CFA Level I practice

$1,000 is invested at 5% a year, compounded annually. What is it worth after 2 years?

$1,000 × 1.05² = $1,102.50.

What is the present value of $1,100 received in one year at a 10% discount rate?

$1,100 / 1.10 = $1,000.

What is the effective annual rate of 12% a year, compounded monthly?

(1 + 0.12/12)¹² − 1 = 1.01¹² − 1 ≈ 12.68%.

A portfolio is 60% in an asset expected to return 10% and 40% in one expected to return 5%. What is its expected return?

0.6 × 10% + 0.4 × 5% = 6% + 2% = 8%.

Standard deviation is the square root of the:

Variance is the average squared deviation; its square root is the standard deviation.

Two assets have a correlation of −1. Which statement is true?

With perfect negative correlation, the right weights eliminate portfolio variance.

In a normal distribution, about 95% of observations lie within how many standard deviations of the mean?

About 68% lie within ±1, 95% within ±1.96 and 99% within ±2.58.

The risk-free rate is 3%, the expected market return is 8% and a stock's beta is 1.2. What is its required return under the CAPM?

3% + 1.2 × (8% − 3%) = 3% + 6% = 9%.

A member learns material nonpublic information about a company. What should they do?

The Standards forbid acting, or causing others to act, on material nonpublic information.

When market interest rates rise, the prices of existing fixed-rate bonds:

Bond prices and yields move in opposite directions.

A bond has a modified duration of 5. If its yield rises by 1 percentage point, its price changes by about:

Percentage price change ≈ −duration × change in yield = −5 × 1%.

A portfolio returned 10%, the risk-free rate is 2% and its standard deviation is 16%. What is its Sharpe ratio?

(10% − 2%) / 16% = 0.5.