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CFA Level I study materials
CFA Level I study resources

CFA Level I practice questions

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Question 1Ethical and Professional Standards

When the CFA Institute Standards of Professional Conduct and applicable local law disagree, a member is required to:

  1. disclose the conflict and follow local law
  2. follow the client's written instructions
  3. follow the applicable local law
  4. follow the stricter requirement Correct answer.

Explanation

Standard I(A) Knowledge of the Law requires members to understand and comply with applicable law and with the Code and Standards, and where the two conflict to follow the more strict of the two. Local law can never justify conduct that the Standards prohibit.

Question 2Ethical and Professional Standards

A research analyst at a full-service firm concludes that a company covered by the firm's investment banking department should be rated a sell. Senior bankers ask her to delay the report until a pending financing closes. According to the Standards, the analyst should:

  1. let the bankers review and edit the report
  2. remove the sell conclusion and keep the report
  3. delay the report until the financing is completed
  4. publish the report without delay Correct answer.

Explanation

Standard I(B) Independence and Objectivity requires members to protect the integrity of their opinions and prohibits supervisors from withholding or altering recommendations to further other business interests. Investment banking revenue cannot take precedence over the analyst's independent conclusion.

Question 3Ethical and Professional Standards

An analyst includes in his report a table of earnings projections prepared by another firm, without identifying the source. The analyst has most likely:

  1. violated the Standards only if the other firm objects
  2. violated the Standards by committing plagiarism Correct answer.
  3. acted acceptably, because he verified the projections himself
  4. acted acceptably, because the projections are widely available

Explanation

Standard I(C) Misrepresentation prohibits plagiarism, which is the use of another person's or firm's analysis, forecasts, or projections without attribution. Attribution is required even when the material is publicly available, and verifying the numbers does not remove the need to cite the source.

Question 4Ethical and Professional Standards

A member is convicted of fraud involving dishonest conduct in a personal business venture unrelated to his employment. Under Standard I(D) Misconduct, the member has most likely:

  1. violated the Standards only if his employer's clients lost money
  2. violated the Standards only if the conduct was a criminal felony
  3. not violated the Standards, because the conduct was unrelated to his work
  4. violated the Standards, because it reflects on honesty and trust Correct answer.

Explanation

Standard I(D) covers conduct that reflects adversely on a member's honesty, trustworthiness, or professional competence, even when the conduct occurs outside professional activity. Fraudulent personal conduct is a classic example of such misconduct.

Question 5Ethical and Professional Standards

A member's client asks him to join the client's corporate board in exchange for an annual fee. Under Standard IV(B) Additional Compensation Arrangements, the member must:

  1. do nothing, because the client initiated the offer
  2. obtain written consent from his employer first Correct answer.
  3. obtain only verbal approval from his supervisor
  4. wait until the fee is received before reporting it

Explanation

Standard IV(B) requires members to obtain written consent from their employer before accepting compensation, fees, or benefits from a third party for services that may conflict with the employer's interest. Board service for a client creates exactly that kind of potential conflict.

Question 6Ethical and Professional Standards

A member combines widely available industry data with nonmaterial nonpublic information obtained from a supplier and concludes that a company's margins will fall. Trading on that conclusion is:

  1. prohibited, because any nonpublic information is material
  2. prohibited unless the supplier gives written consent
  3. permitted only after the conclusion is disclosed to the issuer
  4. permitted under the mosaic theory Correct answer.

Explanation

The mosaic theory allows members to act on conclusions reached by combining public information with nonmaterial nonpublic information. Standard II(A) is triggered only when the information is both material and nonpublic.

Question 7Ethical and Professional Standards

A trader enters large buy orders for a stock with no intention of executing them, aiming to create the appearance of demand before cancelling. This practice is:

  1. prohibited as a form of market manipulation Correct answer.
  2. acceptable if the exchange is notified in advance
  3. acceptable if the orders are cancelled the same day
  4. acceptable because no trade is ever executed

Explanation

Standard II(B) Market Manipulation prohibits practices that distort prices or artificially inflate trading volume, including entering orders with no intent to execute them. No completed trade is required for the prohibition to apply.

