Chartered Financial Analyst (CFA) Level I
Examination Professional Practice Exam
Questions And Correct Answers (Verified
Answers) Plus Rationales 2026 Q&A |
Instant Download Pdf
1. An analyst is evaluating two bonds with identical credit risk and maturity
but different coupon rates. If the yield to maturity (YTM) for both bonds
increases by 50 basis points, which bond will experience the larger
percentage price decrease?
A. The bond with the higher coupon rate.
B. The bond with the lower coupon rate.
C. Both bonds will experience the exact same percentage price decrease.
D. The bond with the higher duration.
Answer: B
Rationale: Duration is inversely related to the coupon rate; bonds with lower
coupon rates have higher duration, meaning they are more sensitive to interest
rate changes and will experience larger percentage price fluctuations for a given
change in YTM.
2. Which of the following statements regarding the GIPS standards is most
accurate?
A. GIPS compliance is mandatory for all investment management firms.
B. Firms must include all fee-paying discretionary portfolios in at least one
composite.
,C. GIPS allow firms to cherry-pick portfolios to create a composite with the best
performance.
D. Only the firm’s most profitable portfolios are required to be included in
composites.
Answer: B
Rationale: Under GIPS standards, all actual fee-paying discretionary portfolios
must be included in at least one composite to ensure performance reporting is
representative and not subject to selection bias.
3. A company has a return on equity (ROE) of 15% and a retention ratio of
60%. What is the sustainable growth rate?
A. 6%
B. 9%
C. 10%
D. 25%
Answer: B
Rationale: The sustainable growth rate is calculated as the product of the
retention ratio and the return on equity, which is 0.60 * 0.15 = 0.09, or 9%.
4. An investor purchases a stock for $50. After one year, the stock pays a
dividend of $2 and the investor sells it for $55. What is the holding period
return (HPR)?
A. 10%
B. 12%
C. 14%
D. 7%
Answer: C
,Rationale: The HPR is calculated as (Price at end + Dividend - Price at start) /
Price at start = (55 + 2 - 50) / 50 = 7/50 = 0.14, or 14%.
5. In the context of hypothesis testing, what is the probability of rejecting a
true null hypothesis called?
A. Power of the test
B. Type I error
C. Type II error
D. Significance level
Answer: B
Rationale: A Type I error occurs when the null hypothesis is rejected even though
it is true, and the probability of making this error is denoted by the significance
level alpha.
6. According to the capital asset pricing model (CAPM), what is the expected
return of a stock with a beta of 1.2 if the risk-free rate is 3% and the
expected market return is 10%?
A. 11.4%
B. 12%
C. 13%
D. 15%
Answer: A
Rationale: The CAPM formula is Expected Return = Risk-free rate + Beta *
(Market return - Risk-free rate) = 3% + 1.2 * (10% - 3%) = 3% + 8.4% = 11.4%.
7. Which of the following inventory valuation methods will result in the
highest net income during a period of rising prices?
A. LIFO
B. FIFO
, C. Weighted average cost
D. Specific identification
Answer: B
Rationale: During periods of rising prices, FIFO (first-in, first-out) assigns older,
lower-cost inventory to the cost of goods sold, resulting in lower expenses and
higher reported net income compared to LIFO.
8. A bond is trading at a premium. Which of the following relationships is
true?
A. Coupon rate < Current yield < Yield to maturity
B. Yield to maturity < Current yield < Coupon rate
C. Current yield < Yield to maturity < Coupon rate
D. Coupon rate = Current yield = Yield to maturity
Answer: B
Rationale: For a premium bond, the price is above par, which causes the yield to
maturity to be the lowest, followed by the current yield, with the coupon rate
being the highest.
9. Which of the following is a component of the CFA Institute Standards of
Professional Conduct?
A. Standards of Practice
B. Professionalism
C. Ethics in Financial Reporting
D. Fiduciary Duty to Regulators
Answer: B
Rationale: Professionalism is one of the seven main sections of the CFA Institute
Standards of Professional Conduct, which guides members in their daily
activities.
