CFA Level I Exam Flashcards

Q: What topics do these CFA Level I flashcards cover?

They cover the ten Level I curriculum areas: ethics, quantitative methods, economics, financial statement analysis, corporate issuers, equity, fixed income, derivatives, alternative investments, and portfolio management.

Q: How many questions are on CFA Level I?

CFA Level I has 180 multiple-choice questions split into two sessions of 90 questions each.

Q: What is the CFA Level I passing score?

CFA Institute sets the Minimum Passing Score, but it does not publish a fixed public raw percentage for candidates to use as a guaranteed passing score.

Q: Does CFA Level I require sponsorship?

No employer sponsorship is required to register for CFA Level I, but candidates must meet CFA Program eligibility, identification, and policy requirements.

Q: How should I use CFA Level I flashcards?

Use flashcards for active recall of formulas, definitions, decision rules, and common distinctions, then validate application with practice questions and mock exam review.

Question 1

Code and Standards Priority

Accepted Answer

Members and candidates must put client interests and the integrity of the investment profession ahead of personal interests. The exam often tests this as a duty of conduct, not as a return-maximization rule.

Question 2

Knowledge of the Law

Accepted Answer

Follow the strictest applicable rule when laws, regulations, and the CFA Institute Standards differ. When uncertain, seek guidance and avoid conduct that may violate the applicable standard.

Question 3

Loyalty, Prudence, and Care

Accepted Answer

Investment professionals owe loyalty to the client or beneficiary whose assets they manage. For pension assets, that duty runs to plan participants and beneficiaries, not merely to the plan sponsor.

Question 4

Fair Dealing

Accepted Answer

Clients must be treated fairly and objectively when recommendations are made or investment actions are taken. Fair dealing allows different actions for different mandates, but not favoritism in access or execution.

Question 5

Material Nonpublic Information

Accepted Answer

Information is material if a reasonable investor would consider it important, and nonpublic if it has not been broadly disseminated. Trading or causing others to trade on it violates market integrity duties.

Question 6

Time Value of Money

Accepted Answer

Cash flows are comparable only after moving them to the same date with compounding or discounting. A higher discount rate lowers present value, while more frequent compounding raises future value for a stated annual rate.

Question 7

Arithmetic Mean vs. Geometric Mean

Accepted Answer

The arithmetic mean summarizes a single-period average return. The geometric mean captures compound growth over multiple periods and is lower when returns vary across periods.

Question 8

Variance and Standard Deviation

Accepted Answer

Variance measures average squared dispersion from the mean. Standard deviation is the square root of variance, so it returns risk to the same units as the original return series.

Question 9

P-Value in Hypothesis Testing

Accepted Answer

A p-value is the probability of observing a result at least as extreme as the sample result if the null hypothesis is true. A smaller p-value gives stronger evidence against the null.

Question 10

Correlation

Accepted Answer

Correlation measures the direction and strength of a linear relationship between two variables. It is unitless, bounded from -1 to +1, and does not by itself prove causation.

Question 11

Price Elasticity of Demand

Accepted Answer

Elasticity compares percentage change in quantity demanded with percentage change in price. Demand is more elastic when buyers have close substitutes, time to adjust, or a large budget impact.

Question 12

Perfect Competition

Accepted Answer

A perfectly competitive firm is a price taker and maximizes profit where marginal revenue equals marginal cost. In long-run equilibrium, economic profit is competed away.

Question 13

Expansionary Monetary Policy

Accepted Answer

Expansionary policy is intended to increase aggregate demand by easing financial conditions. It may lower interest rates, encourage credit creation, and weaken the currency relative to tighter policy.

Question 14

Purchasing Power Parity

Accepted Answer

Purchasing power parity links exchange-rate changes to inflation differences. A country with higher inflation is expected to see its currency depreciate over time, all else equal.

Question 15

Crowding Out

Accepted Answer

Crowding out occurs when government borrowing pushes up interest rates and reduces private investment. The effect is more likely when the economy is near capacity and capital markets are sensitive to rates.

Question 16

Accrual Accounting

Accepted Answer

Accrual accounting records revenue when earned and expenses when incurred, not necessarily when cash moves. This creates timing differences that analysts must reconcile with cash flow.

Question 17

Indirect Cash Flow from Operations

Accepted Answer

The indirect method starts with net income, adds back noncash expenses, and adjusts for working capital changes. Increases in operating assets reduce CFO; increases in operating liabilities increase CFO.

Question 18

Inventory in Rising Prices

Accepted Answer

When input prices rise, FIFO reports lower cost of goods sold and higher ending inventory than LIFO. Analysts compare methods because inventory accounting affects margins, taxes, and working capital ratios.

Question 19

DuPont ROE

Accepted Answer

DuPont analysis decomposes return on equity into profitability, efficiency, and leverage drivers. It helps identify whether ROE changed because margins, asset turnover, or financial leverage changed.

Question 20

Reporting Quality

Accepted Answer

High-quality reporting faithfully represents economic performance and is sustainable. Warning signs include aggressive revenue recognition, delayed expense recognition, unusual related-party transactions, and weak disclosure.

Question 21

Net Present Value Rule

Accepted Answer

A project with positive NPV is expected to add value because discounted future cash flows exceed the initial investment. NPV is preferred because it measures value in currency terms.

Question 22

Internal Rate of Return

Accepted Answer

IRR is the discount rate that sets project NPV to zero. It is intuitive but can mislead when projects are mutually exclusive, have unusual cash flow signs, or differ in scale.

