CFA Level II practice questions

Question 1

An analyst assembles several individually immaterial non-public details from suppliers and customers and, combined with public filings, concludes the issuer will miss guidance. Acting on that conclusion is:

1. AA violation of Standard II(A)
2. BPermitted under the mosaic theory
3. CPermitted only after disclosure to the issuer
4. DA violation of Standard V(A)

Question 2

A firm offers premium clients earlier access to research than standard clients, and discloses the tiering to all clients. Under Standard III(B) this is:

1. AA violation, because all clients must receive research simultaneously
2. BPermitted, because the differential service is disclosed
3. CA violation, unless the premium fee is waived
4. DPermitted only for institutional clients

Question 3

A manager presents a composite that excludes two terminated accounts that underperformed. This most likely violates:

1. AStandard III(D) Performance Presentation
2. BStandard VI(B) Priority of Transactions
3. CStandard IV(A) Loyalty to Employer
4. DStandard I(B) Independence and Objectivity

Question 4

A member takes a research report prepared at her previous employer and reuses its analysis, with attribution removed, at her new firm. She has violated:

1. AStandard IV(A) only
2. BStandard I(C) Misrepresentation and Standard IV(A) Loyalty
3. CStandard V(B) only
4. DNo standard, because she wrote the original analysis

Question 5

An investment firm allocates a hot IPO pro rata across all suitable client accounts, including accounts in which employees are beneficial owners. Under Standard VI(B), this is:

1. AAcceptable if client accounts are filled before employee-owned accounts
2. BAcceptable in all circumstances
3. CA violation regardless of the allocation order
4. DAcceptable only if the employees are not portfolio managers

Question 6

A multiple regression reports a significant F-statistic but no individually significant t-statistics. This most likely indicates:

1. AHeteroskedasticity
2. BSerial correlation
3. CMulticollinearity
4. DA unit root

Question 7

Adding a variable to a regression raises R² from 0.42 to 0.44 but lowers adjusted R² from 0.39 to 0.38. The analyst should conclude the variable:

1. AImproves the model and should be retained
2. BDoes not justify its loss of degrees of freedom
3. CIntroduces heteroskedasticity
4. DMakes the model non-stationary

Question 8

An AR(1) model is estimated on a series with a unit root. The most appropriate remedy is to:

1. AAdd a lag to the model
2. BFirst-difference the series
3. CUse White-corrected standard errors
4. DApply a log transformation to the dependent variable

Question 9

Conditional heteroskedasticity in a regression most directly causes:

1. ABiased coefficient estimates
2. BUnreliable standard errors and invalid t-tests
3. CA spurious unit root
4. DPerfect multicollinearity

Question 10

A machine learning model shows very low training error and substantially higher validation error. This is best described as:

1. AUnderfitting
2. BOverfitting
3. CData leakage
4. DCorrect generalisation

Question 11

An investor borrows in a low-interest-rate currency and invests in a high-interest-rate currency. This carry trade is profitable only if:

1. AUncovered interest rate parity holds
2. BUncovered interest rate parity fails
3. CCovered interest rate parity fails
4. DPurchasing power parity holds in the short run

Question 12

Under the neoclassical growth model, a permanent increase in the savings rate will:

1. ARaise the long-run growth rate of output per capita
2. BRaise the level of output per capita but not its long-run growth rate
3. CHave no effect on either the level or the growth rate
4. DLower the steady-state capital-to-labour ratio

Question 13

Relative purchasing power parity predicts that a country with persistently higher inflation than its trading partners will experience:

1. ACurrency appreciation
2. BCurrency depreciation
3. CNo change in the nominal exchange rate
4. DA widening real interest differential only

Question 14

Poorer countries that adopt the right institutional framework converge toward the income levels of richer members of their group, while countries without those institutions fall further behind. This is best described as:

1. AAbsolute convergence
2. BConditional convergence
3. CClub convergence
4. DDivergence

Question 15

Under the FX portfolio balance approach, a country running persistent fiscal deficits will most likely see its currency:

1. AAppreciate indefinitely as capital flows in
2. BAppreciate in the short run and depreciate in the long run
3. CDepreciate immediately and permanently
4. DRemain unchanged in both horizons

