CFA Level 2 Free Practice Test

. The recommended procedures for compliance with Research Objectivity Requirement 11, Rating System, states that firms should prohibit covered employees from communicating a rating or recommendation different from the current published rating or recommendation.
because she communicated a rating different from her current published rating contrary to Recommendation 11, which states that firms should prohibit covered employees from communicating a rating or recommendation different from the current published rating or recommendation.
because the statement alone about issuing a new report is not a viola- tion. If she disclosed her new recommendation contrary to Recommendation 8, which recommends that reports and recommendations be issued at least quarterly, with additional updates recommended when there is an announcement of significant news or events by, or that might impact, the subject company.

. Cash flow from operations (CFO) already reflects changes in working capital items, therefore Paschel’s first comment is correct. EBITDA has the non-cash charges of depreciation and amortization added back, so Covey’s statement is incorrect, not all non-cash charges will need to be added back. Net borrowing is added back for FCFE not FCFF, so Paschel’s second statement is incorrect.
. Depreciation has already been added back to EBITDA, though there may be other items that still need to be added back.
. Adjusting for net borrowing is not necessary for FCFF (just FCFE).

. According to Standards I(B)–Independence and Objectivity and V(A)–Diligence and Reasonable Basis, members and candidates must exercise diligence, independence, objectivity, and thoroughness in analyzing investments, making investment recommen- dations, and taking investment actions. Changing a written recommendation to what a subject company desires is not acting diligently, independently, objectively, and/or thoroughly, and the analyst should immediately revise her recommendation to express her stated opinion of the company.
Changing a written recommendation to what a subject company desires is not acting diligently, independently, objectively, and/or thoroughly.

. Annisquam is correct with regards to his comments on calibrating a binomial interest rate tree. because his comments are correct. because his comments are correct.

There is a direct relationship, not an indirect one, between estimated poten- tial GDP growth and credit quality: Higher growth leads to higher quality—that is, an improvement in the likelihood of promised cash flows occurring.
Gillibrand’s statement is accurate. In the long run, the growth rate of GDP dominates. The ratio of earnings to GDP can neither rise nor decline forever, so over the long term it must approximate zero. Similarly, the P/E ratio cannot grow or contract forever, so over the long term it must also approximate zero. Thus, the drivers of potential GDP are ultimately the drivers of stock market performance. Navarro’s statement is accurate. The growth rate of potential GDP is an important determinant of the level of real interest rates, and thus real asset returns in general, in the economy. Faster growth in potential GDP means consumers expect their real income to rise more rapidly. Thus, higher rates of potential GDP growth translate into higher real interest rates and higher expected real asset returns in general.