CFA Level II practice questions

Original CFA Level II practice sets

These original examples train the Level II task: read a shared case, select the facts each question needs, calculate or interpret, and explain why the nearest alternative fails. They are instructional questions, not questions from CFA Institute. Each set has four linked items to reflect the exam’s vignette structure.

Item Set 1: Forecast earnings and equity valuation

Vignette: Harbor Components

Harbor Components has 60 million common shares outstanding. It reports under IFRS. The analyst values the equity on 31 December 2026. Earnings for 2026 were $180 million; estimated 2027 earnings are $210 million. The analyst applies a sustainable forward P/E of 14. The current market price is $46 per share. The company has $120 million of net debt. A possible acquisition is mentioned, but the target’s earnings contribution and purchase price are not provided.

For this set, keep actual and forecast earnings separate, note that the P/E is forward, and distinguish equity value per share from enterprise value. Net debt is not automatically deducted from a P/E valuation, because P/E directly relates share price to earnings available to common equity. The acquisition is not quantifiable from the facts given.

Question 1

Using the analyst’s forecast and forward multiple, estimated value per share is closest to: A) $42.00, B) $49.00, or C) $56.00.

Answer: B. Forecast EPS = $210 million / 60 million shares = $3.50. Forward P/E value = $3.50 × 14 = $49.00. Choice A applies the multiple to trailing EPS: $180m / 60m = $3.00, and $3.00 × 14 = $42. Choice C multiplies earnings by 16 or otherwise uses a higher multiple than the case supplies. The word “forward” determines the earnings period.

Question 2

Relative to the current market price, the implied upside is closest to: A) 6.1%, B) 8.0%, or C) 14.3%.

Answer: A. Upside relative to market is ($49 − $46)/$46 = $3/$46 = 6.52%, so the closest choice is A at 6.1%. The candidate should trust the calculated percentage and select the closest choice. Choice B may use a different denominator or rounded inputs; C is too large for a $3 difference on a $46 base.

Question 3

At the $46 market price, the trailing P/E based on 2026 earnings is closest to: A) 13.1, B) 14.0, or C) 15.3.

Answer: C. Trailing EPS is $180m / 60m = $3.00. Trailing P/E is $46/$3 = 15.33. Choice A uses forecast EPS ($46/$3.50 = 13.14), which is forward P/E. Choice B repeats the analyst’s assumed multiple even though the question asks for the market trailing multiple. The case supports both ratios, but the stem specifies which one.

Question 4

Which conclusion about the possible acquisition is best supported? A) It increases Harbor’s value by $2 per share. B) Its effect cannot be estimated from the information provided. C) It reduces earnings by the target’s purchase price.

Answer: B. The vignette omits both the purchase price and earnings contribution, along with financing and integration assumptions. Choice A invents a per-share effect. Choice C confuses purchase price with an earnings reduction. The analyst can identify relevant unknowns, but cannot quantify value from a mention of a possible acquisition alone.

Item Set 1 review

The first question uses forward earnings, the third asks for trailing P/E, and the second changes the denominator according to “relative to market.” Recompute the requested measure rather than carrying a prior result forward. The net debt fact may be irrelevant to these P/E questions; using every supplied number is not the goal. Question 4 asks for evidence sufficiency, not a calculation.

Item Set 2: Fixed income duration and price sensitivity

Vignette: Meridian Transit Bond

Meridian Transit has an option-free bond with a market value of $1,000, modified duration of 6.2, and convexity of 48. A parallel yield increase of 50 basis points is expected. Use the duration-convexity approximation and express the estimated price change as a percentage of current price. Ignore carry and other return components.

The case supplies modified duration and convexity, so the approximation is ΔP/P ≈ −Dmod(Δy) + 0.5 × Convexity × (Δy)². Convert 50 basis points to 0.005 before substituting. The duration term is first order and negative for a yield increase; convexity adds a positive second-order adjustment for a conventional option-free bond.

Question 1

The duration-only estimate of the bond’s percentage price change is closest to: A) −3.10%, B) −0.31%, or C) +3.10%.

Answer: A. −6.2 × 0.005 = −0.031, or −3.10%. Choice B uses 50 basis points as 0.0005 or shifts the decimal. Choice C reverses the inverse relationship between yield and price. The sign check should come before calculator precision.

Question 2

Including convexity, the estimated percentage price change is closest to: A) −3.10%, B) −3.04%, or C) −2.50%.

Answer: B. The convexity term is 0.5 × 48 × (0.005)² = 24 × 0.000025 = 0.0006, or +0.06%. Add it to −3.10%: estimated change = −3.04%. Choice A omits convexity; choice C overstates the adjustment or uses an incorrect yield change. The correction is positive, but it does not make the total change positive.

