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20 sample questions and answers (plain text)

Q1 · Ethics — Over dinner, a friend who works at a listed company tells Daniel the company will miss...

Over dinner, a friend who works at a listed company tells Daniel the company will miss earnings — information not yet public. Daniel should:

ASell his holdings quietly before the announcement; the friend volunteered it. BVerify the rumor through another contact, then trade — confirmed information is fine to use. CNot trade on it, and not share it further — it is material nonpublic information.

A private tip stays private until the company tells everyone — you can’t trade what the market doesn’t know (Standard II(A)–Material Nonpublic Information). Confirming the rumor through a second whisper doesn’t make it public, and “just a little” trading has no de minimis exception.

Answer: C.

Q2 · Ethics — Maya is a portfolio manager in a country where local regulations on client record...

Maya is a portfolio manager in a country where local regulations on client record retention are less strict than the CFA Institute Code and Standards. Which should she follow?

AThe Code and Standards, because they are stricter here. BLocal regulations only — the law of the land governs. CLocal regulations, unless a client specifically asks about the Code.

When the rules differ, follow the stricter one — here, that’s the Code and Standards (Standard I(A)–Knowledge of the Law). “The locals require less” is never a defense — and neither is a client’s request to opt out.

Answer: A.

Q3 · Quantitative Methods — You invest $10,000 at 8% compounded annually. Closest to its value after 5 years?

You invest $10,000 at 8% compounded annually. Closest to its value after 5 years?

A$14,000 B$14,693 C$15,869

Future value = 10,000 × (1.08)⁵. (1.08)⁵ ≈ 1.4693, so FV ≈ $14,693. The trap in (A) is simple interest (8% × 5 = 40% → $14,000); (C) compounds one year too many (1.08⁶). Compounding pays interest on interest, which is why (B) beats (A) but not (C)’s extra year.

Answer: B.

Q4 · Quantitative Methods — For a normal distribution, approximately what share of observations falls within one...

For a normal distribution, approximately what share of observations falls within one standard deviation of the mean?

A68% B95% C99%

The 68–95–99.7 rule: ~68% within ±1σ, ~95% within ±2σ, ~99.7% within ±3σ. This is the workhorse behind confidence intervals — and a reminder that “one sigma events” happen roughly a third of the time, far more often than intuition suggests.

Answer: A.

Q5 · Economics — Country X’s interest rates are higher than Country Y’s. Under covered interest rate...

Country X’s interest rates are higher than Country Y’s. Under covered interest rate parity, Currency X will most likely trade at a:

AForward premium BForward discount CNo forward adjustment — interest differentials don’t affect forwards

The higher-yielding currency trades at a forward discount — the forward price offsets the interest advantage so no arbitrage exists. The logic is pure no-arbitrage: borrow low, invest high, hedge with a forward — that round trip must earn zero excess return. (A) flips the sign; (C) denies the mechanism exists. (Expectations about future spot belong to uncovered parity — a different relationship.)

Answer: B.

Q6 · Economics — A banking system with a 10% required reserve ratio has a money multiplier closest to:

A banking system with a 10% required reserve ratio has a money multiplier closest to:

A0.10 B1.0 C10

The simple money multiplier is 1 ÷ reserve ratio = 1 ÷ 0.10 = 10. (A) confuses the multiplier with the ratio itself; (B) assumes banks create no additional money. In practice, cash leakages and excess reserves make the real multiplier smaller — this is the textbook maximum.

Answer: C.

Q7 · Financial Statement Analysis — In a period of rising prices and stable inventory quantities, compared with FIFO, LIFO...

In a period of rising prices and stable inventory quantities, compared with FIFO, LIFO will most likely report:

AHigher cost of goods sold and lower ending inventory BLower cost of goods sold and higher ending inventory CLower cost of goods sold and lower ending inventory

LIFO expenses the newest — priciest — units first, so COGS is higher and the older, cheaper units stay on the balance sheet, leaving ending inventory lower. (B) is the FIFO outcome — the most common LIFO/FIFO mix-up on exam day; (C) can’t happen under any method — COGS and ending inventory move in opposite directions because goods available is fixed. (Note: IFRS bans LIFO; this is a US GAAP world question.)

Answer: A.

Q8 · Financial Statement Analysis — A company reports current assets of $800 — cash, receivables, and $300 of inventory —...

