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CFA Level I practice questions

207 free questions with answers and explanations.

Practice test
  1. 1.A company's balance sheet shows total assets of $2,000,000, including cash $200,000, accounts receivable $300,000, inventory $300,000, and net property, plant, and equipment $1,200,000. On a common-size balance sheet, what percentage of total assets does inventory represent?Financial Statement Analysis
  2. 2.Two actively managed, well-diversified portfolios are being compared. Portfolio A has a return of 15%, a beta of 1.2; Portfolio B has a return of 18%, a beta of 1.8. The risk-free rate is 3%. Which portfolio performed better on a risk-adjusted basis using the appropriate measure for well-diversified portfolios, and what are the respective values?Portfolio Management
  3. 3.A portfolio manager wants to select 3 stocks from a list of 8 candidates to build a small equity portfolio. The order in which the stocks are chosen does not matter. How many different 3-stock portfolios can be formed?Quantitative Methods
  4. 4.A client deposits $5,000 at the beginning of each year for 4 years into an account that earns 6% annually. What is the value of the account at the end of year 4?Quantitative Methods
  5. 5.A REIT reports net income of $5,000,000 for the year, which includes $2,000,000 of depreciation expense and a $500,000 gain on the sale of a property. Using the standard NAREIT definition, what is the REIT's Funds From Operations (FFO)?Alternative Investments
  6. 6.A market is found to be semi-strong-form efficient based on empirical event studies. Which of the following is most consistent with this finding?Equity Investments
  7. 7.A stock index currently trades at 4,000. The one-year risk-free rate is 5%, and the index is expected to pay a dividend yield of 2% over the year. Using the cost-of-carry model with discrete compounding, what is the no-arbitrage one-year futures price on the index?Derivatives
  8. 8.The price of a good rises from $10 to $12, causing quantity demanded to fall from 100 units to 80 units. Using the midpoint (arc) method, what is the price elasticity of demand for this good?Economics
  9. 9.A senior compliance officer discovers, through internal review, clear evidence that her employer's CIO has been misappropriating $2 million of client assets over three years. After reporting the matter internally to senior management with no corrective action taken, she reports the misconduct directly to the securities regulator. Does this action violate Standard IV(A), Loyalty to Employer?Ethical and Professional Standards
  10. 10.A CFA charterholder is convicted outside of his professional duties of felony tax evasion involving deliberate falsification of personal financial records. His employer is unaware of any workplace misconduct. Under Standard I(D) Professional Misconduct, this conduct:Ethical and Professional Standards
  11. 11.A researcher tests the null hypothesis that a fund's mean excess return equals zero, using a 5% significance level. The true mean excess return is actually not zero, but the test statistic fails to reject the null hypothesis. What type of error has occurred?Quantitative Methods
  12. 12.A bank advertises a stated annual interest rate of 8%, compounded quarterly. What is the effective annual rate (EAR)?Quantitative Methods
  13. 13.An equity analyst initially values a stock at $50 per share based on outdated financial statements. After receiving substantially improved updated earnings guidance, objective valuation models suggest a fair value closer to $70. However, the analyst revises the estimate only slightly, to $53, remaining heavily influenced by the original figure. This behavior best illustrates:Portfolio Management
  14. 14.A company reports net income of $1,200,000 for the year and pays $200,000 in preferred dividends. The weighted average number of common shares outstanding during the year is 500,000, and the company has no dilutive securities outstanding. What is basic earnings per share (EPS)?Financial Statement Analysis
  15. 15.An analyst estimates that a company has a return on equity (ROE) of 12%, an expected long-term growth rate of 4%, and a required rate of return on equity of 10%. Using the fundamental (Gordon Growth-based) approach, what is the company's justified price-to-book (P/B) ratio?Equity Investments
  16. 16.The current spot exchange rate is USD/EUR = 1.1000 (1 EUR = 1.10 USD). The 1-year interest rate is 5% in the United States and 3% in the Eurozone. Using covered interest rate parity, what is the approximate 1-year forward USD/EUR rate?Economics
  17. 17.Last year, a company wrote down inventory from its original cost of $100,000 to a net realizable value of $70,000, recognizing a $30,000 loss. This year, the market value of that same inventory recovers to $110,000. Under IFRS, what is the maximum carrying value to which the inventory can be written back up?Financial Statement Analysis