Examination Professional Practice Exam
Questions And Correct Answers (Verified
Answers) Plus Rationales 2026 Q&A |
Instant Download Pdf
1. An analyst is evaluating two bonds with identical credit risk and maturity
but different coupon rates. If the yield to maturity (YTM) for both bonds
increases by 50 basis points, which bond will experience the larger
percentage price decrease?
A. The bond with the higher coupon rate.
B. The bond with the lower coupon rate.
C. Both bonds will experience the exact same percentage price decrease.
D. The bond with the higher duration.
Answer: B
Rationale: Duration is inversely related to the coupon rate; bonds with lower
coupon rates have higher duration, meaning they are more sensitive to interest
rate changes and will experience larger percentage price fluctuations for a given
change in YTM.
2. Which of the following statements regarding the GIPS standards is most
accurate?
A. GIPS compliance is mandatory for all investment management firms.
B. Firms must include all fee-paying discretionary portfolios in at least one
composite.
,C. GIPS allow firms to cherry-pick portfolios to create a composite with the best
performance.
D. Only the firm’s most profitable portfolios are required to be included in
composites.
Answer: B
Rationale: Under GIPS standards, all actual fee-paying discretionary portfolios
must be included in at least one composite to ensure performance reporting is
representative and not subject to selection bias.
3. A company has a return on equity (ROE) of 15% and a retention ratio of
60%. What is the sustainable growth rate?
A. 6%
B. 9%
C. 10%
D. 25%
Answer: B
Rationale: The sustainable growth rate is calculated as the product of the
retention ratio and the return on equity, which is 0.60 * 0.15 = 0.09, or 9%.
4. An investor purchases a stock for $50. After one year, the stock pays a
dividend of $2 and the investor sells it for $55. What is the holding period
return (HPR)?
A. 10%
B. 12%
C. 14%
D. 7%
Answer: C
,Rationale: The HPR is calculated as (Price at end + Dividend - Price at start) /
Price at start = (55 + 2 - 50) / 50 = 7/50 = 0.14, or 14%.
5. In the context of hypothesis testing, what is the probability of rejecting a
true null hypothesis called?
A. Power of the test
B. Type I error
C. Type II error
D. Significance level
Answer: B
Rationale: A Type I error occurs when the null hypothesis is rejected even though
it is true, and the probability of making this error is denoted by the significance
level alpha.
6. According to the capital asset pricing model (CAPM), what is the expected
return of a stock with a beta of 1.2 if the risk-free rate is 3% and the
expected market return is 10%?
A. 11.4%
B. 12%
C. 13%
D. 15%
Answer: A
Rationale: The CAPM formula is Expected Return = Risk-free rate + Beta *
(Market return - Risk-free rate) = 3% + 1.2 * (10% - 3%) = 3% + 8.4% = 11.4%.
7. Which of the following inventory valuation methods will result in the
highest net income during a period of rising prices?
A. LIFO
B. FIFO
, C. Weighted average cost
D. Specific identification
Answer: B
Rationale: During periods of rising prices, FIFO (first-in, first-out) assigns older,
lower-cost inventory to the cost of goods sold, resulting in lower expenses and
higher reported net income compared to LIFO.
8. A bond is trading at a premium. Which of the following relationships is
true?
A. Coupon rate < Current yield < Yield to maturity
B. Yield to maturity < Current yield < Coupon rate
C. Current yield < Yield to maturity < Coupon rate
D. Coupon rate = Current yield = Yield to maturity
Answer: B
Rationale: For a premium bond, the price is above par, which causes the yield to
maturity to be the lowest, followed by the current yield, with the coupon rate
being the highest.
9. Which of the following is a component of the CFA Institute Standards of
Professional Conduct?
A. Standards of Practice
B. Professionalism
C. Ethics in Financial Reporting
D. Fiduciary Duty to Regulators
Answer: B
Rationale: Professionalism is one of the seven main sections of the CFA Institute
Standards of Professional Conduct, which guides members in their daily
activities.