Question 16

An investor holds 30% of an investee and exercises significant influence. Compared with proportionate consolidation, the equity method will report:

1. AHigher revenue and higher total assets
2. BThe same net income but lower revenue and lower total assets
3. CLower net income and higher total assets
4. DThe same revenue but different net income

Question 17

A sponsor lowers the discount rate used to value its defined benefit obligation. All else equal, this will:

1. ADecrease the PBO and improve funded status
2. BIncrease the PBO and worsen funded status
3. CLeave the PBO unchanged
4. DIncrease plan assets

Question 18

A subsidiary’s functional currency is its local currency. The appropriate translation method and the treatment of the resulting adjustment are:

1. ATemporal method; gain or loss in net income
2. BCurrent rate method; adjustment in other comprehensive income
3. CTemporal method; adjustment in OCI
4. DCurrent rate method; gain or loss in net income

Question 19

Which of the following is the strongest indicator of low reporting quality rather than merely low results quality?

1. ADeclining margins across several periods
2. BA large one-off restructuring charge
3. CFrequent, unexplained changes in accounting estimates that raise reported income
4. DA cyclical downturn in revenue

Question 20

In analysing a bank, which ratio most directly addresses the adequacy of loss absorption capacity?

1. ACommon equity tier 1 ratio
2. BNet interest margin
3. CCost-to-income ratio
4. DLoan-to-deposit ratio

Question 21

A firm repurchases shares at a market price above book value per share. The effect on book value per share is:

1. AAn increase
2. BA decrease
3. CNo change
4. DAn increase only if funded with cash

Question 22

A firm earns EPS of $4.00, targets a 40% payout ratio and currently pays $1.00. With an adjustment factor of 0.25, the target payout adjustment model predicts a dividend increase of:

1. A$0.15
2. B$0.25
3. C$0.60
4. D$1.60

Question 23

When estimating the beta of a private firm using the pure-play method, the analyst should relever the unlevered beta using:

1. AThe comparable company's debt-to-equity ratio
2. BThe subject company's target debt-to-equity ratio
3. CThe industry average debt-to-equity ratio
4. DA zero debt-to-equity ratio

Question 24

In a share-exchange acquisition rather than a cash acquisition, the risk that expected synergies fail to materialise is:

1. ABorne entirely by the acquirer
2. BShared between acquirer and target shareholders
3. CBorne entirely by the target
4. DEliminated by the exchange ratio

Question 25

Which ESG integration approach explicitly excludes entire industries from the investable universe?

1. ABest-in-class
2. BNegative screening
3. CThematic investing
4. DEngagement and active ownership

Question 26

A firm has negative free cash flow to equity, pays no dividend, and applies clean surplus accounting. The most appropriate valuation model is:

1. AGordon growth dividend discount model
2. BFCFE discount model
3. CResidual income model
4. DTwo-stage dividend discount model

Question 27

An analyst forecasts FCFF and discounts it at the cost of equity. This produces:

1. AA correct estimate of equity value
2. BA correct estimate of firm value
3. CAn overstated value, because the discount rate is too high for the cash flow
4. DAn understated value, because the discount rate is too high for the cash flow

Question 28

A firm has book value per share of $20, expected EPS of $3.00 and a required return on equity of 11%. The residual income for the coming year is:

1. A$0.80
2. B$2.20
3. C$3.00
4. D$5.20

Question 29

A controlling-interest value is $100 per share. A discount for lack of control of 20% and a discount for lack of marketability of 15% apply. The minority, non-marketable value is closest to:

1. A$65.00
2. B$68.00
3. C$70.00
4. D$80.00

Question 30

Compared with a trailing P/E, a justified leading P/E is preferable when:

1. AEarnings are volatile and the most recent year was unrepresentative
2. BThe firm has no analyst coverage
3. CBook value is negative
4. DThe firm pays no dividend

Question 31

A manager expects rates to evolve exactly as implied by the current forward curve. Riding the yield curve will most likely produce:

1. AExcess return over a buy-and-hold strategy
2. BThe same return as any other maturity strategy
3. CA loss relative to the benchmark
4. DA gain only if the curve is inverted

Question 32

The one-year spot rate is 3% and the two-year spot rate is 4%. The one-year forward rate one year from now is closest to:

1. A3.50%
2. B4.00%
3. C5.01%
4. D7.00%

Question 33

Relative to an otherwise identical option-free bond, a callable bond has:

1. AA higher value and higher effective duration
2. BA lower value and lower effective duration when rates fall
3. CA higher value and lower effective duration
4. DThe same value but different convexity

Question 34

Which criticism applies most directly to structural credit models such as Merton?

