governance issues have become a popular topic in​ D ​Sweden's financial press. A recent newspaper article on how shareholders are seeking to​ ​influence the ESG practices of companies in which they have invested included the following​ ​comment from Sundstrom: "Mutual funds and private equity firms are both examples of​ ​institutional investors that are willing to take controlling positions and work to influence a target​ ​company's corporate governance policies."​ ​ undstrom's frequent media appearances have earned him a reputation as an expert and he​ S ​was asked to advise a committee of elected officials who are considering updates to Sweden's​ ​corporate governance law. The proposed legislation would impact every business in the country,​ ​from family-owned operations to multinational corporations. Sundstrom’s first major​ ​recommendation to the committee was to implement measures that would reduce the potential​ ​for principal-principal problems to arise.​ ​ hile discussing the sections of the law covering family-owned companies, Sundstrom notes​ W ​that this ownership structure's drawbacks include poor transparency, a high potential for​ ​principal-agent problems, and difficulty attracting talented managers.​ ​ he legislative committee is also considering changes to the governance of state-owned​ T ​enterprises (SOEs). While discussing the mixed-ownership model, Sundstrom makes the​ ​following statements:​ -​ Statement 1: "Because they are perceived to be less of a bankruptcy risk, SOEs typically receive​ ​less market scrutiny than other corporate ownership models."​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​13​ ​300Hours.com​ ​- Statement 2: "SOEs have a tendency to pursue objectives at the expense of shareholder value."​ ​25. Is Sundstrom's comment in the newspaper article​​most likely​​correct?​ ​ .​ Y A ​ es​ ​B.​ ​No, because mutual funds do not typically take controlling positions​ ​C.​ ​No, because private equity firms do not typically influence corporate governance policies​ ​26. The principal-principal problem is​​least likely​​to emerge due to the combination of:​ ​ .​ d A ​ ispersed ownership and concentrated voting.​ ​B.​ ​concentrated ownership and dispersed voting.​ ​C.​ ​concentrated ownership and concentrated voting.​ ​ 7. Sundstrom's assessment of the family ownership model is​​least likely​​correct with respect​ 2 ​to:​ ​ .​ t​ ransparency.​ A ​B.​ ​attracting managerial talent.​ ​C.​ ​the potential for principal-agent problems.​ ​ 8. What is the​​most​​accurate assessment of Sundstrom's statements about the​ 2 ​mixed-ownership model?​ ​ .​ S A ​ tatement 1 and Statement 2 are both correct​ ​B.​ ​Statement 1 is correct and Statement 2 is incorrect​ ​C.​ ​Statement 1 is incorrect and Statement 2 is correct​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​14​ ​300Hours.com​ ​Questions 29-32 relate to Economics.​ ​ aroline Taylor has recently joined North Pacific National Bank (NPNB) in Tokyo as an analyst in​ C ​its currency trading department. Working with a team of analysts, she is required to identify and​ ​execute profitable trading opportunities in the foreign exchange market as well as to advise​ ​clients on foreign exchange risk management.​ ​ aylor has gathered the following data for the US dollar (USD), euro (EUR), Japanese yen (JPY),​ T ​as well as the Coaldavian dollar (COD), which is used in the emerging market country of​ ​Coaldavia.​ ​Exhibit 1: Interest Rate Data​ ​Currency​ ​1-year LIBOR​ ​(Real)​ ​1-year LIBOR​ ​(Nominal)​ ​USD​ ​1.50%​ ​2.25%​ ​JPY​ ​1.25%​ ​1.50%​ ​EUR​ ​1.00%​ ​1.50%​ ​COD​ ​9.50%​ ​12.00%​ ​Exhibit 2: Spot Exchange Rate Data​ ​JPY/USD​ ​101.50​ ​USD/EUR​ ​1.10​ ​JPY/EUR​ ​111.65​ ​COD/USD​ ​20.75​ ​ aylor also reviews the minutes from the monetary policy committees of the Bank of Japan​ T ​(BOJ) and the US Federal Reserve. Based on her assessment of these documents, Taylor​ ​expects that the BOJ is likely to pursue an expansionary monetary policy whereas the US​ ​Federal Reserve is expected to follow a restrictive monetary policy. Additionally, the Japanese​ ​government is expected to reduce its respective budget deficit, while the US government is likely​ ​to see its budget deficit increase in the next year. Capital flows between the US and Japan are​ ​highly mobile.