CFA – PRACTICE QUESTIONS AND CORRECT ANSWERS (VERIFIED ANSWERS) PLUS RATIONALES
2026 Q&A | INSTANT DOWNLOAD PDF.
*CORE DOMAINS*
*Ethical and Professional Standards*
*Quantitative Methods*
*Economics*
*Financial Statement Analysis*
*Corporate Issuers*
*Equity Investments*
*Fixed Income*
*Derivatives*
*Alternative Investments*
*Portfolio Management*
*INTRODUCTION*
The purpose of this comprehensive practice assessment is to prepare candidates for the rigors of the Chartered
Financial Analyst examination. This document assesses a broad spectrum of skills, including the application of
investment principles, quantitative analysis, and financial reporting standards. The exam is structured using
multiple-choice questions and complex, scenario-based vignettes that mirror the actual testing environment.
There is a significant emphasis placed on real-world application, ethical decision-making, and the synthesis of
financial data to provide actionable investment recommendations. Candidates are expected to demonstrate
proficiency in regulatory compliance and professional standards throughout the assessment.
, *SECTION ONE*
1. An investment analyst is asked by a client to provide a recommendation on a stock that the analyst’s firm
is currently underwriting for an IPO. To comply with the Code and Standards, the analyst should:
A. Decline to provide any recommendation to the client.
B. Provide the recommendation but disclose the underwriting relationship.
🟢 C. Provide only factual, publicly available information about the stock.
D. Issue a "buy" rating to support the firm’s underwriting efforts.
🔴 RATIONALE: Standard VI(A) Disclosure of Conflicts requires members to disclose all matters that could
reasonably be expected to impair their independence and objectivity. However, when a firm is underwriting an
IPO, analysts often move to a "restricted list" where they provide only factual data to avoid the appearance of
bias or pressure.
2. Which of the following statements regarding the Central Limit Theorem is most accurate?
🟢 A. For a population with any distribution, the sampling distribution of the sample mean will be approximately
normal for large sample sizes.
B. The mean of the sampling distribution of the sample mean is equal to the population mean divided by the
square root of the sample size.
C. The variance of the sampling distribution of the sample mean is equal to the population variance.
D. The Central Limit Theorem only applies to populations that are already normally distributed.
🔴 RATIONALE: The Central Limit Theorem states that for a large sample size, the sampling distribution of the
sample mean is approximately normal, regardless of the underlying population's distribution.
3. Under IFRS, which of the following is most likely classified as an operating activity on the statement of
cash flows?
,A. Dividends paid to shareholders.
B. Proceeds from the issuance of long-term debt.
🟢 C. Interest paid on a bank loan.
D. Purchase of treasury shares.
🔴 RATIONALE: While IFRS allows flexibility, interest paid is typically classified as an operating activity (or
financing). However, dividends paid and debt issuance/treasury shares are strictly financing activities. In the
context of standard operations, interest paid is the most likely candidate here.
4. A shift to the right in the Aggregate Demand (AD) curve is most likely caused by:
A. An increase in real interest rates.
B. A decrease in consumer confidence.
C. An increase in the personal income tax rate.
🟢 D. An increase in expected corporate profits.
🔴 RATIONALE: An increase in expected corporate profits leads to higher investment spending by firms, which
is a component of aggregate demand (AD = C + I + G + NX ), shifting the curve to the right.
5. A company’s weighted average cost of capital (WACC) will most likely decrease if:
🟢 A. The corporate tax rate increases.
B. The risk-free rate increases.
C. The company’s beta increases.
D. The debt-to-equity ratio decreases while maintaining the same cost of debt.
🔴 RATIONALE: Since interest expense is tax-deductible, the after-tax cost of debt is rd (1 − t). An increase in
the tax rate (t) reduces the after-tax cost of debt, thereby lowering the WACC.
6. An equity analyst calculates a justified forward P/E ratio. If the expected growth rate (g ) increases while
the required rate of return (k ) remains constant, the P/E ratio will:
, A. Decrease.
🟢 B. Increase.
C. Remain unchanged.
D. Become volatile.
🔴 RATIONALE: The formula for the justified forward P/E is P /E = (D1 /E1 )/(k − g). As g increases, the
denominator (k − g ) decreases, causing the P/E ratio to increase.
7. A bond is trading at a premium to par. Which of the following relationships is correct?
🟢 A. Coupon rate > Current yield > Yield to Maturity.
B. Yield to Maturity > Current yield > Coupon rate.
C. Coupon rate = Current yield > Yield to Maturity.
D. Current yield > Coupon rate > Yield to Maturity.
🔴 RATIONALE: For a premium bond, the coupon rate is the highest, followed by the current yield, and the
Yield to Maturity (YTM) is the lowest because it accounts for the capital loss as the price converges to par.
8. A trader enters into a long position in a gold futures contract. If the margin requirement is 10% and the
price of gold drops significantly:
A. The trader will receive a variation margin payment.
🟢 B. The trader will receive a margin call to bring the account back to the initial margin level.
C. The clearinghouse will immediately close the position regardless of margin.
D. The trader's potential loss is limited to the initial margin.
🔴 RATIONALE: When the maintenance margin level is breached due to a price decline in a long position, the
trader must deposit funds (variation margin) to bring the account back to the initial margin level.
