CFA Level I Practice Exam Questions And Correct
Answers (Verified Answers) Plus Rationales 2026
Q&A | Instant Download Pdf
1. Which of the following best describes the primary purpose of the
CFA Institute Code of Ethics and Standards of Professional Conduct?
A) To provide specific investment recommendations
B) To regulate the CFA exams
C) To establish principles guiding ethical behavior for investment
professionals
D) To enforce securities laws
Rationale: The Code and Standards are designed to provide guidance
for ethical conduct and professionalism for investment practitioners,
not to enforce laws or regulate exams.
2. A portfolio manager is considering two investment opportunities
with identical expected returns but different risks. According to the
risk-return tradeoff, which investment should the manager choose?
A) The investment with higher risk
B) The investment with lower risk
C) Either, since expected returns are the same
D) The investment with higher liquidity
Rationale: For the same expected return, rational investors prefer the
investment with lower risk.
3. The time value of money concept implies that:
A) Money received today is worth less than money received in the
future
B) Future money is worth the same as today’s money
C) Money received today is worth more than the same amount in
,the future
D) Interest rates do not affect the present value
Rationale: A dollar today can be invested to earn interest, so it is
more valuable than a dollar received in the future.
4. Which of the following is a primary objective of financial
reporting?
A) To provide detailed operational plans for the company
B) To provide tax-related guidance
C) To provide information useful to investors and creditors in
making economic decisions
D) To set market prices for securities
Rationale: Financial reporting focuses on providing useful information
to external users for investment and lending decisions.
5. The current ratio is calculated as:
A) Current liabilities ÷ Current assets
B) Total assets ÷ Current liabilities
C) Current assets ÷ Current liabilities
D) Current assets ÷ Total liabilities
Rationale: The current ratio measures a company’s short-term
liquidity by comparing current assets to current liabilities.
6. An investor expects an asset to have an annual return of 8% and
a standard deviation of 15%. Which statement is true?
A) Return measures risk
B) Standard deviation measures expected return
C) Standard deviation measures total risk
D) Return and standard deviation are the same
Rationale: Standard deviation quantifies the total variability (risk) of
the asset’s returns.
7. A bond has a 6% coupon, $1,000 par value, and matures in 10
years. If the market interest rate rises, the bond’s price will:
, A) Fall
B) Rise
C) Stay the same
D) Become zero
Rationale: Bond prices move inversely to interest rates; if rates rise,
existing bonds with lower coupons decrease in value.
8. A company has net income of $500,000, total assets of
$2,000,000, and total equity of $1,000,000. Its return on equity
(ROE) is:
A) 10%
B) 20%
C) 50%
D) 25%
Rationale: ROE = Net Income ÷ Equity = 500,000 ÷ 1,000,000 = 0.50 or
50%.
9. Which of the following best describes the concept of
diversification?
A) Investing in a single asset to maximize returns
B) Avoiding foreign securities
C) Spreading investments across multiple assets to reduce risk
D) Increasing exposure to high-risk assets
Rationale: Diversification reduces unsystematic risk by holding a
variety of assets.
10. A company reports a price-to-earnings (P/E) ratio of 20. This
means:
A) Earnings are 20 times the price
B) The stock price is 20 times the earnings per share
C) The stock is undervalued
D) Dividend yield is 20%
Answers (Verified Answers) Plus Rationales 2026
Q&A | Instant Download Pdf
1. Which of the following best describes the primary purpose of the
CFA Institute Code of Ethics and Standards of Professional Conduct?
A) To provide specific investment recommendations
B) To regulate the CFA exams
C) To establish principles guiding ethical behavior for investment
professionals
D) To enforce securities laws
Rationale: The Code and Standards are designed to provide guidance
for ethical conduct and professionalism for investment practitioners,
not to enforce laws or regulate exams.
2. A portfolio manager is considering two investment opportunities
with identical expected returns but different risks. According to the
risk-return tradeoff, which investment should the manager choose?
A) The investment with higher risk
B) The investment with lower risk
C) Either, since expected returns are the same
D) The investment with higher liquidity
Rationale: For the same expected return, rational investors prefer the
investment with lower risk.
3. The time value of money concept implies that:
A) Money received today is worth less than money received in the
future
B) Future money is worth the same as today’s money
C) Money received today is worth more than the same amount in
,the future
D) Interest rates do not affect the present value
Rationale: A dollar today can be invested to earn interest, so it is
more valuable than a dollar received in the future.
4. Which of the following is a primary objective of financial
reporting?
A) To provide detailed operational plans for the company
B) To provide tax-related guidance
C) To provide information useful to investors and creditors in
making economic decisions
D) To set market prices for securities
Rationale: Financial reporting focuses on providing useful information
to external users for investment and lending decisions.
5. The current ratio is calculated as:
A) Current liabilities ÷ Current assets
B) Total assets ÷ Current liabilities
C) Current assets ÷ Current liabilities
D) Current assets ÷ Total liabilities
Rationale: The current ratio measures a company’s short-term
liquidity by comparing current assets to current liabilities.
6. An investor expects an asset to have an annual return of 8% and
a standard deviation of 15%. Which statement is true?
A) Return measures risk
B) Standard deviation measures expected return
C) Standard deviation measures total risk
D) Return and standard deviation are the same
Rationale: Standard deviation quantifies the total variability (risk) of
the asset’s returns.
7. A bond has a 6% coupon, $1,000 par value, and matures in 10
years. If the market interest rate rises, the bond’s price will:
, A) Fall
B) Rise
C) Stay the same
D) Become zero
Rationale: Bond prices move inversely to interest rates; if rates rise,
existing bonds with lower coupons decrease in value.
8. A company has net income of $500,000, total assets of
$2,000,000, and total equity of $1,000,000. Its return on equity
(ROE) is:
A) 10%
B) 20%
C) 50%
D) 25%
Rationale: ROE = Net Income ÷ Equity = 500,000 ÷ 1,000,000 = 0.50 or
50%.
9. Which of the following best describes the concept of
diversification?
A) Investing in a single asset to maximize returns
B) Avoiding foreign securities
C) Spreading investments across multiple assets to reduce risk
D) Increasing exposure to high-risk assets
Rationale: Diversification reduces unsystematic risk by holding a
variety of assets.
10. A company reports a price-to-earnings (P/E) ratio of 20. This
means:
A) Earnings are 20 times the price
B) The stock price is 20 times the earnings per share
C) The stock is undervalued
D) Dividend yield is 20%
