Chartered Financial Analyst (CFA) Level II
Practice Exam Questions With Correct Answers
(Verified Answers) Plus Rationales 2026 Q&A |
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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 detailed trading guidelines
B. To outline all legal requirements for investment professionals
C. To promote ethical behavior and integrity in the investment
profession
D. To define minimum competency requirements
Rationale: The Code of Ethics and Standards ensure CFA charterholders
act with integrity, competence, and in the client’s best interest. It is not
a legal or trading manual but a professional ethical guide.
2. If a company’s inventory turnover ratio is declining, this most
likely indicates:
, A. The company is selling goods faster
B. The company has decreasing inventory levels
C. The company is holding inventory longer, which could suggest
inefficiency or weaker demand
D. The company is improving cost management
Rationale: Inventory turnover measures how efficiently inventory is
sold. A declining turnover indicates slower sales or overstocking,
signaling potential inefficiency.
3. According to the Black-Scholes-Merton model, which factor
increases the value of a European call option?
A. Decreasing volatility
B. Decreasing time to expiration
C. Increasing underlying stock price
D. Decreasing risk-free rate
Rationale: A higher stock price increases the likelihood the call option
finishes in-the-money, raising its value. Greater volatility also increases
option value, but decreasing time or volatility lowers it.
, 4. In a discounted cash flow (DCF) model, the terminal value is used
to:
A. Estimate only the next year’s cash flow
B. Value cash flows during the forecast period
C. Capture the present value of all cash flows beyond the
forecast period
D. Estimate only dividends
Rationale: Terminal value reflects cash flows after the explicit forecast
horizon, representing the ongoing value of the firm.
5. Which ratio is most relevant for assessing a firm’s short-term
liquidity?
A. Debt-to-equity ratio
B. Current ratio
C. Return on equity
D. Price-to-earnings ratio
Rationale: The current ratio (current assets ÷ current liabilities)
evaluates whether a firm can meet short-term obligations.
, 6. A company uses accelerated depreciation instead of straight-line
depreciation. Initially, this will:
A. Increase net income
B. Reduce net income
C. Have no effect on taxes
D. Increase reported equity
Rationale: Accelerated depreciation increases expenses in early years,
reducing net income but increasing cash flow due to lower taxes.
7. Systematic risk is best defined as:
A. Risk that can be eliminated through diversification
B. Risk specific to an individual company
C. Market-wide risk that cannot be diversified away
D. Operational risk
Rationale: Systematic risk affects all assets in the market (e.g.,
recessions, interest rate changes) and cannot be eliminated by
diversification.
8. If a stock has a beta of 1.3, which statement is correct?
A. The stock is less volatile than the market
Practice Exam Questions With 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 detailed trading guidelines
B. To outline all legal requirements for investment professionals
C. To promote ethical behavior and integrity in the investment
profession
D. To define minimum competency requirements
Rationale: The Code of Ethics and Standards ensure CFA charterholders
act with integrity, competence, and in the client’s best interest. It is not
a legal or trading manual but a professional ethical guide.
2. If a company’s inventory turnover ratio is declining, this most
likely indicates:
, A. The company is selling goods faster
B. The company has decreasing inventory levels
C. The company is holding inventory longer, which could suggest
inefficiency or weaker demand
D. The company is improving cost management
Rationale: Inventory turnover measures how efficiently inventory is
sold. A declining turnover indicates slower sales or overstocking,
signaling potential inefficiency.
3. According to the Black-Scholes-Merton model, which factor
increases the value of a European call option?
A. Decreasing volatility
B. Decreasing time to expiration
C. Increasing underlying stock price
D. Decreasing risk-free rate
Rationale: A higher stock price increases the likelihood the call option
finishes in-the-money, raising its value. Greater volatility also increases
option value, but decreasing time or volatility lowers it.
, 4. In a discounted cash flow (DCF) model, the terminal value is used
to:
A. Estimate only the next year’s cash flow
B. Value cash flows during the forecast period
C. Capture the present value of all cash flows beyond the
forecast period
D. Estimate only dividends
Rationale: Terminal value reflects cash flows after the explicit forecast
horizon, representing the ongoing value of the firm.
5. Which ratio is most relevant for assessing a firm’s short-term
liquidity?
A. Debt-to-equity ratio
B. Current ratio
C. Return on equity
D. Price-to-earnings ratio
Rationale: The current ratio (current assets ÷ current liabilities)
evaluates whether a firm can meet short-term obligations.
, 6. A company uses accelerated depreciation instead of straight-line
depreciation. Initially, this will:
A. Increase net income
B. Reduce net income
C. Have no effect on taxes
D. Increase reported equity
Rationale: Accelerated depreciation increases expenses in early years,
reducing net income but increasing cash flow due to lower taxes.
7. Systematic risk is best defined as:
A. Risk that can be eliminated through diversification
B. Risk specific to an individual company
C. Market-wide risk that cannot be diversified away
D. Operational risk
Rationale: Systematic risk affects all assets in the market (e.g.,
recessions, interest rate changes) and cannot be eliminated by
diversification.
8. If a stock has a beta of 1.3, which statement is correct?
A. The stock is less volatile than the market
