CFA INVESTMENT FOUNDATIONS MOCK
EXAM 2025/2026 (QUESTIONS AND
ANSWERS)GRADED A+
A bank is facing the possibility of not having sufficient capital reserves to meet the
requirements of its national banking regulatory authority. Such a possibility is an
example of a(n):
compliance risk.
investment risk.
operational risk. - ANSWER-compliance risk
As part of the risk management function of a company, best practice suggests
that internal auditors should report:
to the chief risk officer.
to the chief financial officer.
to a designated committee established by the board of directors. - ANSWER-to a
designated committee established by the board of directors
,Risk for an investment firm is defined as the:
evolution of the competitive landscape.
likelihood that the values of investments fluctuate.
effect of uncertain future events on organisational outcomes. - ANSWER-effect of
uncertain future events on organisational outcomes
A limitation to a value at risk (VaR) model regarding its inputs is that the model:
requires the user to estimate future returns.
uses historical data to forecast future losses.
uses previous black swan events to forecast future losses. - ANSWER-uses
historical data to forecast future losses
Compliance policies and procedures that address corruption should:
extend to agents and other third parties.
vary by country, depending on local practices.
not require separate training for dealing with government officials. - ANSWER-
extend to agents and other third parties
,Liquidity risk in the investment industry:
is not greater than for the manufacturing industry.
does not include the inability to source adequate financing.
refers to an inability to buy and sell quickly without incurring a loss. - ANSWER-
refers to an inability to buy and sell quickly without incuring a loss
Transactions contracted through central counterparties, such as clearinghouses,
margin requirements, and standardised agreements, are mechanisms that
reduce:
liquidity risk.
business risk.
settlement risk. - ANSWER-settlement risk
How do client cash inflows and outflows affect the calculation of holding-period
returns when using the time-weighted rate of return method?
Less frequent cash flows will result in fewer sub-periods.
, More frequent cash flows will result in fewer sub-periods.
The frequency of cash flows has no impact on the number of sub-periods. -
ANSWER-less frequent cash flows will result in fewer sub- periods
For an investor whose portfolio consists solely of domestic risk-free government
bonds, benchmarking against an investment-grade corporate bond index is most
likely not appropriate because it violates the benchmark selection criterion of:
investability.
compatibility.
pre-specification. - ANSWER-compatibility
An investor will prefer investments with high:
standard deviations.
downside deviations.
reward-to-risk ratios. - ANSWER-reward-to-risk ratios
If an active fund manager is told that she will be "benchmarked against" a
particular stock index, she will:
EXAM 2025/2026 (QUESTIONS AND
ANSWERS)GRADED A+
A bank is facing the possibility of not having sufficient capital reserves to meet the
requirements of its national banking regulatory authority. Such a possibility is an
example of a(n):
compliance risk.
investment risk.
operational risk. - ANSWER-compliance risk
As part of the risk management function of a company, best practice suggests
that internal auditors should report:
to the chief risk officer.
to the chief financial officer.
to a designated committee established by the board of directors. - ANSWER-to a
designated committee established by the board of directors
,Risk for an investment firm is defined as the:
evolution of the competitive landscape.
likelihood that the values of investments fluctuate.
effect of uncertain future events on organisational outcomes. - ANSWER-effect of
uncertain future events on organisational outcomes
A limitation to a value at risk (VaR) model regarding its inputs is that the model:
requires the user to estimate future returns.
uses historical data to forecast future losses.
uses previous black swan events to forecast future losses. - ANSWER-uses
historical data to forecast future losses
Compliance policies and procedures that address corruption should:
extend to agents and other third parties.
vary by country, depending on local practices.
not require separate training for dealing with government officials. - ANSWER-
extend to agents and other third parties
,Liquidity risk in the investment industry:
is not greater than for the manufacturing industry.
does not include the inability to source adequate financing.
refers to an inability to buy and sell quickly without incurring a loss. - ANSWER-
refers to an inability to buy and sell quickly without incuring a loss
Transactions contracted through central counterparties, such as clearinghouses,
margin requirements, and standardised agreements, are mechanisms that
reduce:
liquidity risk.
business risk.
settlement risk. - ANSWER-settlement risk
How do client cash inflows and outflows affect the calculation of holding-period
returns when using the time-weighted rate of return method?
Less frequent cash flows will result in fewer sub-periods.
, More frequent cash flows will result in fewer sub-periods.
The frequency of cash flows has no impact on the number of sub-periods. -
ANSWER-less frequent cash flows will result in fewer sub- periods
For an investor whose portfolio consists solely of domestic risk-free government
bonds, benchmarking against an investment-grade corporate bond index is most
likely not appropriate because it violates the benchmark selection criterion of:
investability.
compatibility.
pre-specification. - ANSWER-compatibility
An investor will prefer investments with high:
standard deviations.
downside deviations.
reward-to-risk ratios. - ANSWER-reward-to-risk ratios
If an active fund manager is told that she will be "benchmarked against" a
particular stock index, she will:
