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Question 1Ethics and Professional Standards

According to the CFA Institute Code of Ethics, which of the following is a required obligation of members and candidates?

  1. Prioritize the employer's interests over the capital markets' integrity
  2. Report all client trades to the media each quarter
  3. Act with integrity, competence, diligence, and respect toward clients and the public Correct answer.
  4. Guarantee that every client investment will be profitable

Explanation

The Code of Ethics requires members and candidates to act with integrity, competence, diligence, and respect, and to place the integrity of the investment profession and the interests of clients above their own personal interests. It does not promise outcomes or require public disclosure of trades.

Question 2Ethics and Professional Standards

A member who receives a gift basket worth a modest amount from a client's vendor must most likely consider which Standard?

  1. Independence and Objectivity Correct answer.
  2. Performance Presentation
  3. Fair Dealing
  4. Market Manipulation

Explanation

Standard I(B) Independence and Objectivity requires members to avoid gifts or benefits that could compromise their judgment, and to disclose or refuse those that might. Modest gifts may be permissible but must be evaluated for their potential influence.

Question 3Ethics and Professional Standards

Under Standard III(A) Loyalty, Prudence, and Care, a member acting as a fiduciary must do which of the following?

  1. Act solely in the client's best interest and manage assets prudently Correct answer.
  2. Delay account reviews until the client requests them
  3. Favor the accounts of larger clients when allocating trades
  4. Follow the employer's trading preferences without question

Explanation

Standard III(A) imposes a fiduciary duty: members must act for the benefit of clients, with the care, skill, and prudence a reasonable person would exercise. Client interests override employer convenience and client size.

Question 4Ethics and Professional Standards

A member writes a research report and omits the fact that the issuer paid for a site visit. Under Standard I(C) Misrepresentation, this omission is best described as:

  1. Acceptable because the payment was small
  2. Acceptable because site visits are common practice
  3. A potential misrepresentation because it could mislead readers about objectivity Correct answer.
  4. A violation only if the report later loses money

Explanation

Standard I(C) prohibits misleading omissions as well as false statements. Omitting a material fact such as issuer sponsorship of a site visit can mislead readers about the report's independence, regardless of the amount or outcome.

Question 5Ethics and Professional Standards

Which Standard primarily addresses the obligation to keep client information confidential?

  1. Standard VI(A) Disclosure of Conflicts
  2. Standard V(A) Diligence and Reasonable Basis
  3. Standard IV(A) Loyalty to Employer
  4. Standard III(E) Preservation of Confidentiality Correct answer.

Explanation

Standard III(E) Preservation of Confidentiality requires members to keep information about current, former, and prospective clients confidential unless disclosure is permitted or required by law. The other Standards address duties to employers, research quality, and conflict disclosure.

Question 6Ethics and Professional Standards

The CFA Institute Standards of Professional Conduct apply to members and candidates in which of the following circumstances?

  1. Only when they are directly supervised by a CFA charterholder
  2. In their professional activities worldwide, including conduct that could reflect on the profession Correct answer.
  3. Only when handling institutional client accounts
  4. Only during business hours in their home country

Explanation

The Standards apply globally to members and candidates in their professional lives, and can also reach personal conduct that harms the profession's reputation or integrity. Supervision, location, and client type do not limit their scope.

Question 7Ethics and Professional Standards

An analyst is asked by her employer to recommend a stock that the employer's investment bank is underwriting. She believes the stock is overvalued. What is the most appropriate action?

  1. Decline to publish any opinion to avoid conflict
  2. Recommend the stock but privately advise favored clients to sell
  3. Issue an objective recommendation and disclose the underwriting relationship Correct answer.
  4. Recommend the stock to support the underwriting relationship

Explanation

Standard VI(A) Disclosure of Conflicts and Standard I(B) Independence and Objectivity require the analyst to maintain independent judgment and disclose the conflict. Suppressing the opinion or misleading clients violates several Standards.

Question 8Ethics and Professional Standards

A member changes employers and wants to contact former clients about his new firm. Under Standard IV(A) Loyalty to Employer, he should:

  1. Follow any non-compete or solicitation agreements and avoid using confidential former-employer information Correct answer.
  2. Solicit clients immediately using records copied before leaving
  3. Wait until the former employer contacts him first
  4. Take the former employer's client list because he built the relationships

Explanation

Standard IV(A) requires members to honor agreements with former employers and to avoid taking or using confidential information such as client lists. Independent memory of relationships may be used, but contractual restrictions must be respected.

