CFA Level 1 Practice Questions — All Questions
20 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.Regulators
- d.Themselves
Client interests come before the employer's and the member's own.
A member who receives material nonpublic information should:
- a.Trade quickly before others learn it
- b.Share it only with best clients
- c.Use it to benefit the firm
- d.Not act or cause others to act on it✓
The Standards prohibit acting or causing others to act on material nonpublic information.
Disclosing conflicts of interest to clients is required because it:
- a.Lets clients judge the objectivity of recommendations✓
- b.Is optional best practice
- c.Eliminates the conflict entirely
- d.Increases fees
Full disclosure lets clients assess potential biases in advice.
Performance presentations to clients must be:
- a.Based only on winning accounts
- b.As optimistic as possible
- c.Fair, accurate, and complete✓
- d.Shown gross of all fees only
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.Arbitrage
- b.Diversification
- c.The time value of money✓
- 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.Negative
- b.Equal to the payback period
- c.Positive✓
- d.Exactly zero always rejected
Positive-NPV projects add value and should be accepted.
Standard deviation is a measure of:
- a.The mean only
- b.Dispersion (variability) of returns✓
- c.Correlation
- d.Central tendency
Standard deviation measures how spread out values are around the mean.
If two assets have a correlation of +1.0, combining them provides:
- a.No diversification benefit✓
- b.Guaranteed higher returns
- c.Zero risk
- d.Maximum 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.Cash flow statement
- c.Statement of changes in equity
- d.Balance sheet✓
The balance sheet shows assets, liabilities, and equity at a point in time.
Under accrual accounting, revenue is recognized when it is:
- a.Taxed
- b.Received in cash
- c.Budgeted
- d.Earned, regardless of when cash is received✓
Accrual accounting recognizes revenue when earned, not when cash arrives.
The basic accounting equation is:
- a.Assets = Revenue - Expenses
- b.Equity = Assets + Liabilities
- c.Assets = Liabilities - Equity
- d.Assets = Liabilities + Equity✓
Assets equal liabilities plus owners' equity.
Which statement explains the change in a company's cash over a period?
- a.Statement of retained earnings
- b.Income statement
- c.Balance sheet
- d.Cash flow statement✓
The cash flow statement reconciles operating, investing, and financing cash flows.
WACC (weighted average cost of capital) represents:
- a.The blended required return on a firm's debt and equity✓
- b.The dividend yield
- c.Only the cost of equity
- 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.Payback is one year
- c.NPV is maximized
- 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.Increase both potential returns and risk to equity holders✓
- b.Reduce both risk and return
- c.Have no effect
- d.Guarantee higher profits
Leverage magnifies gains and losses, raising equity risk and potential return.
A sunk cost in project analysis should be:
- a.Counted twice
- b.Used as the discount rate
- c.Ignored because it cannot be recovered✓
- d.Added to the cash flows
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.Doubles
- d.Stays the same
Bond prices move inversely to interest rates.
Duration is best described as a measure of a bond's:
- a.Issue size
- b.Sensitivity to interest-rate changes✓
- c.Credit rating
- d.Coupon frequency
Duration estimates price sensitivity to interest-rate changes.
Diversification reduces which type of risk?
- a.Inflation entirely
- b.Systematic (market) risk
- c.Unsystematic (firm-specific) risk✓
- d.Interest-rate risk of every bond
Diversification reduces unsystematic, firm-specific risk, not systematic market risk.
A common valuation approach for equities discounts expected future:
- a.Coupons only
- b.Sunk costs
- c.Cash flows or dividends✓
- d.Book values
Equity valuation often discounts expected future cash flows or dividends to present value.