Free CFA Institute CFA-Level-II Exam Questions

Ron Natin heads a committee that oversees the USA Insurance portfolio with total assets of $25 billion. The portfolio has 15% of total assets allocated to foreign investments, which include both international stocks and bonds. The committee has adopted a position that the domestic markets are efficient and thus, has indexed the domestic portion of the portfolio. Each unique asset class in the domestic portfolio has been benchmarked individually. The committee believes that foreign markets are less efficient and utilizes active managers for this asset class. The foreign allocation is 60% stocks and 40% bonds. The committee has divided the foreign stock portfolio equally among three different managers. The committee closely monitors the risk level of these managers by reviewing their portfolio betas (current betas: 1.1, 0.95, and 1.3).As part of his committee responsibilities, Natin is required to review all reports and speeches prepared by other members of the committee before they are presented to the public. One of the committee members, Mclanie Henley, has submitted a speech on the subject of international diversification and the international capital asset pricing model (ICAPM) that she will give to a group of MBA students at a local university. Following are excerpts from her proposed speech:International investment and diversification is an important concern in money management and, of the many relevant issues to discuss, there are two key insights that I will Take time to explain. First of all, it is essential to realize that the currency exposure of a foreign stock investment is the sensitivity of the stock price to a change in the value of the local currency and that a positive correlation between stock prices and the local currency would mean that the local stock price increases as a result of a depreciation of the local currency. Second, as future asset managers you should realize that improvements in a foreign nation's economic activity that result in an increase in real interest rates will decrease bond prices, but will be offset by an appreciation of the home currency.The ICAPM is similar to the domestic CAPM in several ways. For example, both models assume that investors are risk-averse, preferring lower levels of risk and greater expected returns, that all investors have the same expectations for the risk and return of every asset, and that all investors should hold some combination of a risk-free asset and the market portfolio.The IGAPM is a useful construct to determine asset prices in a global context. Strategies that depend explicitly on asset prices derived from the ICAPM can rely on these asset prices even if currency hedging is inhibited in certain markets by legal restrictions on such activities.The committee monitors the investments of its equity managers by modeling the expected returns of each individual stock. The model used is (he ICAPM. One such stock, a Swiss medical equipment manufacturer, has a world beta of 1.2. The world market risk premium is 4%, and the Swiss franc offers a risk premium of 0.5%. The currency exposure is 0.5, and the applicable risk-free rate is 5%. The expected return on this stock according to the ICAPM model is closest to:

Voyager Inc., a primarily internet-based media company, is buying The Daily, a media company with exposure to newspapers, television, and the internet.Voyager's acquisition of The Daily is The company's second major acquisition in its history. The previous acquisition was at the height of the merger boom in the year 2000. Voyager purchased the Dragon Company at a premium to net asset value, thereby doubling the company's size. Voyager used the pooling method to account for the acquisition of Dragon; however, because of FASB changes to the Business Combination Standard, Voyager will use the acquisition method to account for the Daily acquisition.Voyager has made an all-cash offer of $45 per share to acquire The Daily. Wall Street is skeptical about the merger. While Voyager has been growing its revenues by 40% per year, The Daily's revenue growth has been less than 2% per year. Michael Renner. the CFO of Voyager, defends the acquisition by stating that The Daily has accumulated a large amount of tax losses and that the combined company can benefit by immediately increasing net income after the merger. In addition, Renner states that the New Voyager will eliminate the inefficiencies of the internet operations and thereby boost future earnings. Renner believes that the merged companies will have a value of $17.5 billion.In the past, The Daily's management has publicly stated its opposition to merging with any company, a position management still maintains. As a result of this situation, Voyager submitted their merger proposal directly to The Daily's board of directors, while the firm's CEO was on vacation. Upon returning from vacation, The Daily's CEO issued a public statement claiming that the proposed merger was unacceptable under any circumstances.The management of The Daily is not pleased with the $45 per share offering price. Which of the following is the most likely takeover defense The Daily would consider in an effort to stop the acquisition?