Question 9Ethics and Professional Standards

During a client presentation, a member shows the composite return of accounts he personally managed, omitting that the composite excludes poorly performing accounts. This most likely violates:

  1. Standard I(A) Knowledge of the Law
  2. Standard III(D) Performance Presentation Correct answer.
  3. Standard IV(B) Additional Compensation Arrangements
  4. Standard II(A) Material Nonpublic Information

Explanation

Standard III(D) requires performance presentations to be fair, accurate, and complete, and prohibits selectively excluding accounts to inflate results. Misleading composites misrepresent the member's track record.

Question 10Ethics and Professional Standards

A member receives a tip from a corporate insider about an unannounced merger and trades on it. Which Standard is most directly violated?

  1. Standard II(A) Material Nonpublic Information Correct answer.
  2. Standard III(B) Fair Dealing
  3. Standard VI(B) Priority of Transactions
  4. Standard V(B) Communication with Clients

Explanation

Standard II(A) prohibits members from acting or causing others to act on material nonpublic information. Trading on an unannounced merger tip is the classic application of this Standard.

Question 11Ethics and Professional Standards

A portfolio manager allocates a hot initial public offering to accounts based on which clients have generated the most fees for the firm. This practice most likely violates:

  1. Standard V(C) Record Retention
  2. Standard III(B) Fair Dealing Correct answer.
  3. Standard I(D) Misconduct
  4. Standard III(E) Preservation of Confidentiality

Explanation

Standard III(B) Fair Dealing requires members to treat all clients equitably when allocating investment opportunities, and prohibits preferential treatment that disadvantages other clients. Fee-based favoritism in IPO allocations is a classic violation.

Question 12Ethics and Professional Standards

A member's personal account trades in the same security she just recommended to clients. To comply with Standard VI(B) Priority of Transactions, she should:

  1. Trade first to secure the best price for herself
  2. Avoid disclosing her personal holdings to anyone
  3. Ensure client and employer transactions occur before her personal transactions Correct answer.
  4. Trade simultaneously with clients to save time

Explanation

Standard VI(B) requires client and employer transactions to have priority over personal transactions, and personal holdings should be disclosed where required. Trading ahead of clients is front-running.

Question 13Ethics and Professional Standards

An analyst is writing a report on a small company and cannot obtain audited financial statements. Under Standard V(A) Diligence and Reasonable Basis, she should most appropriately:

  1. Disclose the limitations of the data and exercise additional caution in the recommendation Correct answer.
  2. Issue a strong buy recommendation to attract attention
  3. Assume the unaudited figures are accurate to save time
  4. Rely entirely on the company's press releases

Explanation

Standard V(A) requires a reasonable basis, supported by appropriate research and scrutiny, for any recommendation. When data quality is limited, the member should disclose those limitations and adjust the analysis accordingly.

Question 14Ethics and Professional Standards

A member is asked to sign a compliance report she believes contains a material error. Her best course of action is to:

  1. Sign it because her supervisor approved it
  2. Sign it and correct the error after submission
  3. Sign it and note the concern only to a colleague
  4. Refuse to sign and escalate the issue through proper channels Correct answer.

Explanation

Standard I(A) Knowledge of the Law and Standard I(D) Misconduct require members not to participate in or condone violations. Signing a knowingly inaccurate report is improper; the member should refuse and escalate.

Question 15Ethics and Professional Standards

A member serves as a volunteer board member of a charity and, in that role, learns confidential information that could benefit his employer. Under the Standards, he should:

  1. Trade on the information in his personal account
  2. Disclose the information to clients as a value-added service
  3. Share the information with his employer because it benefits the firm
  4. Keep the information confidential and not use it for his employer's benefit Correct answer.

Explanation

Confidentiality obligations extend to information obtained in any professional or fiduciary capacity, including volunteer roles. Using such information for the employer's or personal benefit breaches the duty of confidentiality.

