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UNIT 2 – INVESTMENT PRACTICE MOCK EXAM TWO
VERSION 16 – TESTED FROM 1 DECEMBER 2018
Key facts about the IMC Unit 2 exam
Syllabus (^) IMC Unit 2 Version 16 tested from 1 December 2018
Tax tables for this syllabus Tax tables used for IMC Syllabus Version 16
Number of questions 105 Time allowed (^) 2 hours 20 minutes
Target pass mark
The pass mark of the live exam seldom varies between 60%– 70%. We therefore recommend that candidates should aim to achieve 75%–80% when using this mock exam.
Types of questions used
- Standard multiple choice – Candidates select 1 option of 4.
- Item set – Candidates are given a short scenario with several questions associated with it. The material given in the case study does not change with the questions.
- Gap fill – Candidates must enter a value into the answer field. There are specific formatting requirements and these formatting requirements are always given in the question.
Important information regarding what happens on the day
Identification required
You will need to present ID at the test centre on the day of your exam. The only acceptable forms of ID are:
- a valid signed national passport
- a valid signed UK photo driving licence
- a valid signed UK photo provisional driving licence Photocopies of the above are not acceptable. If you are unable to present the required ID, please view CFA UK's alternative identification policy and follow the instructions provided.
Calculator used
At the test centre you will be provided with:
- a Casio fx-83GT PLUS scientific calculator
- an A4 whiteboard and
- a whiteboard pen.
What can be taken into the exam room
You are not permitted to take anything into the testing room. You will be asked to leave any personal items in the lockers beside the seating area. This means no watches, wallets, bags, pens, papers, books, stationery, food, water, mobile phones and other electrical devices such as tablets, MP3 players, calculators etc.
Results notification timetable
Provisional results notification (in person)
On the day of the exam at the test centre Provisional results & areas of weakness notification (online)
Three working days after examination Official results confirmation (post)
Within 21 days after the examination
Please click here for all Terms and Conditions pertaining to the Investment Management Certificate. CFA UK reserves the right to update the IMC syllabus from time to time, and it is the candidate’s responsibility to check for updates which will be published on CFA UK's site. CFA UK does not represent or guarantee that this mock exam will ensure that a candidate passes the relevant examination(s).
Question Allocation
Question allocation across the syllabus is balanced on the guidance of psychometric and industry specialists. The following question allocation for Version 16 of the IMC is provided as a broad indication of the relative ‘weighting’ of different parts of the syllabus in IMC examinations from 1 December 2018.
CONTENT AREA TOPIC TOPIC NAME QUESTION ALLOCATION
Quantitative methods 7 Quantitative methods 10–
Economics
8 Microeconomics 15- 9 Macroeconomics
Accounting 10 Accounting 10-
Asset classes
11 Equities
25-
12 Fixed income
13 Derivatives
14 Alternatives
Investment theory, 15 Portfolio management
20-
management and measurement (^16) Investment products
17 Investmentmeasurement^ performance
Pass Mark
When examinations are constructed an average difficulty for the whole examination is established and this determines the correct pass mark. The average difficulty may vary slightly from one examination to the next, but this is carefully balanced by slight variations in the pass mark using psychometric analysis. In this way we are able to keep the pass challenge strictly consistent between examinations and over time.
Although we do not rigidly fix the pass mark (for the psychometric reasons stated) the pass mark for the Unit 2 exam seldom varies from between 60% and 70% of all scored questions.
There are no test ‘hurdles’ in the IMC. To pass the examination, candidates need to achieve an overall pass score regardless of where the marks were distributed throughout the examination.
How to use the Mock Exam
The IMC examinations contain a large number of learning outcomes. The objective of the mock exams is to provide guidance to the structure of the exam and the way in which questions are positioned and structured. They should NOT be viewed as a primary source of learning. By its nature, a mock exam will only cover a relatively small proportion of the learning outcomes. Candidates are strongly advised to develop a fundamental understanding of the curriculum in order to demonstrate the competence required to pass the examination. CFA UK offers an Official Training Manual and a number of external training providers also provide learning materials and study support packages to support candidates in studying for the examination.
5. A credit card charges 2.5% interest per month on outstanding credit balances. The annual percentage rate (APR) charged to two decimal places is:
Important! You should enter the answer only in numbers strictly using this format: 00.
Do not include spaces, letters or symbols (but decimal points and commas should be used if indicated).