  18. 18.A risk analyst decomposes total portfolio variance by asset and finds that Asset A represents 25% of portfolio weight but contributes 40% of total portfolio variance. Which conclusion is most appropriate?Portfolio Management
  19. 19.A trader wants to buy a stock only if its price falls to $45 or below, but does not want the order to remain open beyond the current trading session. Which order type best satisfies this instruction?Equity Investments
  20. 20.A GIPS-compliant firm manages a composite of 10 discretionary, fee-paying institutional portfolios that returned an average of 12% for the year. Two additional portfolios in the same strategy were terminated by clients mid-year with returns of −5% each before termination, but were excluded from the year-end composite presentation. Assuming equal weighting for simplicity, what is the correct asset-weighted composite return that should have been reported, and what standard is violated?Ethical and Professional Standards
  21. 21.An investor buys 200 shares of a stock at $50 per share using a margin account with an initial margin requirement of 60% and a maintenance margin requirement of 30%. To what price must the stock fall before the investor receives a margin call?Equity Investments
  22. 22.A manufacturing company purchases a machine for $120,000 with an estimated salvage value of $20,000. The machine is expected to produce 100,000 total units over its useful life. During the current year, the machine produces 15,000 units. Using the units-of-production method, what is the depreciation expense for the year?Financial Statement Analysis
  23. 23.A retailer has a normal operating cycle of 9 months. Which of the following items should be classified as a current asset on its balance sheet?Financial Statement Analysis
  24. 24.A portfolio manager routes client trades through Broker X, paying $0.05 per share in commissions instead of the $0.03 per share available through comparable brokers, in exchange for extensive client entertainment (sporting event tickets and dinners) provided to the manager personally, with no investment research or execution benefit to clients. On a 500,000-share annual trade volume, what is the excess cost borne by clients, and has a violation occurred?Ethical and Professional Standards
  25. 25.An index provider constructs a float-adjusted market-capitalization-weighted index with two constituents. Company X has 100 million total shares outstanding, a share price of $50, and a public float of 60%. Company Y has 200 million total shares outstanding, a share price of $20, and a public float of 80%. What is Company X's approximate weight in the index?Equity Investments
  26. 26.A corporate issuer defaults and enters liquidation. Which of the following claimants has the highest-priority claim on the firm's remaining assets?Fixed Income
  27. 27.A company has a net profit margin of 8%, total asset turnover of 1.5x, and a financial leverage ratio (average total assets/average total equity) of 2.0x. Using the DuPont decomposition, what is the company's return on equity?Financial Statement Analysis
  28. 28.A macroeconomic analyst is compiling a country's Index of Leading Economic Indicators. Which of the following is most appropriately classified as a leading indicator?Economics
  29. 29.An analyst calculates a stock's annual returns for three consecutive years: Year 1 = 20%, Year 2 = -10%, and Year 3 = 15%. What is the stock's geometric mean annual return over the three years?Quantitative Methods
  30. 30.A portfolio earned an annual return of 12% with a standard deviation of 18%. The risk-free rate is 3%. What is the portfolio's Sharpe ratio?Portfolio Management
  31. 31.A machine costs $100,000, has a $10,000 estimated salvage value, and a 5-year useful life. Using the double-declining-balance method, what is the depreciation expense in Year 2?Financial Statement Analysis
  32. 32.A bank has a $2,000,000 loan exposure to a corporate borrower. The one-year probability of default is estimated at 3%, and the recovery rate in default is expected to be 35%. The expected credit loss on this exposure over the next year is closest to:Fixed Income
  33. 33.An analyst knows that 5% of bonds in a large portfolio are internally flagged as financially 'distressed.' Historically, 40% of distressed bonds default within one year, while only 2% of non-distressed bonds default within one year. A randomly selected bond defaults within the year. Using Bayes' formula, what is the probability that this bond was originally flagged as distressed?Quantitative Methods
  34. 34.A 3-year annual-pay bond has a 5% coupon rate, a face value of $1,000, and a market yield to maturity of 6%. The bond's price is closest to:Fixed Income
  35. 35.A research analyst's firm has a paid subscription to a third-party macroeconomic research vendor, granting the firm internal-use rights to the vendor's content. The analyst copies several paragraphs of the vendor's economic outlook verbatim into his own client-facing research report, presenting the analysis as his original work without attribution. Is this a violation of the Code and Standards?Ethical and Professional Standards
