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100+ Free IFoA CM2 Practice Questions

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2026 Statistics

Key Facts: IFoA CM2 Exam

70:30

Paper A to B Weighting

IFoA CM2 guide

3h 20m

Paper A Time

IFoA curriculum

1h 50m

Paper B Time

IFoA curriculum

200 hrs

Recommended Study

IFoA curriculum

5

Core Syllabus Areas

IFoA CM2 syllabus

Core Principles

Exam Stage

IFoA qualification

CM2 is a Core Principles actuarial subject assessed by two computer-based elements sat together: Paper A is a Word-based theory exam carrying 70% and Paper B is an Excel-based applied exam carrying 30%. Marks are aggregated with the Chief Examiner setting the pass mark each session at roughly the 50% level. The current IFoA syllabus weights theories of financial market behaviour and measures of investment risk at about 15% each, asset and stochastic pricing at around 30%, option theory at 20%, and liability valuations including ruin theory and run-off triangles at 20%. The IFoA recommends about 200 study hours, and CM2 may be sat remotely.

Sample IFoA CM2 Practice Questions

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

1An investor's utility function is U(w) = ln(w). What does this functional form imply about the investor's attitude to risk?
A.Risk-averse with decreasing absolute risk aversion
B.Risk-seeking, because U is increasing
C.Risk-neutral, because the function is monotonic
D.Risk-averse with increasing absolute risk aversion
Explanation: For U(w)=ln(w), U'(w)=1/w>0 (non-satiation) and U''(w)=-1/w^2<0 (risk aversion). The coefficient of absolute risk aversion A(w)=-U''/U'=1/w decreases as wealth rises, so the investor exhibits decreasing absolute risk aversion (DARA).
2An investor prefers more to less and is risk-averse. Which form of stochastic dominance is the WEAKEST condition guaranteeing that all such investors prefer investment X to investment Y?
A.First-order stochastic dominance
B.Second-order stochastic dominance
C.Third-order stochastic dominance
D.Mean-variance dominance
Explanation: Second-order stochastic dominance (SSD) applies to all investors who are non-satiated AND risk-averse (concave utility). It is a weaker condition than first-order dominance, which only requires non-satiation, so SSD is the relevant criterion when risk aversion is assumed.
3Under expected utility theory, the certainty equivalent of a risky gamble for a risk-averse investor is:
A.Equal to the expected monetary value of the gamble
B.Greater than the expected monetary value of the gamble
C.Less than the expected monetary value of the gamble
D.Independent of the investor's utility function
Explanation: The certainty equivalent is the certain amount giving the same utility as the gamble. For a risk-averse (concave utility) investor, this is strictly less than the expected monetary value; the difference is the risk premium the investor would pay to avoid the risk.
4A quadratic utility function U(w) = w - bw^2 (b>0) is sometimes criticised as a model of investor behaviour because it implies:
A.Decreasing absolute risk aversion
B.Constant relative risk aversion
C.Risk-neutral behaviour at all wealth levels
D.Increasing absolute risk aversion and eventual satiation
Explanation: For quadratic utility, A(w)=2b/(1-2bw) increases with wealth (increasing absolute risk aversion), which is unrealistic. It also implies U'(w)=1-2bw becomes negative for w>1/(2b), so utility decreases beyond a satiation point.
5The St. Petersburg paradox is most directly resolved by recognising that investors maximise:
A.Expected utility of wealth
B.Expected monetary value
C.The probability of a gain
D.Median wealth
Explanation: The St. Petersburg gamble has infinite expected monetary value yet people will pay only a small amount to play it. Bernoulli resolved this by proposing that investors maximise expected utility (e.g. log utility), which is finite, rather than expected money.
6In behavioural finance, the tendency of investors to hold on to losing investments too long and sell winners too soon is known as:
A.Anchoring
B.The disposition effect
C.Framing
D.Overconfidence
Explanation: The disposition effect describes the reluctance to realise losses and the eagerness to realise gains, consistent with prospect theory's risk-seeking in the loss domain and risk aversion in the gain domain.
7According to prospect theory, the value function is:
A.Concave everywhere and symmetric about the reference point
B.Defined over absolute wealth levels, not changes
C.Concave for gains, convex for losses, and steeper for losses than gains
D.Linear, reflecting risk neutrality
Explanation: Kahneman and Tversky's value function is defined over gains and losses relative to a reference point. It is concave for gains (risk aversion), convex for losses (risk seeking), and steeper for losses, capturing loss aversion.
8Which statement best describes the semi-strong form of the Efficient Markets Hypothesis (EMH)?
A.Prices reflect only past price and volume information
B.Prices reflect all information, public and private
C.Prices systematically misprice securities exploitable by chartists
D.Prices reflect all publicly available information
Explanation: Semi-strong form efficiency states that security prices fully and instantaneously reflect all publicly available information, so fundamental analysis of public data cannot consistently generate abnormal returns.
9Empirical evidence that share prices show a tendency to overreact to news and then partially reverse is most often cited as evidence:
A.Against the EMH, as a market anomaly
B.Supporting strong-form efficiency
C.That markets are weak-form efficient
D.That arbitrage is always riskless
Explanation: Overreaction followed by reversal is a documented anomaly that appears inconsistent with the EMH, since past information (the overreaction) would predict future returns. Such anomalies are central to the empirical debate over market efficiency.
10A practical difficulty in empirically testing the EMH is the joint hypothesis problem, which arises because:
A.Market data is never available
B.Tests of efficiency require an assumed asset-pricing model, so a rejection may reflect the wrong model
C.Transaction costs are always zero
D.Efficiency can only be tested in the strong form
Explanation: Any test of abnormal returns requires a model of expected (normal) returns. A test therefore jointly examines efficiency AND the pricing model, so a rejection could mean either the market is inefficient or the assumed model is misspecified.