6. Into which phase of the product life cycle would the additional ‘maintenance stage’ and ‘proliferation stage’ best fit?
(a) The introduction phase
(b) The obsolescence phase
(c) The maturity phase
(d) The decline phase
7. A fund manager holds a portfolio of UK equities with a beta (β) value of 1.1, which is currently valued at £120 million. The FTSE 100 index is currently valued at 6200. December FTSE 100 futures contracts are priced at 6500. How many December FTSE 100 futures must the fund manager sell to fully hedge the portfolio?
(a) 1,846 contracts
(b) 1,964 contracts
(c) 2,031 contracts
(d) 2,651 contracts
8. The price of sugar falls by 4% which leads to an 8% increase in the quantity of sugar demanded. What is the price elasticity of demand for sugar?
(a) –
(b) –0.
(c) 0.
(d) 2
9. Consider a two-year 5% annual coupon bond with a face value of £100. If an investor’s required return increases from 3.5% to 5%, what is the change in the price of the bond?
(a) +£4.
(b) +£3.
(c) -£1.
(d) - £2.
10. Which of the following methods of equity issuance is least likely to result in the sale of shares to the public?
(a) Offer for sale
(b) Offer for sale by tender
(c) Offer for sale by subscription
(d) Placing
11. Which of these would be best described as an intangible asset?
(a) Work in progress
(b) Trade receivables
(c) Goodwill
(d) Cash
12. Acquisitor PLC acquires 100% of the shares of Purchased PLC for £1.5m. Prior to the acquisition Purchased PLC has the following shareholder funds:
£
Share capital 400,
Share premium 50,
Retained profit 600,
What is the goodwill on acquisition?
(a) £50,
(b) £450,
(c) £600,
(d) £900,
17. In an open economy with no government sector, the marginal propensity to import is 0.3, and the marginal propensity to consume domestic goods is 0.6. The value of the multiplier is:
(a) 1.
(b) 1.
(c) 1.
(d) 1.
18. A company with a price-earnings ratio of 15x pays a dividend of 20p per share with dividend cover of 3x. Calculate the share price of the company in pence.
Important! You should enter the answer only in numbers strictly using this format: 000
Do not include spaces, letters or symbols (but decimal points and commas should be used if indicated).
19. Which of these sectors is most likely to benefit from a bear market?
(a) Financials
(b) Consumer staples
(c) Transportation
(d) Capital goods
20. Which of the following could best be considered as a key difference between hedge funds and conventional funds?
(a) Hedge fund managers have less flexibility than conventional asset managers
(b) Hedge funds are generally less active than conventional funds
(c) Hedge funds are generally less liquid investments than conventional funds
(d) Hedge funds are generally more transparent than conventional funds
The next 4 questions are associated with the following exhibit. The material given in the exhibit will not change.
Exhibit 1 reports economic data for the US and fictional country of Islandia.
1 year interest rate
Spot exchange rate equal to US $1.
1-year forward exchange rate equal to US $1.
1-year forecast inflation
1-year forecast real GDP growth rate
US 1.25% 1.00 1.00 1.25% 1.25%
Islandia 1.50% 0.89 0.91 2.25% 2.00%
When answering these questions assume that purchasing power parity (PPP) applies but ignore transaction and transport costs.
21. When rounded up, the one-year forward exchange rate quoted for the Islandia currency in relation to the US dollar quoted in Exhibit 1 is:
(a) Overvalued by 0.01 relative to the PPP rate
(b) Overvalued by 0.02 relative to the PPP rate
(c) Undervalued by 0.01 relative to the PPP rate
(d) Undervalued by 0.02 relative to the PPP rate
22. Assume that there are zero transaction costs and the interest rate, inflation and GDP forecasts in Exhibit 1 are realised. If the Islandia currency appreciates relative to the US$ over the coming year, which of the following would be the most likely explanation for the increase?
(a) Inflation forecasts are higher
(b) Real GDP is higher relative to the US
(c) Real interest rates are higher
(d) They are overvalued according to the interest rate parity hypothesis
23. Which of the following inferences about Islandia relative to the US are more plausible based upon the information provided in Exhibit 1?
(a) The balance of payments will rise because the forecast GDP is higher
(b) The balance of payments will rise because the forward exchange rate is at a premium
(c) The balance of payments will rise because the real exchange rate is forecast to fall
(d) The balance of payments will rise because the real exchange rate is forecast to rise
28. A company buys a manufacturing machine for £300,000. It has an economic life of five years and an anticipated residual value of £50,000. It is depreciated using the reducing balance method.
