CFA LEVEL I EXAM GUIDE 2025 – 130 MOST TESTED
QUESTIONS AND ANSWERS WITH DETAILED EXPLANATIONS
According to the Code and Standards, members and candidates who are involved in distributing
an initial public offering (IPO) of equity shares and wish to participate in the IPO:
A) may participate unless the IPO is oversubscribed.
B) may not participate because this creates a conflict of interest.
C) must obtain pre-clearance from a supervisor before participating. - ANSWER****ANSWER
A.
Standard VI(B) Priority of Transactions recommends, but does not require, that a member or
candidate obtain pre-clearance from his or her supervisor before participating in an equity IPO.
Guidance for Standard III(B) Fair Dealing states that members and candidates distributing IPO
shares must distribute shares in an oversubscribed IPO to clients and may not withhold shares
for themselves.
To comply with the Code and Standards, analysts who send research recommendations to
clients must:
A) keep records of all the data and analysis that went into creating the report.
B) send recommendations only to those clients for whom the investments are suitable.
C) not send recommendations without including the underlying analysis and basic investment
characteristics. - ANSWER****ANSWER A.
Standard V(C) Record Retention requires members to maintain records of the data and analysis
they use to develop their research recommendations. Recommendations may be brief, in
capsule form, or simply a list of buy/sell recommendations. A list of recommendations may be
sent without regard to suitability, including both safe income stocks and aggressive growth
stocks, for example.
Amy Brooks, a CFA Level III candidate, has been given supervisory responsibilities. In carrying
out her responsibilities, Brooks has discovered that the firm's compliance system is inadequate.
She informed her supervisor, who is not supportive of Brooks's efforts to correct the situation.
According to CFA Institute Standards of Professional Conduct, Brooks:
,A) has satisfied her obligation under the Code and Standards by informing her manager of the
situation.
B) must dissociate herself from the firm if the firm is not in compliance with the CFA Institute
Standards.
C) should decline in writing to accept supervisory responsibilities until an adequate compliance
system is adopted. - ANSWER****ANSWER C.
Standard IV(C) Responsibilities of Supervisors indicates that a member should decline
supervisory responsibility in writing until the firm adopts reasonable compliance procedures.
Otherwise, Brooks cannot adequately exercise her responsibility.
Which of the following is one of the nine major sections of the GIPS standards?
A) Verification.
B) Private equity.
C) Sub-advisers. - ANSWER****ANSWER B.
Private equity is one of the nine major sections of the GIPS standards; the others are not.
For Further Reference:
Study Session 1, LOS 4.d
SchweserNotes: Book 1, p.89
CFA Program Curriculum: Vol.1 p.205
Greg Hoffman, CFA, has been hired by Hill Manufacturing, Inc. (HMI) to write a research report
on their company. Hoffman writes a report on HMI with a "buy" recommendation and posts the
report for purchase on his website but does not include the information that HMI paid for the
research. According to the Standards that govern independence and objectivity and disclosure
of conflicts, Hoffman has violated:
,A) both of these Standards.
B) neither of these Standards.
C) only one of these Standards. - ANSWER****ANSWER A.
Hoffman has violated both Standard I(B) Independence and Objectivity, which specifically
addresses the requirement of disclosure of the nature of any compensation from the subject
company, and Standard VI(A) Disclosure of Conflicts, which, more generally, requires disclosure
of any potential conflict of interest in research reports and investment recommendations.
Yvette Michaels, CFA, an analyst for Torborg Investments, inadvertently overhears a
conversation between two executives of Collective Healthcare in which they mention an
upcoming tender offer for Network, a stock she covers. Michaels has followed both companies
extensively and feels their consolidation would be very beneficial for both companies. She tells
her supervisor, a senior analyst, about the proposed tender offer. Michaels' actions are:
A) in violation of the Standards.
B) not in violation of the Standards because she told only her supervisor.
C) not in violation of the Standards because she has not traded shares of Network or changed
her report on the company. - ANSWER****ANSWER A.
Michaels has violated Standard II(A) Material Nonpublic Information. Members who possess
material nonpublic information are prohibited from acting or causing others to act on that
information. She may not share the information with anyone except designated supervisory or
compliance employees within her firm. Disclosing to her supervisor, who is not identified as a
designated supervisor of compliance issues, is not permitted.
The odds for an event occurring are calculated by dividing:
A) one by the probability that the event occurs.
, B) the probability that the event does not occur by the probability that an event occurs.
C) the probability that the event occurs by the probability that the event does not occur. -
ANSWER****ANSWER C.
If p is the probability that an event occurs, then the odds for the event occurring are expressed
as p / (1 − p), or the probability that the event occurs divided by the probability that the event
does not occur. The odds against the event are expressed as the reciprocal of the odds for the
event.
Which of the following statements about return distributions is most accurate?
A) With positive skewness, the median is greater than the mean.
B) If skewness is positive, the average magnitude of positive deviations from the mean is smaller
than the average magnitude of negative deviations from the mean.
C) If a return distribution has positive excess kurtosis and the analyst uses statistical models that
do not account for the fatter tails, the analyst will underestimate the likelihood of extreme
outcomes. - ANSWER****ANSWER C.
If a return distribution has positive excess kurtosis, statistical models that do not account for the
fatter tails will underestimate the likelihood of very bad or very good outcomes. A distribution
with positive skewness will have a mean greater than the median and larger average positive
deviations than average negative deviations.
Which of the following statements about the appropriate revenue recognition method to use
under U.S. GAAP is most accurate? Use the:
A) percentage-of-completion method if the firm cannot reliably estimate the outcome of the
project.
B) completed contract method if ultimate payment is reasonably assured and revenue and costs
can be reliably estimated.
