Preparing for the CFA Level 1 Equity Investments exam section requires mastering core topics like market efficiency, portfolio management, valuation ratios, and behavioral finance. This post covers 50+ high-quality CFA practice questions (Q71–100) with correct answers and detailed explanations. These questions are designed to reflect the real CFA exam style, making them highly valuable for candidates worldwide.
Whether you are preparing in the USA, UK, Canada, Australia, or Europe, this resource ensures you strengthen your concepts, test your knowledge, and gain confidence for exam success.
📘 CFA Level 1 – Equity Investments MCQs (Part 2: Q51–100)
Q51.
Which of the following is most likely a characteristic of growth stocks?
A. High dividend payouts
B. Low P/E ratios
C. High reinvestment and low dividends
D. Low volatility
Correct Answer: C
Explanation: Growth stocks reinvest earnings for expansion rather than paying dividends, usually with higher P/E ratios.
Q52.
Which equity valuation model is most appropriate when dividends are not paid?
A. Gordon Growth Model
B. Free Cash Flow Model
C. Dividend Discount Model
D. Residual Income Model
Correct Answer: B
Explanation: Free Cash Flow models are useful when dividends are irregular or absent, especially for growth firms.
Q53.
An index that weights stocks equally gives more influence to:
A. Large-cap companies
B. Small-cap companies
C. Dividend-paying companies
D. International firms
Correct Answer: B
Explanation: Equal-weight indices assign the same weight to all stocks, so smaller companies have greater influence compared to cap-weighted indices.
Q54.
Which of the following is a contrarian strategy?
A. Buying stocks after strong positive momentum
B. Buying undervalued stocks in declining markets
C. Selling short during market corrections
D. Following analyst consensus
Correct Answer: B
Explanation: Contrarian investors buy undervalued or out-of-favor stocks and sell when others are overly optimistic.
Q55.
The residual income model values a company based on:
A. Excess returns above required equity returns
B. Total dividends paid
C. Net asset value
D. Sales per share
Correct Answer: A
Explanation: Residual income = Net income – (Equity charge). It measures value created beyond the cost of equity capital.
Q56.
Which of the following markets is considered the most liquid?
A. Real estate market
B. U.S. Treasury securities market
C. Corporate bond market
D. Venture capital
Correct Answer: B
Explanation: U.S. Treasury securities are highly liquid due to depth, transparency, and large trading volume.
Q57.
Which of the following is a limitation of the P/B ratio?
A. Book value is stable compared to earnings
B. Book value may not reflect intangible assets
C. It works well for financial firms
D. It is less volatile than P/E
Correct Answer: B
Explanation: P/B ratios ignore intangible assets (brand value, intellectual property), which can distort valuation.
Q58.
Which of the following is a leading indicator for equity prices?
A. Corporate bond yields
B. GDP growth rate
C. Unemployment rate
D. Past stock prices
Correct Answer: A
Explanation: Corporate bond yields often anticipate equity market movements since credit conditions affect equity valuations.
Q59.
A price-weighted index will be biased toward companies with:
A. Higher stock prices
B. Higher dividends
C. Larger market capitalization
D. Lower volatility
Correct Answer: A
Explanation: Price-weighted indices (e.g., Dow Jones Industrial Average) give more influence to high-priced stocks regardless of company size.
Q60.
Which of the following is an example of a cyclical stock?
A. Food and beverages
B. Airlines
C. Healthcare
D. Utilities
Correct Answer: B
Explanation: Airlines, automobiles, and luxury goods are cyclical industries, highly sensitive to economic cycles.
Q61.
The Efficient Market Hypothesis (EMH) suggests that:
A. All investors can earn abnormal returns
B. Technical analysis is consistently profitable
C. Prices fully reflect all available information
D. Prices are always perfectly predictable
Correct Answer: C
Explanation: EMH argues that security prices quickly incorporate all available information, making consistent abnormal returns unlikely.
Q62.
Which of the following portfolio strategies is passive?
A. Index investing
B. Sector rotation
C. Momentum investing
D. Event-driven strategies
Correct Answer: A
Explanation: Passive strategies, such as index investing, replicate market performance rather than trying to beat it.
Q63.
What does a beta of 1.5 imply?
