Chartered Financial Analyst (CFA) Level I Exam
Questions and Correct Answers (Verified
Answers) Plus Rationales 2026 Q&A | Instant
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1. Which of the following is least likely to be considered a
characteristic of a well-functioning capital market?
A) Prices fully reflect all available information
B) Investors can buy and sell assets easily
C) Prices are predictable and stable
D) Investors act rationally
Answer: C
Rationale: Well-functioning capital markets may have price
fluctuations. Predictable and stable prices are not a requirement.
2. The primary goal of financial reporting is to provide information
that is useful to:
A) Managers in budgeting decisions
B) Investors and creditors in making economic decisions
C) Government regulators for tax purposes
D) Employees in evaluating company performance
Answer: B
Rationale: Financial reporting aims to provide investors and
creditors with relevant information for decision-making.
3. The formula for current yield of a bond is:
A) Annual coupon payment / Face value
, B) Annual coupon payment / Current market price
C) (Face value – Purchase price) / Purchase price
D) (Face value – Current market price) / Face value
Answer: B
Rationale: Current yield is calculated as the annual coupon
payment divided by the current market price of the bond.
4. Which of the following statements about systematic risk is TRUE?
A) It can be eliminated through diversification
B) It affects all assets in the market
C) It is unique to individual companies
D) It is also called unsystematic risk
Answer: B
Rationale: Systematic risk, or market risk, impacts all securities
and cannot be eliminated through diversification.
5. A stock has a beta of 1.2. If the market increases by 10%, the
expected increase in the stock’s return is:
A) 10%
B) 12%
C) 8%
D) 1.2%
Answer: B
Rationale: Expected return = Beta × Market return = 1.2 × 10% =
12%.
6. Which of the following would cause a decrease in the present
value of a cash flow?
A) Lower discount rate
B) Higher discount rate
C) Longer time period
D) Shorter time period
, Answer: B
Rationale: Increasing the discount rate reduces the present value
of future cash flows.
7. Which of the following is not part of the DuPont identity?
A) Net profit margin
B) Asset turnover
C) Financial leverage
D) Market-to-book ratio
Answer: D
Rationale: DuPont analysis decomposes ROE into net profit
margin, asset turnover, and financial leverage.
8. Which of the following best describes a call option?
A) The right to sell an asset at a specified price
B) The obligation to buy an asset at a specified price
C) The right to buy an asset at a specified price
D) The obligation to sell an asset at a specified price
Answer: C
Rationale: A call option gives the holder the right, but not the
obligation, to buy an asset at a strike price.
9. According to the CFA Institute Code of Ethics, members must:
A) Always maximize their personal profits
B) Place the client’s interests above their own
C) Trade based on private, nonpublic information
D) Avoid any disclosure to clients
Answer: B
Rationale: The CFA Code of Ethics emphasizes putting client
interests first and maintaining integrity.
10. Which financial statement shows a company’s financial
position at a specific point in time?
, A) Income statement
B) Statement of cash flows
C) Balance sheet
D) Statement of retained earnings
Answer: C
Rationale: The balance sheet reflects assets, liabilities, and equity
at a specific date.
11. A company’s current ratio is calculated as:
A) Current assets / Current liabilities
B) Current liabilities / Current assets
C) Total assets / Total liabilities
D) Total liabilities / Total assets
Answer: A
Rationale: Current ratio measures short-term liquidity by dividing
current assets by current liabilities.
12. Which of the following methods of inventory valuation will
result in higher net income during periods of rising prices?
A) FIFO
B) LIFO
C) Weighted average cost
D) Specific identification
Answer: A
Rationale: FIFO (First-In, First-Out) uses older, lower-cost inventory
first, resulting in higher net income when prices rise.