A company reports current assets of $800 — cash, receivables, and $300 of inventory — and current liabilities of $400. Its quick ratio is closest to:

A2.00 B1.25 C0.50

Quick ratio = (current assets − inventory) ÷ current liabilities = (800 − 300) ÷ 400 = 1.25. It strips out inventory — the least liquid current asset. (A) 2.00 is the current ratio, which answers a different question; (C) 0.50 turns the current ratio upside down (liabilities ÷ assets) — always check which is on top.

Answer: B.

Q9 · Corporate Issuers — A project has a positive net present value at the company’s cost of capital. The firm...

A project has a positive net present value at the company’s cost of capital. The firm should:

AAccept it — it creates shareholder value BReject it if the payback period exceeds three years CDelay the decision until the IRR is computed

The NPV rule is the decision rule: accept positive-NPV projects, because discounting at the cost of capital already accounts for risk and the time value of money. (B) applies a payback cutoff that ignores both; (C) treats IRR as a prerequisite when NPV alone decides.

Answer: A.

Q10 · Corporate Issuers — An effective system of corporate governance most likely:

An effective system of corporate governance most likely:

ATies executive bonuses to beating this quarter’s earnings target BAligns managers’ incentives with shareholders’ long-term interests CRequires the board to approve every business decision above $10,000

Governance is about the principal–agent problem: shareholders (principals) hire managers (agents) whose interests can diverge. Boards, audits, and shareholder rights align incentives and enforce accountability. (A) does the opposite — it pays managers to mortgage the future for a quarter; (C) confuses oversight with operating the company.

Answer: B.

Q11 · Equity Investments — In a semi-strong-form efficient market, which of the following could consistently earn...

In a semi-strong-form efficient market, which of the following could consistently earn abnormal (risk-adjusted) returns?

ATechnical analysis of price patterns BFundamental analysis of public financial statements CTrading on material nonpublic information

Semi-strong efficiency says all public information is already in prices — so charts (A) and public-statement analysis (B) can’t beat the market consistently. Only nonpublic information isn’t priced in — which is also why trading on it violates Standard II(A), and is illegal in most jurisdictions. Efficiency and ethics agree here.

Answer: C.

Q12 · Equity Investments — A stock just paid a $2.00 dividend. Dividends grow at 5% forever; the required return...

A stock just paid a $2.00 dividend. Dividends grow at 5% forever; the required return is 10%. The Gordon growth model value is closest to:

A$40.00 B$42.00 C$44.00

Next year’s dividend D₁ = 2.00 × 1.05 = $2.10. Value = D₁ ÷ (r − g) = 2.10 ÷ (0.10 − 0.05) = 2.10 ÷ 0.05 = $42. The classic slip is using D₀ ($2.00) instead of D₁ — that gives $40, choice (A); (C) $44 compounds one year too many.

Answer: B.

Q13 · Fixed Income — All else equal, a bond with higher duration will have:

All else equal, a bond with higher duration will have:

AGreater price sensitivity to interest rate changes BLower price sensitivity to interest rate changes CThe same price sensitivity — duration measures time, not risk

Duration is the first-order measure of interest-rate risk: higher duration means a given yield change moves the price more. (C) is the trap — Macaulay duration is measured in years, but modified duration translates it directly into price sensitivity.

Answer: A.

Q14 · Fixed Income — If market yields rise, the price of an existing fixed-rate bond will most likely:

If market yields rise, the price of an existing fixed-rate bond will most likely:

ARise BFall CStay the same

Bond prices and yields move in opposite directions — the iron law of fixed income. The coupon is fixed, so when the market demands a higher yield, the only way to deliver it is a lower price. (A) confuses the bond with a savings account; (C) forgets that price, not coupon, does the adjusting.

Answer: B.

Q15 · Derivatives — You buy a call option with a $50 strike. At expiration the stock is at $58. The...

You buy a call option with a $50 strike. At expiration the stock is at $58. The option’s payoff (intrinsic value) is:

A$0 — options expire worthless B$58 C$8

A call pays max(0, S − X) at expiration: max(0, 58 − 50) = $8. (A) describes an out-of-the-money option; (B) is the stock price, not the option’s value. Note this is the payoff before subtracting the premium you paid — profit is a second step.

Answer: C.

Q16 · Derivatives — Which statement about forwards and futures is most accurate?

Which statement about forwards and futures is most accurate?

AFutures are standardized and exchange-traded; forwards are customized and OTC. BForwards are marked to market daily; futures settle only at contract expiry. CFutures trade over the counter between dealers; forwards trade on organized exchanges.

The split is exchange vs over-the-counter: futures are standardized, exchange-traded, and settled daily through a clearinghouse; forwards are customized private contracts — which is exactly why they carry the counterparty risk that futures mutualize away. (B) and (C) each swap exactly one attribute.

