CFA Mock Exam Level 2

Embarking on the CFA Level 2 exam is a critical milestone with uniquely demanding challenges. As you enter the final stages of preparation, it’s critical to continue to put your knowledge to the test in order to consolidate this information and learn how to apply it.

We’ve created this CFA Mock Exam Level 2 article to help sharpen your skills for the real thing using questions that delve into ethics, economics, corporate finance. This mock exam has been divided into two sessions to provide a realistic experience, challenge your knowledge, and prepare you for success.

General Overview

Before reading on, it’s important to be aware that this CFA level 2 mock exam isn’t a real exam. That being said, this representation has been designed with the CFA’s official learning outcome statements in mind to offer you a tangible glimpse of what awaits you in the real examination.

This mock exam is a great way of understanding your readiness for the real exam by spotlighting areas that may need sharpening.

When paired with dedicated study materials, we believe that this can go a long way in ensuring that you pass your CFA Level 2 exam on your first attempt.

CFA Level 2 Mock Exam

Session 1

Ethical and Professional Standards (10-15%)

Vignette:

Alice Johnson, CFA, works for XYZ Investments. She comes across insider information regarding a technology company’s upcoming merger. Her colleague, Tom, pressures her to use the information to gain profits for their clients.

Questions:

1. If Alice acts upon the insider information, which of the CFA Institute’s Standards of Professional Conduct would she be most directly violating?

• a) Loyalty to Employer
• b) Material Nonpublic Information
• c) Fair Dealing
• d) Professionalism

2. Tom is encouraging Alice to use the insider information. What should Alice’s next course of action be in line with CFA ethical standards?

• a) Report Tom to the management
• b) Ignore Tom’s advice
• c) Consult with a lawyer
• d) Use the information as Tom suggests

3. If Alice decides to act upon the information, what potential consequences could this have on her professional career?

• a) Increased reputation and bonuses
• b) Legal and disciplinary actions
• c) No significant impact
• d) Enhanced career opportunities

Quantitative Methods (5-10%)

Vignette:

Suppose you are analyzing a portfolio and have calculated the expected return as 8% with a standard deviation of 5%. You use the Gaussian distribution to model the returns.

Questions:

1. What is the probability that the portfolio returns will be less than 3%?

• a) 2.28%
• b) 9.18%
• c) 15.87%
• d) 22.57%

2. What is the expected shortfall at the 5% significance level?

• a) 1.5%
• b) -1.5%
• c) 2.5%
• d) -2.5%

3. If the underlying distribution of returns is not normal but has excess kurtosis, how might this affect the risk assessment?

• a) It will not change the risk assessment
• b) It could underestimate the risk
• c) It could overestimate the risk
• d) It will make the risk assessment more accurate

Economics (5-10%)

Vignette:

The economy of Country A has been experiencing inflation, with increasing unemployment rates. The central bank is considering measures to stimulate the economy.

Questions:

1. According to the Phillips Curve, what is the typical relationship between inflation and unemployment?

• a) Positive
• b) Negative
• c) No relationship
• d) Uncertain

2. If the central bank decides to decrease interest rates, what is the likely immediate impact on the currency value of Country A?

• a) Increase
• b) Decrease
• c) Remain constant
• d) Fluctuate wildly

3. What would be the likely long-term effect on the economy if the central bank repeatedly uses expansionary monetary policy to combat rising unemployment?

• a) Reduced inflation
• b) Increased economic stability
• c) Stagflation
• d) Hyperinflation

Financial Statement Analysis (10-15%)

Vignette:

Company B is a manufacturing firm. Its financials indicate a high gross margin but declining net profit margin. Inventory turnover has decreased, and accounts receivable days are increasing.

Questions:

1. What could be the likely cause of a high gross margin but declining net profit margin?

• a) High sales and low cost of goods sold
• b) Increasing operating expenses
• c) Decreasing sales volume
• d) High dividend payout

2. A decrease in inventory turnover could indicate what about Company B?

• a) Better inventory management
• b) Slower sales of inventory
• c) More profitable inventory
• d) Less investment in inventory

3. Increasing accounts receivable days might suggest:

• a) More prompt collection from customers
• b) Less credit sales
• c) Improved liquidity position
• d) Slower collection from customers

Session 2

Corporate Issuers (5-10%)

Vignette:

MNO Inc. is a corporation looking to expand its operations. They are considering issuing bonds or common stocks. Their current capital structure is 40% equity and 60% debt.