Lena Pilchard, research associate for Eiffel Investments, is attempting to measure the value added to the Eiffel Investments portfolio from the use of 1-year earnings growth forecasts developed by professional analysts.Pilchard's supervisor, Edna Wilms, recommends a portfolio allocation strategy that overweights neglected firms. Wilms cites studies of the 'neglected firm effect,' in which companies followed by a small number of professional analysts are associated with higher returns than firms followed by a larger number of analysts. Wilms considers a company covered by three or fewer analysts to be 'neglected.'Pilchard also is aware of research indicating that, on average, stock returns for small firms have been higher than those earned by large firms. Pilchard develops a model to predict stock returns based on analyst coverage, firm size, and analyst growth forecasts. She runs the following cross-sectional regression using data for the 30 stocks included in the Eiffel Investments portfolio:Ri = b0 + b,COVERAGEi + b2 LN(SIZEi) + b3(FORECASTi) + ewhere:Ri = the rate of return on stock iCOVERAGEi = one if there are three or fewer analysts covering stocki, and equals zero otherwiseLN(SIZEi) = the natural logarithm of the market capitalization(stock price times shares outstanding) for stock i,units in millionsFORECASTi = the 1-year consensus earnings growth rate forecast for stock iPilchard derives the following results from her cross-sectional regression:The standard error of estimate in Pilchard's regression equals 1.96 and the regression sum of squares equals 400.Wilrus provides Pilchard with the following values for analyst coverage, firm size, and earnings growth forecast for Eggmann Enterprises, a company that Eiffel Investments is evaluating.Holding firm size and consensus earnings growth forecasts constant, the estimated average difference in stock returns between neglected and non-neglected firms equals:

Bill Henry, CFA, is the CIO of IS University Endowment Fund located in the United States. The Fund's total assets are valued at $3.5 billion. The investment policy uses a total return approach to meet the return objective that includes a spending rate of 5%. In addition, the policy constraints established make tax-exempt instruments an inappropriate investment vehicle. The Fund's current asset mix includes an 18% allocation to private equity. The private equity allocation is shown in Exhibit 1.The private equity allocation is a mixture of funds with different vintages. For example, within the venture capital category, investments have been made in five different funds. Exhibit 2 provides detail about the Alpha Fund with a vintage year of 2006 and committed capital of SI95 million.The Alpha Fund is considering a new investment in Targus Company. Targus is a start-up biotech company seeking $9 million of venture capital financing. Targus's founders believe that, based on the company's new drug pipeline, a company value of $300 million is reasonable in five years. Management at Alpha Fund views Targus Company as a risky investment and is using a discount rate of 40%. After a thorough analysis of Targus's future prospects, Alpha Fund's management believes that there is a possible 15% risk of failure for the company.Using Exhibit 2 and assuming a 20?rried interest, the Alpha Fund's 2008 dollar amount of carried interest is closest to:

William Bow, CFA, is a risk manager for GlobeCorp, an international conglomerate with operations in the technology, consumer products, and medical devices industries. Exactly one year ago, GlobeCorp, under Bow's advice, entered into a 3-year payer interest rate swap with semiannual floating rate payments based on the London interbank offered rate (LIBOR) and semiannual fixed rate payments based on an annual rate of 2.75%. At the time of initiation, the swap had a value of zero and the notional principal was set equal to $150 million. The counterparty to GlobeCorp's swap is NVS Bank, a commercial bank that also serves as a swap dealer. Exhibit 1 below summarizes the current LIBOR term structure.Upper management at GlobeCorp feels that the original swap has served its intended purpose but that circumstances have changed and it is now time to offset the firm's exposure to the swap. Because they cannot find a counterparty to an offsetting swap transaction, management has asked Bow to come up with alternative measures to offset the swap exposure. Bow created a report for the management team which outlines several strategies to neutralize the swap exposure. Two of his strategies are included in Exhibit 2.After examining its long-term liabilities, NVS Bank has decided that it currently needs to borrow $100 million over the next two years to finance its operations. For this type of funding need, NVS generally issues quarterly coupon short-term floating rate notes based on 90-day LIBOR. NVS is concerned, however, that interest rates may shift upward and the LIBOR curve may become upward sloping. To manage this risk, NVS is considering utilizing interest rate derivatives. Managers at the bank have collected quotes on over-the-counter interest rate caps and floors from a well known securities dealer. The quotes, which are based on a notional principal of $100 million, are provided in Exhibit 3.One of the managers at NVS Bank, Lois Green, has expressed her distrust of the securities dealer quoting prices on the caps and floors. In a memo to the CFO, Green suggested that NVS use an alternative but equivalent approach to manage the interest rate risk associated with its two-year funding plan. Following is an excerpt from Green's memo:'Rather than using a cap or floor, NVS Bank can effectively manage its exposure to interest rates resulting from the 2-year funding requirement by taking long positions in a series of put options on fixed-income instruments with expiration dates that coincide with the payment dates on the floating rate note.''As a cheaper alternative, NVS can effectively manage its exposure to interest rates resulting from the 2-ycar funding requirement by creating a collar using long positions in a series of call options on interest rates and long positions in a series of call options on fixed income instruments all of which would have expiration dates that coincide with the payment dates on the floating rate note.'GlobeCorp is concerned with its exposure to the interest rate swap initiated one year ago. Evaluate the strategies recommended by Bow in Exhibit 2.