CFA Institute CFA-Level-II Exam Dumps

Rogcrt Markets is the nation's third largest retail grocery chain, and usually has the largest or second largest market share in every city in which it competes. In its most successful large cities, Rogert has as much as a 25% market share, although its share is sometimes greater in small cities. Rogert is known for its excellent customer service and has a wide variety of grocery selections in almost every part of its stores. Its profit margins on sales are slightly above industry averages, and its return on assets and return on equity are above average.

Rogert has an equity beta of 0.78 and a debt-to-capital ratio of approximately 50%. Recent economic difficulties, including higher commodity prices and higher unemployment, resulted in lower profit margins for Rogert. Still, Rogert's decline in profit margin was less than for its competitors. Rogert did not experience substantial losses of sales from customers switching to lower-priced competitors as its market share remained substantially constant.

Zephine Markets is one of Rogert's smaller competitors. Zephine operates in roughly 15% of the same cities as Roger. Zephine is publicly traded, and one of the members of Rogert's board of directors has asked the staff to evaluate an acquisition of Zephine. The staff believes that Zephine is slightly underpriced and that it could be acquired for a 20% premium over its current price. In recommending against the acquisition, staff member Pierre Chiraq says:

"I agree that eliminating Zephine as a rival would probably enhance our profit margins. However, I am skeptical about this acquisition. First, because our market share is almost never dominant, much of the benefit of eliminating a smaller rival will be shared by our other rivals. They will free-ride on our investment. Second, if our profit margins do increase, wc will eventually attract new rivals into our markets. And finally, our cost of capital should increase substantially because the firm will be diversifying horizontally instead of vertically, increasing the firm's risk."

Over the last several years, grocery industry growth has tended to follow the general economy. The competitors in the industry, like Rogert, compete for market share in a stable industry. The industry's cyclical behavior has shown stable performance in both the ups and downs of the business cycle.

In assessing Rogert's competitive position, Chiraq makes comments about the threat of new entrants:

"My concern about new entrants into our business is low for several reasons. Economies of scale are achievable at a low size of operations relative to that of our firm. Our brand identity is high in the markets in which we compete. And, finally, access to distribution channels is difficult to achieve in the grocery business. While there are many competitive forces that concern mc, new entrants is low on my list."

Finally, the staff discusses industry changes that might have a negative effect on Rogert's industry position. Three phenomena are mentioned that could have such an effect. They are:

1. Industry growth rates are low and declining;

2. Several suppliers are sponsoring national television advertisements for their products;

3. The government has approved a new method of extending the shelf life of fruits and vegetables.

Which industry change mentioned by the staff is least likely to reduce Rogert's profitability?

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Ryan Hendricks serves as a security analyst for Investment Management, Inc. (IMI), which employs the Treynor-Black model to evaluate securities and to make portfolio recommendations. IMI uses the capital asset pricing model (CAPM) to determine the degree to which securities may be mispriced relative to IMFs forecasts.

Hendricks evaluates the common shares of Computer Software Associates (CSA), a small company specializing in a unique computer software market niche. Hendricks obtains the following market model results for CSA, using monthly returns for the past 60 months:

Hendricks uses the adjusted beta method to derive his forecasts for companies' future betas. In deriving his forecast for any company beta, Hendricks uses the following first-order autoregressive formula:

forecast beta = 0.33 + 0.67 x (historical beta) (2)

Hendricks derives required returns for individual securities using the CAPM after making appropriate adjustments using his adjusted beta formula in equation (2).

IMI provides Hendricks with the following capital market forecasts to use as inputs for the CAPM.

IMI asks Hendricks to make decisions to take long and short positions in individual securities for IMl's actively managed portfolio, IMI-Active. Specifically, Hendricks is asked to examine CSA and Millennium Drilling (MD), an oil and gas drilling company specializing in deep sea drilling. After a thorough examination of the prospects for each company, Hendricks derives the following alpha forecasts for CSA and MD.

Hendricks forecasts that the unsystematic variance (the variance of the market model regression error) for MD will be more than double that of CSA .

After determining the appropriate allocations across securities within the IMI-Active portfolio, Hendricks derives the portfolio predictions shown in Exhibit 3.

IMI forecasts that the total standard deviation for the S&P500 returns will equal 20%. After examining the historical forecasting abilities of Hendricks, IMI determines that Hendricks has demonstrated perfect forecasting ability in regards to CSA stock, but imperfect forecasting abilities in regards to MD stock. IMI finds that the correlation between the realized alphas for MD and the forecast MD alphas provided by Hendricks equals 0.50.

Referring to the Treynor-Black model, Hendricks makes the following statements:

Statement 1: All else equal, the Treynor-Black model increases the weight to the active portfolio as its unsystematic risk increases.

Statement 2: The Treynor-Black model is based on the premise that only a limited number of stocks should be included in the actively managed portfolio.