​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​15​ ​300Hours.com​ ​ aylor is considering a carry trade transaction that would involve borrowing Japanese yen and​ T ​investing at the higher COD LIBOR rate for one year. She expects that the COD/USD spot rate will​ ​be 21.25 in one year, while the JPY/USD spot rate will be 100.75 at that time.​ ​ 9. Assuming that uncovered interest parity holds, the expected change in the USD/EUR spot​ 2 ​rate over the next year will be​​closest​​to:​ ​ .​ 0 A ​ .50%.​ ​B.​ ​0.75%.​ ​C.​ ​1.25%.​ ​ 0. Assuming that covered interest rate parity holds, the 1-year JPY/EUR forward rate will be​ 3 ​closest​​to:​ ​ .​ 1 A ​ 11.37.​ ​B.​ ​111.65.​ ​C.​ ​111.93.​ ​ 1. According to the Mundell-Flemming model, what impact will Taylor’s expected monetary and​ 3 ​fiscal policies​​most likely​​have on the JPY/USD exchange rate?​ ​ .​ T A ​ he JPY/USD rate will increase​ ​B.​ ​The JPY/USD rate will decrease​ ​C.​ ​The impact of this combination of policies on the USD/JPY rate is indeterminate​ ​ 2. Based on Taylor’s forecast, the one-year all-in expected profit from the carry trade for COD in​ 3 ​JPY is​​closest​​to:​ ​ .​ 4 A ​ .88%.​ ​B.​ ​7.05%.​ ​C.​ ​8.55%.​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​16​ ​300Hours.com​ ​Questions 33-36 relate to Alternative Investments.​ ​ rystal Jefferson, a high-net-worth investor, is seeking to increase her portfolio's exposure to​ C ​real estate. She has arranged a meeting with her investment advisor, Ken Kilmarnock, to discuss​ ​which real estate investment opportunities are aligned with her overall objectives and​ ​constraints. Specifically, Jefferson has expressed an interest in the potential diversification​ ​benefits of adding real estate investments to a traditional portfolio of stocks and bonds.​ ​ ilmarnock begins the meeting by stating that real estate investments can be organized into a​ K ​quadrant with axes for the type of vehicle (public vs. private) as well as the nature of the​ ​position (debt vs. equity). He notes that the public real estate debt quadrant can be used as a​ ​source of stable cash flows, adding: “There are several investment vehicles in this quadrant,​ ​including commercial mortgage-backed securities (CMBS) and covered bonds.”​ ​ ext, Kilmarnock provides the following list of real estate investment vehicles for Jefferson to​ N ​consider:​ -​ Vehicle A: A limited partnership in a real estate fund​ ​- Vehicle B: Shares of publicly traded REITs​ ​- Vehicle C: Shares of publicly traded REOCs​ ​ owever, he advises Jefferson of the following disadvantages of choosing Vehicle B over​ H ​Vehicle C:​ -​ Disadvantage 1: REOCs offer less potential for capital appreciation​ ​- Disadvantage 2: Distributions to REOC investors are net of corporate-level taxation​ ​ efferson raises the issue of choosing an index to serve as a benchmark for her real estate​ J ​investments. Kilmarnock notes that real estate indexes may be appraisal-based or​ ​transaction-based. He goes on to make the following comments:​ -​ Comment 1: “All transaction-based indexes require data from multiple sales of the same​ ​properties.”​ ​- Comment 2: “Compared to appraisal-based indexes, transaction-based indexes are noisier,​ ​which results in lower Sharpe ratios.”​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​17​ ​300Hours.com​ ​33. Kilmarnock’s statement with respect to public real estate debt vehicles is​​most likely​​:​ ​ .​ ​correct.​ A ​B.​ ​incorrect with respect to covered bonds only.​ ​C.​ ​incorrect with respect to both covered bonds and CMBS.​ ​34. Vehicle A​​most likely​​offers Jefferson the opportunity to invest:​ ​ .​ ​directly in private real estate equity.​ A ​B.​ ​indirectly in private real estate equity.