Question 8Ethical and Professional Standards

A manager directs a portion of a client's trades to a broker whose commissions are higher than those of other brokers, in return for research used in managing that client's account. The arrangement is most likely:

  1. acceptable only if the research is shared with every client of the firm
  2. prohibited, because higher commissions always breach the duty of loyalty
  3. acceptable if the manager tells the broker about the arrangement
  4. acceptable if the research benefits the client Correct answer.

Explanation

Standard III(A) permits client brokerage to be directed to a broker providing research that assists in managing the client's account, provided the manager continues to seek best execution and discloses the practice where required. The test is whether the client benefits from the arrangement.

Question 9Ethical and Professional Standards

A member allocates shares of an oversubscribed initial public offering to family accounts before filling orders from unrelated clients. The member most likely:

  1. acted properly, because family members paid full commissions
  2. acted properly, because the allocation was disclosed afterwards
  3. violated Standard III(B) Fair Dealing Correct answer.
  4. violated Standard III(B) only if clients complained

Explanation

Standard III(B) requires fair treatment of all clients when taking investment action; allocation procedures must be written and must not favour any client, including the member's family or the member's own accounts. Favouring family accounts in an oversubscribed offering is a clear breach.

Question 10Ethical and Professional Standards

An elderly client with an income-oriented investment policy statement verbally instructs her manager to buy a speculative small-cap stock with one-third of her portfolio. The manager should most likely:

  1. refuse all further orders from the client
  2. update the IPS before executing the trade Correct answer.
  3. execute the order immediately as instructed
  4. execute the order only if the client signs a waiver

Explanation

Standard III(C) requires that investments be consistent with the client's objectives, constraints, and stated needs, which are captured in the investment policy statement. A material change in strategy should be evaluated with the client and documented before the trade is placed.

Question 11Ethical and Professional Standards

A firm markets a new product by showing only the returns of the accounts that performed best and describing them as representative of the strategy. This most likely violates:

  1. Standard III(A) Loyalty, Prudence, and Care
  2. Standard V(A) Diligence and Reasonable Basis
  3. Standard VI(C) Referral Fees
  4. Standard III(D) Performance Presentation Correct answer.

Explanation

Standard III(D) requires that performance information be fair, accurate, and complete, and prohibits presenting selected results in a way that misleads clients. Showing only the best-performing accounts gives a false impression of the strategy's results.

Question 12Ethical and Professional Standards

While advising a client, a member learns that the client is engaged in an illegal scheme. Under Standard III(E) Preservation of Confidentiality, the member:

  1. must obtain the client's written consent before speaking to anyone
  2. may disclose the information to the proper authorities Correct answer.
  3. must publicly disclose the client's conduct
  4. must keep the information confidential in every case

Explanation

Standard III(E) protects client information from disclosure, but the protection does not extend to information about illegal activities. Members may report such activity to the appropriate authorities, and may be required to do so by law.

Question 13Ethical and Professional Standards

A member planning to leave her firm to start a competing business downloads her employer's client list and performance records to take with her. Under Standard IV(A) Loyalty, this is most likely:

  1. permitted, because employment contracts rarely mention client lists
  2. permitted, provided she deletes the files after contacting the clients
  3. prohibited, because client records belong to the employer Correct answer.
  4. permitted, because she developed most of those client relationships

Explanation

Standard IV(A) requires loyalty to the employer; members may make preparations to compete but may not take employer property such as client lists and records. The ownership of the records does not depend on which employee developed the relationships.

Question 14Ethical and Professional Standards

A supervisor learns that a subordinate has been making unsuitable recommendations. She asks him to stop and takes no further action. To comply with Standard IV(C) Responsibilities of Supervisors, she should have:

  1. relied on the employee's promise to stop the practice
  2. promptly investigated and limited his activities Correct answer.
  3. waited for the compliance department to act first
  4. suspended the employee without pay immediately

Explanation

Standard IV(C) requires supervisors to make reasonable efforts to detect and prevent violations, and once a violation is discovered, to respond promptly. That response includes investigating the matter and placing appropriate limits on the employee's activities until it is resolved.

