CHARTERED FINANCIAL ANALYST (CFA) LEVEL
II CERTIFICATION: COMPLETE PRACTICE EXAM
WITH ANSWERS AND RATIONALES
(QUESTIONS 1-100)
1. Which of the following is the most accurate description of the purpose of the CFA Institute Code of
Ethics and Standards of Professional Conduct?
A) To provide a detailed list of legal requirements for financial professionals.
B) To establish principles for ethical behavior and professional conduct for CFA members.
C) To guarantee portfolio returns for clients.
D) To standardize accounting practices across all firms.
Answer: B
Rationale: The Code and Standards are designed to provide a framework of ethical principles to guide
the professional conduct of CFA Institute members, upholding the integrity of the profession .
2. According to the Standards of Professional Conduct, which standard requires members to maintain
and improve their professional competence?
A) Standard I: Professionalism
B) Standard II: Integrity of Capital Markets
C) Standard IV: Duties to Employers
D) Standard V: Investment Analysis, Recommendations, and Actions
Answer: A
Rationale: Standard I (Professionalism) includes the sub-section on Competence, which requires
members to maintain and improve their professional competence .
3. Under Standard I(B) Independence and Objectivity, which of the following is MOST likely a violation?
A) Accepting a modest gift from a client after a successful transaction.
B) Using a research report prepared by a third party without independent verification.
,C) Accepting a lavish gift from a client as a token of appreciation.
D) Charging a client a standard fee for services.
Answer: C
Rationale: Accepting lavish gifts or excessive hospitality from a client can impair a member's
independence and objectivity, especially if it creates a conflict of interest .
4. A CFA candidate is preparing a research report and uses a financial model provided by the company
being analyzed. According to Standard V(A) Diligence and Reasonable Basis, the candidate should:
A) Use the model as provided and include a disclaimer.
B) Conduct an independent analysis to ensure the model's assumptions and data are reasonable.
C) Exclude the company from the report if the model is used.
D) Use the model only if it is approved by the company's management.
Answer: B
Rationale: Standard V(A) requires members to have a diligent and reasonable basis for their
recommendations and actions. This includes questioning and validating external data and models .
5. Which of the following is a violation of Standard II(B) Market Manipulation?
A) Publishing a research report with a negative outlook on a stock.
B) Spreading false rumors to influence the price of a security.
C) Selling a stock that has recently declined in value.
D) Placing a limit order to sell a stock.
Answer: B
Rationale: Standard II(B) prohibits practices that distort market prices, including spreading false
information. Spreading false rumors to manipulate prices is a clear violation .
6. A junior analyst at a firm learns that the firm is about to announce a significant merger. The analyst
does not tell anyone but decides to purchase shares in the target company for her personal account.
This action is a violation of:
A) Standard I(A) Knowledge of the Law.
B) Standard II(A) Material Nonpublic Information.
C) Standard III(B) Fair Dealing.
,D) Standard IV(A) Loyalty.
Answer: B
Rationale: Standard II(A) prohibits trading on material nonpublic information. The merger news is
material and nonpublic, and the analyst's action constitutes insider trading .
7. Under Standard III(A) Loyalty, Prudence, and Care, the primary duty of an investment professional is
to:
A) The firm's profitability.
B) The client's interests.
C) The overall market's stability.
D) The public's interest.
Answer: B
Rationale: Standard III(A) states that members must act for the benefit of their clients and place their
clients' interests before their own or their employer's .
8. A portfolio manager uses a quantitative model to manage client portfolios. The model is based on
historical data and has performed well in the past. According to Standard V(A) Diligence and Reasonable
Basis, the manager should:
A) Rely on the model's past performance and continue using it.
B) Conduct ongoing monitoring and due diligence to ensure the model remains valid.
C) Use the model only for large institutional clients.
D) Keep the model's methodology confidential to protect it from competitors.
Answer: B
Rationale: Standard V(A) requires a reasonable basis for recommendations and actions, which includes
ongoing due diligence and evaluation of the models and methods used .
9. Which Standard of Professional Conduct addresses the fair treatment of all clients?
A) Standard I: Professionalism
B) Standard III: Duties to Clients
C) Standard IV: Duties to Employers
D) Standard VI: Conflicts of Interest
, Answer: B
Rationale: Standard III(B) Fair Dealing specifically addresses the fair treatment of clients, requiring
members to deal fairly and objectively with all clients when disseminating recommendations and taking
investment actions .
10. A member of the CFA Institute serves as a director of a publicly traded company. This member is
required to disclose this information to:
A) The CFA Institute only.
B) The employer only.
C) The employer and the CFA Institute.
D) The public only.
Answer: C
Rationale: Standard VI(A) Disclosure of Conflicts requires members to disclose all matters that could
reasonably be expected to impair their independence and objectivity or interfere with their duties to
their clients and employers. Serving as a director is a conflict of interest that must be disclosed to both
the employer and the CFA Institute .
11. A member of the CFA Institute is asked by a client to invest in a security that the member believes is
unsuitable for the client's portfolio. The member should:
A) Follow the client's instructions regardless.
B) Decline to invest in the security and explain the reasons to the client.
C) Invest in the security and hope the client makes a profit.
D) Invest in the security but document the client's request.
Answer: B
Rationale: Standard III(C) Suitability requires members to determine that an investment is suitable for a
client's financial situation and objectives. If a member believes it is unsuitable, they should decline the
request and explain their reasoning .
12. According to the CFA Institute Standards, which of the following is considered a "gift" that must be
disclosed?
A) A $20 coffee mug with a company logo.