​ ​C.​ ​indirectly in publicly traded real estate equity.​ ​35. Which of the disadvantages listed by Kilmarnock is​​most likely​​correct?​ ​ .​ D A ​ isadvantage 1 and Disadvantage 2 are both correct​ ​B.​ ​Disadvantage 1 is correct and Disadvantage 2 is incorrect​ ​C.​ ​Disadvantage 1 is incorrect and Disadvantage 2 is correct​ ​ 6. What is the​​most​​accurate assessment of Kilmarnock’s comments about real estate​ 3 ​indexes?​ ​ .​ O A ​ nly Comment 1 is correct​ ​B.​ ​Only Comment 2 is correct​ ​C.​ ​Comment 1 and Comment 2 are both correct​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​18​ ​300Hours.com​ ​Questions 37-40 relate to Portfolio Management.​ ​ ail Forster, an investment advisor with Pastoral Securities, is preparing for her annual meeting​ G ​with her client Patrick Gilligan. Based on her analysis of Gilligan's investment policy statement​ ​and his current portfolio allocation, Forster believes that exchange-traded funds (ETFs) could​ ​help her client achieve his objectives.​ ​ s a relatively new investor, Gilligan is unfamiliar with ETFs. In particular, he wants to know​ A ​more about the process that is used to create these funds. Forster explains that the creation​ ​process involves an in-kind exchange between the ETF sponsor and authorized participants​ ​(APs) who make markets in the underlying stocks. Asked to explain which party covers the fee​ ​associated with these transactions, Forster responds: "The authorized participant pays the​ ​trading costs associated with buying what is called a creation basket as well as the processing​ ​fees related to creation activities."​ ​ orster recommends that Gilligan use levered ETFs to meet certain specific investment​ F ​objectives. However, she informs her client about two features of these types of funds. First,​ ​levered ETFs are more likely than standard equity ETFs to rely on cash transactions in the​ ​creation process. Second, levered ETFs have the greatest exposure to counterparty risk among​ ​all exchange-traded products.​ ​ illigan is concerned that levered ETFs use swaps and he asks his advisor if mutual funds​ G ​would be a less risky vehicle for him to use. Forster explains that both mutual funds and ETFs​ ​may also use swaps to gain exposure to certain risk factors. However, unlike mutual funds,​ ​ETFs that use swaps are required to publish full details about the terms and counterparties on a​ ​daily basis.​ ​37. Is Forster's description of the fees paid during the ETF creation process​​most likely​​correct?​ ​ .​ Y A ​ es​ ​B.​ ​No, because the ETF sponsor pays the trading costs​ ​C.​ ​No, because the ETF sponsor pays the processing fees​ ​ 8. The nature of Gilligan's objectives that Forster hopes to meet by recommending levered​ 3 ​ETFs is​​more likely​​:​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​19​ ​300Hours.com​ ​ .​ t​ actical.​ A ​B.​ ​dynamic.​ ​C.​ ​strategic.​ ​39. Forster's assessment of the features of levered ETFs is​​most likely​​:​ ​ .​ ​correct.​ A ​B.​ ​incorrect with respect to cash creation.​ ​C.​ ​incorrect with respect to counterparty risk exposure.​ ​40. Is Forster's comparison of swaps usage by ETFs and mutual funds​​most likely​​correct?​ ​ .​ Y A ​ es​ ​B.​ ​No, because mutual funds do not use swaps​ ​C.​ ​No, because ETFs are not required to publish full details of their swap positions​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​20​ ​300Hours.com​ ​Questions 41-44 relate to Ethical and Professional Standards.​ ​ olly Fitzgerald, an investment advisor with Sandhill Capital, was recently awarded her CFA​ M ​charter after passing the Level III exam and satisfying the remaining membership requirements.​ ​This morning, she is preparing for a follow-up meeting with Simon Roy, a prospective client.