CFA Level 1 Practice Test (Part 1) 90 Question Answers: The Level I CFA Program curriculum is organized into 10 topic areas. Each topic area begins with a brief statement of the material and the depth of knowledge expected. It is then divided into one or more study sessions. CFA Level 1 Practice Test (Part 1) 19 sessions in the Level I curriculum should form the basic structure of your reading and preparation.
Each study session includes a statement of its structure and objective and is further divided into assigned readings. An outline illustrating the organization of these 19 study sessions can be found at the front of each volume of the curriculum.
CFA Level 1 Practice Test (Part 1) 90 Question Answers
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Question 1 of 90
1. Question
1 pointsSmith, a research analyst with a brokerage firm, decides to change his recom mendation for the common stock of Green Company, Inc., from a “buy” to a “sell.” He mails this change in investment advice to all the firm’s clients on Wednesday. The day after the mailing, a client calls with a buy order for 500 shares of Green Company. In this circumstance, Smith should:

Question 2 of 90
2. Question
1 pointsWhich statement about a manager’s use of client brokerage commissions violates the Code and Standards?

Question 3 of 90
3. Question
1 pointsJamison is a junior research analyst with Howard & Howard, a brokerage and investment banking firm. Howard & Howard’s mergers and acquisitions depart ment has represented the Britland Company in all of its acquisitions for the past 20 years. Two of Howard & Howard’s senior officers are directors of various Britland subsidiaries. Jamison has been asked to write a research report on Britland. What is the best course of action for her to follow?

Question 4 of 90
4. Question
1 pointsWhich of the following statements clearly conflicts with the recommended procedures for compliance presented in the CFA Institute Standards of Practice Handbook?

Question 5 of 90
5. Question
1 pointsBronson provides investment advice to the board of trustees of a private university endowment fund. The trustees have provided Bronson with the fund’s financial information, including planned expenditures. Bronson receives a phone call on Friday afternoon from Murdock, a prominent alumnus, requesting that Bronson fax him comprehensive financial information about the fund. According to Murdock, he has a potential contributor but needs the information that day to close the deal and cannot contact any of the trustees. Based on the CFA Institute Standards, Bronson should:

Question 6 of 90
6. Question
1 pointsWillier is the research analyst responsible for following Company X. All the information he has accumulated and documented suggests that the outlook for the company’s new products is poor, so the stock should be rated a weak “hold.” During lunch, however, Willier overhears a financial analyst from another firm whom he respects offer opinions that conflict with Willier’s forecasts and expectations. Upon returning to his office, Willier releases a strong “buy” recommendation to the public. Willier:

Question 7 of 90
7. Question
1 pointsAn investment management firm has been hired by ETV Corporation to work on an additional public offering for the company. The firm’s brokerage unit now has a “sell” recommendation on ETV, but the head of the investment banking department has asked the head of the brokerage unit to change the recommendation from “sell” to “buy.” According to the Standards, the head of the broker age unit would be permitted to:

Question 8 of 90
8. Question
1 pointsAlbert and Tye, who recently started their own investment advisory business, have registered to take the Level III CFA examination. Albert’s business card reads, “Judy Albert, CFA Level II.” Tye has not put anything about the CFA designation on his business card, but promotional material that he designed for the business describes the CFA requirements and indicates that Tye partic ipates in the CFA Program and has completed Levels I and II. According to the Standards:

Question 9 of 90
9. Question
1 pointsScott works for a regional brokerage firm. He estimates that Walkton Industries will increase its dividend by US$1.50 a share during the next year. He realizes that this increase is contingent on pending legislation that would, if enacted, give Walkton a substantial tax break. The US representative for Walkton’s home district has told Scott that, although she is lobbying hard for the bill and prospects for its passage are favorable, concern of the US Congress over the federal deficit could cause the tax bill to be voted down. Walkton Industries has not made any statements about a change in dividend policy. Scott writes in his research report, “We expect Walkton’s stock price to rise by at least US$8.00 a share by the end of the year because the dividend will increase by US$1.50 a share. Investors buying the stock at the current time should expect to realize a total return of at least 15% on the stock.” According to the Standards:

Question 10 of 90
10. Question
1 pointsWhich one of the following actions will help to ensure the fair treatment of brokerage firm clients when a new investment recommendation is made?

