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CFA Level I practice questions

207 free questions with answers and explanations.

Practice test
  1. 101.A callable corporate bond has a Z-spread of 150 basis points over the benchmark spot curve and an option-adjusted spread (OAS) of 110 basis points. Based on this information, the value of the embedded call option, expressed as a spread, is closest to:Fixed Income
  2. 102.A central bank uses the Taylor Rule to guide policy. The neutral real interest rate is 2%, current inflation is 3%, the inflation target is 2%, and the output gap is +1%. Using equal weights of 0.5 on both gaps, what target policy rate does the Taylor Rule suggest?Economics
  3. 103.A stock just paid a dividend of $1.00 (D0). Dividends are expected to grow at 20% annually for the next three years, after which growth is expected to stabilize at a constant 5% per year indefinitely. The required rate of return is 10%. Using a two-stage dividend discount model, what is the estimated intrinsic value of the stock today?Equity Investments
  4. 104.An analyst is constructing the global minimum-variance portfolio from two assets: Asset 1 with a standard deviation of 20% and Asset 2 with a standard deviation of 30%, given a correlation of 0.20 between the two assets. What weight should be allocated to Asset 1 to minimize portfolio variance?Portfolio Management
  5. 105.Company A enters a fixed-for-fixed currency swap, paying a fixed 4% on a $10 million USD notional and receiving a fixed 3% on a €9 million EUR notional annually. At the first annual settlement date, the spot exchange rate is $1.15 per euro. What is the net cash flow to Company A at this settlement date (ignoring notional exchange)?Derivatives
  6. 106.Cresthill Corp.'s bylaws stipulate that its nine-member board is divided into three groups of three directors each, with only one group standing for election in any given year (each director serves a three-year term). Which of the following best describes this governance feature and its typical effect on shareholder rights?Corporate Issuers
  7. 107.A 10-year, 6% annual-coupon corporate bond is callable in 3 years at a call price of 103% of par. The bond currently trades at 101.00. Using N=3, PMT=6, PV=-101, FV=103, the bond's yield to call (YTC) is closest to:Fixed Income
  8. 108.A portfolio manager wants to replicate the payoff of a fiduciary call (a long call plus a risk-free bond paying the strike price at expiration) using only stock and put options. Which combination correctly replicates this payoff?Derivatives
  9. 109.An investor buys a European put option on a stock for a premium of $3.50. The put has a strike price of $60. At expiration, the stock is trading at $54. What is the investor's profit per share?Derivatives
  10. 110.A 55-year-old client tells her advisor that she must have $50,000 in cash available within the next six months to pay for her daughter's wedding. In constructing the client's Investment Policy Statement (IPS), this requirement is best classified as which type of constraint?Portfolio Management
  11. 111.An economist notes that real GDP growth turned positive last quarter, marking the start of an economic recovery. Which of the following indicators would most likely continue to worsen for several more months even as the recovery proceeds?Economics
  12. 112.An analyst works for a global asset manager in a country where local securities law is less strict than the CFA Institute Code and Standards regarding client confidentiality. The analyst wants to know which rules govern her conduct. According to the Code and Standards, she must:Ethical and Professional Standards
  13. 113.A company's current free cash flow to equity (FCFE) is $2.00 per share. FCFE is expected to grow at a constant rate of 5% per year indefinitely, and the required rate of return on equity is 11%. Using a single-stage FCFE valuation model, what is the estimated intrinsic value per share?Equity Investments
  14. 114.An analyst develops a quantitative trading strategy and backtests it exclusively on five years of in-sample historical data, achieving a simulated Sharpe ratio of 2.5. She does not perform any out-of-sample testing or walk-forward validation, nor does she examine whether the strategy's parameters were overfit to the historical data. She then presents the strategy to clients as a "proven, reliable approach" for their portfolios. Which Standard has she most likely violated?Ethical and Professional Standards
  15. 115.A GIPS-compliant firm engages an independent verifier who completes a firm-wide verification covering the six-year period 2019–2024, confirming that the firm has complied with the GIPS composite construction requirements on a firm-wide basis and that its policies and procedures are designed to calculate and present performance in compliance with GIPS. A prospective client asks whether this verification confirms that the firm's Equity Composite's reported 2023 return of 14.2% was calculated correctly. What is the best response?Ethical and Professional Standards
  16. 116.A price-weighted index consists of three stocks priced at $50, $30, and $100, with a current divisor of 3.00 (so the index level equals 60.00). The $100 stock undergoes a 2-for-1 stock split, reducing its price to $50, with no change in the prices of the other two stocks. To keep the index level unchanged immediately after the split, what should the new divisor be?Equity Investments
  17. 117.A portfolio manager gradually increases the number of holdings in a portfolio from 10 stocks toward a broadly diversified market portfolio. As the number of holdings grows, which type of risk is progressively eliminated, and which type remains?Portfolio Management
  18. 118.A wealth manager learns during a client meeting that the client has been evading taxes for several years. The client asks the manager to keep this information confidential. A regulatory investigation later issues a valid subpoena requiring the manager to produce all client records, including this information. Under Standard III(E), Preservation of Confidentiality, what should the manager do?Ethical and Professional Standards
  19. 119.A company borrows funds specifically to construct a warehouse and incurs $100,000 of interest during the construction period. Under the applicable capitalization rules, how should this interest be treated?Financial Statement Analysis
  20. 120.A manufacturing firm reports the following operating figures: days of inventory on hand = 60 days, days of sales outstanding = 45 days, and days of payables outstanding = 30 days. What is the firm's cash conversion cycle?Corporate Issuers
  21. 121.A 5-year floating-rate note pays a coupon equal to the 3-month reference rate plus a quoted margin of 60 basis points, resetting quarterly. An investor requires a margin of 90 basis points on bonds of comparable credit risk and liquidity. All else equal, the FRN should currently be trading at:Fixed Income
  22. 122.An equity analyst serves as an independent director on the board of a publicly traded company that his firm actively covers and recommends to clients. He has not informed his employer of this board seat. This situation is best addressed under which standard, and what is the required action?Ethical and Professional Standards
  23. 123.An investor combines Asset A (standard deviation = 10%) and Asset B (standard deviation = 20%) in equal 50/50 weights. What is the minimum possible portfolio standard deviation achievable given these weights, assuming the correlation between the assets can range from −1 to +1?Portfolio Management
  24. 124.Immediately after finishing his Level II exam session, a candidate posts on an online forum: "Today's afternoon session had a vignette about a company using LIFO to inventory that tested deferred tax liabilities — really specific numbers, hard question." Is this a violation of the Code and Standards?Ethical and Professional Standards
  25. 125.Brightstar Corp. plans to issue new preferred stock with a stated annual dividend of $6 per share. The preferred shares are expected to sell for $80 per share, but the firm will incur flotation costs of $2 per share. What is Brightstar's cost of preferred stock, net of flotation costs?Corporate Issuers
  26. 126.An analyst models a stock's annual return using three economic scenarios: Boom (probability 0.30, return 20%), Normal growth (probability 0.50, return 10%), and Recession (probability 0.20, return -5%). What is the stock's expected return?Quantitative Methods
  27. 127.A company reports net income of $200,000. During the year, depreciation expense was $30,000, accounts receivable increased by $10,000, inventory decreased by $5,000, and accounts payable decreased by $8,000. Using the indirect method, what is cash flow from operations?Financial Statement Analysis
  28. 128.An economy has a marginal propensity to consume (MPC) of 0.80 and a proportional income tax rate of 25%, which acts as an automatic stabilizer. If the government increases spending by $200 billion, what is the resulting change in equilibrium GDP?Economics
  29. 129.A hedge fund uses a high-water mark provision with a 20% incentive fee and no hurdle rate. The fund's NAV per share fell to $90 last year after previously peaking at $100 (the high-water mark). This year, before fees, NAV per share rises to $105. What is the incentive fee per share charged this year?Alternative Investments
  30. 130.A company reports current assets of $500,000, which include $200,000 of inventory and $20,000 of prepaid expenses. Current liabilities total $250,000. What is the company's quick ratio?Corporate Issuers
  31. 131.A technology company conducts an initial public offering (IPO), selling 5 million newly issued shares at $20 per share to the public. The deal is underwritten on a firm commitment basis by an investment bank. Which statement best describes this transaction?Equity Investments
  32. 132.A commodity trader holds a long position in a near-month futures contract priced at $78 per barrel that is about to expire. To maintain exposure, she rolls into the next futures contract, priced at $76 per barrel. Which statement best describes the roll yield and the shape of the futures curve?Alternative Investments
  33. 133.Two counterparties enter a $10 million notional interest rate swap with annual settlement. Party A pays a fixed rate of 4.0% and receives a floating rate that resets annually. At the first settlement date, the floating rate that was set at initiation is 3.5%. What is the net cash flow for Party A at this settlement date?Derivatives
