ILLINOIS CHARTERED FINANCIAL ANALYST
EXAM PRACTICE QUESTIONS WITH CORRECT
ANSWERS (VERIFIED ANSWERS) PLUS
RATIONALES 2026 Q&A PDF:
1. Which of the following is considered a primary responsibility of a
CFA charter holder?
A) Marketing investment products
B) Conducting personal research only
C) Acting in the best interest of clients
D) Managing internal company operations
Rationale: CFA charter holders are bound by the CFA Institute Code of
Ethics and Standards of Professional Conduct to act in the best interest
of clients.
2. The price of a bond is most sensitive to changes in which of the
following?
A) Interest rates
B) Dividend yield
C) Exchange rates
D) Commodity prices
Rationale: Bond prices move inversely with interest rates due to the
present value of future cash flows.
3. Which financial statement provides information about a company’s
liquidity at a specific point in time?
A) Income Statement
B) Statement of Cash Flows
C) Balance Sheet
,D) Statement of Shareholders’ Equity
Rationale: The balance sheet shows assets, liabilities, and equity at a
particular date, reflecting liquidity.
4. The Capital Asset Pricing Model (CAPM) assumes that:
A) Investors have different expectations of risk and return
B) Markets are efficient
C) Beta is irrelevant
D) Investors can achieve arbitrage profits
Rationale: CAPM relies on the assumption of market efficiency to relate
expected returns to systematic risk.
5. If a company’s earnings per share (EPS) increases while the price
remains the same, the P/E ratio will:
A) Increase
B) Remain the same
C) Decrease
D) Cannot determine
Rationale: P/E ratio = Price / EPS. If EPS increases and price stays
constant, P/E decreases.
6. Which of the following is considered a systematic risk?
A) CEO turnover
B) Market crash
C) Product recall
D) Labor strike
Rationale: Systematic risk affects the entire market and cannot be
diversified away.
7. The net present value (NPV) of a project is positive when:
A) Internal rate of return < required rate of return
B) Payback period > project life
C) Internal rate of return > required rate of return
, D) Discount rate = 0
Rationale: A positive NPV indicates that the project’s return exceeds the
required rate.
8. Which ratio is most useful in assessing a company’s ability to meet
short-term obligations?
A) Debt-to-Equity
B) Return on Equity
C) Current Ratio
D) Price-to-Earnings
Rationale: The current ratio measures current assets relative to current
liabilities.
9. If the yield curve is upward sloping, which of the following is true?
A) Long-term rates < short-term rates
B) Long-term rates > short-term rates
C) Short-term rates = long-term rates
D) Rates are unpredictable
Rationale: An upward-sloping curve indicates higher yields for longer
maturities.
10. Diversification reduces:
A) Market risk
B) Unsystematic risk
C) Systematic risk
D) Beta
Rationale: Diversification primarily eliminates firm-specific
(unsystematic) risk.
11. Which of the following is considered a leading economic indicator?
A) Unemployment rate
B) GDP
C) Stock market returns
EXAM PRACTICE QUESTIONS WITH CORRECT
ANSWERS (VERIFIED ANSWERS) PLUS
RATIONALES 2026 Q&A PDF:
1. Which of the following is considered a primary responsibility of a
CFA charter holder?
A) Marketing investment products
B) Conducting personal research only
C) Acting in the best interest of clients
D) Managing internal company operations
Rationale: CFA charter holders are bound by the CFA Institute Code of
Ethics and Standards of Professional Conduct to act in the best interest
of clients.
2. The price of a bond is most sensitive to changes in which of the
following?
A) Interest rates
B) Dividend yield
C) Exchange rates
D) Commodity prices
Rationale: Bond prices move inversely with interest rates due to the
present value of future cash flows.
3. Which financial statement provides information about a company’s
liquidity at a specific point in time?
A) Income Statement
B) Statement of Cash Flows
C) Balance Sheet
,D) Statement of Shareholders’ Equity
Rationale: The balance sheet shows assets, liabilities, and equity at a
particular date, reflecting liquidity.
4. The Capital Asset Pricing Model (CAPM) assumes that:
A) Investors have different expectations of risk and return
B) Markets are efficient
C) Beta is irrelevant
D) Investors can achieve arbitrage profits
Rationale: CAPM relies on the assumption of market efficiency to relate
expected returns to systematic risk.
5. If a company’s earnings per share (EPS) increases while the price
remains the same, the P/E ratio will:
A) Increase
B) Remain the same
C) Decrease
D) Cannot determine
Rationale: P/E ratio = Price / EPS. If EPS increases and price stays
constant, P/E decreases.
6. Which of the following is considered a systematic risk?
A) CEO turnover
B) Market crash
C) Product recall
D) Labor strike
Rationale: Systematic risk affects the entire market and cannot be
diversified away.
7. The net present value (NPV) of a project is positive when:
A) Internal rate of return < required rate of return
B) Payback period > project life
C) Internal rate of return > required rate of return
, D) Discount rate = 0
Rationale: A positive NPV indicates that the project’s return exceeds the
required rate.
8. Which ratio is most useful in assessing a company’s ability to meet
short-term obligations?
A) Debt-to-Equity
B) Return on Equity
C) Current Ratio
D) Price-to-Earnings
Rationale: The current ratio measures current assets relative to current
liabilities.
9. If the yield curve is upward sloping, which of the following is true?
A) Long-term rates < short-term rates
B) Long-term rates > short-term rates
C) Short-term rates = long-term rates
D) Rates are unpredictable
Rationale: An upward-sloping curve indicates higher yields for longer
maturities.
10. Diversification reduces:
A) Market risk
B) Unsystematic risk
C) Systematic risk
D) Beta
Rationale: Diversification primarily eliminates firm-specific
(unsystematic) risk.
11. Which of the following is considered a leading economic indicator?
A) Unemployment rate
B) GDP
C) Stock market returns
