ILLINOIS CHARTERED FINANCIAL ANALYST
EXAM (CFA) PRACTICE QUESTIONS WITH
CORRECT ANSWERS (VERIFIED ANSWERS)
PLUS RATIONALES 2026 Q&A | INSTANT
DOWNLOAD PDF:
1. Which financial statement provides a snapshot of 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 Shareholders’ Equity
The balance sheet shows assets, liabilities, and equity at a particular
date, reflecting the financial position.
2. What is the primary purpose of diversification in a portfolio?
A. Maximize returns regardless of risk
B. Reduce unsystematic risk
C. Eliminate market risk entirely
D. Increase leverage
Diversification spreads investments across assets to reduce risk specific
to individual securities (unsystematic risk).
,3. In the Capital Asset Pricing Model (CAPM), what does beta
measure?
A. Expected return on the market
B. Systematic risk relative to the market
C. Total risk of an asset
D. Risk-free rate
Beta quantifies the sensitivity of an asset’s returns to overall market
movements.
4. Which of the following is a leading economic indicator?
A. Stock market returns
B. Unemployment rate
C. Consumer Price Index (CPI)
D. GDP growth
Leading indicators change before the economy as a whole changes;
stock market returns often reflect expectations of future economic
activity.
5. The present value of a future cash flow decreases as:
A. The cash flow amount increases
B. Time to receipt decreases
C. The discount rate increases
D. The investment horizon shortens
A higher discount rate reduces the present value of future cash flows.
6. What type of risk can be reduced through diversification?
,A. Unsystematic risk
B. Systematic risk
C. Market risk
D. Inflation risk
Unsystematic risk is specific to a company or industry and can be
minimized by holding a diversified portfolio.
7. Which ratio measures a company's ability to meet short-term
obligations?
A. Debt-to-Equity Ratio
B. Current Ratio
C. Price-to-Earnings Ratio
D. Return on Equity
The current ratio compares current assets to current liabilities to
evaluate liquidity.
8. The yield to maturity (YTM) of a bond assumes:
A. Coupons are reinvested at a lower rate
B. The bond is sold before maturity
C. All coupons are reinvested at the YTM rate
D. The bond will default
YTM calculates the internal rate of return assuming reinvestment of
coupons at the same YTM.
9. Which of the following is considered a money market instrument?
, A. Corporate bond
B. Common stock
C. Treasury bill
D. Preferred stock
Treasury bills are short-term, highly liquid, and low-risk securities.
10. In financial statements, depreciation is:
A. A cash expense
B. A non-cash expense
C. An asset
D. A liability
Depreciation reduces accounting profits but does not involve an actual
cash outflow.
11. What is the effect of a stock split on a company's market
capitalization?
A. Market capitalization increases
B. Market capitalization decreases
C. Market capitalization remains the same
D. Market capitalization doubles
A stock split increases the number of shares but reduces the price per
share proportionally, leaving market capitalization unchanged.
12. Which method of valuing a stock focuses on dividends?
A. Dividend Discount Model (DDM)
B. Free Cash Flow Model
EXAM (CFA) PRACTICE QUESTIONS WITH
CORRECT ANSWERS (VERIFIED ANSWERS)
PLUS RATIONALES 2026 Q&A | INSTANT
DOWNLOAD PDF:
1. Which financial statement provides a snapshot of 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 Shareholders’ Equity
The balance sheet shows assets, liabilities, and equity at a particular
date, reflecting the financial position.
2. What is the primary purpose of diversification in a portfolio?
A. Maximize returns regardless of risk
B. Reduce unsystematic risk
C. Eliminate market risk entirely
D. Increase leverage
Diversification spreads investments across assets to reduce risk specific
to individual securities (unsystematic risk).
,3. In the Capital Asset Pricing Model (CAPM), what does beta
measure?
A. Expected return on the market
B. Systematic risk relative to the market
C. Total risk of an asset
D. Risk-free rate
Beta quantifies the sensitivity of an asset’s returns to overall market
movements.
4. Which of the following is a leading economic indicator?
A. Stock market returns
B. Unemployment rate
C. Consumer Price Index (CPI)
D. GDP growth
Leading indicators change before the economy as a whole changes;
stock market returns often reflect expectations of future economic
activity.
5. The present value of a future cash flow decreases as:
A. The cash flow amount increases
B. Time to receipt decreases
C. The discount rate increases
D. The investment horizon shortens
A higher discount rate reduces the present value of future cash flows.
6. What type of risk can be reduced through diversification?
,A. Unsystematic risk
B. Systematic risk
C. Market risk
D. Inflation risk
Unsystematic risk is specific to a company or industry and can be
minimized by holding a diversified portfolio.
7. Which ratio measures a company's ability to meet short-term
obligations?
A. Debt-to-Equity Ratio
B. Current Ratio
C. Price-to-Earnings Ratio
D. Return on Equity
The current ratio compares current assets to current liabilities to
evaluate liquidity.
8. The yield to maturity (YTM) of a bond assumes:
A. Coupons are reinvested at a lower rate
B. The bond is sold before maturity
C. All coupons are reinvested at the YTM rate
D. The bond will default
YTM calculates the internal rate of return assuming reinvestment of
coupons at the same YTM.
9. Which of the following is considered a money market instrument?
, A. Corporate bond
B. Common stock
C. Treasury bill
D. Preferred stock
Treasury bills are short-term, highly liquid, and low-risk securities.
10. In financial statements, depreciation is:
A. A cash expense
B. A non-cash expense
C. An asset
D. A liability
Depreciation reduces accounting profits but does not involve an actual
cash outflow.
11. What is the effect of a stock split on a company's market
capitalization?
A. Market capitalization increases
B. Market capitalization decreases
C. Market capitalization remains the same
D. Market capitalization doubles
A stock split increases the number of shares but reduces the price per
share proportionally, leaving market capitalization unchanged.
12. Which method of valuing a stock focuses on dividends?
A. Dividend Discount Model (DDM)
B. Free Cash Flow Model