  34. 134.A regression analysis produces a slope coefficient (b1) of 1.5 for a factor exposure model, with a standard error of the coefficient of 0.60, based on n = 40 observations (38 degrees of freedom). An analyst wants to test H0: b1 = 1 versus Ha: b1 ≠ 1 at the 5% significance level, where the two-tailed critical t-value is approximately ±2.024. What is the calculated t-statistic and conclusion?Quantitative Methods
  35. 135.Under IFRS, a company's equipment has a carrying amount of $500,000. Its fair value less costs to sell is $420,000, and its value in use is $450,000. What impairment loss, if any, should be recognized?Financial Statement Analysis
  36. 136.A perfectly competitive firm's price is $8 per unit. At its current output, average variable cost (AVC) is $9 and average total cost (ATC) is $12. In the short run, the firm should:Economics
  37. 137.A GIPS-compliant firm maintains a composite of 20 discretionary, fee-paying portfolios in its "Global Balanced" strategy. One portfolio with $5 million in assets and a −8% return for the year is reclassified by the firm as "non-discretionary" and removed from the composite, even though the client never requested any change in the manager's investment authority and the manager continues to make all trading decisions without client input. The remaining 19 portfolios have combined assets of $95 million and a 10% return. What is the correctly calculated composite return that should have been reported, and is the firm compliant with GIPS?Ethical and Professional Standards
  38. 138.A real estate analyst compares an appraisal-based real estate index to a transaction-based (repeat-sales) index over the same period. The appraisal-based index shows notably lower volatility and lower correlation with public equity markets. What most likely explains this difference?Alternative Investments
  39. 139.When the price of Good X increases by 5%, the quantity demanded of Good Y increases by 15%. What is the cross-price elasticity of demand, and what does it imply about the relationship between X and Y?Economics
  40. 140.An equity analyst's published research report states: "Company Z will report EPS growth of 15% next quarter," without any qualifying language indicating this is her projection rather than a confirmed fact. Which Standard is most directly violated?Ethical and Professional Standards
  41. 141.A currency trader observes the following spot exchange rates: EUR/USD = 1.1000 and GBP/USD = 1.3000. What is the implied GBP/EUR cross rate?Economics
  42. 142.A stock currently trades at $50. A European call option with a strike price of $52 and six months to expiration is priced at $4.00. The risk-free rate is 5% annually. Using put-call parity, what should be the price of a European put option with the same strike and expiration?Derivatives
  43. 143.A financial analyst is estimating the cost of equity for Delta Corp using the Capital Asset Pricing Model. The risk-free rate is 3%, Delta's equity beta is 1.2, and the expected return on the market portfolio is 9%. What is Delta's estimated cost of equity?Corporate Issuers
  44. 144.The current spot exchange rate is $1.20 per euro. The one-year risk-free rate is 5% in the United States and 3% in the eurozone. Using covered interest rate parity, what is the theoretical one-year forward exchange rate?Derivatives
  45. 145.A trader places a market order to buy 500 shares of a stock. The order book shows the best ask price of $50.05 with 300 shares available, and the next best ask price of $50.15 with sufficient shares to fill the remainder. What is the average execution price per share for this market order?Equity Investments
  46. 146.An equal-weighted index is created from three stocks priced at $20, $50, and $100, with an equal dollar amount invested in each. Over the next period, the $20 stock rises to $22, the $50 stock falls to $45, and the $100 stock rises to $110. What is the index return for the period?Equity Investments
  47. 147.A stock currently trades at $50. Over one period, the stock price can move up by a factor of 1.20 or down by a factor of 0.90. The risk-free rate is 5% per period. A European call option has a strike price of $50. Using a one-period binomial model, what is the value of the call option today?Derivatives
  48. 148.A stock currently pays a dividend of $2.00 (D0). Analysts project an unusually high near-term growth rate of 20% that will decline linearly over the next 8 years to a long-term sustainable growth rate of 5%, which will then continue indefinitely. Using the H-model with a required return of 12%, what is the estimated value of the stock?Equity Investments
  49. 149.A company depreciates a machine using the straight-line method for financial reporting purposes, recording $100,000 of depreciation expense this year. For tax purposes, it uses an accelerated method, deducting $150,000 of tax depreciation this year. The company's tax rate is 30%. Assuming this is the only temporary difference, what deferred tax liability is created this year?Financial Statement Analysis
  50. 150.A bond has a modified duration of 7.5 and a convexity of 85. If the bond's yield to maturity suddenly increases by 100 basis points, the estimated percentage change in the bond's price, incorporating both duration and convexity effects, is closest to:Fixed Income