Free CFA Level II Quantitative Methods Practice Questions

Quantitative methods on the CFA Level II exam cover multiple regression analysis, time-series modeling, machine learning basics, and simulation techniques applied to investment analysis. Weighted 5-10% (CFA Institute).

142 Questions

55 Easy

54 Medium

33 Hard

2026 Syllabus

Sample Questions

Question 1 Easy

An error correction model (ECM) is appropriate when:

Solution

A is correct.

An error correction model is used when variables are cointegrated — they share a long-run equilibrium relationship despite being individually non-stationary. The ECM includes both first-differenced terms (capturing short-run dynamics) and an error correction term (capturing the speed of adjustment back to the long-run equilibrium). This allows the model to incorporate both short-term fluctuations and long-run relationships.

Question 2 Medium

Based on Exhibit 14, the negative coefficient on Tracking Error implies that:

Solution

A is correct.

The negative coefficient on Tracking Error (-0.2) means that as tracking error increases by one percentage point, the log-odds of outperformance decrease by 0.2, holding alpha and AUM growth constant. Since the logistic function is monotonically increasing in log-odds, lower log-odds correspond to a lower probability of outperformance. This suggests that funds with more volatile returns relative to their benchmark are less likely to outperform.

Question 3 Hard

Based on Exhibit 1, the

R^2

and adjusted

R^2

for Reeves's model are closest to:

Solution

B is correct.

R^2 = \frac{RSS}{SST} = \frac{5{,}625}{11{,}625} = 0.4839 \approx 0.484

Adjusted

R^2 = 1 - \frac{(1 - R^2)(n-1)}{n - k - 1} = 1 - \frac{(1 - 0.4839)(63)}{60} = 1 - \frac{0.5161 \times 63}{60} = 1 - \frac{32.51}{60} = 1 - 0.5419 = 0.458

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