Question 15Ethical and Professional Standards

Before making an investment recommendation to clients, a member is required to:

  1. have a reasonable and adequate basis for it Correct answer.
  2. use only research produced inside her own firm
  3. guarantee that the recommendation will be profitable
  4. obtain approval from the compliance department

Explanation

Standard V(A) Diligence and Reasonable Basis requires that recommendations and investment actions be supported by thorough investigation and appropriate research. The member must be able to justify the recommendation but cannot guarantee its outcome.

Question 16Ethical and Professional Standards

A member changes the firm's long-standing asset allocation model but does not inform clients whose accounts are managed under the previous approach. She has most likely violated:

  1. Standard V(A) Diligence and Reasonable Basis
  2. Standard VII(B) Reference to the CFA Institute Designation and the CFA Program
  3. Standard III(C) Suitability, because the new model may not suit her clients
  4. Standard V(B) Communication with Clients and Prospective Clients Correct answer.

Explanation

Standard V(B) requires members to disclose the basic characteristics of the investment process and to inform clients promptly of any change to that process. Failing to tell affected clients about the new allocation model breaches that duty.

Question 17Ethical and Professional Standards

A member's employer has no record-retention policy. To comply with Standard V(C) Record Retention, the member should most likely:

  1. retain records only when a client asks for them in writing
  2. rely on the compliance department to create a policy before she trades
  3. keep records only for recommendations that resulted in losses
  4. keep her own records supporting her analyses Correct answer.

Explanation

Standard V(C) requires members to maintain appropriate records supporting their analyses, recommendations, and investment actions. Where the firm provides no policy, the member must still develop her own records rather than proceed without any.

Question 18Ethical and Professional Standards

A member serves on the board of directors of a company whose shares she recommends to clients. To comply with Standard VI(A) Disclosure of Conflicts, she should most likely:

  1. resign from the board before publishing the recommendation
  2. disclose the board seat to her employer and clients Correct answer.
  3. say nothing, because board service is not compensated
  4. sell her personal holdings in the company

Explanation

Standard VI(A) requires members to disclose to clients and prospective clients, and to their employer, all matters that could reasonably be expected to impair their independence and objectivity. A board seat at a recommended company is such a matter.

Question 19Ethical and Professional Standards

An oversubscribed initial public offering is available to a member's firm. The member allocates a large block to her own account before filling client orders. She has most likely:

  1. acted properly if she discloses the allocation to clients
  2. acted properly because IPO shares are not client assets
  3. violated Standard VI(B) Priority of Transactions Correct answer.
  4. acted properly if she pays the same offering price as clients

Explanation

Standard VI(B) requires that client transactions take precedence over transactions for the member's own account. Allocating a limited, oversubscribed issue to herself ahead of clients is a direct breach of that priority.

Question 20Ethical and Professional Standards

A candidate who has registered for the Level II exam may most appropriately state that she:

  1. is a CFA, Level II
  2. is a CFA charterholder pending completion of Level III
  3. holds a partial CFA designation
  4. has passed Level I of the CFA Program Correct answer.

Explanation

Standard VII(B) permits candidates to state factually that they have passed a given level or are registered for a given exam, such as 'candidate in the CFA Program'. Claiming partial or pending designation status misrepresents the credential.

Question 21Quantitative Methods

An investor deposits $5,000 today in an account that earns 4% per year compounded annually. Assuming no withdrawals, the balance after three years is closest to:

  1. $5,624.32 Correct answer.
  2. $5,600.00
  3. $5,500.00
  4. $5,408.00

Explanation

The future value of a lump sum is PV × (1 + r)^N. Here, $5,000 × 1.04^3 = $5,624.32.

Question 22Quantitative Methods

An investor buys a share for $40, receives a $1 dividend, and sells the share for $44. The holding period return is closest to:

  1. 9.1%
  2. 15.0%
  3. 12.5% Correct answer.
  4. 10.0%

Explanation

Holding period return equals (ending value − beginning value + income) / beginning value. Thus ($44 − $40 + $1) / $40 = 12.5%.

Question 23Quantitative Methods

A return distribution has a long tail extending to the right. This distribution is best described as:

  1. negatively skewed, with the mean less than the median
  2. positively skewed, with the mean less than the median
  3. positively skewed, with the mean greater than the median Correct answer.
  4. symmetric, with the mean equal to the median

Explanation

A long right tail indicates positive skewness. In a positively skewed distribution, extreme large values pull the mean above the median.

