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Free CFA Institute CFA-Level-II Exam Questions

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  • CFA Institute CFA-Level-II Exam Questions
  • Provided By: CFA Institute
  • Exam: CFA Level II Chartered Financial Analyst
  • Certification: CFA Level II
  • Total Questions: 713
  • Updated On: Mar 25, 2025
  • Rated: 4.9 |
  • Online Users: 1426
Page No. 1 of 143
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  • Question 1
    • Kevin Rathbun, CFA, is a financial analyst at a major brokerage firm. His supervisor, Elizabeth Mao, CFA, asks him to analyze the financial position of Wayland, Inc. (Wayland), a manufacturer of components for high quality optic transmission systems. Mao also inquires about the impact of any unconsolidated investments.
      On December 31,2007, Wayland purchased a 35% ownership interest in a strategic new firm called Optimax for $300,000 cash. The pre-acquisition balance sheets of both firms are found in Exhibit 1.

      1

      On the acquisition date, all of Optimax's assets and liabilities were stated on its balance sheet at their fair values except for its property, plant, and equipment (PP&E), which had a fair value of $1.2 million. The remaining useful life of the PP&E is ten years with no salvage value. Both firms use the straight-line depreciation method.
      For the year ended 2008, Optimax reported net income of $250,000 and paid dividends of $100,000.
      During the first quarter of 2009, Optimax sold goods to Wayland and recognized $15,000 of profit from the sale. At the end of the quarter, half of the goods purchased from Optimax remained in Wayland's inventory.
      Wayland currently uses the equity method to account for its investment in Optimax. However, given the potential significance of the investment in the future, Rathbun believes that a proportionate consolidation of Optimax may give a clearer picture of the financial and operating characteristics of Wayland.
      Rathbun also notes that Wayland owns shares in Vanry, Inc. (Vanry). Rathbun gathers the data in Exhibit 2 from Wayland's financial statements. The year-end portfolio value is the market value of all Vanry shares held on December 31. All security transactions occurred on July 1, and the transaction price is the price that Wayland actually paid for the shares acquired. Vanry pays a cash dividend of $1 per share at the end of each year. Wayland expects to sell its investment in Vanry in the near term and accounts for it as held-for-trading.
      Wayland owns some publicly traded bonds of the Rotor Corporation that it reports as held-to-maturity securities.
      Which of the following best describes WaylancTs treatment of the intercompany sales transaction for the quarter ended March 31, 2009? Wayland should reduce its equity income by:

      Answer: A
  • Question 2
    • Lauren Jacobs, CFA, is an equity analyst for DF Investments. She is evaluating Iron Parts Inc. Iron Parts is a manufacturer of interior systems and components for automobiles. The company is the world's second largest original equipment auto parts supplier, with a market capitalization of $1.8 billion. Based on Iron Parts's low price-to-book value ratio of 0.9* and low price-to-sales ratio of 0.15x, Jacobs believes the stock could be an interesting investment. However, she wants to review the disclosures found in the company's financial footnotes. In particular, Jacobs is concerned about Iron Parts's defined benefit pension plan. The following information for 2007 and 2008 is provided.

      1

      Iron Parts has adopted SFAS No. 158, Employers' Accounting for Defined Benefit Pensions and Other Postretirement Plans.
      Jacobs wants to fully understand the impact of changing pension assumptions on Iron Parts's balance sheet and income statement. In addition, she would like to compute Iron Parts's economic pension expense.
      Which of the following best describes the effect(s) of the change in Iron Part's expected return on the plan assets, all else equal?

      Answer: C
  • Question 3
    • Galena Petrovich, CFA, is an analyst in the New York office of TRS Investment Management, Inc. Petrovich is an expert in the industrial electrical equipment sector and is analyzing Fisher Global. Fisher is a global market leader in designing, manufacturing, marketing, and servicing electrical systems and components, including fluid power systems and automotive engine air management systems.
      Fisher has generated double-digit growth over the past ten years, primarily as the result of acquisitions, and has reported positive net income in each year. Fisher reports its financial results using International Financial Reporting Standards (IFRS).
      Petrovich is particularly interested in a transaction that occurred seven years ago, before the change in accounting standards, in which Fisher used the pooling method to account for a large acquisition of Dartmouth Industries, an industry competitor. She would like to determine the effect of using the purchase method instead of the pooling method on the financial statements of Fisher. Fisher exchanged common stock for all of the outstanding shares of Dartmouth.
      Fisher also has a 50% ownership interest in a joint venture with its major distributor, a U .S . company called Hydro Distribution. She determines that Fisher has reported its ownership interest under the proportioned consolidation method, and that the joint venture has been profitable since it was established three years ago. She decides to adjust the financial statements to show how the financial statements would be affected if Fisher had reported its ownership under the equity method. Fisher is also considering acquiring 80% to 100% of Brown and Sons Company. Petrovich must consider the effect of such an acquisition on Fisher's financial statements.
      Petrovich determines from the financial statement footnotes that Fisher reported an unrealized gain in its most recent income statement related to debt securities that are designated at fair value. Competitor firms following U .S . GAAP classify similar debt securities as available-for-sale.
      Finally, Petrovich finds a reference in Fisher's footnotes regarding a special purpose entity (SPE). Fisher has reported its investment in the SPE using the equity method, but Petrovich believes that the consolidation method more accurately reflects Fisher's true financial position, so she makes the appropriate adjustments to the financial statements.
      If Fisher Global decides to purchase only 80% of Brown and Sons, under 1FRS they will have the option to:

