Free CFA Institute CFA-Level-II Exam Questions
Absolute Free CFA-Level-II Exam Practice for Comprehensive Preparation
Page No. 1 of 143
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Question 1
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Austin Clark, CFA, has been asked to analyze White Goods Corporation, a $9 billion company that owns a nationwide chain of stores selling appliances and other electronic goods. As part of his analysis of the White Goods Corporation, Clark's supervisor, David Horvath, asks Clark to forecast White Goods' 2009 sales using multiple regression analysis. The following model was developed:
sales = 20.1 + 0.001 GDP+ 1,000.6 TR + 0.1 CC -3.2 PC -40.3 UR
t-values: (1.1) (2.3) (1.75) (3.2) (-0.48) (-0.9)
Number of observations: 76
Standard error estimate: 15.67
Unadjusted R2: 0.96
Regression sum of squares: 412,522
Error sum of squares: 17,188
Independent Variable Descriptions
GDP = gross domestic product
TR = average coupon rate on 5-year U .S . Treasury securities
CC = most recent quarter end consumer confidence index value
PC = previous year's sales of personal computers
UR = most recent quarter end unemployment rate
Variable Estimates for 2009
GDP =8,000
TR = 0.05
CC =97
PC = 60,000
UR = 0.055Critical Values For Student's t-Distribution
Clark's supervisor asks him to prepare a report explaining the implications of the regression analysis results. Clark writes the following conclusions concerning regression analysis in his report:
Interpreting the results of regression analysis can be problematic if certain assumptions of the ordinary least squares framework are violated. The regression output for White Goods Corporation is unreliable for the following reasons:
Finding 1: The correlation between regression errors across time is very close to 1.
Finding 2: There is a strong relationship between the regression error variance and the regression independent variables.
In this multiple regression equation, a potential statistical issue is:
Answer: B
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Austin Clark, CFA, has been asked to analyze White Goods Corporation, a $9 billion company that owns a nationwide chain of stores selling appliances and other electronic goods. As part of his analysis of the White Goods Corporation, Clark's supervisor, David Horvath, asks Clark to forecast White Goods' 2009 sales using multiple regression analysis. The following model was developed:
- Question 2
- Question 3
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Question 4
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Paul Durham, CFA, is a senior manager in the structured bond department within Newton Capital Partners (NCP), an investment banking firm located in the United States. Durham has just returned from an international marketing campaign for NCP's latest structured note offering, a series of equity linked fixed-income securities or ELFS. The bonds will offer a 4.5% coupon paid annually along with the annual return on the S&P 500 Index and will have a maturity of five years. The total face value of the ELFS series is expected to be $200 million.Susan Jacobs, a fixed-income portfolio manager and principal with Smith & Associates, has decided to include $10 million worth of ELFS in her fixed-income portfolio. At the end of the first year, however, the S&P 500 Index value is 1,054, significantly lower than the initial value of 1,112 set by NCP at the time of the ELFS offering. Jacobs is concerned that the four remaining years of the ELFS life could have similar results and is considering her alternatives to offset the equity exposure of the ELFS position without selling the bonds, Jacobs decides to offset her portfolio's exposure to the ELFS by entering into an equity swap contract. The LIBOR term structure is shown below in Exhibit 1.
After hearing of her plan, one of the other partners with Smith & Associates, Jonathan Widby, feels it is necessary to meet with Jacobs regarding her proposed strategy. Mr. Widby makes the following comments during the meeting:
'You should also know that I am quite bullish on the stock market for the near future. Therefore, as an alternative strategy, I recommend that you establish a long position in a 1 x 3 payer swaption. This strategy would allow you to wait and see how the market performs next year but will give you the ability to enter into a 2-year swap with terms that can be established today should the market have another down year.
If, however, you choose to proceed with your strategy, know that credit risk for an equity swap is greatest toward the end of the swap's life. Thus, analysts tracking your portfolio will not be happy with the added credit risk (hat your portfolio will be exposed to as the swap nears the end of its tenor. You should think about what credit derivatives you can use to manage this risk when the time comes.'