Question 16Ethics and Professional Standards

A member wants to advertise a new investment strategy. To comply with Standard V(B) Communication with Clients and Prospective Clients, she should:

  1. Present hypothetical results as if they were actual results
  2. Omit the risks to keep the message simple
  3. Describe the strategy's risks and limitations as well as its potential returns Correct answer.
  4. Emphasize only the highest historical returns

Explanation

Standard V(B) requires communications to be fair and complete, disclosing the risks and limitations of the investment process. Selective emphasis on returns while omitting risks is misleading.

Question 17Ethics and Professional Standards

A member discovers that her employer's trading system occasionally executes client orders after the firm's proprietary orders. She should first:

  1. Publicly post the details on social media
  2. Ignore it because it is a system issue rather than her decision
  3. Tell clients to move their accounts elsewhere
  4. Raise the issue with her supervisor or compliance and seek to correct the practice Correct answer.

Explanation

Standard I(A) and Standard VI(B) require members to act to prevent or correct practices that disadvantage clients, such as proprietary trading ahead of client orders. The proper first step is internal escalation to supervisors or compliance.

Question 18Ethics and Professional Standards

An analyst is pressured by a portfolio manager to change a 'sell' rating to 'buy' before a client meeting. The analyst believes the original rating is well supported. The most appropriate action is to:

  1. Change the rating to satisfy the portfolio manager
  2. Maintain the independent rating and document the basis for it Correct answer.
  3. Resign from the firm immediately without further action
  4. Change the rating but keep a private note of disagreement

Explanation

Standard I(B) Independence and Objectivity requires members to maintain independent judgment and resist pressure that could compromise it. Documenting the analysis supports the integrity of the rating and the member's record.

Question 19Ethics and Professional Standards

A member manages a fund and also sits on the investment committee of a pension client. A security held by the fund is being considered for the pension. To manage the conflict, the member should most appropriately:

  1. Resign from the fund management role immediately
  2. Vote in favor of the security to benefit the fund
  3. Disclose the conflict and recuse herself from decisions where her fund's interests could be affected Correct answer.
  4. Keep the dual role secret to avoid client concern

Explanation

Standard VI(A) requires members to disclose conflicts and take steps to ensure they do not affect their judgment. Recusal is an appropriate mitigation where dual roles could bias decisions.

Question 20Ethics and Professional Standards

A member learns that a colleague has been consistently backdating trade confirmations to improve reported performance. Under the Standards, the member's most appropriate response is to:

  1. Join in the practice to avoid conflict with the colleague
  2. Say nothing because it is not her account
  3. Quietly correct the records without informing anyone
  4. Report the conduct through the firm's compliance channels and avoid participating in it Correct answer.

Explanation

Standard I(D) Misconduct and Standard I(A) Knowledge of the Law require members to avoid and address conduct that is dishonest or fraudulent. Reporting through compliance channels is the appropriate response, and the member must not participate.

Question 21Financial Reporting and Analysis

Under IFRS, which financial statement reports an entity's financial position at a specific date?

  1. The statement of comprehensive income
  2. The statement of financial position Correct answer.
  3. The statement of cash flows
  4. The statement of changes in equity

Explanation

The statement of financial position lists assets, liabilities, and equity at a single point in time, which is why it is often described as a snapshot. The other statements report movements over a period rather than a static position.

Question 22Financial Reporting and Analysis

A company reports revenue of 500,000, cost of sales of 300,000, and operating expenses of 120,000. What is its gross profit?

  1. 200,000 Correct answer.
  2. 320,000
  3. 180,000
  4. 80,000

Explanation

Gross profit equals revenue minus cost of sales, so 500,000 less 300,000 gives 200,000. Operating expenses are deducted after gross profit to arrive at operating profit, so they are not part of this calculation.

Question 23Financial Reporting and Analysis

Which qualitative characteristic requires financial information to be capable of making a difference in users' decisions?

  1. Relevance Correct answer.
  2. Timeliness
  3. Comparability
  4. Verifiability

Explanation

Relevance means information has predictive value, confirmatory value, or both, so it can influence decisions. Comparability, timeliness, and verifiability are enhancing characteristics that support useful information but do not define decision-altering capacity.

Question 24Financial Reporting and Analysis

Under the accrual basis, when should revenue generally be recognized?

  1. When the fiscal year closes
  2. When the performance obligation is satisfied Correct answer.
  3. When cash is received from the customer
  4. When the invoice is printed and mailed

Explanation

Accrual accounting recognizes revenue when control of goods or services transfers to the customer, which occurs as performance obligations are satisfied. Cash receipt timing is irrelevant under accrual accounting.