Question 3

The approximate dollar change in market value, including convexity, is closest to: A) −$30.40, B) −$3.04, or C) +$30.40.

Answer: A. Apply −3.04% to $1,000: −0.0304 × 1,000 = −$30.40. Choice B confuses a percentage number with a dollar amount; choice C reverses the sign. Since the problem asks for the change rather than the ending value, do not report $969.60 as the answer.

Question 4

If the bond instead had a meaningful embedded call option, the duration estimate would generally be: A) less reliable because cash flows may change as yields move. B) exact because convexity is supplied. C) unaffected by the option.

Answer: A. An embedded option can make expected cash flows and effective duration change with interest rates. The simple modified-duration and convexity approximation assumes the stated measures adequately describe price sensitivity; option-adjusted measures may be needed. Choice B mistakes a second-order approximation for an exact result, and C ignores the option’s effect on cash flows.

Item Set 2 review

The most important first step was converting basis points to a decimal yield change. Then apply the sign, first-order duration effect, and second-order convexity term. Keep the units straight: −3.04% is a relative change; on $1,000 it implies −$30.40. The final question checks model limitations rather than arithmetic.

How to use these sets in study

Attempt each set before reading its explanation. Mark the exact case fact you used for each choice, and write down why the closest distractor fails. If your arithmetic differs, keep the setup visible and recheck the basis, period, and units before recalculating. A fast answer without a defensible setup is difficult to reproduce on a new vignette.

After review, change one input and redo the relevant calculation. In Harbor, change forecast earnings or the multiple; in Meridian, change the yield shock or duration. Explain the direction before calculating. If you got the answer right for the wrong reason, record it as a skill to repair. Return to the same concept later with a different case rather than simply memorizing these figures.

Item Set 3: Portfolio performance and risk

Vignette: Summit Balanced Fund

Summit Balanced Fund has an annual return of 8.0%, annualized standard deviation of 12.0%, and beta of 1.10. The risk-free rate is 2.0%. Its benchmark returned 7.0%, and tracking error was 4.0%. Assume all returns cover the same period.

Question 1

The Sharpe ratio is closest to: A) 0.17, B) 0.50, or C) 0.67.

Answer: B. Sharpe = (portfolio return − risk-free rate)/portfolio standard deviation = (8% − 2%)/12% = 0.50. Choice A divides active return by total risk. Choice C does not subtract the risk-free rate.

Question 2

The Treynor ratio is closest to: A) 5.45%, B) 7.27%, or C) 10.00%.

Answer: A. Treynor = excess return/beta = 6%/1.10 = 5.45%. Choice B uses total return divided by beta; choice C applies an incorrect denominator. Treynor scales excess return by systematic risk, while Sharpe uses total volatility.

Question 3

The information ratio is closest to: A) 0.10, B) 0.25, or C) 1.50.

Answer: B. Active return is 8% − 7% = 1%. Information ratio = active return/tracking error = 1%/4% = 0.25. Choice A divides by total standard deviation; choice C confuses active return with excess return over the risk-free rate.

Question 4

Which interpretation best matches beta of 1.10? A) The fund is guaranteed to return 10% more than the market. B) The fund has greater sensitivity to systematic market movements than a beta-one portfolio, all else equal. C) The fund has 10% more total volatility than its benchmark.

Answer: B. Beta estimates sensitivity to systematic market movements relative to the market. It does not guarantee outperformance and does not directly measure total volatility. Choice A converts sensitivity into a promised return; choice C confuses beta with standard deviation.

Use each risk measure for its intended comparison

Sharpe compares excess return with total volatility. Treynor scales excess return by beta. The information ratio compares active return with tracking error. Identify the benchmark and denominator before calculating. If periods differ, convert them consistently before interpreting the result.

A review checklist for original practice

• Can you point to the case facts that support each calculation?
• Did you convert basis points, percentages, and share counts correctly?
• Did you keep actual and forecast values separate?
• Does each ratio use the correct denominator?
• Can you explain why the nearest distractor fails?
• Can you repeat the method with new values?

Use practice results to choose the next task

If you scored well on a set, test the concept later with different inputs and wording. If you missed an item, name the error before rereading. A knowledge gap calls for a curriculum review; a wrong-period error calls for more careful stem parsing; a calculator mistake calls for a setup drill. Review correct guesses too, since an unstable method can produce a lucky answer. These examples cover valuation, fixed income, and portfolio performance, but they do not represent every curriculum area.

A practice percentage is not an official pass estimate. CFA Institute reports pass or fail with a scale score against the MPS and does not publish one raw threshold across sittings. Use this practice set to build reliable reasoning: cite the case fact, show the calculation, check units, and explain the distractor.

CFA Institute describes the Level II vignette format and provides candidate practice questions and mock exams based on the registered exam curriculum. The calculations and vignettes above are original teaching examples.