To offset any credit risk associated with the equity swap, Widby recommends using an index trade strategy by entering into a credit default swap (CDS) as a protection buyer. Widby's strategy would involve purchasing credit protection on an index comprising largely the same issuers (companies) included in the equity index underlying the swap. Widby suggests the CDS should have a maturity equal to that of the swap to provide maximum credit protection.
Evaluate, in light of the appropriate equity swap strategy for Jacobs's portfolio, Mr. Widby's comments regarding the credit risk and use of swaptions in Jacobs's portfolio.
Answer: C
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Paul Durham, CFA, is a senior manager in the structured bond department within Newton Capital Partners (NCP), an investment banking firm located in the United States. Durham has just returned from an international marketing campaign for NCP's latest structured note offering, a series of equity linked fixed-income securities or ELFS. The bonds will offer a 4.5% coupon paid annually along with the annual return on the S&P 500 Index and will have a maturity of five years. The total face value of the ELFS series is expected to be $200 million.
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Question 5
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Sampson Aerospace is a publicly-traded U .S . manufacturer. Sampson supplies communication and navigation control systems to manufacturers of airplanes for commercial and government use. The company operates two divisions: Commercial Operations and Government Operations. Revenues from the Government Operations division comprise 80% of Sampson's total company revenues. Revenues for other companies in the industry are also driven primarily by sales to the U .S . government.
Sampson has gained a reputation for offering unique products and services. Sampson's market share has been increasing, and its net profit margin is among the highest in its industry.
As part of its business strategy, Sampson seeks out opportunities to enhance internal growth by acquiring smaller companies that possess new technologies that would allow Sampson to offer unique products and services. To this end, Sampson CEO, Drew Smith, recently asked his acquisitions team to consider the purchase of a controlling interest in either NavTech or Aerospace Communications, both software applications firms. Smith provides his acquisitions team with an aerospace analyst's industry report that addresses many key issues within the industry. Selected passages from the report are reproduced below:
Sales in the aerospace electronics industry depend primarily on government military spending, which, in turn, depends on defense budgets. Sales depend on commercial travel to a much lesser extent. The government defense spending budget outlook is fairly bleak as the current administration is looking for ways to reduce the budget deficit. We feel the commercial airline segment has more upside than downside, especially as the global economy improves, so we might see a gradual shift in industry focus toward the commercial airline sector. Companies that already have a foothold in the commercial sector are well-positioned to grow during the global recovery. Even so, companies in this industry will remain highly sensitive to government spending for their revenues. Research and development costs are high and the industry is highly capital intense. While there are only a few companies in this industry, good opportunities exist, especially for companies that have developed sustainable profits through wise acquisitions, cost containment, and the ability to secure long-term government contracts.
Sampson Aerospace recently announced that it is reducing its investment return assumption on its pension assets from 6% to 5%, and that it has entered negotiations to possibly acquire controlling equity interests in communications software firms, NavTech and Aerospace Communications. NavTech recently has decided to capitalize a significant portion of its research and development expense, and Aerospace Communications has restructured and reclassified many of its leases from operating to financial leases. Sampson CEO Drew Smith recently announced that Sampson had dropped out of negotiations with Knowledge Technologies, claiming it was likely not a sustainable business model.Consensus forecasts for NavTech and Aerospace Communications are presented in Exhibit 1.
Assuring that NavTech is valued according to the constant growth dividend model, the market expectation of dividend growth implied by NavTech's current stock price is closest to:
Answer: B
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Sampson Aerospace is a publicly-traded U .S . manufacturer. Sampson supplies communication and navigation control systems to manufacturers of airplanes for commercial and government use. The company operates two divisions: Commercial Operations and Government Operations. Revenues from the Government Operations division comprise 80% of Sampson's total company revenues. Revenues for other companies in the industry are also driven primarily by sales to the U .S . government.
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