B) An invitation to a company presentation.
II CERTIFICATION: COMPLETE PRACTICE EXAM
WITH ANSWERS AND RATIONALES
(QUESTIONS 1-100)
1. Which of the following is the most accurate description of the purpose of the CFA Institute Code of
Ethics and Standards of Professional Conduct?
A) To provide a detailed list of legal requirements for financial professionals.
B) To establish principles for ethical behavior and professional conduct for CFA members.
C) To guarantee portfolio returns for clients.
D) To standardize accounting practices across all firms.
Answer: B
Rationale: The Code and Standards are designed to provide a framework of ethical principles to guide
the professional conduct of CFA Institute members, upholding the integrity of the profession .
2. According to the Standards of Professional Conduct, which standard requires members to maintain
and improve their professional competence?
A) Standard I: Professionalism
B) Standard II: Integrity of Capital Markets
C) Standard IV: Duties to Employers
D) Standard V: Investment Analysis, Recommendations, and Actions
Answer: A
Rationale: Standard I (Professionalism) includes the sub-section on Competence, which requires
members to maintain and improve their professional competence .
3. Under Standard I(B) Independence and Objectivity, which of the following is MOST likely a violation?
A) Accepting a modest gift from a client after a successful transaction.
B) Using a research report prepared by a third party without independent verification.
,C) Accepting a lavish gift from a client as a token of appreciation.
D) Charging a client a standard fee for services.
Answer: C
Rationale: Accepting lavish gifts or excessive hospitality from a client can impair a member's
independence and objectivity, especially if it creates a conflict of interest .
4. A CFA candidate is preparing a research report and uses a financial model provided by the company
being analyzed. According to Standard V(A) Diligence and Reasonable Basis, the candidate should:
A) Use the model as provided and include a disclaimer.
B) Conduct an independent analysis to ensure the model's assumptions and data are reasonable.
C) Exclude the company from the report if the model is used.
D) Use the model only if it is approved by the company's management.
Answer: B
Rationale: Standard V(A) requires members to have a diligent and reasonable basis for their
recommendations and actions. This includes questioning and validating external data and models .
5. Which of the following is a violation of Standard II(B) Market Manipulation?
A) Publishing a research report with a negative outlook on a stock.
B) Spreading false rumors to influence the price of a security.
C) Selling a stock that has recently declined in value.
D) Placing a limit order to sell a stock.
Answer: B
Rationale: Standard II(B) prohibits practices that distort market prices, including spreading false
information. Spreading false rumors to manipulate prices is a clear violation .
6. A junior analyst at a firm learns that the firm is about to announce a significant merger. The analyst
does not tell anyone but decides to purchase shares in the target company for her personal account.
This action is a violation of:
A) Standard I(A) Knowledge of the Law.
B) Standard II(A) Material Nonpublic Information.
C) Standard III(B) Fair Dealing.
,D) Standard IV(A) Loyalty.
Answer: B
Rationale: Standard II(A) prohibits trading on material nonpublic information. The merger news is
material and nonpublic, and the analyst's action constitutes insider trading .
7. Under Standard III(A) Loyalty, Prudence, and Care, the primary duty of an investment professional is
to:
A) The firm's profitability.
B) The client's interests.
C) The overall market's stability.
D) The public's interest.
Answer: B
Rationale: Standard III(A) states that members must act for the benefit of their clients and place their
clients' interests before their own or their employer's .
8. A portfolio manager uses a quantitative model to manage client portfolios. The model is based on
historical data and has performed well in the past. According to Standard V(A) Diligence and Reasonable
Basis, the manager should:
A) Rely on the model's past performance and continue using it.
B) Conduct ongoing monitoring and due diligence to ensure the model remains valid.
C) Use the model only for large institutional clients.
D) Keep the model's methodology confidential to protect it from competitors.
Answer: B
Rationale: Standard V(A) requires a reasonable basis for recommendations and actions, which includes
ongoing due diligence and evaluation of the models and methods used .
9. Which Standard of Professional Conduct addresses the fair treatment of all clients?
A) Standard I: Professionalism
B) Standard III: Duties to Clients
C) Standard IV: Duties to Employers
D) Standard VI: Conflicts of Interest
, Answer: B
Rationale: Standard III(B) Fair Dealing specifically addresses the fair treatment of clients, requiring
members to deal fairly and objectively with all clients when disseminating recommendations and taking
investment actions .
10. A member of the CFA Institute serves as a director of a publicly traded company. This member is
required to disclose this information to:
A) The CFA Institute only.
B) The employer only.
C) The employer and the CFA Institute.
D) The public only.
Answer: C
Rationale: Standard VI(A) Disclosure of Conflicts requires members to disclose all matters that could
reasonably be expected to impair their independence and objectivity or interfere with their duties to
their clients and employers. Serving as a director is a conflict of interest that must be disclosed to both
the employer and the CFA Institute .
11. A member of the CFA Institute is asked by a client to invest in a security that the member believes is
unsuitable for the client's portfolio. The member should:
A) Follow the client's instructions regardless.
B) Decline to invest in the security and explain the reasons to the client.
C) Invest in the security and hope the client makes a profit.
D) Invest in the security but document the client's request.
Answer: B
Rationale: Standard III(C) Suitability requires members to determine that an investment is suitable for a
client's financial situation and objectives. If a member believes it is unsuitable, they should decline the
request and explain their reasoning .
12. According to the CFA Institute Standards, which of the following is considered a "gift" that must be
disclosed?
A) A $20 coffee mug with a company logo.
B) An invitation to a company presentation.