13. The standard deviation of a portfolio decreases when:
A) All assets are perfectly positively correlated
B) Assets are negatively correlated
C) Only one asset is held
D) Portfolio weights are ignored
Questions and Correct Answers (Verified
Answers) Plus Rationales 2026 Q&A | Instant
Download Pdf
1. Which of the following is least likely to be considered a
characteristic of a well-functioning capital market?
A) Prices fully reflect all available information
B) Investors can buy and sell assets easily
C) Prices are predictable and stable
D) Investors act rationally
Answer: C
Rationale: Well-functioning capital markets may have price
fluctuations. Predictable and stable prices are not a requirement.
2. The primary goal of financial reporting is to provide information
that is useful to:
A) Managers in budgeting decisions
B) Investors and creditors in making economic decisions
C) Government regulators for tax purposes
D) Employees in evaluating company performance
Answer: B
Rationale: Financial reporting aims to provide investors and
creditors with relevant information for decision-making.
3. The formula for current yield of a bond is:
A) Annual coupon payment / Face value
, B) Annual coupon payment / Current market price
C) (Face value – Purchase price) / Purchase price
D) (Face value – Current market price) / Face value
Answer: B
Rationale: Current yield is calculated as the annual coupon
payment divided by the current market price of the bond.
4. Which of the following statements about systematic risk is TRUE?
A) It can be eliminated through diversification
B) It affects all assets in the market
C) It is unique to individual companies
D) It is also called unsystematic risk
Answer: B
Rationale: Systematic risk, or market risk, impacts all securities
and cannot be eliminated through diversification.
5. A stock has a beta of 1.2. If the market increases by 10%, the
expected increase in the stock’s return is:
A) 10%
B) 12%
C) 8%
D) 1.2%
Answer: B
Rationale: Expected return = Beta × Market return = 1.2 × 10% =
12%.
6. Which of the following would cause a decrease in the present
value of a cash flow?
A) Lower discount rate
B) Higher discount rate
C) Longer time period
D) Shorter time period
, Answer: B
Rationale: Increasing the discount rate reduces the present value
of future cash flows.
7. Which of the following is not part of the DuPont identity?
A) Net profit margin
B) Asset turnover
C) Financial leverage
D) Market-to-book ratio
Answer: D
Rationale: DuPont analysis decomposes ROE into net profit
margin, asset turnover, and financial leverage.
8. Which of the following best describes a call option?
A) The right to sell an asset at a specified price
B) The obligation to buy an asset at a specified price
C) The right to buy an asset at a specified price
D) The obligation to sell an asset at a specified price
Answer: C
Rationale: A call option gives the holder the right, but not the
obligation, to buy an asset at a strike price.
9. According to the CFA Institute Code of Ethics, members must:
A) Always maximize their personal profits
B) Place the client’s interests above their own
C) Trade based on private, nonpublic information
D) Avoid any disclosure to clients
Answer: B
Rationale: The CFA Code of Ethics emphasizes putting client
interests first and maintaining integrity.
10. Which financial statement shows a company’s financial
position at a specific point in time?
, A) Income statement
B) Statement of cash flows
C) Balance sheet
D) Statement of retained earnings
Answer: C
Rationale: The balance sheet reflects assets, liabilities, and equity
at a specific date.
11. A company’s current ratio is calculated as:
A) Current assets / Current liabilities
B) Current liabilities / Current assets
C) Total assets / Total liabilities
D) Total liabilities / Total assets
Answer: A
Rationale: Current ratio measures short-term liquidity by dividing
current assets by current liabilities.
12. Which of the following methods of inventory valuation will
result in higher net income during periods of rising prices?
A) FIFO
B) LIFO
C) Weighted average cost
D) Specific identification
Answer: A
Rationale: FIFO (First-In, First-Out) uses older, lower-cost inventory
first, resulting in higher net income when prices rise.
13. The standard deviation of a portfolio decreases when:
A) All assets are perfectly positively correlated
B) Assets are negatively correlated
C) Only one asset is held
D) Portfolio weights are ignored