Question 25Financial Reporting and Analysis

An entity purchases equipment for 60,000 with an estimated residual value of 6,000 and a useful life of six years. Using straight-line depreciation, what is annual depreciation expense?

  1. 11,000
  2. 9,000 Correct answer.
  3. 6,000
  4. 10,000

Explanation

Straight-line depreciation equals depreciable cost divided by useful life. Depreciable cost is 60,000 minus 6,000, or 54,000, which divided by six years gives 9,000 per year.

Question 26Financial Reporting and Analysis

Which section of the statement of cash flows under IFRS may report interest paid as either an operating or a financing outflow?

  1. Operating activities
  2. Investing activities
  3. Non-cash disclosures
  4. Financing activities Correct answer.

Explanation

IFRS permits interest paid to be classified as an operating outflow or, alternatively, as a financing outflow because it relates to obtaining finance. Interest received similarly has a choice between operating and investing.

Question 27Financial Reporting and Analysis

What does the equity section of the statement of financial position represent?

  1. The residual interest in assets after deducting liabilities Correct answer.
  2. The total amount of cash held by the entity
  3. The sum of all long-term borrowings
  4. The cumulative profit reported in prior years only

Explanation

Equity is defined as the residual interest in the assets of the entity after deducting all its liabilities. It includes share capital, reserves, and retained earnings, not simply cash or borrowings.

Question 28Financial Reporting and Analysis

Which of the following is an example of an intangible asset?

  1. Delivery truck
  2. Patent Correct answer.
  3. Prepaid rent
  4. Inventory

Explanation

A patent is an identifiable non-monetary asset without physical substance, which fits the definition of an intangible asset. Trucks, inventory, and prepaid rent are tangible or current monetary items.

Question 29Financial Reporting and Analysis

A company has current assets of 240,000 and current liabilities of 160,000. What is its current ratio?

  1. 1.00
  2. 2.40
  3. 0.67
  4. 1.50 Correct answer.

Explanation

The current ratio divides current assets by current liabilities, so 240,000 divided by 160,000 equals 1.50. A ratio above one indicates current assets exceed current liabilities.

Question 30Financial Reporting and Analysis

An entity sells goods for 10,000 with a two-year warranty. How should the estimated warranty cost be treated at the sale date?

  1. Deferred until a claim is actually made
  2. Recorded as a reduction of revenue
  3. Disclosed only in the notes with no recognition
  4. Recognized as a provision with a matching expense Correct answer.

Explanation

A present obligation arising from the sale creates a provision when an outflow is probable and can be estimated reliably. The corresponding warranty expense is recognized in the same period as the related revenue.

Question 31Financial Reporting and Analysis

Under IFRS, how is a change in accounting estimate generally accounted for?

  1. By restating all prior financial statements presented
  2. By adjusting opening retained earnings only
  3. Retrospectively, restating prior periods
  4. Prospectively, affecting current and future periods Correct answer.

Explanation

Changes in accounting estimates are applied prospectively because the new information affects current and future periods, not prior reported results. Retrospective restatement applies to changes in accounting policy and prior period errors.

Question 32Financial Reporting and Analysis

Which method of accounting for investments in associates is required in the consolidated financial statements under IFRS?

  1. Equity method Correct answer.
  2. Proportionate consolidation
  3. Cost method
  4. Fair value through profit or loss

Explanation

IAS 28 requires the equity method for associates and joint ventures in consolidated statements. The cost method and fair value are not permitted there, and proportionate consolidation was eliminated.

Question 33Financial Reporting and Analysis

A firm reports net income of 90,000, depreciation of 15,000, and an increase in accounts receivable of 10,000. What is cash flow from operating activities using the indirect method?

  1. 75,000
  2. 105,000
  3. 95,000 Correct answer.
  4. 85,000

Explanation

Starting with net income, add back non-cash depreciation of 15,000 and subtract the 10,000 increase in receivables, giving 90,000 plus 15,000 minus 10,000 equals 95,000. An increase in receivables consumes cash because revenue exceeded collections.

Question 34Financial Reporting and Analysis

An asset is carried at 100,000 but its recoverable amount is 80,000. Under IFRS, what is the impairment loss?

