CFA Level 1 Exam Questions with
Verified Answers 2025/2026 (Graded A+)
A portfolio manager who adds hedge funds to a portfolio of traditional securities is most likely
seeking to: - Answer- both increase expected returns and decrease portfolio variance.
For which of the following investments is an investor most likely to require the greatest liquidity
premium? - Answer- Private equity funds. Private equity funds tend to have lockup periods;
investors will require liquidity premiums as compensation
Funds that invest in the equity of companies, primarily by using debt financing, are best
characterized as: - Answer- Leveraged buyout (LBO) funds, a type of private equity fund, use
borrowed money to purchase equity in established companies.
Utility assets such as natural gas distribution pipelines are best classified as - Answer-
infrastructure investments
The difference between a hedge fund's trading net asset value and its accounting net asset value
is that: - Answer- Trading NAV adjusts accounting NAV downward to account for illiquidity of
a hedge fund's investments, such as positions that are large relative to trading volume.
An additional risk of direct investment in real estate, which is not typically a significant risk in a
portfolio of traditional investments, is: - Answer- liquidity risk
In the valuation of a real estate investment trust (REIT), subtracting the REIT's liabilities from
the value of its real estate assets and dividing by the number of shares outstanding provides an
estimate of the REIT's: - Answer- An asset-based approach to valuing a REIT is to estimate its
net asset value as the difference between the value of the REIT's real estate assets and its
liabilities, divided by the number of shares outstanding.
Regarding the use of financial ratios in the analysis of a firm's financial statements, it is most
accurate to say that: - Answer- a range of target values for a ratio may be more appropriate than a
single target value.
ROE = - Answer- tax burden × interest burden × EBIT margin × asset turnover × financial
leverage
or
, [(EBIT - I)(1-t)]/equity
tax burden = - Answer- net income/EBT
net income = - Answer- (EBT)(1-t)
interest burden = - Answer- EBT/EBIT
EBIT margin = - Answer- EBIT/revenue
Financial ratios are not useful when viewed in ______ and are only valid when compared to
historical figures or peers - Answer- isolation
asset turnover = - Answer- revenue/total assets
financial leverage = - Answer- total assets/total equity
Sustainable growth = - Answer- ROE (1 - dividend payout rate)
Current ratio = - Answer- CA / CL
The cash conversion cycle is the: - Answer- sum of the time it takes to sell inventory and collect
on accounts receivable, less the time it takes to pay for credit purchases.
Cash conversion cycle = - Answer- (average receivables collection period) + (average inventory
processing period) − (payables payment period)
Allocating an tangible asset's cost to the income statement over time is known as: - Answer-
depreciation
A money management firm has created a new junk-bond fund. When the firm advertised the new
fund at its issuance, they used care to accurately compute the returns from the past 10 years for
all assets in the fund. The firm used the current portfolio weights to determine an average annual
historical return equal to 18% and claim an 18% annual historical return in their advertising
literature. With respect to Standard III(D), Performance Presentation, this is: - Answer- a
violation because the advertisement implies the firm generated this return.
Reporting the historical returns of all assets now in the fund introduces a survivorship bias. Also,
the advertisement is misleading because the fund just came into existence and has no historical
record. Thus, the firm has misled the public as to their performance history.
CFA Institute Standard II(A) prohibits - Answer- trading using material non-public information.
A member may not trade using such information regardless of the laws of other countries
Verified Answers 2025/2026 (Graded A+)
A portfolio manager who adds hedge funds to a portfolio of traditional securities is most likely
seeking to: - Answer- both increase expected returns and decrease portfolio variance.
For which of the following investments is an investor most likely to require the greatest liquidity
premium? - Answer- Private equity funds. Private equity funds tend to have lockup periods;
investors will require liquidity premiums as compensation
Funds that invest in the equity of companies, primarily by using debt financing, are best
characterized as: - Answer- Leveraged buyout (LBO) funds, a type of private equity fund, use
borrowed money to purchase equity in established companies.
Utility assets such as natural gas distribution pipelines are best classified as - Answer-
infrastructure investments
The difference between a hedge fund's trading net asset value and its accounting net asset value
is that: - Answer- Trading NAV adjusts accounting NAV downward to account for illiquidity of
a hedge fund's investments, such as positions that are large relative to trading volume.
An additional risk of direct investment in real estate, which is not typically a significant risk in a
portfolio of traditional investments, is: - Answer- liquidity risk
In the valuation of a real estate investment trust (REIT), subtracting the REIT's liabilities from
the value of its real estate assets and dividing by the number of shares outstanding provides an
estimate of the REIT's: - Answer- An asset-based approach to valuing a REIT is to estimate its
net asset value as the difference between the value of the REIT's real estate assets and its
liabilities, divided by the number of shares outstanding.
Regarding the use of financial ratios in the analysis of a firm's financial statements, it is most
accurate to say that: - Answer- a range of target values for a ratio may be more appropriate than a
single target value.
ROE = - Answer- tax burden × interest burden × EBIT margin × asset turnover × financial
leverage
or
, [(EBIT - I)(1-t)]/equity
tax burden = - Answer- net income/EBT
net income = - Answer- (EBT)(1-t)
interest burden = - Answer- EBT/EBIT
EBIT margin = - Answer- EBIT/revenue
Financial ratios are not useful when viewed in ______ and are only valid when compared to
historical figures or peers - Answer- isolation
asset turnover = - Answer- revenue/total assets
financial leverage = - Answer- total assets/total equity
Sustainable growth = - Answer- ROE (1 - dividend payout rate)
Current ratio = - Answer- CA / CL
The cash conversion cycle is the: - Answer- sum of the time it takes to sell inventory and collect
on accounts receivable, less the time it takes to pay for credit purchases.
Cash conversion cycle = - Answer- (average receivables collection period) + (average inventory
processing period) − (payables payment period)
Allocating an tangible asset's cost to the income statement over time is known as: - Answer-
depreciation
A money management firm has created a new junk-bond fund. When the firm advertised the new
fund at its issuance, they used care to accurately compute the returns from the past 10 years for
all assets in the fund. The firm used the current portfolio weights to determine an average annual
historical return equal to 18% and claim an 18% annual historical return in their advertising
literature. With respect to Standard III(D), Performance Presentation, this is: - Answer- a
violation because the advertisement implies the firm generated this return.
Reporting the historical returns of all assets now in the fund introduces a survivorship bias. Also,
the advertisement is misleading because the fund just came into existence and has no historical
record. Thus, the firm has misled the public as to their performance history.
CFA Institute Standard II(A) prohibits - Answer- trading using material non-public information.
A member may not trade using such information regardless of the laws of other countries