QUESTIONS AND ANSWERS WITH DETAILED EXPLANATIONS
According to the Code and Standards, members and candidates who are involved in distributing
an initial public offering (IPO) of equity shares and wish to participate in the IPO:
A) may participate unless the IPO is oversubscribed.
B) may not participate because this creates a conflict of interest.
C) must obtain pre-clearance from a supervisor before participating. - ANSWER****ANSWER
A.
Standard VI(B) Priority of Transactions recommends, but does not require, that a member or
candidate obtain pre-clearance from his or her supervisor before participating in an equity IPO.
Guidance for Standard III(B) Fair Dealing states that members and candidates distributing IPO
shares must distribute shares in an oversubscribed IPO to clients and may not withhold shares
for themselves.
To comply with the Code and Standards, analysts who send research recommendations to
clients must:
A) keep records of all the data and analysis that went into creating the report.
B) send recommendations only to those clients for whom the investments are suitable.
C) not send recommendations without including the underlying analysis and basic investment
characteristics. - ANSWER****ANSWER A.
Standard V(C) Record Retention requires members to maintain records of the data and analysis
they use to develop their research recommendations. Recommendations may be brief, in
capsule form, or simply a list of buy/sell recommendations. A list of recommendations may be
sent without regard to suitability, including both safe income stocks and aggressive growth
stocks, for example.
Amy Brooks, a CFA Level III candidate, has been given supervisory responsibilities. In carrying
out her responsibilities, Brooks has discovered that the firm's compliance system is inadequate.
She informed her supervisor, who is not supportive of Brooks's efforts to correct the situation.
According to CFA Institute Standards of Professional Conduct, Brooks:
,A) has satisfied her obligation under the Code and Standards by informing her manager of the
situation.
B) must dissociate herself from the firm if the firm is not in compliance with the CFA Institute
Standards.
C) should decline in writing to accept supervisory responsibilities until an adequate compliance
system is adopted. - ANSWER****ANSWER C.
Standard IV(C) Responsibilities of Supervisors indicates that a member should decline
supervisory responsibility in writing until the firm adopts reasonable compliance procedures.
Otherwise, Brooks cannot adequately exercise her responsibility.
Which of the following is one of the nine major sections of the GIPS standards?
A) Verification.
B) Private equity.
C) Sub-advisers. - ANSWER****ANSWER B.
Private equity is one of the nine major sections of the GIPS standards; the others are not.
For Further Reference:
Study Session 1, LOS 4.d
SchweserNotes: Book 1, p.89
CFA Program Curriculum: Vol.1 p.205
Greg Hoffman, CFA, has been hired by Hill Manufacturing, Inc. (HMI) to write a research report
on their company. Hoffman writes a report on HMI with a "buy" recommendation and posts the
report for purchase on his website but does not include the information that HMI paid for the
research. According to the Standards that govern independence and objectivity and disclosure
of conflicts, Hoffman has violated:
,A) both of these Standards.
B) neither of these Standards.
C) only one of these Standards. - ANSWER****ANSWER A.
Hoffman has violated both Standard I(B) Independence and Objectivity, which specifically
addresses the requirement of disclosure of the nature of any compensation from the subject
company, and Standard VI(A) Disclosure of Conflicts, which, more generally, requires disclosure
of any potential conflict of interest in research reports and investment recommendations.
Yvette Michaels, CFA, an analyst for Torborg Investments, inadvertently overhears a
conversation between two executives of Collective Healthcare in which they mention an
upcoming tender offer for Network, a stock she covers. Michaels has followed both companies
extensively and feels their consolidation would be very beneficial for both companies. She tells
her supervisor, a senior analyst, about the proposed tender offer. Michaels' actions are:
A) in violation of the Standards.
B) not in violation of the Standards because she told only her supervisor.
C) not in violation of the Standards because she has not traded shares of Network or changed
her report on the company. - ANSWER****ANSWER A.
Michaels has violated Standard II(A) Material Nonpublic Information. Members who possess
material nonpublic information are prohibited from acting or causing others to act on that
information. She may not share the information with anyone except designated supervisory or
compliance employees within her firm. Disclosing to her supervisor, who is not identified as a
designated supervisor of compliance issues, is not permitted.
The odds for an event occurring are calculated by dividing:
A) one by the probability that the event occurs.
, B) the probability that the event does not occur by the probability that an event occurs.
C) the probability that the event occurs by the probability that the event does not occur. -
ANSWER****ANSWER C.
If p is the probability that an event occurs, then the odds for the event occurring are expressed
as p / (1 − p), or the probability that the event occurs divided by the probability that the event
does not occur. The odds against the event are expressed as the reciprocal of the odds for the
event.
Which of the following statements about return distributions is most accurate?
A) With positive skewness, the median is greater than the mean.
B) If skewness is positive, the average magnitude of positive deviations from the mean is smaller
than the average magnitude of negative deviations from the mean.
C) If a return distribution has positive excess kurtosis and the analyst uses statistical models that
do not account for the fatter tails, the analyst will underestimate the likelihood of extreme
outcomes. - ANSWER****ANSWER C.
If a return distribution has positive excess kurtosis, statistical models that do not account for the
fatter tails will underestimate the likelihood of very bad or very good outcomes. A distribution
with positive skewness will have a mean greater than the median and larger average positive
deviations than average negative deviations.
Which of the following statements about the appropriate revenue recognition method to use
under U.S. GAAP is most accurate? Use the:
A) percentage-of-completion method if the firm cannot reliably estimate the outcome of the
project.
B) completed contract method if ultimate payment is reasonably assured and revenue and costs
can be reliably estimated.
