Practice questions

CFA Level II (CFA Institute): Practice Questions

By The Exam Atlas Editorial Team · Verified 2026-05-31

30 questions · 11 domains · ~38 min · Updated 2026-05-31

Original concept-check questions for CFA Level II, reflecting its valuation focus and item-set (vignette) style. Each answer is explained, including why the others are wrong. Filter by domain or difficulty. These are concept checks — not real exam questions.

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1. Exam format easy

   CFA Level II questions are delivered as:

   A Standalone multiple-choice B Item sets (vignettes) followed by linked questions C Essays only D Oral exams

2. Exam format medium

   Compared with Level I, Level II emphasizes:

   A Recall of definitions B Application and asset valuation C Only ethics D Only quantitative methods

3. Equity Investments medium

   A dividend discount model (DDM) values equity by:

   A Discounting expected future dividends to present value B Multiplying sales by a fixed factor C Counting shares outstanding D Using only the current price

4. Fixed Income medium

   All else equal, when market interest rates rise, the price of an existing fixed-rate bond:

   A Rises B Falls C Is unchanged D Doubles

5. Fixed Income medium

   Duration measures a bond's:

   A Sensitivity to interest-rate changes B Credit rating C Coupon currency D Issue size

6. Equity Investments easy

   A price-to-earnings (P/E) ratio is an example of:

   A A relative valuation multiple B A cash flow statement C An audit procedure D A bond covenant

7. Corporate Issuers medium

   The weighted average cost of capital (WACC) is:

   A The blended required return on a firm's debt and equity B The firm's tax rate C Total revenue D The dividend per share

8. Ethics easy

   Ethics at Level II is:

   A Removed entirely B Still a significant, tested topic C Optional D Only relevant at Level III

9. Equity Investments hard

   Free cash flow valuation (FCFF/FCFE) values a company based on:

   A Cash flows available to capital providers B Reported net income only C Share count D Dividend history alone

10. Portfolio Management medium

    The Capital Asset Pricing Model (CAPM) estimates expected return using:

    A The risk-free rate, beta and the market risk premium B Only the dividend C The P/E ratio D The coupon rate

11. Portfolio Management medium

    Diversification primarily reduces:

    A Unsystematic (firm-specific) risk B Systematic (market) risk C All risk to zero D The risk-free rate

12. Exam format easy

    A good strategy for Level II item sets is to:

    A Read the vignette carefully, then answer each linked question B Answer before reading the case C Skip the vignette D Memorize answer letters

13. Exam format medium

    A CFA Level II 'item set' (vignette) consists of:

    A A case description followed by multiple-choice questions about it B Long essays C An oral defense D True/false statements

14. Equity Investments medium

    The Gordon (constant) growth model values a stock as:

    A D1 / (r - g) B D1 x r C r - g D Price x earnings

15. Equity Investments medium

    An EV/EBITDA multiple, compared with a P/E ratio:

    A Is less affected by capital structure, aiding comparison across differently-leveraged firms B Ignores earnings entirely C Is identical to P/E D Applies only to banks

16. Financial Statement Analysis medium

    A company using LIFO during a period of rising prices will report, versus FIFO:

    A Lower net income and lower ending inventory B Higher inventory and higher net income C Identical results D No cost of goods sold

17. Financial Statement Analysis medium

    The current ratio is calculated as:

    A Current assets divided by current liabilities B Total assets divided by equity C Sales divided by assets D Net income divided by liabilities

18. Fixed Income medium

    Convexity describes:

    A How a bond's duration changes as yields change (the curvature of the price-yield curve) B The coupon rate C The maturity date D The credit rating

19. Fixed Income hard

    Compared with an otherwise identical option-free bond, a callable bond typically has:

    A A lower price and higher yield, compensating the investor for call risk B A higher price C No difference D A zero coupon

20. Quantitative Methods medium

    Multiple regression's R-squared indicates:

    A The proportion of variation in the dependent variable explained by the model B The sample size C The intercept value D The currency used

21. Quantitative Methods hard

    A low p-value (for example below 0.05) on a regression coefficient suggests that:

    A The variable is statistically significant B The model is useless C There is no relationship D The data are corrupted

22. Economics medium

    Purchasing power parity (PPP) suggests exchange rates adjust so that:

    A Identical goods cost about the same across countries B Interest rates equalize C GDP levels equalize D Inflation becomes zero

23. Derivatives medium

    The value of a forward contract at initiation is typically:

    A Zero (no cost to enter) B The spot price C The strike price D An upfront premium

24. Derivatives hard

    Put-call parity links the prices of:

    A A call, a put, the underlying asset and a risk-free bond B Two different stocks C Two different bonds D A forward and a future

25. Alternative Investments medium

    A hedge fund's '2 and 20' fee structure refers to:

    A A management fee (about 2%) plus a performance fee (about 20% of gains) B Two managers and 20 analysts C A two-year lockup with 20% tax D 20 funds in one

26. Portfolio Management medium

    The Sharpe ratio measures:

    A Excess return per unit of total risk (standard deviation) B Return per unit of beta C Total return only D The risk-free rate

27. Portfolio Management medium

    The security market line (SML) plots expected return against:

    A Systematic risk (beta) B Total risk C Time D Share price

28. Portfolio Management medium

    Active return is:

    A The portfolio return minus its benchmark return B The risk-free rate C The total return D The portfolio's beta

29. Corporate Issuers medium

    Other things equal, increasing financial leverage in the capital structure:

    A Raises potential returns to equity but also financial risk B Always reduces risk C Never affects value D Eliminates interest expense

30. Ethics medium

    Under the CFA Standards, an analyst who obtains material nonpublic information must:

    A Not trade or cause others to trade on it B Share it with close friends C Trade on it quickly D Post it publicly to be safe

Practice questions FAQ

Are these real CFA Level II exam questions?

No. These are original study questions written to test understanding. They are not real exam questions, exam dumps, or copied from any provider.

How should I use these practice questions?

Answer each one, read the explanation (including why the wrong options are wrong), and use the per-domain score below to focus your revision on weak areas. Revisit before exam day.

How many questions should I do before the exam?

Enough to score consistently across every domain, alongside full-length practice from official or reputable providers. Understanding why each answer is right matters more than raw volume.

What score means I am ready?

A good signal is consistently scoring around 80% or higher across all domains on questions you have not seen before, and being able to explain why the wrong options are wrong.

Should I use exam dumps?

No. Dumps (real or leaked questions) breach provider policy, can void your certification, and do not build the understanding the exam actually tests.

Sources

• CFA Institute — CFA Program ↗