Question 24Quantitative Methods

According to the central limit theorem, as sample size increases, the sampling distribution of the sample mean:

  1. approaches a normal distribution only if the population is normal
  2. has a standard deviation equal to the population standard deviation
  3. becomes more skewed regardless of the population
  4. approaches a normal distribution regardless of the population distribution Correct answer.

Explanation

The central limit theorem states that the sampling distribution of the sample mean approaches normality as sample size grows, for almost any population distribution. Its standard deviation is the population standard deviation divided by the square root of sample size.

Question 25Quantitative Methods

A correlation coefficient of -0.9 between two variables indicates:

  1. a strong negative linear relationship Correct answer.
  2. no linear relationship
  3. a strong positive linear relationship
  4. a weak negative linear relationship

Explanation

Correlation ranges from -1 to +1, and values near -1 indicate a strong negative linear relationship. A value of -0.9 is close to the negative extreme.

Question 26Quantitative Methods

Which measure of return is most appropriate for describing the compound rate of growth of an investment over several periods?

  1. Arithmetic mean return
  2. Geometric mean return Correct answer.
  3. Median return
  4. Harmonic mean return

Explanation

The geometric mean return accounts for compounding and describes the constant per-period rate that links the beginning and ending values. The arithmetic mean ignores compounding and overstates multiperiod growth.

Question 27Quantitative Methods

A bank quotes a stated annual rate of 12% compounded monthly. The effective annual rate is closest to:

  1. 12.00%
  2. 12.68% Correct answer.
  3. 12.36%
  4. 12.75%

Explanation

The effective annual rate is (1 + 0.12/12)^12 − 1 = 1.01^12 − 1, which equals approximately 12.68%.

Question 28Quantitative Methods

A project has a positive net present value when its cash flows are discounted at the firm's required rate of return. The project's internal rate of return is:

  1. equal to the required rate of return
  2. negative
  3. less than the required rate of return
  4. greater than the required rate of return Correct answer.

Explanation

Net present value falls as the discount rate rises. A positive NPV at the required return means the IRR, which produces zero NPV, must exceed that required return.

Question 29Quantitative Methods

An investment returns 10%, -5%, and 20% over three consecutive years. The geometric mean return is closest to:

  1. 7.84% Correct answer.
  2. 8.33%
  3. 6.67%
  4. 8.00%

Explanation

The geometric mean return is [(1.10)(0.95)(1.20)]^(1/3) − 1. The product is 1.254, whose cube root is about 1.0784, giving 7.84%.

Question 30Quantitative Methods

An investor buys $1,000 of a stock at the end of each of three months, at prices of $10, $12.50, and $20 per share. The average price paid per share is closest to:

  1. $12.50
  2. $13.04 Correct answer.
  3. $13.50
  4. $14.17

Explanation

When equal dollar amounts are invested at different prices, the average cost per share is the harmonic mean of the prices. It is 3 / (1/10 + 1/12.50 + 1/20) = 3 / 0.23, or about $13.04.

Question 31Quantitative Methods

Fund A has an expected return of 12% and a standard deviation of 18%. Fund B has an expected return of 8% and a standard deviation of 10%. Based on the coefficient of variation, which fund offers less risk per unit of expected return?

  1. Fund B, because it has the lower standard deviation
  2. Fund A, because its coefficient of variation is 0.67
  3. Fund A, because it has the higher expected return
  4. Fund B, because its coefficient of variation is 1.25 Correct answer.

Explanation

The coefficient of variation is the standard deviation divided by the mean. Fund A's is 18/12 = 1.50 and Fund B's is 10/8 = 1.25, so Fund B has less risk per unit of expected return.

Question 32Quantitative Methods

For any distribution with a mean of 50 and a standard deviation of 10, the minimum proportion of observations within the interval 30 to 70 is:

  1. 95%
  2. 75% Correct answer.
  3. 68%
  4. 50%

Explanation

Chebyshev's inequality states that at least 1 − 1/k^2 of observations lie within k standard deviations of the mean. The interval 30 to 70 spans k = 2 standard deviations, so at least 1 − 1/4 = 75% of observations lie within it.