About the IFoA CM2 Exam

IFoA Subject CM2 (Financial Engineering and Loss Reserving) tests stochastic asset-liability modelling, financial economics, option pricing, the term structure of interest rates, credit risk, ruin theory, and non-life loss-reserving methods used in actuarial practice.

Assessment

Paper A (Word-based theory, 70%) and Paper B (Excel-based applied, 30%) sat in the same session

Time Limit

Paper A: 3 hours 20 minutes; Paper B: 1 hour 50 minutes

Passing Score

50% aggregate; Chief Examiner sets the pass mark each session using a 70:30 Paper A to Paper B weighting

Exam Fee

Set by the IFoA fee schedule; varies by booking window (see official site) (Institute and Faculty of Actuaries (IFoA))

IFoA CM2 Exam Content Outline

15%

Theories of Financial Market Behaviour

Apply utility theory, risk aversion measures, stochastic dominance, behavioural finance, and the three forms of the efficient markets hypothesis to investor decision-making.

15%

Measures of Investment Risk

Use variance, semi-variance, shortfall probability, Value at Risk, Expected Shortfall, and the axioms of coherent risk measures to quantify investment risk.

30%

Asset Pricing and Stochastic Models

Build mean-variance portfolios, apply the CAPM and multi-factor models, and model security prices with Brownian motion, Ito's lemma, and the lognormal framework.

20%

Option Theory

Price options with the binomial and Black-Scholes models, interpret the Greeks, construct replicating and delta-hedged portfolios, and apply risk-neutral valuation.

20%

Liability Valuations and Loss Reserving

Model the term structure of interest rates, value credit risk, apply ruin theory, and reserve for non-life claims using run-off triangles, chain ladder, and Bornhuetter-Ferguson.

How to Pass the IFoA CM2 Exam

What You Need to Know

  • Passing score: 50% aggregate; Chief Examiner sets the pass mark each session using a 70:30 Paper A to Paper B weighting
  • Assessment: Paper A (Word-based theory, 70%) and Paper B (Excel-based applied, 30%) sat in the same session
  • Time limit: Paper A: 3 hours 20 minutes; Paper B: 1 hour 50 minutes
  • Exam fee: Set by the IFoA fee schedule; varies by booking window (see official site)

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

IFoA CM2 Study Tips from Top Performers

1Treat the financial-economics theory (utility, stochastic dominance, EMH, risk measures) as quick-win marks; learn the definitions and key inequalities precisely so Paper A bookwork is automatic.
2Drill Ito's lemma and the lognormal model until you can derive the drift of the log-price and apply risk-neutral valuation without hesitation, as these underpin most option questions.
3Practise both the binomial replicating-portfolio method and the Black-Scholes formula, and be fluent with the Greeks (delta, gamma, vega, theta, rho) and what each one hedges.
4For loss reserving, work full chain ladder and Bornhuetter-Ferguson triangles by hand and in Excel so Paper B's data-analysis tasks are mechanical under time pressure.
5Rehearse Paper B in Excel using past data-analysis questions; speed and clean spreadsheet structure matter as much as the underlying actuarial method.

Frequently Asked Questions

How is the IFoA CM2 exam structured?

CM2 has two computer-based elements sat in the same session: Paper A is a Word-based theory exam worth 70% and Paper B is an Excel-based applied exam worth 30%. There is no single multiple-choice paper.

How long is the CM2 exam?

Paper A lasts 3 hours 20 minutes and Paper B lasts 1 hour 50 minutes. Both must be completed in the same examination sitting.

What is the pass mark for CM2?

Marks from Paper A and Paper B are aggregated using a 70:30 weighting, and the Chief Examiner sets the pass mark for each session at around the 50% level. There is no separate pass mark for each paper.

Which topics carry the most weight in CM2?

Asset pricing and stochastic models carry the largest indicative weight at about 30%, followed by option theory and liability valuations (including ruin theory and run-off triangles) at around 20% each.

Does this practice bank match the real CM2 format?

The real CM2 is written and computational, not multiple choice. This bank provides 100 MCQs as knowledge-prep to reinforce CM2 terminology, formulas, and concepts before tackling full written and Excel-based questions.

How much study time does CM2 require?

The IFoA recommends approximately 200 study hours for CM2, typically spread over several months alongside work or other study commitments.