Question 23

Weighted Average Cost of Capital

Accepted Answer

WACC blends the required returns of debt and equity using market-value weights. After-tax cost of debt is used because interest expense usually creates a tax shield.

Question 24

Working Capital Management

Accepted Answer

Working capital management balances liquidity against return. More inventory and receivables can support sales, but they also tie up cash and may signal collection or demand problems.

Question 25

Financial Leverage

Accepted Answer

Financial leverage uses fixed financing costs to magnify changes in returns to equity. It can raise expected ROE when operating returns exceed borrowing costs, but it also increases downside risk.

Question 26

Market-Capitalization Weighted Index

Accepted Answer

A market-cap weighted index gives larger companies more influence because weights are based on total market value. Rebalancing is limited, but concentration can rise when a few large stocks dominate.

Question 27

Efficient Market Forms

Accepted Answer

Weak-form efficiency reflects past market data, semi-strong reflects public information, and strong-form reflects public and private information. The stronger the form, the harder it is to earn abnormal returns from information.

Question 28

Gordon Growth Model

Accepted Answer

The Gordon model values equity as next period dividend divided by required return minus constant growth. It is most appropriate for stable dividend payers with sustainable growth below the required return.

Question 29

Price-to-Earnings Multiple

Accepted Answer

The P/E multiple compares share price with earnings per share. A high P/E may reflect growth expectations, lower risk, or overvaluation, so analysts compare it with fundamentals and peers.

Question 30

Common vs. Preferred Equity

Accepted Answer

Common stock usually carries voting rights and residual claims. Preferred stock typically has dividend and liquidation priority over common stock but often has limited voting rights.

Question 31

Bond Price and Yield Relationship

Accepted Answer

Bond prices move inversely with required yields. When market yields rise, existing fixed coupon payments become less attractive, so the bond price falls.

Question 32

Duration

Accepted Answer

Duration estimates a bond price's sensitivity to a change in yield. Higher duration means greater interest-rate risk, especially for longer maturities and lower coupon bonds.

Question 33

Convexity

Accepted Answer

Convexity captures curvature in the bond price-yield relationship. Positive convexity means price gains from falling yields are larger than price losses from equal-sized yield increases, all else equal.

Question 34

Credit Spread

Accepted Answer

A credit spread is the yield premium over a benchmark bond for credit and liquidity risk. Wider spreads generally signal higher perceived default risk or weaker market liquidity.

Question 35

Callable Bond

Accepted Answer

A callable bond lets the issuer redeem debt before maturity. The call feature benefits the issuer, so investors usually require compensation through a higher yield or lower price.

Question 36

Forward Contract

Accepted Answer

A forward contract is a private agreement to buy or sell an asset at a set price on a future date. It is customized and exposes each party to counterparty risk.

Question 37

Futures Contract

Accepted Answer

A futures contract is standardized and exchange traded, with margin and daily settlement. These features reduce counterparty risk compared with a customized forward contract.

Question 38

Call Option Payoff

Accepted Answer

A call option gives the holder the right to buy the underlying asset at the exercise price. At expiration, its payoff is positive only when the underlying price exceeds the exercise price.

Question 39

Put Option Payoff

Accepted Answer

A put option gives the holder the right to sell the underlying asset at the exercise price. At expiration, its payoff is positive only when the underlying price is below the exercise price.

Question 40

Interest Rate Swap

Accepted Answer

In a plain interest rate swap, one party pays a fixed rate and receives a floating rate, while the other does the opposite. Swaps are often used to manage interest-rate exposure.

Question 41

Hedge Funds

Accepted Answer

Hedge funds often use flexible strategies, leverage, derivatives, and short selling. They may offer diversification benefits, but investors must evaluate fees, liquidity limits, transparency, and manager risk.

Question 42

Private Equity

Accepted Answer

Private equity invests in companies outside public markets or takes public companies private. Returns depend on operational improvement, leverage, exit valuation, and timing.

Question 43

Real Estate Capitalization Rate

Accepted Answer

A capitalization rate converts expected property income into value. A lower cap rate implies a higher value for the same income stream, often reflecting lower required return or stronger growth expectations.

Question 44

Commodity Returns

Accepted Answer

Commodity exposure can come from spot price changes, collateral return, and roll yield in futures-based strategies. Storage costs, convenience yield, and curve shape affect roll yield.

Question 45

Alternative Investment Liquidity

Accepted Answer

Many alternatives are less liquid than public stocks and bonds. Limited liquidity can support a return premium, but it also raises valuation, rebalancing, and redemption risk.

Question 46

Diversification

Accepted Answer

Diversification reduces unsystematic risk by combining assets whose returns are not perfectly correlated. It cannot eliminate market-wide systematic risk.

Question 47

Risk Aversion

Accepted Answer

A risk-averse investor requires higher expected return to accept higher risk. This does not mean the investor avoids all risk; it means risk must be compensated.

Question 48

Strategic Asset Allocation

Accepted Answer

Strategic allocation sets long-term policy weights based on objectives, constraints, and capital market expectations. It is the baseline portfolio plan rather than a short-term market call.

Question 49

Tactical Asset Allocation

Accepted Answer

Tactical allocation is a deliberate short-term deviation from strategic weights to exploit perceived opportunities. It requires skill because wrong timing can add risk and costs.

Question 50

Rebalancing

Accepted Answer

Rebalancing restores portfolio weights toward policy targets after market movements. It controls unintended risk drift, though it may create transaction costs and taxes.

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