Question 33Quantitative Methods

Given P(A) = 0.4, P(B) = 0.3, and P(A and B) = 0.1, the probability of A given B, P(A|B), is:

  1. 0.333 Correct answer.
  2. 0.100
  3. 0.250
  4. 0.600

Explanation

Conditional probability is P(A|B) = P(A and B) / P(B). Substituting gives 0.1 / 0.3 = 0.333.

Question 34Quantitative Methods

A discrete random variable X takes values 0, 1, and 2 with probabilities 0.2, 0.5, and 0.3, respectively. The expected value of X is:

  1. 0.50
  2. 1.50
  3. 1.10 Correct answer.
  4. 1.00

Explanation

The expected value is the probability-weighted sum of the possible values: (0 × 0.2) + (1 × 0.5) + (2 × 0.3) = 1.10.

Question 35Quantitative Methods

A random sample of 100 observations is drawn from a population with a standard deviation of 20. The standard error of the sample mean is:

  1. 0.2
  2. 0.5
  3. 20.0
  4. 2.0 Correct answer.

Explanation

The standard error of the sample mean is the population standard deviation divided by the square root of the sample size. Here, 20 / √100 = 20 / 10 = 2.0.

Question 36Quantitative Methods

A sample of 25 observations has a mean of 50 and a sample standard deviation of 10. Using a critical value of 1.96, the 95% confidence interval for the population mean is closest to:

  1. [45.00, 55.00]
  2. [46.08, 53.92] Correct answer.
  3. [48.04, 51.96]
  4. [40.40, 59.60]

Explanation

The confidence interval is the sample mean plus or minus the critical value times the standard error, where the standard error is 10/√25 = 2. Thus 50 ± (1.96 × 2) gives approximately [46.08, 53.92].

Question 37Quantitative Methods

A disease affects 1% of a population. A test correctly identifies 95% of people with the disease and correctly identifies 90% of people without the disease. A person tests positive. The probability the person actually has the disease is closest to:

  1. 0.95%
  2. 86.4%
  3. 9.5%
  4. 8.8% Correct answer.

Explanation

Bayes' formula gives P(disease | positive) = (0.95 × 0.01) / [(0.95 × 0.01) + (0.10 × 0.99)]. This equals 0.0095 / 0.1085, or about 8.8%.

Question 38Quantitative Methods

A portfolio is 60% invested in Asset A and 40% in Asset B. Asset A has a standard deviation of 20%; Asset B has a standard deviation of 10%. The correlation between returns is 0.5. The portfolio standard deviation is closest to:

  1. 16.0%
  2. 14.4% Correct answer.
  3. 13.0%
  4. 10.0%

Explanation

Portfolio variance is wA^2σA^2 + wB^2σB^2 + 2wAwBρσAσB = 0.36(0.04) + 0.16(0.01) + 2(0.6)(0.4)(0.5)(0.2)(0.1) = 0.0208. The square root is about 14.4%.

Question 39Quantitative Methods

An analyst tests a null hypothesis at the 5% significance level and obtains a p-value of 0.03. The most appropriate conclusion is that the null hypothesis:

  1. should not be rejected, because the test statistic is negative
  2. should be rejected, because the p-value equals the probability the null hypothesis is true
  3. should not be rejected, because 0.03 is less than 0.05
  4. should be rejected, because the p-value is less than the significance level Correct answer.

Explanation

The decision rule is to reject the null hypothesis when the p-value is less than the chosen significance level. Since 0.03 < 0.05, the null hypothesis is rejected.

Question 40Quantitative Methods

If continuously compounded returns on an asset are normally distributed, the asset's price is best described as:

  1. normally distributed but truncated at zero
  2. uniformly distributed over positive values
  3. normally distributed and able to take negative values
  4. lognormally distributed and unable to take negative values Correct answer.

Explanation

If the logarithm of price is normally distributed, the price itself follows a lognormal distribution. A lognormal variable is positively skewed and bounded below by zero, so it cannot take negative values.

Question 41Economics

If the price of a good falls by 10% and the quantity demanded rises by 25%, the price elasticity of demand (absolute value) is:

  1. 0.4
  2. 15
  3. 2.5 Correct answer.
  4. 0.25

Explanation

Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, taken in absolute value: 25% / 10% = 2.5. A value greater than 1 means demand is elastic over this range.