The depreciation charge on the machine in year two is closest to:
(a) £50,
(b) £63,
(c) £90,
(d) £93,
29. What is the primary motivation for a fund manager to lend stocks?
(a) To reduce taxation
(b) To enhance returns
(c) To hedge the portfolio
(d) To reduce risk
30. Classical unemployment would be best described as being due to:
(a) Workers being between jobs
(b) The level of real wages being too high
(c) Inflexible wages and prices leading to an aggregate demand deficiency
(d) Workers being unemployed by choice
31. An investor buys a put option and a call option on the same asset, which both have the same expiry date and strike price. The position created is best described as a:
(a) Long straddle
(b) Short straddle
(c) Long strangle
(d) Short strangle
32. The monthly returns of a fund over the past year are:
Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec % 2.5% 3.0% 2.4% 1.0% 0.8% 0.4% 1.1% – 1.4% 0.2% – 2.2% – 3.1% 1.4%
What is the median monthly return?
Important! You should enter the answer only in numbers strictly using this format: 0.
Do not include spaces, letters or symbols (but decimal points and commas should be used if indicated).
33. When will private equity funds generally distribute carried interest to the fund manager?
(a) When investors make their initial investment
(b) Monthly
(c) Annually
(d) Following the successful exit of an investment
34. Which of the following is most accurate for a downward sloping yield curve?
(a) Forward rate < Spot rate < Yield
(b) Forward rate > Spot rate > Yield
(c) Spot rate < Yield < Forward rate
(d) Yield < Forward rate < Spot rate
35. Which of the following would be most appropriate for a company wishing to raise capital from its shareholders?
(a) Scrip issue
(b) Rights issue
(c) Share buyback
(d) Stock split
36. The Keynesian model for an economy describes the:
(a) Long term adjustment of the economy where prices and wages are ‘fully flexible’
(b) Long term adjustment of the economy where prices and wages are ‘sticky’
(c) Short term adjustment of the economy where prices and wages are ‘fully flexible’
(d) Short term adjustment of the economy where prices and wages are ‘sticky’
42. A change in method of depreciation which leads to a higher depreciation charge will:
(a) Reduce profits
(b) Increase profits
(c) Reduce net cash flow
(d) Increase net cash flow
43. A sample taken by selecting every 10th^ item from a list of population members is best described as being a:
(a) Stratified sample
(b) Random sample
(c) Systematic sample
(d) Decimal sample
44. The Macaulay Duration of a bond which has a modified duration of 2.4 and a yield of 14% is closest to:
(a) 2.11 years
(b) 2.34 years
(c) 2.74 years
(d) 2.89 years
45. The monthly return of an investment over the past six months is:
+0.75%; –0.02%; +1.01%; –0.15%; +1.82%; +1.74%
The geometric mean monthly return is closest to:
(a) 0.818%
(b) 0.855%
(c) 0.914%
(d) 0.932%
46. If modified duration is used to estimate the price of a bond following a change in yield, then the impact of convexity means that the estimated price will be:
(a) Lower than the actual price if yields fall, and higher than the actual price if yields rise
(b) Higher than the actual price if yields fall, and lower than the actual price if yields rise
(c) Higher than the actual price if yields fall, and higher than the actual price if yields rise
(d) Lower than the actual price if yields fall, and lower than the actual price if yields rise
47. A company has zero units of inventory on January 1st. - The company buys 200 units at £34 each on January 5th. - The company buys a further 300 units at £38 each on January 11th. - 250 units are sold on January 15th. - The company buys a further 100 units at £44 each on January 25th. - 120 units are sold on January 29th.
What is the balance sheet value of the remaining inventory at the end of January if the company uses LIFO?
Important! You should enter the answer only in numbers strictly using this format: 0000
Do not include spaces, letters or symbols (but decimal points and commas should be used if indicated).
48. Which of these correlation coefficients between two assets will provide the best diversification benefits?
(a) +0.
(b) Zero
(c) –0.
(d) –0.
49. Stamp duty reserve tax (SDRT) is charged at:
(a) 0.5% on the purchase of all eligible securities
(b) 0.5% on the sale of all eligible securities
(c) 0.5% on the purchase or sale of all eligible securities
(d) £1 on all purchases of securities over £10,
54. An ordinary share has just paid a dividend of £0.45. If the company is expected to grow indefinitely at 4%, and its current market value is £3.50 what is the expected return on the stock?