Questions:

1. If MNO Inc. decides to issue more bonds, what effect might this have on their weighted average cost of capital (WACC)?

• a) Increase
• b) Decrease
• c) No change
• d) Depends on market conditions

2. What could be a potential drawback of issuing common stocks for MNO Inc.?

• a) Increased interest expense
• b) Dilution of ownership
• c) Increased debt ratio
• d) Lower dividend payout

3. Which financial metric could be most directly affected by issuing bonds?

• a) Gross profit margin
• b) Earnings per share (EPS)
• c) Debt to equity ratio
• d) Price to earnings (P/E) ratio

Equity Investments (10-15%)

Vignette:

John, a portfolio manager, is reviewing the stocks of three companies: X, Y, and Z. Company X has a high dividend payout ratio, Company Y has significant growth potential, and Company Z has stable earnings but a high P/E ratio.

Questions:

1. Which company might be most suitable for a client seeking regular income?

• a) Company X
• b) Company Y
• c) Company Z
• d) None of the above

2. If the market is expecting high growth in the technology sector, which company might be the most attractive investment?

• a) Company X
• b) Company Y
• c) Company Z
• d) Insufficient information

3. A high P/E ratio in Company Z might indicate:

• a) The stock is undervalued
• b) The stock is overvalued
• c) The stock pays high dividends
• d) The stock has low growth prospects

Fixed Income (10-15%)

Vignette:

Karen, a CFA charterholder, is analyzing two bonds: Bond A with a coupon of 6% and maturity of 5 years, and Bond B with a coupon of 8% and maturity of 10 years. Interest rates are expected to rise.

Questions:

1. Which bond will have a higher price sensitivity to changes in interest rates?

• a) Bond A
• b) Bond B
• c) Both have the same sensitivity
• d) Cannot be determined

2. If Karen expects interest rates to rise, which bond might she prefer?

• a) Bond A
• b) Bond B
• c) Neither
• d) Both

3. What type of risk is most prominent in Karen’s consideration between these two bonds?

• a) Credit risk
• b) Liquidity risk
• c) Interest rate risk
• d) Inflation risk

Derivatives (5-10%)

Vignette:

Sarah, a financial analyst, is reviewing two options: a European call option with a strike price of $50, and an American put option with a strike price of $45. The underlying stock is trading at $48.

Questions:

1. What is the intrinsic value of the European call option?

• a) $0
• b) $2
• c) $3
• d) -$2

2. What advantage does the American option have over the European option?

• a) Lower price
• b) Higher intrinsic value
• c) Can be exercised at any time before expiration
• d) Has a higher strike price

3. If the volatility of the underlying stock increases, what is the likely effect on the price of the call option?

• a) Increase
• b) Decrease
• c) No change
• d) Cannot be determined

Alternative Investments (5-10%)

Vignette:

Investment firm XYZ is evaluating investments in hedge funds, real estate, and private equity. They are seeking diversification and potential high returns but are concerned about the risks involved.

Questions:

1. Which of these alternative investments typically offers the highest liquidity?

• a) Hedge funds
• b) Real estate
• c) Private equity
• d) All equally liquid

2. In considering private equity, what is a significant risk that firm XYZ must be aware of?

• a) Interest rate risk
• b) Inflation risk
• c) Lack of transparency and regulatory oversight
• d) High liquidity

3. If firm XYZ wants to hedge against market volatility, which alternative investment might be suitable?

• a) Hedge funds
• b) Real estate
• c) Private equity
• d) None of the above

Portfolio Management and Wealth Planning (10-15%)

Vignette:

David, a financial advisor, is helping a client to build a retirement portfolio. The client is 45 years old, has moderate risk tolerance, and aims to retire at age 65.

Questions:

1. What asset allocation might be most suitable for David’s client?

• a) 70% stocks, 30% bonds
• b) 30% stocks, 70% bonds
• c) 50% stocks, 50% bonds
• d) 80% stocks, 20% real estate

2. If David’s client wishes to take on slightly more risk for potentially higher returns, what change might be advisable in the portfolio?

• a) Increase in bonds
• b) Increase in stocks
• c) Increase in cash
• d) Increase in alternative investments

3. What is a key consideration David must keep in mind while planning for his client’s retirement?

• a) The client’s current age
• b) The client’s preferred retirement location
• c) The client’s Social Security benefits
• d) The client’s life expectancy and retirement goals

You can mark your answer choices on this mock test by printing it off and doing the exam by hand. Make sure to complete as many question banks as possible and review the answer explanations of your errors to ensure you pass on your first try.