C F A I N S T I T U T E · C H A R T E R E D F I N A N C I A L A N A LY S T
CFA Institute Practice Exam 1
Practice Question Bank
Comprehensive Review with 37 Questions, Answers & Rationales
Level 1 — Corporate Governance, Investments, Ethics & Quantitative
Methods
Edition 1 · August 2026
,Table of Contents
1. Instructions for Use 2
2. Practice Questions with Answers & Rationales — CFA Institute Practice Exam 1 2
CFA · Chartered Financial Analyst Page 1
, CFA INSTITUTE PRACTICE EXAM 1 GUIDE INSTRUCTIONS & PRACTICE QUESTIONS
How to Use This Guide
Read each stem, choose your answer, then check the rationale directly below it. The correct option is marked, and each
wrong option is explained so you understand why it's wrong — not just that it is. This guide contains 37 questions covering
the full scope of the CFA Institute Practice Exam 1 content with detailed rationales for every question.
Category: CFA Institute Practice Exam 1 — Level 1
1 Which of the following is most likely associated with poor corporate governance?
A Reduction in exposure to regulatory actions
B Increased control and compliance monitoring of corporate decisions
C Management of a company to a lower risk profile relative to shareholder tolerance
Why C is correct: Poor governance can result in ineffective decision making. Management may make decisions that
benefit themselves at the cost of shareholders, such as taking less risk than is appropriate to create a more stable
environment. Managing the company at a lower risk profile than necessary based on shareholders' tolerance is an example
of ineffective decision making.
A — A reduction in exposure to regulatory actions would be the result of good, not poor, corporate governance.
B — Increased control and compliance monitoring are usually the result of good corporate governance.
2 In capital investment decisions, project sequencing is most likely a type of:
A timing option
B flexibility option
C fundamental option
Why A is correct: Project sequencing is a type of timing option. "Delaying an investment and basing the decision on
hopefully improved information that you might have in, say, a year could help improve the NPV of the projects selected.
Project sequencing options allow the company to defer the decision to invest in a future investment until the outcome of
some or all of a current investment is known."
B — Project sequencing is a type of timing option, not a type of flexibility option. Flexibility options include price-setting
and production flexibility options.
C — Project sequencing is a type of timing option, not a type of fundamental option. A fundamental option exists in cases
where "the whole investment is essentially an option."
CFA Institute Practice Exam 1
Practice Question Bank
Comprehensive Review with 37 Questions, Answers & Rationales
Level 1 — Corporate Governance, Investments, Ethics & Quantitative
Methods
Edition 1 · August 2026
,Table of Contents
1. Instructions for Use 2
2. Practice Questions with Answers & Rationales — CFA Institute Practice Exam 1 2
CFA · Chartered Financial Analyst Page 1
, CFA INSTITUTE PRACTICE EXAM 1 GUIDE INSTRUCTIONS & PRACTICE QUESTIONS
How to Use This Guide
Read each stem, choose your answer, then check the rationale directly below it. The correct option is marked, and each
wrong option is explained so you understand why it's wrong — not just that it is. This guide contains 37 questions covering
the full scope of the CFA Institute Practice Exam 1 content with detailed rationales for every question.
Category: CFA Institute Practice Exam 1 — Level 1
1 Which of the following is most likely associated with poor corporate governance?
A Reduction in exposure to regulatory actions
B Increased control and compliance monitoring of corporate decisions
C Management of a company to a lower risk profile relative to shareholder tolerance
Why C is correct: Poor governance can result in ineffective decision making. Management may make decisions that
benefit themselves at the cost of shareholders, such as taking less risk than is appropriate to create a more stable
environment. Managing the company at a lower risk profile than necessary based on shareholders' tolerance is an example
of ineffective decision making.
A — A reduction in exposure to regulatory actions would be the result of good, not poor, corporate governance.
B — Increased control and compliance monitoring are usually the result of good corporate governance.
2 In capital investment decisions, project sequencing is most likely a type of:
A timing option
B flexibility option
C fundamental option
Why A is correct: Project sequencing is a type of timing option. "Delaying an investment and basing the decision on
hopefully improved information that you might have in, say, a year could help improve the NPV of the projects selected.
Project sequencing options allow the company to defer the decision to invest in a future investment until the outcome of
some or all of a current investment is known."
B — Project sequencing is a type of timing option, not a type of flexibility option. Flexibility options include price-setting
and production flexibility options.
C — Project sequencing is a type of timing option, not a type of fundamental option. A fundamental option exists in cases
where "the whole investment is essentially an option."