Answer: A.

Q17 · Alternative Investments — Compared with traditional mutual funds, hedge funds typically:

Compared with traditional mutual funds, hedge funds typically:

AFace tighter regulation, offer daily liquidity, and charge only asset-based fees BGuarantee a minimum return to investors regardless of performance CUse leverage and short selling, charge performance fees, and restrict redemptions

Hedge funds trade regulatory freedom for investor restrictions: leverage, shorts, derivatives, and concentrated bets are normal; performance fees align (and enrich) managers; lockups and gates protect the strategy from redemption runs. (A) describes mutual funds; (B) describes no hedge fund — a promised minimum return is a red flag, not a feature.

Answer: C.

Q18 · Alternative Investments — A hedge fund charges “2 and 20” — a 2% management fee plus a 20% performance fee on...

A hedge fund charges “2 and 20” — a 2% management fee plus a 20% performance fee on profits — with a high-water mark (the prior peak NAV the fund must re-clear before incentive fees resume). The fund starts at $100 million, falls 10% in year 1, then gains 15% in year 2. The 10% and 15% returns are stated net of the management fee. The performance fee in year 2 applies to:

AThe full $13.5 million year-2 gain BNothing — the year-1 loss eliminates any year-2 fee COnly the $3.5 million above the prior $100 million peak

Year 1: 100 × 0.90 = $90M. Year 2: 90 × 1.15 = $103.5M. The high-water mark is $100M, so only the $3.5M above the old peak earns the 20% incentive (about $0.7M). The high-water mark means the manager only eats what they kill above the old peak — investors don't pay twice for the same recovery. (A) ignores the high-water mark entirely and would charge investors for merely climbing out of a hole; (B) overcorrects — the mark delays the fee until the peak is re-cleared, it doesn't cancel fees forever; (C) applies the mark correctly — incentive only on the $3.5M of genuinely new profit.

Answer: C.

Q19 · Portfolio Management — A client needs $500,000 in 10 years. She can save $35,000 at the end of each year,...

A client needs $500,000 in 10 years. She can save $35,000 at the end of each year, earning 6% annually. She will:

AExceed the goal by about $127,000 BFall short by about $39,000 CMeet the goal almost exactly

Future value of an ordinary annuity: 35,000 × [((1.06¹⁰ − 1) ÷ 0.06)] ≈ 35,000 × 13.18 ≈ $461,000 — about $39,000 short. (A) is the trap of compounding all ten deposits for the full ten years as if every dollar were invested today (350,000 × 1.06¹⁰ ≈ $627,000) — but dollars saved in year 9 earn only one year of growth; the timing of cash flows is the whole question. (C) is where the annuity-due error lands (~$489,000) — close, but the stem says end of each year.

Answer: B.

Q20 · Portfolio Management — Maya is risk-averse — she prefers less risk for the same expected return. Which...

Maya is risk-averse — she prefers less risk for the same expected return. Which statement is most accurate?

AShe avoids all risky assets, so risk premiums don't apply to her BShe requires higher expected returns to bear more risk — that extra is the risk premium CRiskier assets always deliver higher realized returns

Risk aversion doesn't mean risk avoidance — it means demanding compensation. The risk premium (extra expected return for bearing risk) is the price risky assets must offer to clear the market. Risk isn't punished; it's priced — the risk premium is the market's hazard pay. (A) confuses risk-averse with risk-paralyzed — even cautious investors hold equities once the premium is rich enough; (C) confuses expected with realized — risk means the higher return might not show up, which is precisely why the premium exists; (B) states the risk-averse bargain correctly — more risk demands more expected return.

Answer: B.

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Levels I–III · Free

Practice Bank

Level I

Multiple-choice questions across the 10 Level I topic areas.

Each round deals two per topic, no repeats in fresh rounds until you’ve seen them all. About 15 minutes.

Level II

Vignette sets — the item-set format.

Each round deals 3 whole sets. The vignette stays pinned while you answer. About 30 minutes.

Level III

Item sets and essay sets with grader checklists.

Each round deals 3 whole sets. Pick your pathway first: Portfolio Management, Private Wealth, or Private Markets.

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Sample questions and answers (plain text)

Level I sample

L1-001 · Quantitative Methods — A bank quotes a stated annual rate of 8% compounded quarterly. The effective annual rate i…

A bank quotes a stated annual rate of 8% compounded quarterly. The effective annual rate is closest to:

A8.24% B8.30% C8.00%

EAR = (1 + 0.08/4)⁴ − 1 = 8.24%. 8.30% is monthly compounding.