Question 11 of 90
11. Question
1 pointsThe mosaic theory holds that an analyst:

Question 12 of 90
12. Question
1 pointsJurgen is a portfolio manager. One of her firm’s clients has told Jurgen that he will compensate her beyond the compensation provided by her firm on the basis of the capital appreciation of his portfolio each year. Jurgen should:

Question 13 of 90
13. Question
1 pointsOne of the discretionary accounts managed by Farnsworth is the Jones Corporation employee profitsharing plan. Jones, the company president, recently asked Farnsworth to vote the shares in the profitsharing plan in favor of the slate of directors nominated by Jones Corporation and against the direc tors sponsored by a dissident stockholder group. Farnsworth does not want to lose this account because he directs all the account’s trades to a brokerage firm that provides Farnsworth with useful information about taxfree investments. Although this information is not of value in managing the Jones Corporation account, it does help in managing several other accounts. The brokerage firm providing this information also offers the lowest commissions for trades and provides best execution. Farnsworth investigates the director issue, concludes that the managementnominated slate is better for the longrun performance of the company than the dissident group’s slate, and votes accordingly. Farnsworth:

Question 14 of 90
14. Question
1 pointsBrown works for an investment counseling firm. Green, a new client of the firm, is meeting with Brown for the first time. Green used another counseling firm for financial advice for years, but she has switched her account to Brown’s firm. After spending a few minutes getting acquainted, Brown explains to Green that she has discovered a highly undervalued stock that offers large potential gains. She recommends that Green purchase the stock. Brown has committed a viola tion of the Standards. What should she have done differently?

Question 15 of 90
15. Question
1 pointsGrey recommends the purchase of a mutual fund that invests solely in longterm US Treasury bonds. He makes the following statements to his clients:
I. “The payment of the bonds is guaranteed by the US government; therefore, the default risk of the bonds is virtually zero.”
II. “If you invest in the mutual fund, you will earn a 10% rate of return each year for the next several years based on historical performance of the market.”
Did Grey’s statements violate the CFA Institute Code and Standards? 
Question 16 of 90
16. Question
1 pointsAnderb, a portfolio manager for XYZ Investment Management Company a registered investment organization that advises investment firms and private accounts—was promoted to that position three years ago. Bates, her supervisor, is responsible for reviewing Anderb’s portfolio account transactions and her required monthly reports of personal stock transactions. Anderb has been using Jonelli, a broker, almost exclusively for brokerage transactions for the portfolio account. For securities in which Jonelli’s firm makes a market, Jonelli has been giving Anderb lower prices for personal purchases and higher prices for personal sales than Jonelli gives to Anderb’s portfolio accounts and other investors. Anderb has been filing monthly reports with Bates only for those months in which she has no personal transactions, which is about every fourth month. Which of the following is most likely to be a violation of the Code and Standards?

Question 17 of 90
17. Question
1 pointsThe nominal riskfree rate is best described as the sum of the real riskfree rate and a premium for:

Question 18 of 90
18. Question
1 pointsWhich of the following risk premiums is most relevant in explaining the difference in yields between 30year bonds issued by the US Treasury and 30year bonds issued by a small private issuer?

Question 19 of 90
19. Question
1 pointsA bank quotes a stated annual interest rate of 4.00%. If that rate is equal to an effective annual rate of 4.08%, then the bank is compounding interest:

Question 20 of 90
20. Question
1 pointsThe value in six years of $75,000 invested today at a stated annual interest rate of 7% compounded quarterly is closest to:

Question 21 of 90
21. Question
1 pointsA client requires £100,000 one year from now. If the stated annual rate is 2.50% compounded weekly, the deposit needed today is closest to:

Question 22 of 90
22. Question
1 pointsFor a lump sum investment of ¥250,000 invested at a stated annual rate of 3% compounded daily, the number of months needed to grow the sum to ¥1,000,000 is closest to:

Question 23 of 90
23. Question
1 pointsGiven a €1,000,000 investment for four years with a stated annual rate of 3% compounded continuously, the difference in its interest earnings compared with the same investment compounded daily is closest to:

Question 24 of 90
24. Question
1 pointsAn investment pays €300 annually for five years, with the first payment occur ring today. The present value (PV) of the investment discounted at a 4% annual rate is closest to:

Question 25 of 90
25. Question
1 pointsA perpetual preferred stock makes its first quarterly dividend payment of $2.00 in five quarters. If the required annual rate of return is 6% compounded quar terly, the stock’s present value is closest to:

Question 26 of 90
26. Question
1 pointsA saver deposits the following amounts in an account paying a stated annual rate of 4%, compounded semiannually
At the end of Year 4, the value of the account is closest to:

Question 27 of 90
27. Question
1 pointsA saver deposits the following amounts in an account paying a stated annual rate of 4%, compounded semiannually
At the end of Year 4, the value of the account is closest to:

Question 28 of 90
28. Question
1 pointsAn investment of €500,000 today that grows to €800,000 after six years has a stated annual interest rate closest to:

Question 29 of 90
29. Question
1 pointsA sweepstakes winner may select either a perpetuity of £2,000 a month begin ning with the first payment in one month or an immediate lump sum payment of £350,000. If the annual discount rate is 6% compounded monthly, the present value of the perpetuity is:

Question 30 of 90
30. Question
1 pointsGiven the following timeline and a discount rate of 4% a year compounded annually, the present value (PV), as of the end of Year 5 (PV_{5} ), of the cash flow received at the end of Year 20 is closest to:

Question 31 of 90
31. Question
1 pointsA mutual fund has the return frequency distribution shown in the following table.
Which of the following statements is correct?

Question 32 of 90
32. Question
1 pointsBased on the table below, which of the following statements is correct?

Question 33 of 90
33. Question
1 pointsThe following histogram shows a distribution of the S&P 500 Index annual returns for a 50year period:
The interval containing the median return is:

Question 34 of 90
34. Question
1 pointsThe following is a frequency polygon of monthly exchange rate changes in the US dollar/Japanese yen spot exchange rate for a fouryear period. A positive change represents yen appreciation (the yen buys more dollars), and a negative change represents yen depreciation (the yen buys fewer dollars).
Based on the chart, yen appreciation:

Question 35 of 90
35. Question
1 pointsThe following is a frequency polygon of monthly exchange rate changes in the US dollar/Japanese yen spot exchange rate for a fouryear period. A positive change represents yen appreciation (the yen buys more dollars), and a negative change represents yen depreciation (the yen buys fewer dollars).
The height of a bar in a histogram represents the matching data interval’s:

Question 36 of 90
36. Question
1 pointsThe annual returns for three portfolios are shown in the following table. Portfolios P and R were created in Year 1, Portfolio Q in Year 2.
The median annual return from portfolio creation to 2013 for:

Question 37 of 90
37. Question
1 pointsLast year, an investor allocated his retirement savings in the asset classes shown in the following table.
The portfolio return in 2015 is closest to:

Question 38 of 90
38. Question
1 pointsThe following exhibit shows the annual MSCI World Index total returns for a 10year period
The fourth quintile return for the MSCI World Index is closest to: 
Question 39 of 90
39. Question
1 points10 Years of S&P 500 Total Returns (in Ascending Order)
Returns
–38.49%
–0.73%
0.00%
9.54%
11.39%
12.78%
13.41%
19.42%
23.45%
29.60%
The third quartile percentage of total returns is closest to:

Question 40 of 90
40. Question
1 pointsComplete the missing entries in the table below to answer this question.
An analyst does a performance measurement to compare the risk of a contemporaneous sample portfolio with that of the S&P 500 by determining the ranges and mean absolute deviations (MAD) of the two investments. The comparison shows that the S&P 500 appears riskier in terms of the:

Question 41 of 90
41. Question
1 pointsAnnual returns and summary statistics for three funds are listed in the following table:
The fund that shows the highest dispersion is:

Question 42 of 90
42. Question
1 pointsOver the past 240 months, an investor’s portfolio had a mean monthly return of 0.79%, with a standard deviation of monthly returns of 1.16%. According to Chebyshev’s inequality, the minimum number of the 240 monthly returns that fall into the range of −0.95% to 2.53% is closest to:

Question 43 of 90
43. Question
1 pointsAfter estimating the probability that an investment manager will exceed his benchmark return in each of the next two quarters, an analyst wants to forecast the probability that the investment manager will exceed his benchmark return over the twoquarter period in total. Assuming that each quarter’s performance is independent of the other, which probability rule should the analyst select?

Question 44 of 90
44. Question
1 pointsAn analyst developed two scenarios with respect to the recovery of $100,000 principal from defaulted loans:
The amount of the expected recovery is closest to:

Question 45 of 90
45. Question
1 pointsUS and Spanish bonds have return standard deviations of 0.64 and 0.56, respectively. If the correlation between the two bonds is 0.24, the covariance of returns is closest to:

Question 46 of 90
46. Question
1 pointsWhich of the following correlation coefficients indicates the weakest linear relationship between two variables?

Question 47 of 90
47. Question
1 pointsAn analyst develops the following covariance matrix of returns:
The correlation of returns between the hedge fund and the market index is clos est to:

Question 48 of 90
48. Question
1 pointsIn a discrete uniform distribution with 20 potential outcomes of integers 1 to 20, the probability that X is greater than or equal to 3 but less than 6, P(3 ≤ X < 6), is:

Question 49 of 90
49. Question
1 pointsA portfolio manager annually outperforms her benchmark 60% of the time. Assuming independent annual trials, what is the probability that she will out perform her benchmark four or more times over the next five years?

Question 50 of 90
50. Question
1 pointsA portfolio has an expected mean return of 8 percent and standard deviation of 14 percent. The probability that its return falls between 8 and 11 percent is closest to:

Question 51 of 90
51. Question
1 pointsA portfolio has an expected return of 7% with a standard deviation of 13%. For an investor with a minimum annual return target of 4%, the probability that the portfolio return will fail to meet the target is closest to:

Question 52 of 90
52. Question
1 pointsX is a discrete random variable with possible outcomes X = {1,2,3,4}. Three functions f(x), g(x), and h(x) are proposed to describe the probabilities of the outcomes in X.
The conditions for a probability function are satisfied by:

Question 53 of 90
53. Question
1 pointsA stock is priced at $100.00 and follows a oneperiod binomial process with an up move that equals 1.05 and a down move that equals 0.97. If 1 million Bernoulli trials are conducted, and the average terminal stock price is $102.00, the probability of an up move (p) is closest to:

Question 54 of 90
54. Question
1 pointsA call option on a stock index is valued using a threestep binomial tree with an up move that equals 1.05 and a down move that equals 0.95. The current level of the index is $190, and the option exercise price is $200. If the option value is positive when the stock price exceeds the exercise price at expiration and $0 otherwise, the number of terminal nodes with a positive payoff is:

Question 55 of 90
55. Question
1 pointsA client holding a £2,000,000 portfolio wants to withdraw £90,000 in one year without invading the principal. According to Roy’s safetyfirst criterion, which of the following portfolio allocations is optimal?

Question 56 of 90
56. Question
1 pointsThe price of a stock at t = 0 is $208.25 and at t = 1 is $186.75. The continuously compounded rate of return for the stock from t = 0 to t = 1 is closest to:

Question 57 of 90
57. Question
1 pointsA population has a nonnormal distribution with mean μ and variance σ2. The sampling distribution of the sample mean computed from samples of large size from that population will have:

Question 58 of 90
58. Question
1 pointsIf an estimator is consistent, an increase in sample size will increase the:

Question 59 of 90
59. Question
1 pointsFor a sample size of 17, with a mean of 116.23 and a variance of 245.55, the width of a 90% confidence interval using the appropriate tdistribution is closest to:

Question 60 of 90
60. Question
1 pointsFor a sample size of 65 with a mean of 31 taken from a normally distributed population with a variance of 529, a 99% confidence interval for the population mean will have a lower limit closest to:

Question 61 of 90
61. Question
1 pointsAn analyst is examining a large sample with an unknown population variance. To test the hypothesis that the historical average return on an index is less than or equal to 6%, which of the following is the most appropriate test?

