CFA LEVEL II PRACTICE EXAM – PAPER 1 |
ADVANCED MOCK EXAM WITH VERIFIED ANSWERS
& DETAILED EXPLANATIONS | CASE-BASED
PRACTICE QUESTIONS | 2026 EDITION
Course Name
Chartered Financial Analyst (CFA) Level II
Level
Professional Certification – Advanced
Short Introduction
This original CFA Level II Practice Exam – Paper 1 is designed to help candidates
prepare for the advanced concepts tested in the CFA Level II curriculum. The
exam emphasizes analytical reasoning, financial modeling, valuation techniques,
ethical decision-making, and case-based investment analysis across Equity
Valuation, Fixed Income, Financial Statement Analysis, Corporate Issuers,
Economics, Derivatives, Alternative Investments, Portfolio Management, and
Ethical & Professional Standards. Each question includes the correct answer and a
detailed italicised explanation.
Instructions
Answer all 40 questions.
Read each question and any supporting information carefully.
Choose the single best answer for each multiple-choice question.
Show calculations where applicable.
Complete all short-answer, application, and higher-order thinking questions.
Review the explanations after completing the examination.
Exam Structure
15 Multiple Choice Questions
, 10 Short Answer Questions
10 Application/Case Study Questions
5 Higher-Order Thinking Questions
Total Questions: 40
SECTION A – MULTIPLE CHOICE QUESTIONS
Question 1
An analyst values a company's stock using the Dividend Discount Model (DDM).
Which factor is most likely to increase the estimated intrinsic value?
A. Higher required rate of return
B. Lower expected dividend growth rate
C. Higher expected future dividend growth rate
D. Higher market volatility
Answer: C
Explanation: A higher expected dividend growth rate increases the present value
of future dividends, leading to a higher intrinsic value.
Question 2
Which valuation multiple is most appropriate for comparing companies with
significantly different capital structures?
A. Price-to-Earnings (P/E)
B. Enterprise Value to EBITDA (EV/EBITDA)
C. Dividend Yield
D. Price-to-Book (P/B)
, Answer: B
Explanation: EV/EBITDA accounts for both debt and equity financing, making it
more appropriate when comparing firms with different leverage.
Question 3
A bond portfolio has a duration of 7 years.
If market interest rates increase by 1%, the portfolio's value will most likely:
A. Increase by approximately 7%
B. Decrease by approximately 7%
C. Remain unchanged
D. Increase by approximately 1%
Answer: B
Explanation: Duration estimates the approximate percentage price change for a
1% change in interest rates. Bond prices move inversely to interest rates.
Question 4
Under residual income valuation, residual income is calculated as:
A. Net Income − Dividends
B. Operating Cash Flow − Capital Expenditure
C. Net Income − Equity Charge
D. EBIT − Interest Expense
Answer: C
ADVANCED MOCK EXAM WITH VERIFIED ANSWERS
& DETAILED EXPLANATIONS | CASE-BASED
PRACTICE QUESTIONS | 2026 EDITION
Course Name
Chartered Financial Analyst (CFA) Level II
Level
Professional Certification – Advanced
Short Introduction
This original CFA Level II Practice Exam – Paper 1 is designed to help candidates
prepare for the advanced concepts tested in the CFA Level II curriculum. The
exam emphasizes analytical reasoning, financial modeling, valuation techniques,
ethical decision-making, and case-based investment analysis across Equity
Valuation, Fixed Income, Financial Statement Analysis, Corporate Issuers,
Economics, Derivatives, Alternative Investments, Portfolio Management, and
Ethical & Professional Standards. Each question includes the correct answer and a
detailed italicised explanation.
Instructions
Answer all 40 questions.
Read each question and any supporting information carefully.
Choose the single best answer for each multiple-choice question.
Show calculations where applicable.
Complete all short-answer, application, and higher-order thinking questions.
Review the explanations after completing the examination.
Exam Structure
15 Multiple Choice Questions
, 10 Short Answer Questions
10 Application/Case Study Questions
5 Higher-Order Thinking Questions
Total Questions: 40
SECTION A – MULTIPLE CHOICE QUESTIONS
Question 1
An analyst values a company's stock using the Dividend Discount Model (DDM).
Which factor is most likely to increase the estimated intrinsic value?
A. Higher required rate of return
B. Lower expected dividend growth rate
C. Higher expected future dividend growth rate
D. Higher market volatility
Answer: C
Explanation: A higher expected dividend growth rate increases the present value
of future dividends, leading to a higher intrinsic value.
Question 2
Which valuation multiple is most appropriate for comparing companies with
significantly different capital structures?
A. Price-to-Earnings (P/E)
B. Enterprise Value to EBITDA (EV/EBITDA)
C. Dividend Yield
D. Price-to-Book (P/B)
, Answer: B
Explanation: EV/EBITDA accounts for both debt and equity financing, making it
more appropriate when comparing firms with different leverage.
Question 3
A bond portfolio has a duration of 7 years.
If market interest rates increase by 1%, the portfolio's value will most likely:
A. Increase by approximately 7%
B. Decrease by approximately 7%
C. Remain unchanged
D. Increase by approximately 1%
Answer: B
Explanation: Duration estimates the approximate percentage price change for a
1% change in interest rates. Bond prices move inversely to interest rates.
Question 4
Under residual income valuation, residual income is calculated as:
A. Net Income − Dividends
B. Operating Cash Flow − Capital Expenditure
C. Net Income − Equity Charge
D. EBIT − Interest Expense
Answer: C
