CFA Level II Exam 2026 Latest
Comprehensive Study Guide with
Practice Questions
SECTION 1: Ethical and Professional Standards (Questions 1–10)
Vignette 1: Questions 1–4
Carolyn Chen, CFA, is a portfolio manager at Ridgewood Capital Management.
She has been managing the portfolio of a long-time client, Dr. James Peterson, for
the past eight years. Dr. Peterson is a retired surgeon with a moderate risk
tolerance, a 15-year time horizon, and a primary objective of capital preservation
with modest income generation.
Chen recently attended a conference where she learned about a new high-yield
bond fund that has been generating returns of 18% annually over the past three
years. Without conducting a full suitability analysis, Chen recommends that Dr.
Peterson allocate 40% of his portfolio to this high-yield bond fund, citing the
"exceptional returns" and "limited downside risk" based on the fund manager's
presentation.
Question 1
Under Standard III(C) – Suitability, what should Chen have done before making
this recommendation?
A) Obtained Dr. Peterson's verbal consent to the recommendation
B) Made a reasonable inquiry into Dr. Peterson's investment experience, risk and
return objectives, and financial constraints
C) Conducted a performance analysis of the high-yield bond fund over the past
five years
D) Obtained written approval from her compliance officer
Correct Answer: B
,Rationale: Standard III(C) – Suitability requires that before making investment
recommendations or taking investment action, members must make a reasonable
inquiry into the client's investment experience, risk and return objectives, and
financial constraints (including time horizon, liquidity needs, tax considerations,
and unique circumstances). Verbal consent (A) does not satisfy the requirement for
a reasonable inquiry. Performance analysis (C) is insufficient without
understanding the client's profile. Compliance approval (D) does not substitute for
client suitability analysis.
Question 2
Which of the following statements about the high-yield bond fund
recommendation is MOST accurate under the Code and Standards?
A) Chen's recommendation is suitable because high-yield bonds offer higher
returns
B) Chen's recommendation violates Standard III(C) because she failed to consider
Dr. Peterson's risk tolerance and financial constraints
C) Chen's recommendation is acceptable because Dr. Peterson is a long-time client
D) Chen's recommendation is suitable because the fund has generated strong
historical returns
Correct Answer: B
Rationale: Chen's recommendation violates Standard III(C) because she failed
to consider Dr. Peterson's risk tolerance and financial constraints. High-yield
bonds carry significant credit and market risk, which is inconsistent with a capital
preservation objective and moderate risk tolerance. Historical returns (A, D) do not
justify suitability. Long-standing client relationships (C) do not eliminate the
suitability requirement.
Question 3
In her conversation with Dr. Peterson, Chen states that the high-yield bond fund
has "limited downside risk." This statement is:
A) Acceptable because all investments carry some risk
B) A violation of Standard I(C) – Misrepresentation
,C) Acceptable because she is expressing her professional opinion
D) A violation of Standard V(A) – Diligence and Reasonable Basis
Correct Answer: B
Rationale: Stating that a high-yield bond fund has "limited downside risk" is a
violation of Standard I(C) – Misrepresentation because it misrepresents the true
risk characteristics of the investment. High-yield bonds are, by definition, below
investment grade and carry significant default risk and price volatility. Standard
I(C) prohibits making untrue statements or omitting material facts. Expressing a
professional opinion (C) does not justify misrepresentation.
Question 4
What additional Standard might Chen have violated by not documenting her
suitability analysis?
A) Standard I(A) – Knowledge of the Law
B) Standard V(C) – Record Retention
C) Standard III(E) – Preservation of Confidentiality
D) Standard IV(A) – Loyalty
Correct Answer: B
Rationale: Chen may have violated Standard V(C) – Record Retention if she
failed to adequately document her suitability analysis and the basis for her
recommendation. Members must retain records that support their investment
recommendations and actions. Record retention is essential for demonstrating
compliance with suitability requirements and for defending against potential
claims.
Vignette 2: Questions 5–7
Davidson is a senior portfolio manager at Westbrook Advisors. He supervises a
team of five junior analysts. One of his analysts, Sarah Miller, recently submitted a
research report on a technology company. Davidson approved the report without
reviewing it thoroughly. The report was later found to contain plagiarized content
from a competitor's research note.
, Question 5
Under Standard IV(C) – Responsibilities of Supervisors, Davidson's actions most
likely constitute:
A) No violation because the plagiarism was committed by the analyst, not
Davidson
B) A violation because Davidson failed to establish and enforce reasonable
procedures to prevent violations
C) No violation because Davidson is not responsible for the content of analyst
reports
D) A violation of Standard I(A) – Knowledge of the Law only
Correct Answer: B
Rationale: Davidson's actions constitute a violation of Standard IV(C) –
Responsibilities of Supervisors because he failed to establish and enforce
reasonable procedures to prevent violations by those under his supervision.
By approving the report without thorough review, he failed to implement adequate
supervisory procedures. Supervisors have a duty to make reasonable efforts to
detect and prevent violations. The violation is not excused by the fact that the
analyst committed the plagiarism (A).
Question 6
What is the MOST appropriate action for Davidson to take after discovering the
plagiarism?
A) Terminate Sarah Miller immediately
B) Review and enhance the firm's supervisory procedures and ensure the report is
corrected or withdrawn
C) Ignore the issue since the report has already been distributed
D) Report the issue only to the compliance department and take no further action
Correct Answer: B
Rationale: The most appropriate action is to review and enhance the firm's
supervisory procedures and ensure the report is corrected or withdrawn.
Standard IV(C) requires supervisors to take steps to prevent and detect violations.