Question 62 of 90
62. Question
1 pointsA hypothesis test for a normallydistributed population at a 0.05 significance level implies a:

Question 63 of 90
63. Question
1 pointsAll else equal, is specifying a smaller significance level in a hypothesis test likely to increase the probability of a:

Question 64 of 90
64. Question
1 pointsAn analyst tests the profitability of a trading strategy with the null hypothesis being that the average abnormal return before trading costs equals zero. The calculated tstatistic is 2.802, with critical values of ± 2.756 at significance level α = 0.01. After considering trading costs, the strategy’s return is near zero. The results are most likely:

Question 65 of 90
65. Question
1 pointsWhich of the following represents a correct statement about the pvalue?

Question 66 of 90
66. Question
1 pointsThe following table shows the significance level (α) and the pvalue for three hypothesis tests.
The evidence for rejecting H_{0} is strongest for:

Question 67 of 90
67. Question
1 pointsAn investment consultant conducts two independent random samples of 5year performance data for US and European absolute return hedge funds. Noting a 50 basis point return advantage for US managers, the consultant decides to test whether the two means are statistically different from one another at a 0.05 level of significance. The two populations are assumed to be normally distributed with unknown but equal variances. Results of the hypothesis test are contained in the tables below.
The results of the hypothesis test indicate that the:

Question 68 of 90
68. Question
1 pointsA fund manager reported a 2% mean quarterly return over the past ten years for its entire base of 250 client accounts that all follow the same investment strat egy. A consultant employing the manager for 45 client accounts notes that their mean quarterly returns were 0.25% less over the same period. The consultant tests the hypothesis that the return disparity between the returns of his clients and the reported returns of the fund manager’s 250 client accounts are signifi cantly different from zero.
Assuming normally distributed populations with unknown population vari ances, the most appropriate test statistic is:

Question 69 of 90
69. Question
1 pointsAn analyst is examining the monthly returns for two funds over one year. Both funds’ returns are nonnormally distributed. To test whether the mean return of one fund is greater than the mean return of the other fund, the analyst can use:

Question 70 of 90
70. Question
1 pointsJill Batten is analyzing how the returns on the stock of Stellar Energy Corp. are related with the previous month’s percent change in the US Consumer Price Index for Energy (CPIENG). Based on 248 observations, she has computed the sample correlation between the Stellar and CPIENG variables to be −0.1452. She also wants to determine whether the sample correlation is statistically significant. The critical value for the test statistic at the 0.05 level of significance is approximately 1.96. Batten should conclude that the statistical relationship between Stellar and CPIENG is:

Question 71 of 90
71. Question
1 pointsA hypothesis test for a normallydistributed population at a 0.05 significance level implies a:

Question 72 of 90
72. Question
1 pointsThe value of a test statistic is best described as the basis for deciding whether to:

Question 73 of 90
73. Question
1 pointsWhich of the following is a Type I error?

Question 74 of 90
74. Question
1 pointsA Type II error is best described as:

Question 75 of 90
75. Question
1 pointsThe level of significance of a hypothesis test is best used to:

Question 76 of 90
76. Question
1 pointsA wireless phone manufacturer introduced a nextgeneration phone that received a high level of positive publicity. Despite running several highspeed production assembly lines, the manufacturer is still falling short in meeting demand for the phone nine months after introduction. Which of the following statements is the most plausible explanation for the demand/supply imbalance?

