CFA Level 1 Practice Questions — All Questions

Under the CFA Institute Code and Standards, when interests conflict, a member should place first the interests of:

• a.Their employer
• b.The client✓
• c.Themselves
• d.Regulators

Client interests come before the employer's and the member's own.

A member who receives material nonpublic information should:

• a.Not act or cause others to act on it✓
• b.Trade quickly before others learn it
• c.Share it only with best clients
• d.Use it to benefit the firm

The Standards prohibit acting or causing others to act on material nonpublic information.

Disclosing conflicts of interest to clients is required because it:

• a.Eliminates the conflict entirely
• b.Is optional best practice
• c.Lets clients judge the objectivity of recommendations✓
• d.Increases fees

Full disclosure lets clients assess potential biases in advice.

Performance presentations to clients must be:

• a.As optimistic as possible
• b.Shown gross of all fees only
• c.Based only on winning accounts
• d.Fair, accurate, and complete✓

Members must present performance information fairly, accurately, and completely.

The concept that a dollar today is worth more than a dollar in the future is:

• a.Diversification
• b.The time value of money✓
• c.Arbitrage
• d.Duration

Time value of money reflects that money can earn a return over time.

A project should be accepted under the NPV rule when its net present value is:

• a.Positive✓
• b.Negative
• c.Exactly zero always rejected
• d.Equal to the payback period

Positive-NPV projects add value and should be accepted.

Standard deviation is a measure of:

• a.Central tendency
• b.Correlation
• c.Dispersion (variability) of returns✓
• d.The mean only

Standard deviation measures how spread out values are around the mean.

If two assets have a correlation of +1.0, combining them provides:

• a.Maximum diversification benefit
• b.Guaranteed higher returns
• c.Zero risk
• d.No diversification benefit✓

Perfectly positively correlated assets provide no diversification benefit.

Which statement reports a company's financial position at a point in time?

• a.Income statement
• b.Balance sheet✓
• c.Cash flow statement
• d.Statement of changes in equity

The balance sheet shows assets, liabilities, and equity at a point in time.

Under accrual accounting, revenue is recognized when it is:

• a.Earned, regardless of when cash is received✓
• b.Received in cash
• c.Budgeted
• d.Taxed

Accrual accounting recognizes revenue when earned, not when cash arrives.

The basic accounting equation is:

• a.Assets = Revenue - Expenses
• b.Assets = Liabilities - Equity
• c.Assets = Liabilities + Equity✓
• d.Equity = Assets + Liabilities

Assets equal liabilities plus owners' equity.

Which statement explains the change in a company's cash over a period?

• a.Balance sheet
• b.Income statement
• c.Statement of retained earnings
• d.Cash flow statement✓

The cash flow statement reconciles operating, investing, and financing cash flows.

WACC (weighted average cost of capital) represents:

• a.Only the cost of equity
• b.The blended required return on a firm's debt and equity✓
• c.The dividend yield
• d.The risk-free rate

WACC blends the after-tax cost of debt and the cost of equity by their weights.

In capital budgeting, IRR is the discount rate at which:

• a.NPV equals zero✓
• b.NPV is maximized
• c.Payback is one year
• d.WACC equals the risk-free rate

The internal rate of return sets a project's NPV to zero.

All else equal, increasing financial leverage tends to:

• a.Reduce both risk and return
• b.Have no effect
• c.Increase both potential returns and risk to equity holders✓
• d.Guarantee higher profits

Leverage magnifies gains and losses, raising equity risk and potential return.

A sunk cost in project analysis should be:

• a.Added to the cash flows
• b.Used as the discount rate
• c.Counted twice
• d.Ignored because it cannot be recovered✓

Sunk costs are irrelevant to the decision; only incremental cash flows matter.

When market interest rates rise, the price of an existing fixed-rate bond generally:

• a.Rises
• b.Falls✓
• c.Stays the same
• d.Doubles

Bond prices move inversely to interest rates.

Duration is best described as a measure of a bond's:

• a.Sensitivity to interest-rate changes✓
• b.Credit rating
• c.Coupon frequency
• d.Issue size

Duration estimates price sensitivity to interest-rate changes.

Diversification reduces which type of risk?

• a.Systematic (market) risk
• b.Interest-rate risk of every bond
• c.Unsystematic (firm-specific) risk✓
• d.Inflation entirely

Diversification reduces unsystematic, firm-specific risk, not systematic market risk.

A common valuation approach for equities discounts expected future:

• a.Sunk costs
• b.Coupons only
• c.Book values
• d.Cash flows or dividends✓

Equity valuation often discounts expected future cash flows or dividends to present value.