Comprehensive Study Guide with
Practice Questions
SECTION 1: Ethical and Professional Standards (Questions 1–10)
Vignette 1: Questions 1–4
Carolyn Chen, CFA, is a portfolio manager at Ridgewood Capital Management.
She has been managing the portfolio of a long-time client, Dr. James Peterson, for
the past eight years. Dr. Peterson is a retired surgeon with a moderate risk
tolerance, a 15-year time horizon, and a primary objective of capital preservation
with modest income generation.
Chen recently attended a conference where she learned about a new high-yield
bond fund that has been generating returns of 18% annually over the past three
years. Without conducting a full suitability analysis, Chen recommends that Dr.
Peterson allocate 40% of his portfolio to this high-yield bond fund, citing the
"exceptional returns" and "limited downside risk" based on the fund manager's
presentation.
Question 1
Under Standard III(C) – Suitability, what should Chen have done before making
this recommendation?
A) Obtained Dr. Peterson's verbal consent to the recommendation
B) Made a reasonable inquiry into Dr. Peterson's investment experience, risk and
return objectives, and financial constraints
C) Conducted a performance analysis of the high-yield bond fund over the past
five years
D) Obtained written approval from her compliance officer
Correct Answer: B
,Rationale: Standard III(C) – Suitability requires that before making investment
recommendations or taking investment action, members must make a reasonable
inquiry into the client's investment experience, risk and return objectives, and
financial constraints (including time horizon, liquidity needs, tax considerations,
and unique circumstances). Verbal consent (A) does not satisfy the requirement for
a reasonable inquiry. Performance analysis (C) is insufficient without
understanding the client's profile. Compliance approval (D) does not substitute for
client suitability analysis.
Question 2
Which of the following statements about the high-yield bond fund
recommendation is MOST accurate under the Code and Standards?
A) Chen's recommendation is suitable because high-yield bonds offer higher
returns
B) Chen's recommendation violates Standard III(C) because she failed to consider
Dr. Peterson's risk tolerance and financial constraints
C) Chen's recommendation is acceptable because Dr. Peterson is a long-time client
D) Chen's recommendation is suitable because the fund has generated strong
historical returns
Correct Answer: B
Rationale: Chen's recommendation violates Standard III(C) because she failed
to consider Dr. Peterson's risk tolerance and financial constraints. High-yield
bonds carry significant credit and market risk, which is inconsistent with a capital
preservation objective and moderate risk tolerance. Historical returns (A, D) do not
justify suitability. Long-standing client relationships (C) do not eliminate the
suitability requirement.
Question 3
In her conversation with Dr. Peterson, Chen states that the high-yield bond fund
has "limited downside risk." This statement is:
A) Acceptable because all investments carry some risk
B) A violation of Standard I(C) – Misrepresentation
,C) Acceptable because she is expressing her professional opinion
D) A violation of Standard V(A) – Diligence and Reasonable Basis
Correct Answer: B
Rationale: Stating that a high-yield bond fund has "limited downside risk" is a
violation of Standard I(C) – Misrepresentation because it misrepresents the true
risk characteristics of the investment. High-yield bonds are, by definition, below
investment grade and carry significant default risk and price volatility. Standard
I(C) prohibits making untrue statements or omitting material facts. Expressing a
professional opinion (C) does not justify misrepresentation.
Question 4
What additional Standard might Chen have violated by not documenting her
suitability analysis?
A) Standard I(A) – Knowledge of the Law
B) Standard V(C) – Record Retention
C) Standard III(E) – Preservation of Confidentiality
D) Standard IV(A) – Loyalty
Correct Answer: B
Rationale: Chen may have violated Standard V(C) – Record Retention if she
failed to adequately document her suitability analysis and the basis for her
recommendation. Members must retain records that support their investment
recommendations and actions. Record retention is essential for demonstrating
compliance with suitability requirements and for defending against potential
claims.
Vignette 2: Questions 5–7
Davidson is a senior portfolio manager at Westbrook Advisors. He supervises a
team of five junior analysts. One of his analysts, Sarah Miller, recently submitted a
research report on a technology company. Davidson approved the report without
reviewing it thoroughly. The report was later found to contain plagiarized content
from a competitor's research note.
, Question 5
Under Standard IV(C) – Responsibilities of Supervisors, Davidson's actions most
likely constitute:
A) No violation because the plagiarism was committed by the analyst, not
Davidson
B) A violation because Davidson failed to establish and enforce reasonable
procedures to prevent violations
C) No violation because Davidson is not responsible for the content of analyst
reports
D) A violation of Standard I(A) – Knowledge of the Law only
Correct Answer: B
Rationale: Davidson's actions constitute a violation of Standard IV(C) –
Responsibilities of Supervisors because he failed to establish and enforce
reasonable procedures to prevent violations by those under his supervision.
By approving the report without thorough review, he failed to implement adequate
supervisory procedures. Supervisors have a duty to make reasonable efforts to
detect and prevent violations. The violation is not excused by the fact that the
analyst committed the plagiarism (A).
Question 6
What is the MOST appropriate action for Davidson to take after discovering the
plagiarism?
A) Terminate Sarah Miller immediately
B) Review and enhance the firm's supervisory procedures and ensure the report is
corrected or withdrawn
C) Ignore the issue since the report has already been distributed
D) Report the issue only to the compliance department and take no further action
Correct Answer: B
Rationale: The most appropriate action is to review and enhance the firm's
supervisory procedures and ensure the report is corrected or withdrawn.
Standard IV(C) requires supervisors to take steps to prevent and detect violations.