  1. 0
  2. 100,000
  3. 80,000
  4. 20,000 Correct answer.

Explanation

The impairment loss equals carrying amount minus recoverable amount when recoverable amount is lower. Here 100,000 less 80,000 gives a loss of 20,000 recognized in profit or loss.

Question 35Financial Reporting and Analysis

Which cost flow assumption typically produces the highest ending inventory in a period of rising prices?

  1. Weighted average
  2. Specific identification
  3. First-in, first-out Correct answer.
  4. Last-in, first-out

Explanation

When prices rise, FIFO assigns the older, lower costs to cost of sales and leaves the newer, higher costs in ending inventory. LIFO and weighted average therefore generally report lower ending inventory in such periods.

Question 36Financial Reporting and Analysis

How is a finance lease distinguished from an operating lease by a lessee under IFRS?

  1. By whether the asset is new
  2. By whether payments are made monthly
  3. By whether the lease term exceeds one year
  4. By whether substantially all risks and rewards of ownership transfer Correct answer.

Explanation

A lease is a finance lease when it transfers substantially all the risks and rewards incidental to ownership to the lessee. Indicators include ownership transfer, bargain purchase options, and terms covering the major part of the asset's life.

Question 37Financial Reporting and Analysis

A company issues bonds at a discount. How does the effective interest method affect interest expense over the bond's life?

  1. Interest expense is recognized only at maturity
  2. Interest expense stays constant each period
  3. Interest expense decreases each period
  4. Interest expense increases each period Correct answer.

Explanation

Under the effective interest method, interest expense equals the carrying amount times the market rate. Because the carrying amount of a discount bond rises toward par as the discount amortizes, interest expense increases each period.

Question 38Financial Reporting and Analysis

Which item is reported in other comprehensive income rather than profit or loss?

  1. Interest on a bank loan
  2. Sales returns
  3. Gain on disposal of equipment
  4. Revaluation surplus on property under the revaluation model Correct answer.

Explanation

A revaluation surplus on property, plant, and equipment is recognized in other comprehensive income and accumulated in equity. Gains on disposal, sales returns, and loan interest are recognized in profit or loss.

Question 39Financial Reporting and Analysis

A parent owns 80% of a subsidiary. The subsidiary reports net assets of 500,000 at acquisition. How is the non-controlling interest measured under the proportionate share method?

  1. 400,000
  2. 0
  3. 100,000 Correct answer.
  4. 500,000

Explanation

Under the proportionate share method, non-controlling interest equals the NCI percentage times the subsidiary's net assets, so 20% of 500,000 equals 100,000. The full goodwill method would instead include a goodwill share.

Question 40Financial Reporting and Analysis

Which of the following best describes the going concern assumption?

  1. The entity will be liquidated within the next year
  2. The entity will merge with another entity
  3. The entity will continue in operation for the foreseeable future Correct answer.
  4. The entity's assets are stated at liquidation value

Explanation

Going concern assumes the entity will continue operating for the foreseeable future without intention or necessity to liquidate. Financial statements are normally prepared on this basis unless that assumption is inappropriate.

Question 41Financial Reporting and Analysis

An entity has taxable temporary differences of 40,000 and a tax rate of 25%. What deferred tax liability should be recognized?

  1. 0
  2. 4,000
  3. 10,000 Correct answer.
  4. 40,000

Explanation

A deferred tax liability is measured as the taxable temporary difference multiplied by the expected tax rate, so 40,000 times 25% equals 10,000. It arises because the carrying amount exceeds the tax base.

Question 42Financial Reporting and Analysis

Under IFRS 15, a contract with a customer includes a significant financing component. How is the transaction price adjusted?

  1. The consideration is increased by an arbitrary inflation factor
  2. The revenue is deferred until all cash is received
  3. No adjustment is made because payment terms are irrelevant
  4. The promised consideration is discounted to present value using an appropriate rate Correct answer.

Explanation

When a significant financing component exists, the promised consideration is adjusted for the time value of money by discounting to present value. Interest income or expense is then recognized over the financing period.

Question 43Financial Reporting and Analysis

A company uses the revaluation model for a building. Original cost was 200,000 with accumulated depreciation of 50,000, and the fair value is now 180,000. What is the revaluation surplus?