Answer: A.

L1-002 · Quantitative Methods — An investor deposits $10,000 at 6% compounded annually. After 5 years the balance is close…

An investor deposits $10,000 at 6% compounded annually. After 5 years the balance is closest to:

A$13,499 B$13,382 C$13,000

FV = 10,000 × 1.06⁵ = 13,382. $13,000 is simple interest; $13,499 is continuous compounding.

Answer: B.

Level II sample — item set with vignette

Lena Ortiz regresses 60 months of a small-cap fund's excess returns on three factors: the market excess return (MKT), size (SMB) and value (HML). The model's R² is 0.62. The two-tailed 5% critical t-value is 2.00.

Variable	Coefficient	Standard error
Intercept	0.20	0.15
MKT	0.95	0.10
SMB	0.30	0.20
HML	−0.25	0.08

L2-001 · Quantitative Methods — Which slope coefficients are statistically significant at the 5% level?…

Which slope coefficients are statistically significant at the 5% level?

AMKT and HML BMKT only CMKT, SMB and HML

t-stats: MKT 9.5, SMB 1.5, HML −3.13. Only MKT and HML exceed 2.00 in absolute value.

Answer: A.

L2-002 · Quantitative Methods — The model's adjusted R² is closest to:…

The model's adjusted R² is closest to:

A0.58 B0.62 C0.60

1 − (1 − 0.62)(59/56) = 0.5996.

Answer: C.

Level III sample — essay set with grader checklist

The Harbor Workers' Pension Plan has assets of $1,000 million and liabilities with a present value of $900 million. Liabilities are expected to grow 4% a year with a standard deviation of 6%. The investment committee is choosing between two asset mixes:

Mix	Expected return	Standard deviation	Correlation with liability returns
A	7%	10%	0.6
B	6%	8%	0.8

The committee uses surplus utility U = E(Rs) − 0.005λσ²(Rs), with returns in percent, where Rs is the change in surplus divided by beginning assets.

L3-005 · essay — Calculate the plan's funded ratio and surplus.…

Calculate the plan's funded ratio and surplus.

Write your answer

Optional: get AI feedback on your answer. The checklist below is already the full lesson.

Grader checklist:

Funded ratio 1.11
surplus $100m 1,000 / 900 = 1.11
1,000 − 900 = $100 million.

The model answer

Funded ratio 1.11; surplus $100m 1,000 / 900 = 1.11; 1,000 − 900 = $100 million.

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Leaderboard

Over dinner, a friend who works at a listed company tells Daniel the company will miss earnings — information not yet public. Daniel should:

Maya is a portfolio manager in a country where local regulations on client record retention are less strict than the CFA Institute Code and Standards. Which should she follow?

You invest $10,000 at 8% compounded annually. Closest to its value after 5 years?

For a normal distribution, approximately what share of observations falls within one standard deviation of the mean?

Country X’s interest rates are higher than Country Y’s. Under covered interest rate parity, Currency X will most likely trade at a:

A banking system with a 10% required reserve ratio has a money multiplier closest to:

In a period of rising prices and stable inventory quantities, compared with FIFO, LIFO will most likely report:

A company reports current assets of $800 — cash, receivables, and $300 of inventory — and current liabilities of $400. Its quick ratio is closest to:

A project has a positive net present value at the company’s cost of capital. The firm should:

An effective system of corporate governance most likely:

In a semi-strong-form efficient market, which of the following could consistently earn abnormal (risk-adjusted) returns?

A stock just paid a $2.00 dividend. Dividends grow at 5% forever; the required return is 10%. The Gordon growth model value is closest to:

All else equal, a bond with higher duration will have:

If market yields rise, the price of an existing fixed-rate bond will most likely:

You buy a call option with a $50 strike. At expiration the stock is at $58. The option’s payoff (intrinsic value) is:

Which statement about forwards and futures is most accurate?

Compared with traditional mutual funds, hedge funds typically:

A client needs $500,000 in 10 years. She can save $35,000 at the end of each year, earning 6% annually. She will:

Maya is risk-averse — she prefers less risk for the same expected return. Which statement is most accurate?

Practice Bank

Level I

Level II

Level III

Choose your Level III pathway

Portfolio Management

Private Wealth

Private Markets

A bank quotes a stated annual rate of 8% compounded quarterly. The effective annual rate is closest to:

An investor deposits $10,000 at 6% compounded annually. After 5 years the balance is closest to:

Which slope coefficients are statistically significant at the 5% level?

The model's adjusted R² is closest to:

Calculate the plan's funded ratio and surplus.