Chartered Financial Analyst Level II
Exam Practice Questions And Correct
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1. A portfolio manager is evaluating a firm using a three-stage discounted
dividend model. The expected dividend next year is $4, growth is 12%
for two years, then 5% thereafter, and required return is 10%. Which
valuation approach is most appropriate for this scenario?
A. Single-stage Gordon Growth Model
B. H-model dividend discount model
C. Multi-stage dividend discount model
D. Three-stage dividend discount model
The three-stage dividend discount model is appropriate when a firm
experiences an initial high-growth period, a transition phase, and a
stable long-term growth rate, which matches the structure described
in the problem.
2. A CFA candidate is analyzing covariance stationarity in a time series.
Which condition must hold for a series to be covariance stationary?
A. Mean and variance must both change over time
B. Only variance must be constant over time
, C. Mean must trend upward over time
D. Mean, variance, and autocovariances must be constant over time
Covariance stationarity requires constant mean and variance, and
autocovariances that depend only on lag length, not time.
3. A firm’s bond is callable in 3 years. Which relationship is most
accurate?
A. Callable bonds have higher duration than non-callable bonds
B. Callable bonds have no embedded options
C. Callable bonds are always priced at a premium to straight bonds
D. Callable bonds typically have lower price appreciation potential
than non-callable bonds when interest rates fall
Callable bonds limit upside price potential because the issuer may
redeem the bond when interest rates decline.
4. Which of the following best describes a Type I error in hypothesis
testing?
A. Failing to reject a false null hypothesis
B. Accepting a true null hypothesis
C. Rejecting a false alternative hypothesis
D. Rejecting a true null hypothesis
A Type I error occurs when the null hypothesis is incorrectly rejected
even though it is true.
5. An analyst is using the equity risk premium in CAPM. Which statement
is most accurate?
A. It is always negative in emerging markets
B. It is independent of investor risk aversion
C. It equals the risk-free rate minus market return
D. It represents the excess return investors require for holding
equities over risk-free assets
, The equity risk premium is the additional expected return required
for investing in equities relative to risk-free securities.
6. Which assumption is required for the Modigliani-Miller proposition
with taxes?
A. No bankruptcy costs
B. Perfect information asymmetry
C. No corporate taxes
D. Interest is tax-deductible at the corporate level
With corporate taxes included, interest tax shields create value,
which is central to MM with taxes.
7. A regression model yields heteroskedastic residuals. Which estimator
is most appropriate?
A. OLS without correction
B. Simple moving average
C. Ordinary least squares with lagged variables only
D. Heteroskedasticity-consistent standard errors (White’s correction)
White’s correction adjusts standard errors to remain valid under
heteroskedasticity.
8. Which financial ratio is most directly affected by changes in inventory
accounting methods?
A. Debt-to-equity ratio
B. Interest coverage ratio
C. Dividend payout ratio
D. Cost of goods sold and gross profit margin
Inventory accounting methods directly affect COGS, thereby
impacting gross profit and related margins.
9. A forward contract differs from a futures contract primarily because
forwards:
A. Are exchange-traded and standardized
Exam Practice Questions And Correct
Answers (Verified Answers) Plus
Rationale 2026 Q&A| Instant Download
1. A portfolio manager is evaluating a firm using a three-stage discounted
dividend model. The expected dividend next year is $4, growth is 12%
for two years, then 5% thereafter, and required return is 10%. Which
valuation approach is most appropriate for this scenario?
A. Single-stage Gordon Growth Model
B. H-model dividend discount model
C. Multi-stage dividend discount model
D. Three-stage dividend discount model
The three-stage dividend discount model is appropriate when a firm
experiences an initial high-growth period, a transition phase, and a
stable long-term growth rate, which matches the structure described
in the problem.
2. A CFA candidate is analyzing covariance stationarity in a time series.
Which condition must hold for a series to be covariance stationary?
A. Mean and variance must both change over time
B. Only variance must be constant over time
, C. Mean must trend upward over time
D. Mean, variance, and autocovariances must be constant over time
Covariance stationarity requires constant mean and variance, and
autocovariances that depend only on lag length, not time.
3. A firm’s bond is callable in 3 years. Which relationship is most
accurate?
A. Callable bonds have higher duration than non-callable bonds
B. Callable bonds have no embedded options
C. Callable bonds are always priced at a premium to straight bonds
D. Callable bonds typically have lower price appreciation potential
than non-callable bonds when interest rates fall
Callable bonds limit upside price potential because the issuer may
redeem the bond when interest rates decline.
4. Which of the following best describes a Type I error in hypothesis
testing?
A. Failing to reject a false null hypothesis
B. Accepting a true null hypothesis
C. Rejecting a false alternative hypothesis
D. Rejecting a true null hypothesis
A Type I error occurs when the null hypothesis is incorrectly rejected
even though it is true.
5. An analyst is using the equity risk premium in CAPM. Which statement
is most accurate?
A. It is always negative in emerging markets
B. It is independent of investor risk aversion
C. It equals the risk-free rate minus market return
D. It represents the excess return investors require for holding
equities over risk-free assets
, The equity risk premium is the additional expected return required
for investing in equities relative to risk-free securities.
6. Which assumption is required for the Modigliani-Miller proposition
with taxes?
A. No bankruptcy costs
B. Perfect information asymmetry
C. No corporate taxes
D. Interest is tax-deductible at the corporate level
With corporate taxes included, interest tax shields create value,
which is central to MM with taxes.
7. A regression model yields heteroskedastic residuals. Which estimator
is most appropriate?
A. OLS without correction
B. Simple moving average
C. Ordinary least squares with lagged variables only
D. Heteroskedasticity-consistent standard errors (White’s correction)
White’s correction adjusts standard errors to remain valid under
heteroskedasticity.
8. Which financial ratio is most directly affected by changes in inventory
accounting methods?
A. Debt-to-equity ratio
B. Interest coverage ratio
C. Dividend payout ratio
D. Cost of goods sold and gross profit margin
Inventory accounting methods directly affect COGS, thereby
impacting gross profit and related margins.
9. A forward contract differs from a futures contract primarily because
forwards:
A. Are exchange-traded and standardized
