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100+ Free IAI CM2 Practice Questions

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Key Facts: IAI CM2 Exam

2

Exam Components

IAI CM2 format

CM2A

Written Paper

IAI CM2 format

CM2B

Excel Exam

IAI CM2 format

Core

Principles Subject

IAI qualification

100

Practice Questions

OpenExamPrep

IFoA-aligned

Syllabus Basis

IAI CM2 syllabus

IAI Subject CM2 mirrors the IFoA CM2 Core Principles subject for the Indian jurisdiction and is assessed in two parts: CM2A, a paper-based written exam of roughly 3 hours 15-20 minutes, and CM2B, a computer-based Excel exam of roughly 1 hour 45-50 minutes, combined into one overall mark. The syllabus spans financial-market theory, stochastic asset-liability models, derivative valuation and loss reserving, with heavy weighting on derivatives pricing and stochastic calculus. IAI sets the pass mark each diet and does not publish a fixed question count, fee, or percentage cut score; candidates should confirm current logistics on the IAI website.

Sample IAI CM2 Practice Questions

Try these sample questions to test your IAI CM2 exam readiness. Each question includes a detailed explanation. Start the interactive quiz above for the full 100+ question experience with AI tutoring.

1Under the Efficient Markets Hypothesis, which form asserts that current prices reflect all publicly available information, including past prices, financial statements, and economic news?
A.Semi-strong form
B.Weak form
C.Strong form
D.Random-walk form
Explanation: The semi-strong form states that prices fully reflect all publicly available information, so neither technical nor fundamental analysis of public data can yield consistent excess returns. The weak form covers only past price information, and the strong form adds private (insider) information.
2An empirical study finds that share prices fully and instantaneously incorporate the information in published annual reports, so no trading rule based on those reports earns abnormal returns. This evidence is most directly consistent with which form of market efficiency?
A.Weak form only
B.Semi-strong form
C.Strong form only
D.No form of efficiency
Explanation: Annual reports are publicly available information. If prices instantly impound that information so no excess returns are possible, this supports the semi-strong form. The strong form would additionally require private information to be reflected, which this study does not test.
3Which of the following is commonly cited as evidence AGAINST the Efficient Markets Hypothesis (i.e., an anomaly)?
A.Prices adjusting rapidly to earnings announcements
B.Lack of profitable insider-trading opportunities
C.The January effect and momentum in returns
D.Random fluctuation of prices around fundamental value
Explanation: Calendar effects such as the January effect, and the persistence of momentum in returns, are anomalies that appear inconsistent with strict market efficiency because they suggest predictable patterns. Rapid price adjustment and randomness are consistent with the EMH.
4Behavioural finance challenges the EMH by documenting systematic biases. 'Anchoring' refers to which tendency?
A.Overweighting recent information when forecasting
B.Holding losing investments too long to avoid realising a loss
C.Following the actions of a crowd rather than independent analysis
D.Relying too heavily on an initial reference value when making estimates
Explanation: Anchoring is the tendency to rely too heavily on an initial piece of information (an 'anchor') when forming estimates, so subsequent adjustments are insufficient. The other options describe recency bias, the disposition effect, and herding respectively.
5In an informationally efficient market under the weak form, the best forecast of tomorrow's price (ignoring drift) given today's price is:
A.Today's price
B.The long-run average price
C.Zero
D.The discounted present value of future dividends only
Explanation: Weak-form efficiency implies prices follow (approximately) a martingale, so the expected future price equals the current price after allowing for any required return/drift. Past prices contain no exploitable information about future changes.
6Over- and under-reaction of prices to news are studied as departures from efficiency. Excessive volatility in market prices relative to the volatility of fundamentals was famously highlighted by which researcher?
A.Eugene Fama
B.Robert Shiller
C.Harry Markowitz
D.Fischer Black
Explanation: Robert Shiller's work on excess volatility argued that stock prices fluctuate far more than can be justified by subsequent changes in dividends, a challenge to the EMH. Fama is associated with the EMH itself, Markowitz with portfolio theory, and Black with option pricing.
7An investor has utility function U(w) = ln(w). This investor is best described as:
A.Risk-seeking with increasing absolute risk aversion
B.Risk-neutral
C.Risk-averse with decreasing absolute risk aversion
D.Risk-averse with constant absolute risk aversion
Explanation: For U(w)=ln(w), U'(w)=1/w>0 and U''(w)=-1/w^2<0, so the investor is risk-averse. The absolute risk aversion A(w)=-U''/U'=1/w decreases as wealth rises, giving decreasing absolute risk aversion (DARA).
8The coefficient of absolute risk aversion is defined as A(w) = -U''(w)/U'(w). For the exponential utility U(w) = -e^(-aw) with a>0, the absolute risk aversion equals:
A.1/a
B.aw
C.a/w
D.a
Explanation: For U(w)=-e^(-aw), U'(w)=a e^(-aw) and U''(w)=-a^2 e^(-aw). Thus A(w)=-U''/U'=a^2 e^(-aw)/(a e^(-aw))=a, a constant. Exponential utility therefore exhibits constant absolute risk aversion (CARA).
9The certainty equivalent of a risky prospect is defined as:
A.The amount of certain wealth giving the same expected utility as the prospect
B.The expected monetary value of the prospect
C.The variance of the prospect's payoffs
D.The risk-free rate times the prospect's expected value
Explanation: The certainty equivalent (CE) is the guaranteed amount of wealth that an investor would accept in exchange for the risky prospect, i.e. U(CE)=E[U(W)]. For a risk-averse investor the CE is below the expected monetary value; the difference is the risk premium.
10An investor with utility U(w)=ln(w) and current wealth 100 is offered a fair gamble that pays +50 or -50 each with probability 0.5. Which statement is correct?
A.The investor accepts because the gamble is actuarially fair
B.The investor rejects because expected utility falls below ln(100)
C.The investor is indifferent because expected wealth is unchanged
D.The investor accepts because log utility is risk-neutral
Explanation: Expected utility = 0.5 ln(150) + 0.5 ln(50) = 0.5(5.0106) + 0.5(3.9120) = 4.4613, while ln(100)=4.6052. Since expected utility after the gamble is lower, the risk-averse log investor rejects the fair gamble.