Question 77 of 90
77. Question
1 pointsThe market demand function for fouryear private universities is given by the equation
= 84 – 3.1P_{pr} + 0.8I + 0.9P_{pu}
where is the number of applicants to private universities per year in thousands, P_{pr} is the average price of private universities (in thousands of USD), I is the household monthly income (in thousands of USD), and P_{pu} is the average price of public (governmentsupported) universities (in thousands of USD). Assume that P_{pr} is equal to 38, I is equal to 100, and P_{pu} is equal to 18.
The price elasticity of demand for private universities is closest to:

Question 78 of 90
78. Question
1 pointsThe production relationship between the number of machine hours and total product for a company is presented below.
Diminishing marginal returns first occur beyond machine hour:

Question 79 of 90
79. Question
1 pointsThe marketing director for a Swiss specialty equipment manufacturer estimates the firm can sell 200 units and earn total revenue of CHF500,000. However, if 250 units are sold, revenue will total CHF600,000. The marginal revenue per unit associated with marketing 250 units instead of 200 units is closest to:

Question 80 of 90
80. Question
1 pointsAn agricultural firm operating in a perfectly competitive market supplies wheat to manufacturers of consumer food products and animal feeds. If the firm were able to expand its production and unit sales by 10% the most likely result would be:

Question 81 of 90
81. Question
1 pointsAn operator of a ski resort is considering offering price reductions on weekday ski passes. At the normal price of €50 per day, 300 customers are expected to buy passes each weekday. At a discounted price of €40 per day 450 customers are expected to buy passes each weekday. The marginal revenue per customer earned from offering the discounted price is closest to:

Question 82 of 90
82. Question
1 pointsA firm’s director of operations gathers the following information about the firm’s cost structure at different levels of output:
Refer to the data in Exhibit 1. When quantity produced is equal to 4 units, the average fixed cost (AFC) is closest to:

Question 83 of 90
83. Question
1 pointsA company has total variable costs of $4 million and fixed costs of $3 million. Based on this information, the company will stay in the market in the long term if total revenue is at least:

Question 84 of 90
84. Question
1 pointsUpsilon Natural Gas, Inc. is a monopoly enjoying very high barriers to entry. Its marginal cost is $40 and its average cost is $70. A recent market study has determined the price elasticity of demand is 1.5. The company will most likely set its price at:

Question 85 of 90
85. Question
1 pointsThe demand schedule in a perfectly competitive market is given by P = 93 – 1.5Q (for Q ≤ 62) and the longrun cost structure of each company is:
Total cost: 256 + 2Q + 4Q²
Average cost: 256/Q + 2 + 4Q
Marginal cost: 2 + 8QNew companies will enter the market at any price greater than:

Question 86 of 90
86. Question
1 pointsSigmaSoft and ThetaTech are the dominant makers of computer system soft ware. The market has two components: a large massmarket component in which demand is price sensitive, and a smaller performanceoriented com ponent in which demand is much less price sensitive. SigmaSoft’s product is considered to be technically superior. Each company can choose one of two strategies:
 Open architecture (Open): Mass market focus allowing other software vend ers to develop products for its platform.
 Proprietary (Prop): Allow only its own software applications to run on its platform.
Depending upon the strategy each company selects, their profits would be:
The Nash equilibrium for these companies is:

Question 87 of 90
87. Question
1 pointsAn analyst gathered the following market share data for an industry comprised of five companies:
The industry’s threefirm Herfindahl–Hirschmann Index is closest to:

Question 88 of 90
88. Question
1 pointsDeep River Manufacturing is one of many companies in an industry that make a food product. Deep River units are identical up to the point they are labeled. Deep River produces its labeled brand, which sells for $2.20 per unit, and “house brands” for seven different grocery chains which sell for $2.00 per unit. Each grocery chain sells both the Deep River brand and its house brand. The best characterization of Deep River’s market is:

Question 89 of 90
89. Question
1 pointsA government entity that regulates an authorized monopoly will most likely base regulated prices on:

Question 90 of 90
90. Question
1 pointsOver time, the market share of the dominant company in an oligopolistic mar ket will most likely:
See also:
 CFA Level 1 Mock Exam and Practice Questions
 CFA Level 1 Practice Test (Basic) (50 MCQs warmup test)
 CFA Level 1 Practice Test (Part 1) (90 Question Answers)
 CFA Level 1 Practice Test (Part 2) (90 Question Answers)