      Answer: C
  • Question 4
    • Millennium Investments (MI), an investment advisory firm, relies on mean-variance analysis to advise its clients. Mi's advisors make asset allocation recommendations by selecting the mix of assets along the capital allocation line that is most appropriate for each client.
      One of MPs clients, Edward Alverson, 60 years of age, requests an analysis of four risky mutual funds (Fund W, Fund X, Fund Y, and Fund Z). After examining the four funds, MI finds that all four mutual funds are equally weighted portfolios, and that all of the funds, except Fund Z, are mean-variance efficient. MI also finds that the correlations between all pairs of the mutual funds are less than one.
      MI calculates the average variance of returns across all assets within each mutual fund, the average covariance of returns across all pairs of assets within each mutual fund, and each mutual fund's total variance of returns. The results of Mi's calculations are reported in Exhibit 1.

      20

      During his meeting with the MT advisors, Alverson explains that he will retire soon, and, consequently, is highly risk-averse. Alverson agrees with Mi's reliance on mean-variance analysis and makes the following statements:
      Statement 1: All portfolios lying on the minimum variance frontier are desirable portfolios.
      Statement 2: Because I am highly risk-averse, I expect that my investment portfolio on the capital allocation line will have risk and return equal to that of the global minimum variance portfolio.
      MI operates under the assumption that all investors agree on the forecasts of asset expected returns, variances, and correlations. Based on these assumptions, MI created the Millennium Investments 5000 Fund (MI-5000), which is a market value-weighted portfolio of all assets in the market. MI derives the forecasts for the MI-5000 Fund and for a fund comprising short-term government securities shown in Exhibit 2.

      21

      Given the data in Exhibit 2 and Mi's determination that Alverson's investment portfolio should have a standard deviation equal to 12%, what is the highest possible expected return for Alverson, and what percentage should Alverson invest in the MI-5000 fund?
      Highest expected Percentage invested
      Return in MI-5000

      Answer: C
  • Question 5
    • Christopher Robinson, chairman of the board of directors for a private endowment fund, believes that the endowment fund for which he is responsible has diverged too far from its stated objectives. Over several years the board has increased the size of the fund's equity position beyond the stated limits of the investment policy statement. In an effort to realign the fund's investments, Robinson has elected to choose a mortgage-backed security (MBS) for inclusion in the endowment's portfolio. After surveying the MBS market, Robinson has selected four MBS securities to present as potential investments at the next investment committee meeting. Details on the selected MBS securities are presented below:

      68

      At the investment committee meeting, a fellow board member raises his concerns over the potential MBS investments stating, 'While we all agree that the fixed-income proportion of the endowment is much too small, I am not sure the suggested MBS securities will fulfill the cash flow requirements of the endowment. What risks are we taking on by allocating a portion of the portfolio to these investments? We cannot afford to end up with a timing mismatch between the cash needs of the endowment and the cash provided from its investments. Also, we have given no consideration to commercial mortgage backed securities (CMBS). Isn't our analysis incomplete if we fail to give proper discussion of potential CMBS investment opportunities?'
      Robinson responded to his fellow board member by addressing the board member's concerns as follows:
      'Since the cash requirements of the endowment fund fluctuate directly with interest rates, the cash flows provided from the MBS will provide adequate protection against cash shortfalls arising from differences in the timing of cash needs and cash sources. In addition, we can further reduce uncertainty surrounding the timing of cash flows by purchasing planned amortization class CMOs, which are securities issued against pools of MBS. CMBS were not presented due to the unacceptable risk profile of the comparable CMBS trading in the marketplace.'
      Which of the following factors would most likely increase the rate of prepayments on any of the listed MBS securities?

      Answer: B
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