A. The stock is less volatile than the market
B. The stock moves independently of the market
C. The stock is 50% more volatile than the market
D. The stock has no systematic risk
Correct Answer: C
Explanation: A beta of 1.5 means the stock tends to amplify market movements by 50% in both directions.
Q64.
Which of the following is a disadvantage of technical analysis?
A. It captures investor psychology
B. It may not work in efficient markets
C. It provides short-term trading signals
D. It is based on chart patterns
Correct Answer: B
Explanation: In efficient markets, technical analysis is limited since prices already reflect all known information.
Q65.
Which of the following valuation ratios is least useful for companies with negative earnings?
A. P/E ratio
B. P/S ratio
C. P/B ratio
D. EV/EBITDA
Correct Answer: A
Explanation: P/E ratios are meaningless when earnings are negative; alternative ratios like P/S or EV/EBITDA are better.
Q66.
What is the Treynor ratio used for?
A. Risk-adjusted return using standard deviation
B. Systematic risk-adjusted return using beta
C. Measuring unsystematic risk
D. Measuring liquidity premium
Correct Answer: B
Explanation: Treynor ratio = (Portfolio return – Risk-free rate) ÷ Beta. It uses systematic risk instead of total risk.
Q67.
Which of the following equity indices is value-weighted?
A. Dow Jones Industrial Average
B. Nikkei 225
C. S&P 500
D. FTSE Equal Weight Index
Correct Answer: C
Explanation: The S&P 500 is market-cap (value) weighted, unlike DJIA (price-weighted).
Q68.
If an investor believes markets are weak-form efficient, which strategy is least likely to succeed?
A. Using insider information
B. Using fundamental analysis
C. Using technical analysis
D. Using industry reports
Correct Answer: C
Explanation: Weak-form efficiency assumes past price data is already reflected in stock prices, so technical analysis is ineffective.
Q69.
Which of the following is most likely an arbitrage opportunity?
A. Buying undervalued stock and holding long term
B. Buying stock in one market and selling it at a higher price in another
C. Following analyst recommendations
D. Rotating sectors based on macroeconomic trends
Correct Answer: B
Explanation: Arbitrage involves exploiting price discrepancies between markets for the same asset.
Q70.
A price-to-cash flow (P/CF) ratio is more reliable than P/E when:
A. The company has high depreciation
B. The company has strong dividend payouts
C. The company is highly profitable
D. The company has low leverage
Correct Answer: A
Explanation: Cash flow is less affected by accounting distortions (e.g., depreciation), making P/CF more reliable than P/E.
Q71.
Which type of market efficiency assumes that all public information is reflected in stock prices?
A. Weak-form
B. Semi-strong form
C. Strong form
D. Random walk
Correct Answer: B
Explanation: Semi-strong form efficiency states that all publicly available information (e.g., financial statements, news) is already priced in.
Q72.
Which of the following is most likely a value stock characteristic?
A. High P/E ratio
B. Low price-to-book ratio
C. High growth expectations
D. High reinvestment of earnings
Correct Answer: B
Explanation: Value stocks trade at low P/B and P/E ratios, often considered undervalued compared to fundamentals.
Q73.
A closed-end fund differs from an open-end fund in that it:
A. Always trades at NAV
B. Can trade at a premium or discount to NAV
C. Issues and redeems shares daily
D. Invests only in bonds
Correct Answer: B
Explanation: Closed-end funds trade on exchanges, often at a premium or discount relative to NAV.
Q74.
Which of the following is an example of a leading economic indicator for equity markets?
A. Inflation rate
B. Consumer confidence index
C. GDP growth
D. Unemployment rate
Correct Answer: B
Explanation: Consumer confidence reflects future consumption patterns, making it a leading indicator for equity performance.
Q75.
Which equity market anomaly suggests that small-cap stocks outperform large-cap stocks?
A. January effect
B. Size effect
C. Value effect
D. Weekend effect
Correct Answer: B
Explanation: The size effect suggests that smaller companies tend to outperform larger firms over the long run.
Q76.
The Sharpe ratio uses which measure of risk?
A. Standard deviation
B. Beta
C. Value at Risk
D. Alpha
Correct Answer: A
Explanation: The Sharpe ratio = (Portfolio return – Risk-free rate) ÷ Standard deviation. It uses total risk, unlike Treynor ratio (beta).
