November 18, 2013

The CFA Level 1 Exam is just around the corner on December 7, 2013. I hope that you have mastered a greater part of the subject. If you have doubts and questions on certain topics, you will find what you are looking for right here.

So without further ado, let’s look at some of these questions with their answers!

During this discussion on CFA, students raised a few interesting questions. Answers were also given by the students! Here is a summary of what had been covered:

### Question 1:

“Which of the following events will reduce a company’s weighted average cost of capital (WACC)?

A) A reduction in the market risk premium. B) An increase in expected inflation. C) A reduction in the company’s bond rating.

The answers is A. An increase in either the company’s beta or the market risk premium will cause the WACC to increase using the CAPM approach. A reduction in the market risk premium will reduce the cost of equity for WACC.

In my opinion, A can’t be a good answer because: if the beta is negative, a reduction of Market risk premium will increases the cost of equity, so increases the WACC ( k_e = RFR + beta ‘t MarketRiskPremium ). Am I right?

“In general beta is always positive and by assuming this we can say option A is correct. And if in case the beta is negative the question will provide you a hint to decrease a WAAC – A increase in the market risk premium.”

Another interesting question stated by a student, Jenny, is quoted below. See if you can figure it out before scrolling to the answer!

### Question 2:

“I always struggle with solving opportunity cost problems in Econ. Can you please explain how to solve this problem?

The country of Hokah uses 30 units of labor to produce a unit of cheese and 35 units of labor to produce a unit of leather. The country of Ymer uses 25 units of labor to produce a unit of cheese and 20 units of labor to produce a unit of leather. Which of the following statements is most accurate?

A. Ymer’s opportunity cost of unit of leather is 0.8 units of cheese.

B. Hokah’s opportunity cost of one unit of cheese is 1.167 units of leather.

C. Ymer has an absolute and a comparative advantage in both cheese and leather. Thanks!”

“Ok so for every question of opportunity cost you can draw a chart like this. Cheese Leather HOKAH 30 35 YMER 25 20 Here you can easily look for the opportunity cost of cheese or leather for HOKAH and YMER. Here in this question the correct answer is A, Ymer has a opportunity cost of per unit of leather is .80 (20/25).”

The answers were provided by the students themselves. After all, adding some fuel to get the gears in motion before the CFA exam will do your good!

### Question 3:

“Secondary Market vs Third Market: What’s the difference? Is it that the secondary market can only trade in an exchange?”

“Here, there are four markets –

1) Primary market- where private companies issue shares to the public for the first time called IPO.

2) Secondary market – After IPO the sale & purchase of shares in market is called secondary market.

3) Third market – Sale & purchase of shares listed in exchange in over the counter market is called third market.

4) Fourth market – As like as Third market but if is privately or trough unrecognized exchange. Hope it is clear.”

### Question 4:

“Which of the following statements best describes an investment that is not on the efficient frontier? A. There is a portfolio that has a lower risk for the same return. B. There is a portfolio that has a lower return for the same risk C. The portfolio has a very high return

I chose B. but the correct answer was A. I don’t understand the explanation given in the answer, can anyone tell why is the answer A and why other two are wrong?”

“I choose B as well. A is not correct because it comes under definition of efficient frontier. To me, B seems most appropriate under the circumstances.”

All the best for your CFA Exam Prep!

EduPristine

Trusted by Fortune 500 Companies and 10,000 Students from 40+ countries across the globe, it is one of the leading International Training providers for Finance Certifications like FRM®, CFA®, PRM®, Business Analytics, HR Analytics, Financial Modeling, and Operational Risk Modeling. EduPristine has conducted more than 500,000 man-hours of quality training in finance.