  36. 36.A company previously classified a long-term equipment lease as an operating lease and expensed the lease payments as rent expense. Under the current lease accounting standard, the lessee must capitalize this lease by recognizing a right-of-use asset and a corresponding lease liability on the balance sheet. Holding all else constant, this capitalization will most likely:Financial Statement Analysis
  37. 37.A company using LIFO reports cost of goods sold of $2,000,000. The LIFO reserve was $60,000 at the beginning of the year and $80,000 at the end of the year. What would COGS have been if the company had used FIFO?Financial Statement Analysis
  38. 38.A stock has a standard deviation of returns of 35% and a correlation of 0.60 with the market portfolio, which has a standard deviation of 20%. What is the stock's beta?Portfolio Management
  39. 39.A portfolio generated an annual return of 14%. The portfolio has a beta of 1.2, the risk-free rate is 3%, and the market return during the period was 11%. Using the CAPM-derived required return as the benchmark, calculate the portfolio's Jensen's alpha.Portfolio Management
  40. 40.A sell-side analyst is invited by a company she covers to a fully paid multi-day trip to its headquarters, including business-class airfare, a luxury hotel suite, and evening entertainment at high-end restaurants, all funded by the issuer. To comply with Standard I(B) Independence and Objectivity, the analyst should best:Ethical and Professional Standards
  41. 41.A firm reports the following: cash $50,000; marketable securities $20,000; accounts receivable $30,000; inventory $100,000; prepaid expenses $10,000; and current liabilities of $100,000. What is the firm's quick ratio?Financial Statement Analysis
  42. 42.A market is found to be weak-form efficient based on empirical tests. Which of the following statements is most accurate regarding this finding?Equity Investments
  43. 43.A price-weighted index consists of three stocks priced at $40, $60, and $80, with a current divisor of 3.0. The stock priced at $60 undergoes a 2-for-1 stock split, and no other prices change. What must the new divisor be so that the index level remains unchanged immediately after the split?Equity Investments
  44. 44.A regression of a stock's monthly returns on market index returns produces the equation: Stock Return = 0.5% + 1.2 x (Market Return), with an R-squared of 0.64. What is the correlation coefficient between the stock's returns and the market's returns?Quantitative Methods
  45. 45.A portfolio manager oversees three institutional accounts with the following year-end results: Account A ($10 million, 20% return), Account B ($30 million, 10% return), and Account C ($60 million, 8% return). In a marketing presentation, the manager reports a single 'firm composite return' of 15% for the year, based only on Account A's performance. What is the actual asset-weighted composite return, and has the manager violated the Code and Standards?Ethical and Professional Standards
  46. 46.Two identical firms compete as Cournot duopolists in a market with inverse demand P = 120 - Q, where Q = q1 + q2, and each firm has zero marginal cost. What is the Cournot-Nash equilibrium market price?Economics
  47. 47.A brokerage firm receives an allocation of 10,000 shares in a hot, oversubscribed IPO. Five institutional clients each requested 10,000 shares. The portfolio manager allocates all 10,000 shares to his largest, most profitable client relationship. This action most likely violates:Ethical and Professional Standards
  48. 48.A corporate bond has a yield to maturity of 5.80% and a nominal (G-) spread over the interpolated government benchmark of 150 bps. Its Z-spread, calculated using the full government spot rate curve, is 165 bps. Given an upward-sloping yield curve, this difference between the Z-spread and the nominal spread is best explained by:Fixed Income
  49. 49.Harbor Manufacturing has $2,000,000 of retained earnings available for equity financing at a cost of 10%. Once retained earnings are exhausted, the firm must issue new common equity at a higher cost of 12%. Harbor's target capital structure is 60% equity and 40% debt. At what total capital budget level will Harbor experience a break point requiring the use of more expensive new equity?Corporate Issuers
  50. 50.An equity trader compares two market structures. In Market A, designated dealers continuously post firm bid and ask prices at which they stand ready to trade, and investors transact directly against these quotes. In Market B, buy and sell orders from investors are collected and automatically matched against each other without a designated intermediary providing continuous quotes. Which statement correctly characterizes these two markets?Equity Investments