CFA Level 2 Free Practice Test

. The investment committee is correct in that direct real investment will likely generate income and price appreciation, but their view on the diversification is incorrect. Real estate returns generally have low correlations with returns on other assets classes, such as stocks and bonds, and thus allow the endowment to diversify portfolio risk.
. Investors in direct real estate can expect to generate income by leasing or renting the property.
. Investors in direct real estate can expect price appreciation on the real estate investment.

1 Drawbridge sold AUD 5 million forward to the settlement date at an all-in forward price of 0.8940 (USD/AUD).
2 To mark the position to market, Drawbridge offsets the forward transaction by buying AUD 5 million three months forward to the settlement date.
3 For the offsetting forward contract, because the AUD is the base currency in the USD/AUD quote, buying AUD forward means paying the offer for both the spot rate and forward points.
I. The all-in three-month forward rate is calculated as 0.9066 – 0.00364 = 0.90296
II. This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90296) = –USD44,800 (This is a cash outflow because Drawbridge sold the AUD for- ward and the AUD appreciated against the USD).
4 To determine the mark-to-market value of the original forward position, calculate the present value of the USD cash outflow using the three-month USD discount rate: –USD44,8000/[1 + 0.0023(90/360)] = –USD44,774.
The present value of the cash flow was not calculated (step 4 of
calculation).
The cash flow was calculated using the bid rate instead of the offer rate.
1 The all-in three-month forward rate = 0.9062 – 0.00368 = 0.90252
2 This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90252) = – USD42,600, and the present value is calculated as –USD42,600/[1 + 0.0023(90/360)] = –USD42,576.

Initial market reaction is an important barometer for the value investors place on the gains from merging as well as an indication of future returns.
A spin-off does not generate cash for the parent company.
The more of the merger that is paid for by stock, the more that the risks and benefits of realizing these synergies (assuming they really exist) will be passed on to the target shareholders—hence a lower benefit will result if more stock is used.

Hollingsworth;s preferred method of calculating the GDP growth rate is the Solow growth accounting equation, and the rate is calculated as follows:
ΔY/Y = ΔA/A + α(ΔK/K) + (1 – α)(ΔL/L) where
ΔY/Y = Growth in gross domestic product, GDP ΔA/A = Growth in total factor productivity = 1/5% ΔK/K = Growth rate of capital = 3.2%
ΔL/L = Growth rate of labor = 0.4%
α = Output elasticity of capital = 0.3
1 – α = Output elasticity of labor = 0.7
Thus, ΔY/Y = 1.5 + (0.3 × 3.2) + (0.7 × 0.4) = 1.5 + 0.96 + 0.28 = 2.74. The calculation did not apply (1 – α).
ΔY/Y = 1.5 + (0.3 × 3.2) + 0.4 = 1.5 + 0.96 + 0.4 = 2.86
The inflation rate was incorrectly used in place of TFP in the calculation.
ΔY/Y = 1.7 + (0.3 × 3.2) + (0.7 × 0.4) = 1.7 + 0.96 + 0.28 = 2.94

Swift’s functional currency is the AUD because sales are generated in AUD and the company operates within the competitive and regulatory environment of Australia. Under IFRS, when the subsidiary’s functional currency is the local currency, translations are done using the current rate method. Thus, Swift will use the current rate method for converting its financial statements.
The use of the current rate method depends on the identification of the functional currency, not on the local currency. Translations from the functional currency to the presentation currency is done using the current rate method. The local currency has an impact on translation only where it differs from the functional currency. In these cases, the translation from the local to the functional currency is done using the temporal method.
Swift’s functional currency is the AUD, not the USD, because sales are generated in AUD and the company operates within the competitive and regulatory environment of Australia. If it were the USD this answer would be correct.