  1. 50,000
  2. 20,000
  3. 0
  4. 30,000 Correct answer.

Explanation

The carrying amount before revaluation is 200,000 minus 50,000, or 150,000. The surplus is fair value of 180,000 less 150,000, giving 30,000 recognized in other comprehensive income.

Question 44Financial Reporting and Analysis

A firm reports a gross profit margin of 40% and sales of 250,000. What is its cost of sales?

  1. 250,000
  2. 150,000 Correct answer.
  3. 60,000
  4. 100,000

Explanation

Gross profit equals 40% of 250,000, or 100,000. Cost of sales is sales minus gross profit, so 250,000 less 100,000 equals 150,000.

Question 45Financial Reporting and Analysis

An entity recognizes a provision for a lawsuit it expects to lose. Which condition is required for recognition under IAS 37?

  1. An obligation that cannot be estimated
  2. A future obligation arising from a planned event
  3. A possible obligation that is only remote
  4. A present obligation arising from a past event, probable outflow, and reliable estimate Correct answer.

Explanation

IAS 37 requires a present obligation from a past event, a probable outflow of resources, and a reliable estimate before a provision is recognized. Remote contingencies are only disclosed, and uncertain amounts may be disclosed rather than recognized.

Question 46Financial Reporting and Analysis

Under IFRS, which of the following is the correct treatment of a change in accounting policy that is material?

  1. Apply the new policy prospectively from the date of change.
  2. Apply the new policy retrospectively, adjusting opening retained earnings and restating comparatives. Correct answer.
  3. Apply the new policy only to future transactions without adjusting prior periods.
  4. Disclose the change but continue using the old policy for existing items.

Explanation

IAS 8 requires retrospective application for material changes in accounting policy, unless transitional provisions specify otherwise. This means restating prior period comparatives and adjusting the opening balance of retained earnings to reflect the new policy as if it had always been applied.

Question 47Financial Reporting and Analysis

An entity has profit before tax of 200,000 and a tax rate of 30%. Included in profit is a non-deductible expense of 20,000 and a tax-exempt income of 10,000. What is the current tax expense?

  1. 57,000
  2. 63,000 Correct answer.
  3. 66,000
  4. 60,000

Explanation

Current tax is based on taxable profit, which is accounting profit adjusted for permanent differences. Taxable profit equals 200,000 + 20,000 non-deductible expense − 10,000 exempt income = 210,000; at 30% the tax is 63,000.

Question 48Financial Reporting and Analysis

Which of the following costs should be expensed as incurred rather than capitalized as part of the cost of property, plant and equipment?

  1. Freight charges for delivering the equipment to the site
  2. Ongoing maintenance and servicing costs Correct answer.
  3. Directly attributable costs of testing whether the asset functions properly
  4. Installation and assembly costs

Explanation

Under IAS 16, the cost of an item of property, plant and equipment includes its purchase price, directly attributable costs of bringing the asset to the location and condition for intended use, and initial estimate of dismantling costs. Routine maintenance and servicing costs are expensed as incurred because they do not enhance the asset's future economic benefits.

Question 49Financial Reporting and Analysis

An entity issues 10,000 shares with a nominal value of 1 each at a price of 5 per share. Transaction costs directly attributable to the issue are 8,000. What amount is recorded in share premium?

  1. 48,000
  2. 50,000
  3. 40,000
  4. 32,000 Correct answer.

Explanation

The proceeds from the share issue are 10,000 shares × 5 = 50,000. The nominal value credited to share capital is 10,000 × 1 = 10,000. Transaction costs that are directly attributable to the issue are deducted from equity, so share premium is 50,000 − 10,000 − 8,000 = 32,000.

Question 50Financial Reporting and Analysis

An entity enters into a contract to sell goods for 100,000, providing a right of return for 30 days. Based on past experience, the entity estimates that 5% of goods will be returned. The cost of the goods is 60,000. Under IFRS 15, what amount of revenue should be recognized at the time of sale?

  1. 90,000
  2. 100,000
  3. 95,000 Correct answer.
  4. 97,000

Explanation

Under IFRS 15, revenue is recognized for goods transferred, excluding expected returns. The entity expects a 5% return, so revenue is 100,000 × 95% = 95,000. A refund liability and a right-of-return asset are also recognized for the expected return.