Q77.
What does a PEG ratio < 1 suggest?
A. The stock is overvalued
B. The stock is fairly valued
C. The stock is undervalued relative to growth
D. The stock has negative earnings
Correct Answer: C
Explanation: PEG ratio = P/E ÷ Growth rate. A PEG < 1 often suggests undervaluation relative to expected growth.
Q78.
Which of the following is a limitation of the Dividend Discount Model (DDM)?
A. It accounts for growth
B. It can be applied to all firms
C. It assumes constant growth
D. It is based on free cash flows
Correct Answer: C
Explanation: The Gordon DDM assumes a constant growth rate, which may not reflect real-world conditions.
Q79.
Which of the following best describes a momentum strategy?
A. Buying undervalued stocks
B. Buying stocks with recent strong performance
C. Holding undervalued stocks long term
D. Selling stocks based on fundamentals
Correct Answer: B
Explanation: Momentum investors buy stocks with upward price momentum, betting that the trend will continue.
Q80.
Which of the following is a limitation of equal-weighted indices?
A. They overrepresent large firms
B. They underrepresent small firms
C. They require frequent rebalancing
D. They are biased toward value stocks
Correct Answer: C
Explanation: Equal-weighted indices must be rebalanced frequently to maintain equal weights, increasing costs.
Q81.
Which of the following is a sector rotation strategy?
A. Shifting investments between industries depending on the business cycle
B. Buying undervalued stocks and holding long term
C. Selling high P/E stocks and buying low P/E stocks
D. Following analyst recommendations
Correct Answer: A
Explanation: Sector rotation involves moving investments into industries expected to outperform at different economic stages.
Q82.
Which of the following is an advantage of the P/S (Price-to-Sales) ratio?
A. Sales are less subject to manipulation
B. It works only for dividend-paying firms
C. It ignores market expectations
D. It focuses on book value
Correct Answer: A
Explanation: Sales are harder to manipulate compared to earnings, making P/S useful when earnings are negative.
Q83.
Which of the following is a limitation of technical indicators?
A. They capture market psychology
B. They may generate false signals in efficient markets
C. They can identify trends
D. They can confirm patterns
Correct Answer: B
Explanation: Technical indicators are unreliable in efficient markets since prices already reflect available information.
Q84.
If a stock has an alpha of +2%, what does it imply?
A. The stock underperformed the market by 2%
B. The stock outperformed the market by 2%
C. The stock has higher risk than the market
D. The stock has negative growth
Correct Answer: B
Explanation: Alpha represents excess return over the market. A +2% alpha means outperformance.
Q85.
Which of the following is a passive investment strategy?
A. Indexing
B. Arbitrage
C. Momentum trading
D. Sector rotation
Correct Answer: A
Explanation: Indexing aims to replicate market returns instead of beating them, making it passive.
Q86.
Which of the following best describes the random walk hypothesis?
A. Stock prices move in predictable patterns.
B. Stock prices follow historical averages.
C. Stock prices reflect all information and move randomly.
D. Stock prices revert to their mean value.
Correct Answer: C
Explanation: Random walk theory suggests that price changes are independent of past movements, making them unpredictable.
Q87.
Which type of index gives the greatest weight to large-cap companies?
A. Equal-weighted index
B. Price-weighted index
C. Market-cap weighted index
D. Fundamental-weighted index
Correct Answer: C
Explanation: Market-cap weighted indices (e.g., S&P 500) assign weights based on company size, giving larger firms more influence.
Q88.
A stock has a beta of 1.5. If the market return increases by 10%, what is the expected stock return (ignoring alpha)?
A. 10%
B. 12%
C. 15%
D. 20%
Correct Answer: C
Explanation: Expected return = Beta × Market return = 1.5 × 10% = 15%.
Q89.
Which of the following best describes the January effect?
A. Small-cap stocks outperform in January.
B. Investors sell losing stocks in January.
C. Large-cap stocks outperform in January.
D. Dividends are higher in January.
Correct Answer: A
Explanation: The January effect refers to small-cap stocks’ tendency to outperform early in the year due to tax-loss harvesting and reinvestment.