About the IAI CM2 Exam

IAI Subject CM2 Financial Engineering and Loss Reserving is a Core Principles actuarial subject covering the efficient markets hypothesis, utility theory, portfolio theory, CAPM and APT, the term structure of interest rates, Brownian motion and Ito calculus, the binomial and Black-Scholes models, credit risk, ruin theory and run-off-triangle loss reserving.

Assessment

Two components: CM2A written paper and CM2B computer-based (Excel) exam, combined into a single overall result

Time Limit

CM2A about 3 hours 15-20 minutes plus CM2B about 1 hour 45-50 minutes

Passing Score

Pass mark is set by IAI each diet on the combined CM2A and CM2B mark; IAI does not publish a fixed percentage

Exam Fee

Subject fee set by IAI each examination diet; confirm on the IAI website (Institute of Actuaries of India (IAI))

IAI CM2 Exam Content Outline

20-25%

Theories of Financial Market Behaviour

Master the three forms of the efficient markets hypothesis, behavioural-finance biases, utility theory and risk aversion, measures of investment risk, and stochastic models of investment returns including the lognormal model.

35-40%

Asset-Pricing and Stochastic Models

Work with mean-variance portfolio theory and the efficient frontier, the single-index model, CAPM and arbitrage pricing theory, the term structure of interest rates and one-factor models, Brownian motion, Ito's lemma, martingales and the risk-neutral measure.

25-30%

Valuation of Derivatives

Value forwards and options using put-call parity, the binomial and Black-Scholes models, replication and risk-neutral (five-step) pricing, interpret the Greeks for hedging, and apply structural and reduced-form credit-risk models.

15-20%

Loss Reserving and Ruin

Analyse the classical surplus process and probability of ruin, the adjustment coefficient and Lundberg inequality, and reserve for a non-life insurer using run-off triangles, the chain-ladder, Bornhuetter-Ferguson, average-cost-per-claim and stochastic methods.

How to Pass the IAI CM2 Exam

What You Need to Know

  • Passing score: Pass mark is set by IAI each diet on the combined CM2A and CM2B mark; IAI does not publish a fixed percentage
  • Assessment: Two components: CM2A written paper and CM2B computer-based (Excel) exam, combined into a single overall result
  • Time limit: CM2A about 3 hours 15-20 minutes plus CM2B about 1 hour 45-50 minutes
  • Exam fee: Subject fee set by IAI each examination diet; confirm on the IAI website

Keys to Passing

  • Work through all 100 available questions
  • Review every answer and explanation
  • Track weak areas and revisit them
  • Use our AI tutor for tough concepts

IAI CM2 Study Tips from Top Performers

1Learn the derivation logic behind the Black-Scholes and binomial models rather than only memorising formulae, so you can adapt them to unfamiliar payoffs in the CM2A written paper.
2Practise Ito's lemma and the five-step risk-neutral method repeatedly until setting up the stochastic differential equation and changing measure becomes routine.
3Drill the Greeks in the context of hedging, not just as definitions, because the exam frequently asks how a delta- or gamma-hedged position behaves.
4Work through full run-off triangles by hand, computing chain-ladder development factors, Bornhuetter-Ferguson estimates and inflation adjustments, so the CM2B Excel tasks feel familiar.
5Build and reuse clean Excel templates for portfolio variance, option pricing and reserving so you can answer CM2B questions quickly and check your figures against your written CM2A reasoning.

Frequently Asked Questions

What is IAI Subject CM2?

CM2 Financial Engineering and Loss Reserving is a Core Principles subject of the Institute of Actuaries of India. It covers stochastic asset-liability models, the valuation of financial derivatives, credit risk and loss reserving, and mirrors the IFoA CM2 subject for the Indian jurisdiction.

How is the IAI CM2 exam structured?

CM2 has two components. CM2A is a paper-based written exam of roughly 3 hours 15-20 minutes, and CM2B is a computer-based exam (using Excel) of roughly 1 hour 45-50 minutes. The two parts are combined into a single overall mark.

What topics are tested on IAI CM2?

The syllabus covers the efficient markets hypothesis, utility theory, mean-variance portfolio theory, CAPM and APT, the term structure of interest rates, Brownian motion and Ito calculus, the binomial and Black-Scholes models, the Greeks, credit risk, ruin theory and run-off-triangle loss reserving.

What is the passing score for IAI CM2?

IAI sets the pass mark for the combined CM2A and CM2B result at each examination diet and does not publish a fixed percentage. Candidates should check the current IAI examinations guidance for the latest grading information.

How does IAI CM2 relate to the IFoA CM2 subject?

IAI's CM2 syllabus mirrors the IFoA CM2 Core Principles subject, so the core reading and learning objectives are closely aligned. The main differences are jurisdiction, examination logistics and fees, which are administered by IAI in India.

How should I prepare for IAI CM2?

Build fluency with the financial-economics theory and the derivative-pricing formulae first, then practise stochastic-calculus and reserving problems. Because CM2B is Excel-based, you should also practise spreadsheet modelling of valuations, projections and reserving triangles under timed conditions.