1. AThey require an estimation sample of historical defaults
2. BThey rely on unobservable asset values and volatilities
3. CThey cannot incorporate the capital structure
4. DThey assume default is a surprise jump process

Question 35

A credit protection buyer on a CDS is economically equivalent to:

1. ABeing long the reference bond
2. BBeing short credit risk of the reference entity
3. CSelling a put on the reference entity
4. DBeing long the benchmark government bond only

Question 36

Three months after inception, the forward price on a contract has risen from $50 to $53. With six months remaining and a risk-free rate of 4%, the value to the long is closest to:

1. A$2.94
2. B$3.00
3. C$3.06
4. D$0.00

Question 37

In the Black–Scholes–Merton model, N(d₂) is best interpreted as:

1. AThe delta of the call
2. BThe risk-neutral probability the option finishes in the money
3. CThe actual probability the option finishes in the money
4. DThe present value factor applied to the strike

Question 38

A dealer is short gamma and rebalances a delta hedge only weekly. A large move in the underlying in either direction will most likely produce:

1. AA hedging gain
2. BA hedging loss
3. CNo effect, because the book is delta neutral
4. DA gain only if the move is upward

Question 39

An increase in the volatility of the underlying will, all else equal:

1. AIncrease call values and decrease put values
2. BDecrease call values and increase put values
3. CIncrease both call and put values
4. DLeave both unchanged

Question 40

Two months after inception of a plain vanilla interest rate swap, market rates have fallen. The value of the swap to the fixed-rate payer is:

1. APositive
2. BNegative
3. CZero
4. DPositive only if the swap is collateralised

Question 41

A commodity futures curve is in contango. An investor holding a long-only rolling futures position will most likely earn:

1. AA positive roll return
2. BA negative roll return
3. CA roll return of exactly zero
4. DA roll return independent of the curve shape

Question 42

A REIT reports net income of $40m, depreciation of $22m and gains on property sales of $6m. Funds from operations is:

1. A$50m
2. B$56m
3. C$62m
4. D$68m

Question 43

A merger arbitrage strategy has a return profile most similar to:

1. AA long call on the target
2. BA short put on deal completion
3. CA long straddle
4. DA long position in the acquirer

Question 44

Compared with direct real estate ownership, publicly traded REITs most likely exhibit:

1. ALower liquidity and lower short-run equity correlation
2. BHigher liquidity and higher short-run equity correlation
3. CHigher liquidity and lower short-run equity correlation
4. DIdentical liquidity and correlation

Question 45

Under the theory of storage, a market in contango is best explained by:

1. AA high convenience yield
2. BHigh storage costs relative to the convenience yield
3. CProducer hedging pressure
4. DBackwardated inventory levels

Question 46

A manager has an information coefficient of 0.05, 100 independent bets per year and a transfer coefficient of 0.8. The expected information ratio is closest to:

1. A0.04
2. B0.40
3. C0.50
4. D4.00

Question 47

A portfolio holds 400 stocks but all positions reflect a single macroeconomic view. Under the fundamental law of active management, breadth is closest to:

1. A400
2. B20
3. C1
4. D400 divided by the transfer coefficient

Question 48

A portfolio has a one-day 95% VaR of $1.2m. The most accurate interpretation is:

1. AThe maximum loss on any single day is $1.2m
2. BOn 5% of days the loss is expected to exceed $1.2m
3. CThe average daily loss is $1.2m
4. DLosses will never exceed $1.2m in a month

Question 49

A backtest uses financial statement data as later restated rather than as originally reported. This introduces:

1. ASurvivorship bias
2. BLook-ahead bias
3. CData snooping bias
4. DSelection bias

Question 50

An ETF trades persistently at a premium to net asset value. The most likely cause is:

1. AA failure of the creation/redemption mechanism
2. BHigh portfolio turnover within the fund
3. CA high expense ratio
4. DA large number of authorised participants