Q90.
If the dividend payout ratio decreases, while earnings remain constant, the sustainable growth rate will:
A. Increase
B. Decrease
C. Stay the same
D. Turn negative
Correct Answer: A
Explanation: Lower payout means higher retention ratio → more reinvested earnings → higher sustainable growth.
Q91.
The Treynor ratio differs from the Sharpe ratio because it uses:
A. Alpha instead of standard deviation
B. Beta instead of standard deviation
C. Variance instead of beta
D. Systematic + unsystematic risk
Correct Answer: B
Explanation: Treynor = (Portfolio return – Risk-free rate) ÷ Beta. It uses systematic risk, unlike Sharpe which uses total risk.
Q92.
Which valuation method is best suited for high-growth companies with no dividends?
A. Gordon Growth Model
B. P/E ratio
C. Free Cash Flow (FCF) model
D. P/B ratio
Correct Answer: C
Explanation: The FCF model works for firms not paying dividends but generating cash flow.
Q93.
A high turnover ratio in mutual funds usually leads to:
A. Higher tax efficiency
B. Lower transaction costs
C. Higher transaction costs and taxes
D. Better long-term performance
Correct Answer: C
Explanation: High turnover increases costs and reduces tax efficiency.
Q94.
Which of the following best describes an ETF compared to a mutual fund?
A. ETFs are actively managed.
B. ETFs trade throughout the day like stocks.
C. ETFs cannot be shorted.
D. ETFs always trade at NAV.
Correct Answer: B
Explanation: ETFs trade intraday on exchanges, unlike mutual funds that trade only at end-of-day NAV.
Q95.
Which of the following is an example of a behavioral finance bias?
A. Efficient market hypothesis
B. Overconfidence bias
C. Random walk theory
D. Capital Asset Pricing Model
Correct Answer: B
Explanation: Overconfidence is a behavioral bias where investors overestimate their knowledge/ability.
Q96.
Which of the following is a limitation of the P/E ratio?
A. It is easy to use.
B. It applies only to loss-making firms.
C. Earnings can be manipulated.
D. It incorporates growth expectations.
Correct Answer: C
Explanation: Earnings can be distorted by accounting practices, making P/E unreliable at times.
Q97.
If an investor buys undervalued stocks expecting them to converge to fair value, they are using:
A. Growth strategy
B. Value investing strategy
C. Momentum strategy
D. Arbitrage strategy
Correct Answer: B
Explanation: Value investors buy undervalued stocks and wait for the market to recognize their true worth.
Q98.
Which of the following is a limitation of fundamental analysis?
A. It incorporates company financials.
B. It requires assumptions about the future.
C. It is based on intrinsic value.
D. It helps identify undervalued stocks.
Correct Answer: B
Explanation: Fundamental analysis depends on forecasts, which can be uncertain or inaccurate.
Q99.
Which factor is most likely to increase a stock’s required return under CAPM?
A. Lower beta
B. Higher risk-free rate
C. Lower market return
D. Reduced systematic risk
Correct Answer: B
Explanation: A higher risk-free rate increases the required return under CAPM.
Q100.
Which of the following best describes arbitrage pricing theory (APT)?
A. Stock prices are influenced only by market risk.
B. Multiple factors influence asset returns.
C. Stock prices follow a random walk.
D. Stock returns are unpredictable.
Correct Answer: B
Explanation: APT considers multiple macroeconomic factors (inflation, interest rates, GDP growth) affecting returns, unlike CAPM’s single-factor model.
- CFA Level 1 Equity Investments Part 1 (Q1–50)
- CFA Level 1 Ethics
- CFA Level 1 Quantitative Methods
- CFA Level 1 Financial Reporting & Analysis
- CFA Level 1 Economics MCQs
- CFA Level 1 Corporate Finance MCQs
You’ve now completed CFA Level 1 Equity Investments Part 2 (Q71–100). Each question is crafted to match the CFA Institute’s exam rigor and ensure you practice effectively.
👉 Next, continue your journey with Equity Investments Part 3 (Q101–150) for more advanced practice.
If you found this resource helpful, share it with fellow CFA aspirants and bookmark it for revision. Stay consistent, and success on exam day will follow! 🚀