​ I​n his initial meeting with Fitzgerald last week, Roy, age 58, mentioned that he was considering​ ​transferring the funds in his personal retirement account to Sandhill. Specifically, he expressed a​ ​desire to have his funds managed in a style that is consistent with an aggressive growth​ ​strategy. At that time, Fitzgerald told Roy that she would not make any specific investment​ ​recommendations before she had conducted a proper assessment of his objectives and​ ​constraints. However, she did provide Roy with marketing materials featuring the 1-year, 3-year,​ ​and 5-year performance of Sandhill's aggressive growth composite relative to its benchmark.​ ​Fitzgerald does not share any information about returns on Sandhill's other composites, which​ ​have significantly underperformed the aggressive growth composite over the past two years.​ ​Fitzgerald also did not inform Roy about whether the marketing materials that he received had​ ​been prepared in accordance with the Global Investment Performance Standards (GIPS).​ ​ hen he meets with Fitzgerald for the second time, Roy informs her that he has decided to​ W ​transfer his retirement account to Sandhill for her to manage. Additionally, he has chosen​ ​Fitzgerald to manage funds that he has placed in a revocable trust that he has created for the​ ​benefit of his two children, Paul and Greta. As he discusses his financial objectives with​ ​Fitzgerald, Roy mentions that the funds in his retirement account are already sufficient to cover​ ​his living expenses for the duration of his expected life and he believes that he is likely to​ ​transfer surplus funds into his children's trust account at some point in the next five years.​ ​ fter finishing with Roy, Fitzgerald gets a phone call from another client, Adam Olsen, age 52,​ A ​who tells her that his wife Carole passed away two weeks ago. Fitzgerald shares her​ ​condolences, adding that Carole had seemed to be in excellent health at a meeting two years​ ​ago to update Adam Olsen's investment policy statement (IPS). Olsen notes, other than his​ ​wife's passing, his circumstances are largely unchanged since that meeting, which was the last​ ​time he had communicated with Fitzgerald before today's call other than the quarterly account​ ​statements that are automatically sent to Sandhill's clients. His level of wealth is consistent with​ ​what had been expected at that time and his willingness to take risk is unchanged. Olsen would​ ​still like to retire at age 65, but believes that it will be more difficult to generate enough wealth by​ ​that time to cover his living expenses during retirement. Before Carole's death, the couple had​ ​used Adam's income to cover their living expenses and relied upon Carole's income for savings.​ ​Olsen does not believe that the reduction in living expenses after Carole's death will be sufficient​ ​to allow him to save at the same rate as before.​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​21​ ​300Hours.com​ ​41. In providing marketing materials to Roy, has Fitzgerald​​most likely​​violated the Standards?​ ​ .​ N A ​ o​ ​B.​ ​Yes, by failing to disclose the performance of Sandhill's other compositesYes, by failing​ ​to disclose the performance of Sandhill's other composites​ ​C.​ ​Yes, by failing to inform Roy whether the marketing materials have been prepared in​ ​compliance with GIPS​ ​ 2. In managing the funds in Roy's retirement account, Fitzgerald​​most likely​​owes a duty of​ 4 ​loyalty to:​ ​ .​ R A ​ oy only.​ ​B.​ ​Roy's children only.​ ​C.​ ​both Roy and his children.​ ​43. Has Fitzgerald​​most likely​​violated the Standards in her handling of Olsen's account?​ ​ .​ Y A ​ es, regarding loyalty, prudence, and care​ ​B.​ ​No, because Olsen's circumstances only changed recently​ ​C.​ ​Yes, regarding communication with clients and prospective clients​ ​ 4. Given the recent change in Olsen's circumstances, Fitzgerald should *least likely*​ 4 ​recommend that he:​ ​ .​ d A ​ elay his retirement.​ ​B.​ ​budget based on a lower income during retirement.​ ​C.​ ​update his IPS to allow him to take more investment risk.​ ​Submit your answers at​​https://3h.rs/CFAL2Mock​​to get your score,​ ​performance benchmark and answer explanations​ ​22