9. Which of the following is a characteristic of private equity "leveraged buyouts" (LBOs)?
2026 Q&A | INSTANT DOWNLOAD PDF.
*CORE DOMAINS*
*Ethical and Professional Standards*
*Quantitative Methods*
*Economics*
*Financial Statement Analysis*
*Corporate Issuers*
*Equity Investments*
*Fixed Income*
*Derivatives*
*Alternative Investments*
*Portfolio Management*
*INTRODUCTION*
The purpose of this comprehensive practice assessment is to prepare candidates for the rigors of the Chartered
Financial Analyst examination. This document assesses a broad spectrum of skills, including the application of
investment principles, quantitative analysis, and financial reporting standards. The exam is structured using
multiple-choice questions and complex, scenario-based vignettes that mirror the actual testing environment.
There is a significant emphasis placed on real-world application, ethical decision-making, and the synthesis of
financial data to provide actionable investment recommendations. Candidates are expected to demonstrate
proficiency in regulatory compliance and professional standards throughout the assessment.
, *SECTION ONE*
1. An investment analyst is asked by a client to provide a recommendation on a stock that the analyst’s firm
is currently underwriting for an IPO. To comply with the Code and Standards, the analyst should:
A. Decline to provide any recommendation to the client.
B. Provide the recommendation but disclose the underwriting relationship.
🟢 C. Provide only factual, publicly available information about the stock.
D. Issue a "buy" rating to support the firm’s underwriting efforts.
🔴 RATIONALE: Standard VI(A) Disclosure of Conflicts requires members to disclose all matters that could
reasonably be expected to impair their independence and objectivity. However, when a firm is underwriting an
IPO, analysts often move to a "restricted list" where they provide only factual data to avoid the appearance of
bias or pressure.
2. Which of the following statements regarding the Central Limit Theorem is most accurate?
🟢 A. For a population with any distribution, the sampling distribution of the sample mean will be approximately
normal for large sample sizes.
B. The mean of the sampling distribution of the sample mean is equal to the population mean divided by the
square root of the sample size.
C. The variance of the sampling distribution of the sample mean is equal to the population variance.
D. The Central Limit Theorem only applies to populations that are already normally distributed.
🔴 RATIONALE: The Central Limit Theorem states that for a large sample size, the sampling distribution of the
sample mean is approximately normal, regardless of the underlying population's distribution.
3. Under IFRS, which of the following is most likely classified as an operating activity on the statement of
cash flows?
,A. Dividends paid to shareholders.
B. Proceeds from the issuance of long-term debt.
🟢 C. Interest paid on a bank loan.
D. Purchase of treasury shares.
🔴 RATIONALE: While IFRS allows flexibility, interest paid is typically classified as an operating activity (or
financing). However, dividends paid and debt issuance/treasury shares are strictly financing activities. In the
context of standard operations, interest paid is the most likely candidate here.
4. A shift to the right in the Aggregate Demand (AD) curve is most likely caused by:
A. An increase in real interest rates.
B. A decrease in consumer confidence.
C. An increase in the personal income tax rate.
🟢 D. An increase in expected corporate profits.
🔴 RATIONALE: An increase in expected corporate profits leads to higher investment spending by firms, which
is a component of aggregate demand (AD = C + I + G + NX ), shifting the curve to the right.
5. A company’s weighted average cost of capital (WACC) will most likely decrease if:
🟢 A. The corporate tax rate increases.
B. The risk-free rate increases.
C. The company’s beta increases.
D. The debt-to-equity ratio decreases while maintaining the same cost of debt.
🔴 RATIONALE: Since interest expense is tax-deductible, the after-tax cost of debt is rd (1 − t). An increase in
the tax rate (t) reduces the after-tax cost of debt, thereby lowering the WACC.
6. An equity analyst calculates a justified forward P/E ratio. If the expected growth rate (g ) increases while
the required rate of return (k ) remains constant, the P/E ratio will:
, A. Decrease.
🟢 B. Increase.
C. Remain unchanged.
D. Become volatile.
🔴 RATIONALE: The formula for the justified forward P/E is P /E = (D1 /E1 )/(k − g). As g increases, the
denominator (k − g ) decreases, causing the P/E ratio to increase.
7. A bond is trading at a premium to par. Which of the following relationships is correct?
🟢 A. Coupon rate > Current yield > Yield to Maturity.
B. Yield to Maturity > Current yield > Coupon rate.
C. Coupon rate = Current yield > Yield to Maturity.
D. Current yield > Coupon rate > Yield to Maturity.
🔴 RATIONALE: For a premium bond, the coupon rate is the highest, followed by the current yield, and the
Yield to Maturity (YTM) is the lowest because it accounts for the capital loss as the price converges to par.
8. A trader enters into a long position in a gold futures contract. If the margin requirement is 10% and the
price of gold drops significantly:
A. The trader will receive a variation margin payment.
🟢 B. The trader will receive a margin call to bring the account back to the initial margin level.
C. The clearinghouse will immediately close the position regardless of margin.
D. The trader's potential loss is limited to the initial margin.
🔴 RATIONALE: When the maintenance margin level is breached due to a price decline in a long position, the
trader must deposit funds (variation margin) to bring the account back to the initial margin level.
9. Which of the following is a characteristic of private equity "leveraged buyouts" (LBOs)?
