CFA Level II — Practice Questions flashcards

6 of 70 questions free to study here · 9 topics · the whole deck is built into Willys

Multiple-choice practice questions, one best answer each, on regression, FRA, equity and fixed income valuation, credit, derivatives pricing, alternatives, active management and ethics.

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Practice deck · part of CFA Program Level II · written against: CFA Program Level II curriculum topics (concepts and formulas; no figures that change yearly). Updated 2026-10-10.

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An analyst regresses quarterly fund returns on three factors using 50 observations. The output shows a regression sum of squares of 120 and a sum of squared errors of 92. What is the F-statistic for the test that all slopes are jointly zero?

A) 1.30
B) 20.0
C) 21.3
D) 0.57

B) 20.0

$F = \frac{RSS / k}{SSE / (n - k - 1)} = \frac{120 / 3}{92 / 46} = \frac{40}{2}$ ⁠. Dividing 120 by 92 without the degrees-of-freedom adjustments gives 1.30, and 0.57 is the R², not an F-statistic.
Quantitative Methods
A company has 20 million shares, net income of 50 million and a share price of 40. It borrows 80 million at a 7% pretax rate (25% tax rate) to buy back 2 million shares at market. What happens to EPS?

A) It falls to about 2.47
B) It rises to about 2.54
C) It rises to about 2.78
D) It stays at 2.50

B) It rises to about 2.54

After-tax interest is 80 × 7% × 0.75 = 4.2 million, so EPS = (50 − 4.2) ÷ 18 ≈ 2.54. EPS rises because the after-tax cost of debt (5.25%) is below the earnings yield (6.25%); ignoring interest overstates it at 2.78.
Corporate Issuers › Dividends and Repurchases
A company just paid a dividend of 2.00. Dividends are expected to grow 10% a year for two years and then 4% a year forever. The required return is 9%. What is the share worth today?

A) About 42.92
B) About 41.60
C) About 46.42
D) About 44.79

C) About 46.42

D1 = 2.20, D2 = 2.42, D3 = 2.517; the terminal value at year 2 is 2.517 ÷ 0.05 = 50.34, so $V_0 = \frac{2.20}{1.09} + \frac{2.42 + 50.34}{1.09^2} \approx 46.42$ ⁠. Building the terminal value from D2 instead of D3 gives 44.79.
Equity Valuation
A stock trades at 80 and will pay a dividend of 2.00 in six months. The annual risk-free rate is 4% (annual compounding). What is the no-arbitrage price of a 9-month forward?

A) About 82.39
B) About 78.04
C) About 81.16
D) About 80.37

D) About 80.37

$F_0 = \left(80 - \frac{2}{1.04^{0.5}}\right) \times 1.04^{0.75} \approx 78.04 \times 1.0299 \approx 80.37$ ⁠. Ignoring the dividend gives 82.39; compounding for a full year instead of nine months gives 81.16.
Derivatives
A comparable office building just sold for 20 million with net operating income of 1.1 million. The subject property's NOI for next year is 1.2 million, and NOI in this market is expected to grow 2% a year. What is the subject's value by direct capitalization?

A) About 21.8 million
B) About 18.3 million
C) About 20.0 million
D) About 34.3 million

A) About 21.8 million

The comparable implies a cap rate of 1.1 ÷ 20 = 5.5%, so value = 1.2 ÷ 0.055 ≈ 21.8 million. Subtracting the 2% growth from that cap rate double-counts growth, since a market cap rate already reflects it, and gives 34.3 million.
Alternative Investments
A pension plan client directs its investment manager to send all of the plan's trades through a particular broker that the client chose. How should the manager respond?

A) Follow it and route other clients' trades there to win volume discounts
B) Refuse, because the manager must always seek best execution itself
C) Follow the direction but disclose that best execution may not be achieved
D) Follow the direction with no disclosure, since brokerage is the client's

C) Follow the direction but disclose that best execution may not be achieved

Brokerage belongs to the client, so the manager may follow directed brokerage, but should disclose that best execution may suffer. Routing other clients' trades to that broker would use their brokerage for a different client's benefit.
Ethical and Professional Standards

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