CFA Level II – Mock Exam 100 QUESTIONS AND
CORRECT DETAILED ANSWERS FOR
GUARANTEED SUCCESS / NEWEST 2025/2026
GRADED A+||BRAND NEW VERSION!!
1. When valuing a company using the residual income model, which
adjustment is most critical under IFRS?
A. Adjustment for operating leases
B. Adjustment for clean surplus violations
C. Adjustment for deferred taxes
D. Adjustment for minority interest
Residual income models require that all changes in equity flow through income
except owner transactions; IFRS frequently violates clean surplus via OCI.
2. An analyst increases the forecasted long-term growth rate in a justified P/E
model. Holding all else constant, the justified P/E will:
A. Decrease
B. Remain unchanged
C. Increase
D. Become indeterminate
Higher expected growth increases future residual earnings, raising the justified
multiple.
3. Which factor most increases the value of a call option?
A. Decrease in volatility
B. Decrease in time to maturity
C. Increase in strike price
D. Increase in volatility
,Higher volatility raises the probability of favorable outcomes for call options.
4. In a fixed-income portfolio, convexity is most valuable when:
A. Interest rates are stable
B. Yield curve is flat
C. Rates increase steadily
D. Interest rate volatility is high
Convexity benefits portfolios most when rates fluctuate significantly.
5. Compared to a binomial model, the Black–Scholes–Merton model assumes:
A. Discrete dividends
B. Early exercise
C. Continuous price changes
D. Stochastic interest rates
BSM assumes continuous trading and continuous price movements.
6. A higher correlation between assets in a portfolio will:
A. Decrease portfolio risk
B. Eliminate systematic risk
C. Reduce diversification benefits
D. Increase expected return
Higher correlation limits the risk-reduction effect of diversification.
7. Which scenario most favors a long volatility strategy?
A. Declining interest rates
B. Stable markets
C. Tight bid–ask spreads
D. Large unexpected price movements
, Long volatility strategies profit from large price swings regardless of direction.
8. In equity valuation, terminal value typically represents:
A. Less than 30% of total value
B. Exactly half of intrinsic value
C. Only accounting profits
D. A significant portion of total firm value
Terminal value often accounts for the majority of intrinsic value in DCF models.
9. A bond with higher convexity will:
A. Lose more value when yields rise
B. Gain less when yields fall
C. Gain more when yields fall than it loses when yields rise
D. Have higher duration
Convexity causes asymmetric price responses to yield changes.
10.Which hedge fund strategy is most exposed to tail risk?
A. Equity market neutral
B. Event-driven
C. Global macro
D. Selling volatility
Short volatility strategies suffer large losses during extreme market events.
11.In credit analysis, a widening credit spread most directly reflects:
A. Lower liquidity
B. Lower interest rates
C. Increased default risk
D. Higher inflation
CORRECT DETAILED ANSWERS FOR
GUARANTEED SUCCESS / NEWEST 2025/2026
GRADED A+||BRAND NEW VERSION!!
1. When valuing a company using the residual income model, which
adjustment is most critical under IFRS?
A. Adjustment for operating leases
B. Adjustment for clean surplus violations
C. Adjustment for deferred taxes
D. Adjustment for minority interest
Residual income models require that all changes in equity flow through income
except owner transactions; IFRS frequently violates clean surplus via OCI.
2. An analyst increases the forecasted long-term growth rate in a justified P/E
model. Holding all else constant, the justified P/E will:
A. Decrease
B. Remain unchanged
C. Increase
D. Become indeterminate
Higher expected growth increases future residual earnings, raising the justified
multiple.
3. Which factor most increases the value of a call option?
A. Decrease in volatility
B. Decrease in time to maturity
C. Increase in strike price
D. Increase in volatility
,Higher volatility raises the probability of favorable outcomes for call options.
4. In a fixed-income portfolio, convexity is most valuable when:
A. Interest rates are stable
B. Yield curve is flat
C. Rates increase steadily
D. Interest rate volatility is high
Convexity benefits portfolios most when rates fluctuate significantly.
5. Compared to a binomial model, the Black–Scholes–Merton model assumes:
A. Discrete dividends
B. Early exercise
C. Continuous price changes
D. Stochastic interest rates
BSM assumes continuous trading and continuous price movements.
6. A higher correlation between assets in a portfolio will:
A. Decrease portfolio risk
B. Eliminate systematic risk
C. Reduce diversification benefits
D. Increase expected return
Higher correlation limits the risk-reduction effect of diversification.
7. Which scenario most favors a long volatility strategy?
A. Declining interest rates
B. Stable markets
C. Tight bid–ask spreads
D. Large unexpected price movements
, Long volatility strategies profit from large price swings regardless of direction.
8. In equity valuation, terminal value typically represents:
A. Less than 30% of total value
B. Exactly half of intrinsic value
C. Only accounting profits
D. A significant portion of total firm value
Terminal value often accounts for the majority of intrinsic value in DCF models.
9. A bond with higher convexity will:
A. Lose more value when yields rise
B. Gain less when yields fall
C. Gain more when yields fall than it loses when yields rise
D. Have higher duration
Convexity causes asymmetric price responses to yield changes.
10.Which hedge fund strategy is most exposed to tail risk?
A. Equity market neutral
B. Event-driven
C. Global macro
D. Selling volatility
Short volatility strategies suffer large losses during extreme market events.
11.In credit analysis, a widening credit spread most directly reflects:
A. Lower liquidity
B. Lower interest rates
C. Increased default risk
D. Higher inflation
