Thousands hoping to get a foot in the door of the investment industry will take a stab at the chartered financial analyst exam in August.
Taken in three parts, the CFA Institute test is known for being one of the finance industry’s most gruelling qualifications, with candidates typically putting in 1,000 hours of study over four years.
More than 190,000 people globally now wear the coveted CFA charterholder badge.
However, the not-for-profit that accredits finance professionals has struggled to attract the number of test takers it did before the pandemic, and some in the industry have questioned its usefulness for nabbing a top job in asset management, equity research or investment banking.
The CFA Institute has since outlined plans to overhaul its programme, with changes for Level I and Level II including new practical skills modules on artificial intelligence and Python programming coming into effect in 2024.
Financial News picked out four sample questions from the CFA Institute’s Level 1 mock exam to test your skills.
How many can you get right? Answers at the bottom...
Mailaka Securities (MS) advertises the use of a “bottom up” investment style in its marketing material. Recently, MS senior management decided to switch to a “top down” approach, citing the fact that it is less labour intensive. All other aspects of the research process are to remain the same. The head of research at MS, Mara Cherogony, CFA, is instructed to supervise the implementation of the new procedures, notify clients of the changes, and revise the text of marketing materials when new material is produced. Which of the following CFA Standards pertaining to Investment Analysis, Recommendations, and Actions is Cherogony least likely in danger of violating?
A. Responsibilities of Supervisors
B. Communication with Clients and Prospective Clients
C. Diligence and Reasonable Basis
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When calculating the future value of a five-year ordinary annuity with monthly payments, the last payment:
A. does not earn interest.
B. occurs at the beginning of the fifth year.
C. occurs one month prior to the end of the fifth year.
A Europe-based telecommunications provider follows International Financial Reporting Standards (IFRS) and capitalises new product development costs. During 2014, it spent €25m on new product development and reported an amortisation expense related to a prior year’s new product development of €10m. The company’s cash flow from operations was €290m.
An analyst is comparing the European company with a US-based telecommunications provider and has decided to adjust its financial statements to US GAAP. Under US GAAP, ignoring tax effects, the cash flow from operations for the European company would be closest to:
A. €265m.
B. €290m.
C. €275m.
The real estate index most likely to suffer from sample selection bias is a(n):
A. repeat sales index.
B. REIT index.
C. appraisal index.
ANSWERS
C. Diligence and Reasonable Basis
Research can still be considered diligent and having a reasonable basis if done using a “top down” research methodology as opposed to a “bottom up” methodology. By not communicating to prospective clients the change in the investment process through the delay in the creation of new marketing material, however, Cherogony violates Standard V(B)–Communication with Clients, which requires members and candidates to disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyse investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. As a supervisor, Cherogony is responsible for ensuring compliance with the Code and Standards.
A. does not earn interest.
Suppose we have five separate deposits of $1,000 occurring at equally spaced intervals of one year, with the first payment occurring at t = 1. Our goal is to find the future value of this ordinary annuity after the last deposit at t = 5. The increment in the time counter is one year, so the last payment occurs five years from now. We find the future value of each $1,000 deposit as of t = 5 with Equation 2, FVN= PV(1 + r)N. (Note that we are finding the future value at t = 5, so the last payment does not earn any interest.)
A. €265m.
US GAAP requires that both research and development costs be expensed as incurred. Cash flow from operations would be lower by the amount spent on development: €290m – €25m = €265m. The amortisation of previous development costs is a non-cash expense, so it does not affect cash flow.
A. repeat sales index.
Only properties that sell in each period and are included in the index and vary over time which may not be representative of the whole market.
To contact the author of this story with feedback or news, email Kristen McGachey
