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 Exam 1: Review PART 2
Practice Question Bank
Comprehensive Review with 81 Questions, Answers & Rationales
Level 1 — Alternative Investments, Derivatives, Fixed Income & Portfolio
Management
Edition 1 · August 2026
,Table of Contents
1. Instructions for Use 2
2. Practice Questions with Answers & Rationales — CFA Exam 1: Review PART 2 2
CFA · Chartered Financial Analyst Page 1
,CFA EXAM 1: REVIEW PART 2 PRACTICE 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 81 questions covering
the full scope of the CFA Exam 1: Review PART 2 content with detailed rationales for every question.
Category: CFA Exam 1: Review PART 2 — Level 1 Finance
1 In the most recent year, Mowe Company and Larrie Company each experienced a 5% increase in sales.
Mowe's operating income increased by 7% and its net income increased by 8%. Larrie's operating income
increased by 6% and its net income increased by 9%. Based only on this information, Larrie most likely:
A uses less financial leverage than Mowe
B uses more financial leverage than Mowe
C has lower operating leverage than Mowe
D has higher operating leverage than Mowe
Why B is correct: Financial leverage magnifies the effect of changes in operating income on net income. Larrie's net
income increased by 9% versus operating income of 6% (a 3% difference), while Mowe's net income increased by 8% versus
operating income of 7% (a 1% difference). This indicates Larrie uses more financial leverage.
A — Larrie shows greater magnification, indicating more, not less, financial leverage.
C — Operating leverage relates to the relationship between sales and operating income.
D — Mowe's operating income increased by 7% versus 6% for Larrie, indicating higher operating leverage for Mowe.
, 2 Marr Company is a corporate bond issuer rated AA. Hook Company is a corporate bond issuer based in the
same country and rated A+. Both companies have 5-year domestic bond issues outstanding with yield
spreads of 250 basis points. Based only on this information, it is most likely that:
A Marr's bonds have more specific collateral than Hook's bonds
B Hook's bonds have more specific collateral than Marr's bonds
C Marr has higher default risk than Hook
D Hook has lower default risk than Marr
Why B is correct: Hook has a lower credit rating (A+ vs AA), so we would expect a wider yield spread, all else equal.
Since both have the same spread, Hook's bonds must have more specific collateral (which reduces credit risk and thus the
spread) to offset their lower credit quality.
A — Marr's higher rating would normally mean less collateral is needed.
C — Marr has a higher rating, meaning lower default risk.
D — Hook has a lower rating, meaning higher default risk.
3 An investment advisor constructs a portfolio that plots on the capital market line but has less risk and a
lower return than the market portfolio. This portfolio is most accurately described as:
A a lending portfolio
B a borrowing portfolio
C an inefficient portfolio
D a leveraged portfolio
Why A is correct: A portfolio on the capital market line (CML) with less risk and lower return than the market portfolio
is a lending portfolio. This is achieved by combining the market portfolio with lending (investing at the risk-free rate).
B — Borrowing portfolios have higher risk and return than the market.
C — All portfolios on the CML are efficient.
D — Leveraged portfolios have higher risk and return than the market.
CFA Exam 1: Review PART 2
Practice Question Bank
Comprehensive Review with 81 Questions, Answers & Rationales
Level 1 — Alternative Investments, Derivatives, Fixed Income & Portfolio
Management
Edition 1 · August 2026
,Table of Contents
1. Instructions for Use 2
2. Practice Questions with Answers & Rationales — CFA Exam 1: Review PART 2 2
CFA · Chartered Financial Analyst Page 1
,CFA EXAM 1: REVIEW PART 2 PRACTICE 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 81 questions covering
the full scope of the CFA Exam 1: Review PART 2 content with detailed rationales for every question.
Category: CFA Exam 1: Review PART 2 — Level 1 Finance
1 In the most recent year, Mowe Company and Larrie Company each experienced a 5% increase in sales.
Mowe's operating income increased by 7% and its net income increased by 8%. Larrie's operating income
increased by 6% and its net income increased by 9%. Based only on this information, Larrie most likely:
A uses less financial leverage than Mowe
B uses more financial leverage than Mowe
C has lower operating leverage than Mowe
D has higher operating leverage than Mowe
Why B is correct: Financial leverage magnifies the effect of changes in operating income on net income. Larrie's net
income increased by 9% versus operating income of 6% (a 3% difference), while Mowe's net income increased by 8% versus
operating income of 7% (a 1% difference). This indicates Larrie uses more financial leverage.
A — Larrie shows greater magnification, indicating more, not less, financial leverage.
C — Operating leverage relates to the relationship between sales and operating income.
D — Mowe's operating income increased by 7% versus 6% for Larrie, indicating higher operating leverage for Mowe.
, 2 Marr Company is a corporate bond issuer rated AA. Hook Company is a corporate bond issuer based in the
same country and rated A+. Both companies have 5-year domestic bond issues outstanding with yield
spreads of 250 basis points. Based only on this information, it is most likely that:
A Marr's bonds have more specific collateral than Hook's bonds
B Hook's bonds have more specific collateral than Marr's bonds
C Marr has higher default risk than Hook
D Hook has lower default risk than Marr
Why B is correct: Hook has a lower credit rating (A+ vs AA), so we would expect a wider yield spread, all else equal.
Since both have the same spread, Hook's bonds must have more specific collateral (which reduces credit risk and thus the
spread) to offset their lower credit quality.
A — Marr's higher rating would normally mean less collateral is needed.
C — Marr has a higher rating, meaning lower default risk.
D — Hook has a lower rating, meaning higher default risk.
3 An investment advisor constructs a portfolio that plots on the capital market line but has less risk and a
lower return than the market portfolio. This portfolio is most accurately described as:
A a lending portfolio
B a borrowing portfolio
C an inefficient portfolio
D a leveraged portfolio
Why A is correct: A portfolio on the capital market line (CML) with less risk and lower return than the market portfolio
is a lending portfolio. This is achieved by combining the market portfolio with lending (investing at the risk-free rate).
B — Borrowing portfolios have higher risk and return than the market.
C — All portfolios on the CML are efficient.
D — Leveraged portfolios have higher risk and return than the market.
