CFA Level I PREPARATION TEST 2026
QUESTIONS AND CORRECT ANSWERS
GRADED A+
● How are interest rates used in TVM. Answer: 1 - Required Rate of
Return
2 - Discount Rate
3 - Opportunity Cost
● What Constitutes an Interest Rate. Answer: Real Risk Free Rate -
Single period rate for a completely risk free security if no inflation is
expected
+ Inflation Premium
+ Default Risk Premium
+ Liquidity Premium
+ Maturity Premium
● Nominal Risk Free Rate. Answer: real risk-free rate + expected
inflation rate
(1+Nominal Risk Free Rate) = (1 + Real Risk Free Rate) + (1 + Inflation
Premium)
,● Holding Period Return. Answer: The return over the entire period that
an investor owns a financial security.
● Geometric Average. Answer: Single per-period return; gives same
cumulative performance as sequence of actual returns
Compound period-by-period returns; find per-period rate that
compounds to same final value
● Harmonic Mean. Answer: A type of weighted mean computed by
averaging the reciprocals of the observations, then taking the reciprocal
of that average.
● trimmed mean. Answer: the mean that results from trimming away (or
discarding) a fixed percentage of the extreme observations
● Winsorized mean. Answer: Measure of central tendency in which
mean is calculated by excluding a small percentage of the lowest and
highest variables.
● Money Weighted Rate of Return. Answer: IRR calculated using
periodic cash flows into and out of an account and is the discount rate
that makes the PV of cash inflows equal to the PV of cash outflows.
,● time-weighted rate of return. Answer: Measures comping rate of
return of return of initial investment in a portfolio over stated
measurement period
(Not sensitive to additions or withdrawals of funds unlike money
weighted return)
● Money Weighted vs Time Weighted Returns. Answer: Money
Weighted Returns
- Internal Rate of Return for a Portfolio
- Considers contributions and withdrawals
- Evaluates performance of the investor
Time Weighted Returns
- Geometric Mean of holding period return
- Not Sensitive to contributions or withdrawals
- Evaluates performance of a fund manager
● Annualized Return Formula. Answer: Total return on an annualized
basis
● Broken Out Real Rate of Return. Answer: (1 + Real Risk Free Rate) *
(1 + Risk Premium)
———————————————————————————
, (1 + Inflation Premium)
● Leveraged Return Formula. Answer:
● Basic Concept of The Time Value of Money and why. Answer: Cash
received today is worth more than in the future
Reasons
- Opportunity cost
Inflation poses threat to purchasing power
Element of uncertainty regarding cash flows
● Market Discount Rate. Answer: The rate of return required by
investors given the risk of the investment in a bond; also called the
required yield or the required rate of return.
● Present Value on Fixed Income Investments. Answer: Calculated by
discounting each cash flow using the market discount rate
● Cash Flows on a Bond. Answer: Discounted Cash Flow (Zero Coupon
Bonds)
Level Payments (Annuity Instruments)
Periodic Payments (Coupon Instruments)
QUESTIONS AND CORRECT ANSWERS
GRADED A+
● How are interest rates used in TVM. Answer: 1 - Required Rate of
Return
2 - Discount Rate
3 - Opportunity Cost
● What Constitutes an Interest Rate. Answer: Real Risk Free Rate -
Single period rate for a completely risk free security if no inflation is
expected
+ Inflation Premium
+ Default Risk Premium
+ Liquidity Premium
+ Maturity Premium
● Nominal Risk Free Rate. Answer: real risk-free rate + expected
inflation rate
(1+Nominal Risk Free Rate) = (1 + Real Risk Free Rate) + (1 + Inflation
Premium)
,● Holding Period Return. Answer: The return over the entire period that
an investor owns a financial security.
● Geometric Average. Answer: Single per-period return; gives same
cumulative performance as sequence of actual returns
Compound period-by-period returns; find per-period rate that
compounds to same final value
● Harmonic Mean. Answer: A type of weighted mean computed by
averaging the reciprocals of the observations, then taking the reciprocal
of that average.
● trimmed mean. Answer: the mean that results from trimming away (or
discarding) a fixed percentage of the extreme observations
● Winsorized mean. Answer: Measure of central tendency in which
mean is calculated by excluding a small percentage of the lowest and
highest variables.
● Money Weighted Rate of Return. Answer: IRR calculated using
periodic cash flows into and out of an account and is the discount rate
that makes the PV of cash inflows equal to the PV of cash outflows.
,● time-weighted rate of return. Answer: Measures comping rate of
return of return of initial investment in a portfolio over stated
measurement period
(Not sensitive to additions or withdrawals of funds unlike money
weighted return)
● Money Weighted vs Time Weighted Returns. Answer: Money
Weighted Returns
- Internal Rate of Return for a Portfolio
- Considers contributions and withdrawals
- Evaluates performance of the investor
Time Weighted Returns
- Geometric Mean of holding period return
- Not Sensitive to contributions or withdrawals
- Evaluates performance of a fund manager
● Annualized Return Formula. Answer: Total return on an annualized
basis
● Broken Out Real Rate of Return. Answer: (1 + Real Risk Free Rate) *
(1 + Risk Premium)
———————————————————————————
, (1 + Inflation Premium)
● Leveraged Return Formula. Answer:
● Basic Concept of The Time Value of Money and why. Answer: Cash
received today is worth more than in the future
Reasons
- Opportunity cost
Inflation poses threat to purchasing power
Element of uncertainty regarding cash flows
● Market Discount Rate. Answer: The rate of return required by
investors given the risk of the investment in a bond; also called the
required yield or the required rate of return.
● Present Value on Fixed Income Investments. Answer: Calculated by
discounting each cash flow using the market discount rate
● Cash Flows on a Bond. Answer: Discounted Cash Flow (Zero Coupon
Bonds)
Level Payments (Annuity Instruments)
Periodic Payments (Coupon Instruments)