Using the Treynor-Black model, IMI must select optimal combinations of the S&P500 market index and the IMI-Active portfolio. The optimal combination is expected to lie along a capital allocation line with intercept and slope:

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Richard Grass is the healthcare analyst for Furrnon Investments and is reviewing the investment merits of the developing hospice industry. The hospice industry has a short history in the public market, as several companies have recently completed their initial public offering. Hospice services are provided to patients diagnosed with terminal illness as an alternative to aggressive medical management. The use of hospice services at skilled nursing facilities and assisted-living facilities is forecasted to continue its recent growth. Medicare is the primary payer for hospice services, accounting for 85% of the approximately $7 billion in industry's revenues. Hospice providers offer symptom and pain management to patients diagnosed with a terminal illness by their physician. The program was added to the Medicare benefit package in the early 1980s. Growth in the sector has only recently. accelerated due to the emergence of a number of for-profit companies. The caregiver provides a plan for each admitted patient and care is given in any number of healthcare environments, including the patient's home.

Grass's analysis of the hospice industry has uncovered several facts that are outlined below:

* The industry's revenue annual growth rate has increased from 14% in the late 1990s to 25% in 2008.

* The average length of stay at facilities for hospice patients is increasing.

* Labor costs account for 75% of total expenses, drugs 15% of total expenses, and medical supplies 10%.

* More than 80% of hospice patients are above 65 years old and 30% are above 85 years old.

* Based on the U .S . Census Bureau's statistics, over the next six years (2009-2015), the number of people in the 65 and older age group will increase annually by 1.4%.

* The Medicare hospice benefit is still underutilized by the terminally ill population, according to MedPac (an independent advisory committee for the U .S . Congress on healthcare issues).

* Only 30% of Medicare beneficiaries enroll in the hospice benefit before they die.

* In recent years, the U .S . government has approved rate increases for the sector compared to flat or declining rate trends for other healthcare services.

* The Medicare hospice program has a beneficiary cap which cannot exceed approximately $18,000 annually per person.

* The top six for-profit providers account for about half of the segment's sales.

* The overall hospice provider market is roughly divided into 55% non-profit, 10% U .S . government, and 35% for-profit.

Grass's analysis has narrowed his search to Hope Company. Hope controls about 7% of the total hospice service market or 20% of the for-profit market. The company has the only regulator approved for-profit certificate for the state of Florida, one of the most attractive markets in the United States. In addition to a strong market share in Florida, Hope has a strong presence in urban markets like Dallas and San Francisco. Hope has a more diversified revenue base than other publicly traded for-profit providers.

Grass is forecasting Hope Company's revenues and profits for the next year. Which of the following statements is least likely a risk Grass should consider in developing his forecast? Furmon Investment's economist is forecasting a:

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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.

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.

Alverson asks MI to examine the risk-return characteristics for an equal-weighted combination of Funds Y and Z. MI should conclude that the:

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Chester Brothers, LLC, is an investment management firm with $200 million in assets under management. Chester's equity style is described to clients as a "large cap core" strategy. One year ago, Chester instituted a new compensation plan for its equity portfolio managers. Under this new plan, each portfolio manager receives an annual bonus based upon that manager's quarterly performance relative to the S&P 500 index. For each quarter of aut-performance, the manager receives a bonus in the amount of 20% of his regular annual compensation. Chester has not disclosed this new plan to clients. Portfolio managers at Chester are not bound by non-compete agreements.

Fames Rogers, CFA, and Karen Pierce, CFA, are both portfolio managers affected by the new policy. Rogers out-performed the S&P 500 index in each of the last three quarters, largely because he began investing his clients1 funds in small cap securities. Chester has recently been citing Rogers's performance in local media advertising, including claims that "Chester's star manager, James Rogers, has outperformed the S&P 500 index in each of the last three quarters." The print advertising associated with the media campaign includes a photograph of Rogers, identifying him as James Rogers, CFA . Below his name is a quote apparently attributable to Rogers saying "as a CFA chartcrholdcr I am committed to the highest ethical standards."

A few weeks after the advertising campaign began, Rogers was approached by the Grumpp Foundation, a local charitable endowment with $3 billion in assets, about serving on their investment advisory committee. The committee meets weekly to review the portfolio and make adjustments as needed. The Grumpp trustees were impressed by the favorable mention of Rogers in the marketing campaign. In making their offer, they even suggested that Rogers could mention his position on the advisory committee in future Chester marketing material. Rogers has not informed Chester about the Grumpp offer, but he has not yet accepted the position.

Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a computer model she developed while working al Chester, as well as the most recent list of her buy recommendations, which was created from the output of her computer valuation model. Pierce soon accepted a position at a competing firm, Cheeri Group. On her first day at Cheeri, she contacted each of her five largest former clients, informing them of her new employment and asking that they consider moving their accounts from Chester to Cheeri. During both telephone conversations and e-mails with her former clients, Pierce mentioned that Chester had a new compensation program that created incentives for managers to shift into smaller cap securities.

Cheeri has posted Pierce's investment performance for the past five years on its Web site, excluding the three most recent quarters. The footnotes to the performance information include the following two statements:

Statement 1: Includes large capitalization portfolios only.

Statement 2: Results reflect manager's performance at previous employer.

Chester's advertising campaign includes claims about Rogers's investment performance, as well as Rogers's use and reference to the CFA charter. Is Chester's advertising campaign consistent with the CFA Institute Standards?

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