Free CFA® Level 2 Exam Questions and Answers

Teodor Brandt, an analyst at Kestrel Holdings, is reviewing Kestrel's investment in Larkin Industries. On 1 January 20X5, Kestrel paid $90 million for 25% of Larkin's outstanding voting shares and gained significant influence. On that date, the book value of Larkin's net assets was $320 million. The excess of the purchase price over Kestrel's share of book value is attributable entirely to equipment whose fair value exceeded its book value. The equipment has a remaining useful life of 10 years, and straight-line depreciation is used. For the year ended 31 December 20X5, Larkin reported net income of $48 million and paid dividends of $16 million. Kestrel reports under IFRS. The carrying amount of Kestrel's investment in Larkin at 31 December 20X5 is closest to:

• AA. $97 million
• BB. $98 million
• CC. $101 million

Lucia Ferraro, an equity analyst at Marlowe Capital, has concluded that shares of Halvorsen Packaging are undervalued. Her estimates are in Exhibit 1. Exhibit 1: Halvorsen Packaging Valuation Inputs Current market price | $40.00 Estimated intrinsic value today | $46.00 Required return on equity | 9.0% Expected dividend, paid at end of year 1 | $1.20 Ferraro assumes the market price will converge to the intrinsic value at the end of year 1, when the dividend is paid and the share is sold. Based on Exhibit 1, the expected one-year holding period return on the shares is closest to:

• AA. 9.00%
• BB. 18.00%
• CC. 25.35%

Marcus Oyelaran, a CFA charterholder and research analyst at Brightwater Asset Management, covers Delmar Instruments. At an industry reception, Delmar's chief financial officer mentions to Oyelaran that third-quarter revenue will fall well below the guidance the company issued to the market. The company has not announced this. The next week, Oyelaran visits three Delmar distributors, who report slower order volumes. He then lowers his rating on Delmar to Sell and distributes the revised recommendation to Brightwater's clients. His report cites only the distributor visits and public filings. Oyelaran's actions most likely:

• AA. did not violate the Standards, because the distributor visits would have supported the lower rating without the CFO's comment
• BB. violated Standard II(A), because the CFO's comment is material nonpublic information and he acted on it in making the recommendation
• CC. violated Standard V(B), because the report did not identify the distributor visits as the source of the lower rating

Aisha Rahman, a quantitative analyst, regresses the monthly excess return of a mutual fund on the monthly excess returns of a market index (MKT) and a small-cap factor (SMB) using 62 monthly observations. Exhibit 1 shows partial results. Exhibit 1: Regression Output Variable | Coefficient | Standard error Intercept | 0.12 | 0.09 MKT | 0.84 | 0.31 SMB | 0.27 | 0.15 The critical t-value for a two-tailed test at the 5% significance level with 59 degrees of freedom is 2.001. Rahman tests the null hypothesis that the fund's market beta equals 1.0 against the alternative that it does not equal 1.0. Based on Exhibit 1, Rahman should conclude that she:

• AA. fails to reject the null hypothesis, because the t-statistic of −0.52 lies within ±2.001
• BB. rejects the null hypothesis, because the t-statistic of 2.71 exceeds 2.001
• CC. rejects the null hypothesis, because the t-statistic of −5.16 is below −2.001

Priya Anand, a fixed-income strategist, is evaluating a government spot curve to decide how to position a bond portfolio. Exhibit 1 shows the annual-pay spot rates. Exhibit 1: Government Spot Rates Maturity | Spot rate 1 year | 2.00% 2 years | 2.60% 3 years | 3.10% Anand believes the market is pricing in a steeper curve than her own view supports. She plans to compare the implied one-year rate two years from now with her own expectation. Based on Exhibit 1, the one-year forward rate two years from now is closest to:

• AA. 3.20%
• BB. 3.66%
• CC. 4.11%

Henrik Solberg, a strategist at Aldergate Advisors, is estimating the required return on a developed-market equity index by building up the return from its component premiums. His assumptions are in Exhibit 1. Exhibit 1: Return Component Assumptions Real default-free interest rate | 1.20% Expected inflation | 2.10% Premium for inflation uncertainty | 0.30% Credit risk premium on corporate bonds | 1.40% Equity risk premium over corporate bonds | 3.00% Solberg states that equities are riskier than the same issuers' bonds, so he measures the equity risk premium relative to credit-risky corporate bonds rather than default-free government bonds. Based on Exhibit 1, the required return on the equity index is closest to:

• AA. 6.60%
• BB. 7.70%
• CC. 8.00%

A portfolio manager is considering investing in a stock with a _ of 1.2. If the market return is 10% and the risk-free rate is 2%, what is the expected return according to CAPM?

• AA. 14.00%
• BB. 12.40%
• CC. 15.20%
• DD. 10.40%

A trader is assessing market efficiency. If stock prices reflect all publicly available information, which form of efficiency is present?

• AA. Total efficiency
• BB. Weak form
• CC. Strong form
• DD. Semi-strong form

An investment analyst observed that stock A and stock B have a correlation of 0.85. What does this indicate about the relationship between these two stocks?

• AA. They are independent
• BB. One is a leader
• CC. They move together
• DD. They always fall

A company's return on equity (ROE) is 15%, and its debt-to-equity ratio is 1. A financial analyst using the DuPont analysis wants to determine the net profit margin. What is it if the asset turnover is 2?

• AA. 5%
• BB. 20%
• CC. 15%
• DD. 10%