(a) 12.98%
(b) 14.52%
(c) 17.37%
(d) 18.13%
55. Which bias leads investors to be too slow in reacting to news about an investment?
(a) Conservatism bias
(b) Overconfidence bias
(c) Sample size neglect
(d) Memory bias
56. A fund begins Year 1 with a value of £14m. At the beginning of Year 2 a further £6m is deposited in the fund. No further deposits or withdrawals are made during the two years. If the money-weighted return on the fund over the entire two years is 12% per annum, what is the value of the fund at the end of year 2?
(a) £20.00m
(b) £21.68m
(c) £24.28m
(d) £25.08m
57. Which of the following is least accurate with regard to American Depositary Receipts (ADRs)?
(a) They represent investments in a number of non-US shares
(b) They may be traded on the NYSE
(c) They eliminate currency risk for US investors
(d) They allow non-US companies to increase exposure to US investors
58. The ‘minimum efficient scale’ (MES) for a firm is best described as the:
(a) Highest level of output where the long run average cost is at a minimum
(b) Lowest level of output where the long run average cost is at a minimum
(c) Highest level of output where the short run average cost is at a minimum
(d) Lowest level of output where the short run average cost is at a minimum
59. What is the present value of a five year annual 6% coupon bond if the discount rate is 5.5%?
(a) £100.
(b) £101.
(c) £102.
(d) £102.
60. Which of the following least well reflects an assumption of the CAPM model?
(a) Investors can borrow at a rate which is higher than their lending rate
(b) There are no taxes or transaction costs
(c) Investors all have the same expectations of risk and return
(d) Investors all try to maximise returns and minimise risk
61. The spot €/£ exchange rate is €1.27 = £1.00. One year interest rates in the Eurozone are 2%; one year interest rates in the UK are 5%. Using interest rate parity, what is the implied one year €/£ forward rate?
Important! You should enter the answer only in numbers strictly using this format: 0.
Do not include spaces, letters or symbols (but decimal points and commas should be used if indicated).
62. A machine has an initial cost of £650,000 with a useful life of 5 years.
If the annual straight line depreciation charge is £90,000, what is the expected scrap value of the machine?
Important! You should enter the number only in numbers strictly using this format: 000,
Do not include spaces, letters, or symbols (but decimal points and commas should be used only if indicated)
68. Who is the legal owner of the assets held by a unit trust?
(a) The unit holders
(b) The authorised corporate director
(c) The trustees
(d) The fund manager
69. The following items are displayed in an account which reconciles operating profit and net cash flow.
£
Operating profit 250,
Increase in trade receivables 12,
Decrease in trade payables 15,
Depreciation 24,
What is the net cash flow?
(a) 229,
(b) 247,
(c) 262,
(d) 274,
70. A company has revenue of £12m, cost of sales of £6.5m, interest expenses of £0.5m, and administration expenses of £2m.
What is the company’s operating profit?
(a) £3m
(b) £3.5m
(c) £5m
(d) £5.5m
71. The short term ‘Phillips curve’ suggests that:
(a) Lower inflation is associated with lower unemployment
(b) Lower inflation is associated with higher unemployment
(c) Higher inflation is associated with higher unemployment
(d) There is no relationship between inflation and unemployment
72. The psychological bias that leads agents to give too much weight to recent experience when making forecasts is known as:
(a) Memory bias
(b) Overconfidence
(c) Conservatism bias
(d) Sample size neglect
73. An equity analyst considering the investment potential of Firm A has prepared the following table of information:
Variable (m=millions)
Firm A
Most recent accounts
Number of shares (m) 200
Warrants outstanding (m) -
Net income (£m) 40
Dividends paid (£m) 15
Book value of assets (£m) 300
Book value of debt (£m) 100
Equity to total assets ratio 0.
Shareholders’ funds (£m) 400
What is the dividend growth rate (expressed as a percentage) for Firm A implied by the retained earnings and return on equity ratios shown in the above table?
Important! You should enter the answer only in numbers strictly using this format: 0.
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
74. A firm has revenue of £100m, operating costs of £20m, investment expenditure of £27m, pays an equity dividend of £11m, and pays taxes of £18m. What is the free cash flow to the firm?
(a) £53m
(b) £42m
(c) £35m
(d) £24m
