CFA® Sample Questions for Levels 1 & 2

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CFA Level I Questions

CFA Level I exam consists of 180 multiple-choice questions split between two 135-minute sessions. UWorld CFA offers candidates 2,400+ relevant Level I practice questions with detailed answer explanations.

CFA Level II consists of 22 item sets of vignettes with 88 corresponding multiple-choice questions split between two sessions lasting 2 hours and 12 minutes each. UWorld CFA offers candidates 900+ vignette style sample problems with leading explanations.

CFA Level II Questions

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WACC Sample Question

Statutory Tax Sample Question

AUM Sample Question

WACC Sample Question

Statutory Tax Sample Question

An analyst gathers the following information abouta company reporting under US GAAP:

($ millions)	Fiscal Year End 20X1
Total deferred tax assets	1,100
Valuation allowance	(700)
Total deferred tax assets after valuation allowance	400
Total deferred tax liabilities	(1,500)
Net deferred tax liabilities	(1,100)

All else being equal, an increase in the statutory tax rate from 20% to 25% would most likely increase:

		A) total liabilities.
		B) total assets.
		C) taxable income.

Submit

Explanation

Deferred tax assets (DTA) and deferred tax liabilities (DTL) result from temporary differences between taxable income (based on tax reporting) and accounting profit (based on financial reporting). These differences create future tax benefits (ie, DTA) or obligations (ie, DTL).

DTA and DTL are reassessed at the end of each fiscal year, based on the tax rates that will be applied in the future when the temporary differences reverse, and DTA is recovered, or DTL is settled. If future income is taxed at higher (lower) rates:

the company’s tax obligations increase (decrease), resulting in an increased (decreased) DTL, and
the benefit of future deductions increases (decreases), resulting in an increased (decreased) DTA.

DTA and DTL are netted and reported as a single item on the balance sheet. In this case, since DTL > DTA, there are no deferred taxes reported as an asset on the balance sheet.

Deferred taxes and statutory tax rates
	20% rate	25% rate	Difference
Total DTA	1,100	1,375	275
Total DTL	(1,500)	(1,875)	(375)
Net effect	(900)	(500)	(100)

An increase in the statutory tax rate increases both DTL and DTA, so in this scenario the net effect is an increase in net DTL. Therefore,total liabilities will increase and the tax rate change will not affect total assets (Choice B) .

Note: No calculation is necessary to answer this question.

(Choice C) Tax rates do not affect the amount of taxable income; instead, they are used to determine taxes payable, calculated as the tax rate multiplied by the taxable income.

Things to remember:

Deferred tax assets (DTA) and deferred tax liabilities (DTL) are created by temporary differences and must be reassessed every year for any changes in the applicable tax rate. An increase in the statutory tax rate increases both DTA and DTL since both future tax benefits (ie, DTA) and obligations (ie, DTL) will increase. DTA and DTL are netted and reported as a single item on the balance sheet.

AUM Sample Question

A hedge fund has the following fee structure, charged on year-end assets under management (AUM):

Annual management fee	1.5%
Incentive fee	12%
Soft hurdle rate	5%
High-water mark	$380 million

The fund value is $372 million at the beginning of the year and $412 million, before fees, at the end of the year. For this year, if fees are calculated independently, the net return to the investor is closest to:

		A) 50,000
		B) 62,500
		C) 75,000

Submit

Explanation

Typical hedge fund fee structure
Fee	Basic for calculation	Specific details
Management	End-of-period assets under management (AUM)	Annual charge; typically, 1%-3% of AUM Does not depend on fund’s profitability Always calculated before incentive fee
Incentive	Annual retuns	Can be net or gross of management fee Can be subject to hurdle rate and/or high-water mark

An investor’s return is calculated net of fees and as a percentage of the fund’s beginning value. Hedge funds often levy both a management fee and an incentive fee.

The management fee is calculated as a percentage of the fund’s total ending assets under management (AUM) and is assessed regardless of profitability.
The incentive fee is calculated as a percentage of profits either net (ie, after deducting) or gross (ie, before deducting) of management fees.
If fees are calculated independently, calculations are on a gross basis.

An incentive fee is often contingent on profits being greater than a hurdle rate and/or AUM being higher than the high-water mark. In this scenario, the fund’s threshold to earn an incentive fee is contingent on exceeding the 5% soft hurdle rate and the high-water mark of $380 million. Due to the soft hurdle rate, the incentive fee will be applied to the entire gain above the high-water mark.

The investor’s return for the year is calculated (in $ millions) as follows:

Steps	Calculations
Calculate profit before fees Calculate return after management fee	Ending AUM 412 Begining AUM (372) Profit before Fees 40 Management Fee(412 × 0.015) (6.18) Profit after Manangement fee 33.82 Return after management fee (33.82 ÷ 372) 9.09%
Calculate incentive fee Incentive fee earned since 9.09% > 5% hurdle rate	Profit before fees 40 High-water mark adj(380 – 372) (8) Incentive fee base 32 Incentive fee (32 × 0.12) (3.84)
Calculate investor return	Profit before fees 40 Management fee (6.18) Incentive fee (3.84) Profit after fees 29.98 Investor return (29.98 ÷ 372 ) 8.06%

The operating breakeven point is not to be confused with the (total) breakeven point where revenue equals the firm’s total costs. Total costs include all operating and nonoperating costs (eg, fixed financial costs).

(Choice A) A 7.80% return inappropriately calculates returns using beginning AUM, instead of the high-water mark, as the incentive fee’s base.

(Choice C) An 8.67% return inappropriately calculates returns using a hard hurdle rate.

Things to remember:

An investor’s return on a hedge fund is calculated net of fees and as a percentage of the fund’s beginning value. Hedge funds levy both a management fee and an incentive fee. The management fee is calculated as a percentage of the fund’s ending total value, gross of fees, and assessed regardless of profitability. The incentive fee is calculated as a percentage of profits, subject to hurdle rates and high-water marks.

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Frequently Asked Questions

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UWorld CFA is a CFA Institute Approved Prep Provider, meaning our content adheres to the latest LOS. Problems and explanations are written by active CFAs and finance educators to reflect the format of the exam.

What types of questions are on the CFA exam?

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Are all questions scored on the CFA exam?

CFA exam grading is not as straightforward as simply receiving a numerical score. After a multi-step process, a minimum passing score (MPS) is determined and applied to all graded exams. In recent years, its estimated that Levels I and II have had a MPS close to 70%, while Level III has had a MPS close to 60%.

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How Many Questions Are on the CFA Level 1 Exam?

CFA Level I consists of 180 multiple-choice questions split between two 135-minute sessions. UWorld CFA offers candidates 2,400+ relevant Level I practice questions with detailed answer explanations.

How Many Questions Are on the CFA Level 2 Exam?

Total capital	82 billion
Debt-to-equity ratio	25%
Cost of common equity	9.0%
Pretax cost of debt	5.0%
Tax rate	20%

CFA® Sample Questions: Levels 1 & 2