CFA Level II Exam Questions And Correct
Answers (Verified Answers) Plus
Rationales 2025/2026 Q&A | Instant
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1. An analyst estimates the following regression:
𝑅𝑖 = 1.2 + 0.8𝑅𝑚 .
If the market return is 10%, the expected return of the asset is
closest to:
A. 8.0%
B. 9.2%
C. 10.0%
D. 11.2%
Answer: B. 9.2%
Expected return = 1.2 + (0.8 × 10) = 9.2%.
2. In time-series modeling, a unit root in a variable indicates:
A. Stationarity
B. Mean reversion
C. Non-stationarity
D. Constant variance
Answer: C. Non-stationarity
A unit root means the series has a stochastic trend and is not
stationary.
3. Which model is most appropriate for forecasting volatility
clustering?
,A. AR(1)
B. GARCH
C. Linear regression
D. Probit model
Answer: B. GARCH
GARCH models conditional variance and captures volatility clustering.
4. Heteroskedasticity primarily affects:
A. Coefficient estimates
B. Standard errors
C. R-squared
D. Mean of dependent variable
Answer: B. Standard errors
Heteroskedasticity makes standard errors unreliable though
coefficients remain unbiased.
5. A Durbin-Watson statistic close to 2 suggests:
A. Positive autocorrelation
B. Negative autocorrelation
C. No autocorrelation
D. Perfect correlation
Answer: C. No autocorrelation
A value near 2 indicates absence of serial correlation.
Economics
6. If a currency appreciates, exports will most likely:
A. Increase
B. Decrease
,C. Remain unchanged
D. Increase then decrease
Answer: B. Decrease
A stronger currency makes exports more expensive to foreign buyers.
7. In the Mundell-Fleming model, expansionary fiscal policy with
fixed exchange rates leads to:
A. Higher interest rates
B. Capital outflows
C. Higher output
D. Currency depreciation
Answer: C. Higher output
Fiscal expansion increases demand under fixed exchange rates.
8. The Fisher equation links:
A. Real interest rate and inflation
B. Exchange rate and inflation
C. GDP and inflation
D. Bond yield and duration
Answer: A. Real interest rate and inflation
Nominal rate ≈ real rate + expected inflation.
9. Purchasing Power Parity implies:
A. Exchange rates adjust to inflation differences
B. Interest rates determine exchange rates
C. Bond yields determine inflation
D. Capital flows determine PPP
, Answer: A. Exchange rates adjust to inflation differences
PPP suggests currencies adjust so identical goods cost the same.
10. If domestic inflation exceeds foreign inflation, the domestic
currency will most likely:
A. Appreciate
B. Depreciate
C. Remain stable
D. Become pegged
Answer: B. Depreciate
Higher inflation reduces purchasing power and weakens the currency.
Financial Reporting & Analysis
11. Under IFRS, development costs are:
A. Always expensed
B. Always capitalized
C. Capitalized if criteria met
D. Ignored
Answer: C. Capitalized if criteria met
IFRS allows capitalization when technical feasibility and future
benefits are demonstrated.
12. Inventory write-downs under IFRS can be:
A. Reversed
B. Never reversed
C. Converted to LIFO
D. Amortized
Answers (Verified Answers) Plus
Rationales 2025/2026 Q&A | Instant
Download Pdf
1. An analyst estimates the following regression:
𝑅𝑖 = 1.2 + 0.8𝑅𝑚 .
If the market return is 10%, the expected return of the asset is
closest to:
A. 8.0%
B. 9.2%
C. 10.0%
D. 11.2%
Answer: B. 9.2%
Expected return = 1.2 + (0.8 × 10) = 9.2%.
2. In time-series modeling, a unit root in a variable indicates:
A. Stationarity
B. Mean reversion
C. Non-stationarity
D. Constant variance
Answer: C. Non-stationarity
A unit root means the series has a stochastic trend and is not
stationary.
3. Which model is most appropriate for forecasting volatility
clustering?
,A. AR(1)
B. GARCH
C. Linear regression
D. Probit model
Answer: B. GARCH
GARCH models conditional variance and captures volatility clustering.
4. Heteroskedasticity primarily affects:
A. Coefficient estimates
B. Standard errors
C. R-squared
D. Mean of dependent variable
Answer: B. Standard errors
Heteroskedasticity makes standard errors unreliable though
coefficients remain unbiased.
5. A Durbin-Watson statistic close to 2 suggests:
A. Positive autocorrelation
B. Negative autocorrelation
C. No autocorrelation
D. Perfect correlation
Answer: C. No autocorrelation
A value near 2 indicates absence of serial correlation.
Economics
6. If a currency appreciates, exports will most likely:
A. Increase
B. Decrease
,C. Remain unchanged
D. Increase then decrease
Answer: B. Decrease
A stronger currency makes exports more expensive to foreign buyers.
7. In the Mundell-Fleming model, expansionary fiscal policy with
fixed exchange rates leads to:
A. Higher interest rates
B. Capital outflows
C. Higher output
D. Currency depreciation
Answer: C. Higher output
Fiscal expansion increases demand under fixed exchange rates.
8. The Fisher equation links:
A. Real interest rate and inflation
B. Exchange rate and inflation
C. GDP and inflation
D. Bond yield and duration
Answer: A. Real interest rate and inflation
Nominal rate ≈ real rate + expected inflation.
9. Purchasing Power Parity implies:
A. Exchange rates adjust to inflation differences
B. Interest rates determine exchange rates
C. Bond yields determine inflation
D. Capital flows determine PPP
, Answer: A. Exchange rates adjust to inflation differences
PPP suggests currencies adjust so identical goods cost the same.
10. If domestic inflation exceeds foreign inflation, the domestic
currency will most likely:
A. Appreciate
B. Depreciate
C. Remain stable
D. Become pegged
Answer: B. Depreciate
Higher inflation reduces purchasing power and weakens the currency.
Financial Reporting & Analysis
11. Under IFRS, development costs are:
A. Always expensed
B. Always capitalized
C. Capitalized if criteria met
D. Ignored
Answer: C. Capitalized if criteria met
IFRS allows capitalization when technical feasibility and future
benefits are demonstrated.
12. Inventory write-downs under IFRS can be:
A. Reversed
B. Never reversed
C. Converted to LIFO
D. Amortized
