CFA Program Level I Practice Test

CFA Program Level I is the broad foundation route for investment tools, asset classes, financial statement analysis, ethics, portfolio concepts, and professional standards.

This page includes 12 original sample questions for initial review. They are not official CFA Institute questions and do not reproduce a live exam; they are designed to preview the breadth, calculation setup, and professional-standards judgment that a full Finance Prep route would need to support.

What this route should test

• ethics and professional standards decision-making
• quantitative methods, economics, financial statement analysis, and corporate issuer concepts
• portfolio management and asset-class foundations across equity, fixed income, derivatives, alternatives, and wealth planning
• calculation setup and interpretation, not just formula memorization

Sample Exam Questions

Use these questions to check whether your gaps are broad topic recognition, ethics judgment, formula setup, or financial statement interpretation before using the Notify me form for CFA Level I practice updates.

Question 1

Topic: ethics and professional standards

An analyst receives material nonpublic information from a supplier contact and immediately updates a recommendation before the information is released. What is the best action?

• A. Trade only for personal accounts because client accounts would create a conflict
• B. Do not trade or recommend based on the information, and follow the firm’s escalation policy
• C. Publish the recommendation quickly so all clients receive it at the same time
• D. Use the information if it confirms the analyst’s prior public research

Best answer: B

Explanation: Material nonpublic information should not be used for trading or recommendations. The correct response is to stop use of the information, preserve confidentiality, and follow compliance escalation.

Question 2

Topic: time value of money

A candidate compares two bonds with the same yield but different coupon structures. Which factor most directly affects reinvestment risk?

• A. The name of the bond trustee
• B. The country where the bond certificate is printed
• C. Whether the bond is quoted in clean or dirty price format
• D. The timing and size of cash flows received before maturity

Best answer: D

Explanation: Reinvestment risk concerns the uncertainty around reinvesting interim cash flows. Coupon size and timing matter because they determine how much cash must be reinvested before maturity.

Question 3

Topic: financial statement analysis

A company reports rising net income while operating cash flow declines and receivables grow faster than revenue. What should an analyst examine first?

• A. Whether earnings quality is weakening because revenue may be less cash-convertible
• B. Whether the company should stop preparing cash flow statements
• C. Whether higher receivables automatically prove fraud
• D. Whether depreciation should be ignored because it is noncash

Best answer: A

Explanation: Level I financial statement analysis often tests quality of earnings. Rising income with weak cash conversion and fast receivables growth can indicate aggressive revenue recognition, collection issues, or changing customer terms.

Question 4

Topic: economics

A central bank raises policy rates to reduce inflation pressure. Which effect is most consistent with the policy objective?

• A. Lower borrowing costs and higher immediate demand
• B. Automatic elimination of unemployment
• C. Slower credit growth and reduced aggregate demand pressure
• D. A permanent increase in real GDP growth

Best answer: C

Explanation: Tighter monetary policy generally works by increasing borrowing costs, slowing credit growth, and reducing demand pressure. It does not guarantee a specific unemployment or growth outcome.

Question 5

Topic: corporate issuers

A company evaluates a project with positive net present value but major execution risk and limited management capacity. What is the best capital-budgeting conclusion?

• A. Accept automatically because positive net present value is the only relevant decision input
• B. Reject automatically because all execution risk is unacceptable
• C. Ignore capacity constraints because they are not financial variables
• D. Consider value, risk, constraints, and implementation capacity before committing capital

Best answer: D

Explanation: Positive net present value is important, but capital allocation also requires judgment about constraints, risk, strategic fit, and execution. A strong answer avoids both automatic acceptance and automatic rejection.

Question 6

Topic: portfolio management

Why can adding a risky asset reduce total portfolio volatility?

• A. Risky assets always have negative risk
• B. The asset’s returns may be imperfectly correlated with the existing portfolio
• C. Portfolio risk is determined only by the highest-return asset
• D. Diversification removes all systematic risk

Best answer: B

Explanation: Diversification depends on correlation. A risky asset can reduce portfolio volatility if it does not move perfectly with existing holdings, though systematic risk remains.

Question 7

Topic: equity valuation

A stock’s value estimate is highly sensitive to the assumed long-term growth rate. What should the analyst do?

• A. Test sensitivity and explain how the valuation changes under reasonable growth assumptions
• B. Use the highest growth rate because optimistic forecasts are more useful
• C. Remove the growth assumption from the model
• D. Treat the point estimate as certain

Best answer: A

Explanation: Valuation models depend on assumptions. Sensitivity analysis helps users understand estimate uncertainty and avoids overconfidence in a single output.

Question 8

Topic: fixed income

A callable bond offers a higher yield than a similar noncallable bond. What is one reason investors may require that higher yield?

• A. Callable bonds never repay principal
• B. Callable bonds have no interest-rate risk
• C. The issuer can redeem the bond when it becomes advantageous, limiting investor upside
• D. The call feature guarantees higher reinvestment rates

Best answer: C

Explanation: A call option benefits the issuer. When rates fall, the issuer may call the bond and refinance, leaving investors with reinvestment risk and limited price appreciation.

Question 9

Topic: derivatives

A portfolio manager uses a futures contract to reduce exposure to an equity index. What is the primary purpose?

• A. Increase accounting earnings without risk
• B. Eliminate all portfolio risk permanently
• C. Create voting rights in the index constituents
• D. Hedge or adjust market exposure efficiently

Best answer: D

Explanation: Futures can be used to adjust market exposure without buying or selling every underlying security. They do not eliminate all risk and do not provide ownership rights in index constituents.

Question 10

Topic: alternative investments

Why might private equity investments require a higher expected return than public equities?

• A. Private equity always has daily liquidity
• B. Investors may require compensation for illiquidity, leverage, valuation uncertainty, and operational risk
• C. Private equity has no business risk
• D. Expected return is unrelated to risk

Best answer: B

Explanation: Alternative investments can include illiquidity, leverage, valuation uncertainty, and governance or operational complexity. Higher expected return may compensate for those risks, but it is not guaranteed.

Question 11

Topic: wealth planning

A young investor with stable income and a long horizon wants to build retirement savings. Which factor most supports a higher equity allocation?

• A. Long investment horizon and ability to tolerate interim volatility
• B. The desire to avoid all short-term price movement
• C. A need for all funds in the next month
• D. A legal prohibition on owning equities

Best answer: A

Explanation: A long horizon and ability to withstand volatility can support greater growth-asset exposure. The recommendation still depends on objectives, constraints, risk tolerance, and liquidity needs.

Question 12

Topic: professional conduct

An analyst advertises that clients are guaranteed to outperform if they follow the analyst’s recommendations. What is the main problem?

• A. The statement is acceptable if the analyst has a strong track record
• B. Guarantees are acceptable if placed in small print
• C. The claim is misleading because investment outcomes cannot be guaranteed
• D. The claim is acceptable for institutional clients only

Best answer: C

Explanation: Professional standards emphasize fair, accurate, and not misleading communication. Strong past performance or confidence in research does not justify guaranteeing future outperformance.

CFA Level I quick checklist

• Can you identify the topic area before reaching for a formula?
• Can you explain what a calculation output means in plain investment language?
• Can you spot ethics problems even when the business motive sounds reasonable?

Related CFA Institute pages

• CFA Level II
• CIPM
• CFA Institute updates