Question 42Economics

Which transaction is included in the calculation of a country's GDP for the current year?

  1. A retiree receives a government pension payment.
  2. A firm builds a new warehouse. Correct answer.
  3. A household purchases a 20-year-old house.
  4. An investor buys shares of an existing company.

Explanation

GDP measures the market value of final goods and services produced during the period, and new structures built by firms count as gross private domestic investment. Resales of existing assets, purchases of financial claims, and transfer payments do not reflect current production.

Question 43Economics

Which type of unemployment is most closely associated with a recession-induced fall in aggregate demand?

  1. Seasonal unemployment
  2. Structural unemployment
  3. Cyclical unemployment Correct answer.
  4. Frictional unemployment

Explanation

Cyclical unemployment arises from a shortfall in aggregate demand during recessions and tends to fall as the economy recovers. Frictional and structural unemployment persist even at full employment, while seasonal unemployment follows predictable annual patterns.

Question 44Economics

The theory of comparative advantage implies that a country should specialize in producing goods for which it has:

  1. the lowest opportunity cost Correct answer.
  2. the highest domestic price
  3. the largest absolute output per worker
  4. the lowest money wage rate

Explanation

Comparative advantage is determined by opportunity cost, so gains from trade arise when a country specializes where the amount of other output given up per additional unit is smallest. Absolute productivity levels and wage rates alone do not determine the pattern of mutually beneficial trade.

Question 45Economics

A binding price floor set above the equilibrium price will most likely result in:

  1. an increase in quantity demanded
  2. no change in market quantity
  3. a shortage of the good
  4. a surplus of the good Correct answer.

Explanation

A price floor above equilibrium prevents the price from falling to its market-clearing level, so quantity supplied exceeds quantity demanded and a surplus results. A shortage would instead arise from a binding price ceiling set below equilibrium.

Question 46Economics

During the contraction phase of a business cycle, an economy typically experiences:

  1. rising employment and rising inflation
  2. falling output and rising unemployment Correct answer.
  3. rising output and falling unemployment
  4. falling unemployment and falling prices

Explanation

In a contraction, real output and employment decline while unemployment rises, and inflation often decelerates. The combinations in the other options describe expansions or other phases of the cycle.

Question 47Economics

A firm's total fixed cost is $200 and its total variable cost at 10 units of output is $300. The average total cost at 10 units is:

  1. $500
  2. $30
  3. $50 Correct answer.
  4. $20

Explanation

Total cost equals fixed cost plus variable cost, or $200 + $300 = $500, and average total cost is total cost divided by output: $500 / 10 = $50. Average fixed and average variable costs can also be summed to reach the same figure.

Question 48Economics

Compared with a perfectly competitive market with the same cost structure, a profit-maximizing monopolist will most likely produce:

  1. a larger quantity at a lower price
  2. a smaller quantity at higher price Correct answer.
  3. a larger quantity at a higher price
  4. the same quantity at the same price

Explanation

A monopolist sets marginal revenue equal to marginal cost and then charges the price read from the demand curve, which exceeds marginal cost. Because marginal revenue lies below price, the monopolist restricts output and charges more than a competitive market would.

Question 49Economics

To reduce inflation, a central bank would most appropriately:

  1. lower the reserve requirement
  2. sell government securities in the open market Correct answer.
  3. purchase government securities in the open market
  4. lower the policy interest rate

Explanation

Selling securities drains reserves from the banking system, pushes short-term interest rates higher, and dampens aggregate demand, which reduces inflationary pressure. Purchasing securities, cutting reserve requirements, and lowering the policy rate all work in the expansionary direction.

Question 50Economics

If the reserve requirement is 20% and banks hold no excess reserves, the simple deposit multiplier is:

  1. 5 Correct answer.
  2. 0.2
  3. 1.25
  4. 20

Explanation

The simple deposit multiplier equals the reciprocal of the reserve requirement: 1 / 0.20 = 5. It gives the maximum potential expansion of deposits from each additional unit of reserves when there are no currency or excess-reserve leakages.