CFA CFA 2 — Questions and Answers
Question 1: Under the CFA Institute Code of Ethics, what must a member do when an investment recommendation could benefit the member personally?
- Disclose the conflict of interest to clients and prospects (Correct answer)
- Decline to make any recommendation
- Transfer the account to a colleague
- Wait 30 days before acting
Correct answer: Disclose the conflict of interest to clients and prospects
Standard VI(A) requires full and fair disclosure of all matters that could reasonably impair independence or create conflicts of interest.
Question 2: The required rate of return used to discount a firm's free cash flow to the firm (FCFF) is the:
- Weighted average cost of capital (WACC) (Correct answer)
- Cost of equity
- Risk-free rate
- After-tax cost of debt
Correct answer: Weighted average cost of capital (WACC)
FCFF belongs to all capital providers, so it is discounted at the WACC.
Question 3: A bond's Macaulay duration of 6 years and modified duration are related by which adjustment?
- Dividing Macaulay duration by (1 + yield per period) (Correct answer)
- Multiplying by (1 + yield)
- Adding convexity
- Subtracting the coupon rate
Correct answer: Dividing Macaulay duration by (1 + yield per period)
Modified duration equals Macaulay duration divided by (1 + yield per period).
Question 4: Which financial ratio best measures a company's ability to meet short-term obligations using its most liquid assets?
- Quick (acid-test) ratio (Correct answer)
- Debt-to-equity ratio
- Gross margin
- Interest coverage ratio
Correct answer: Quick (acid-test) ratio
The quick ratio excludes inventory, focusing on cash, marketable securities, and receivables.
Question 5: In the Capital Asset Pricing Model (CAPM), beta measures a security's:
- Systematic (market) risk (Correct answer)
- Total risk
- Unsystematic risk
- Default risk
Correct answer: Systematic (market) risk
Beta captures the non-diversifiable systematic risk relative to the market portfolio.
Question 6: Under IFRS, which inventory cost flow assumption is NOT permitted?
- LIFO (last-in, first-out) (Correct answer)
- FIFO (first-in, first-out)
- Weighted average cost
- Specific identification
Correct answer: LIFO (last-in, first-out)
IFRS prohibits LIFO, though it is allowed under U.S. GAAP.
Question 7: A positively sloped (normal) yield curve generally implies that:
- Longer-term yields are higher than shorter-term yields (Correct answer)
- Short-term yields exceed long-term yields
- All maturities have equal yields
- Yields are falling across all maturities
Correct answer: Longer-term yields are higher than shorter-term yields
A normal upward-sloping curve has higher yields for longer maturities, reflecting term premiums.
CFA CFA 2
Under the CFA Institute Code of Ethics, what must a member do when an investment recommendation could benefit the member personally?