Equity valuation questions are where most candidates hemorrhage points, but it is rarely because they forget the formulas. The real failure point is misinterpreting the inputs, a subtle trap that turns a simple calculation into a guaranteed wrong answer.
The CFA Level I Equity Investments topic covers how to value individual stocks using various models, analyze industries, and understand market concepts like efficiency. It represents 11-14% of the exam, making it a critical component for achieving a passing score.
Key facts
- Topic Weighting
- 11-14% of the Level I exam
- Official Body
- CFA Institute
- Exam Format
- 180 multiple-choice questions (two 135-minute sessions)
- Required Study
- 300+ hours recommended for Level I
- Pass Rate (May 2024)
- 37% for Level I
- Key Skills
- Valuation (DDM, FCF, Multiples), Industry Analysis, Market Efficiency
For the May 2024 exam window, the CFA Institute reported a Level I pass rate of 37% (CFA Institute). This figure underscores the exam's difficulty and the necessity of targeted practice.
How Are These Practice Questions Designed?
This is a curated set of problems designed by CFA charterholders to simulate the real Level I exam. We've included a mix of conceptual and calculation-heavy questions that mirror what you will face on test day. For a broader diagnostic, you can try VoraPrep's free CFA practice questions covering all ten topics.
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Each question maps directly to the 2026 CFA Institute Level I curriculum for Equity Investments, testing your knowledge of:
- Market Organization and Structure
- Security Market Indexes
- Market Efficiency
- Equity Valuation: Concepts and Basic Tools
- Industry and Company Analysis
Focus on the explanations. Our objective is not just to give you the answer. It is to teach you to think like an examiner, identify the distractors, and understand precisely why the wrong choices are so tempting.
Equity Investments Practice Questions
Attempt each question before you read the explanation. Be honest about your confidence level. If you guess, make a note of it, as that indicates a knowledge gap.
Question 1: Market Indexes
An equity index is composed of three stocks. Their prices and shares outstanding are listed below:
| Stock | Price per Share | Shares Outstanding |
|---|---|---|
| A | $20 | 1,000 |
| B | $50 | 500 |
| C | $100 | 100 |
Assuming the index is price-weighted, the performance of which stock will have the greatest impact on the index value?
A price-weighted index's value is driven by the stock with the highest absolute price per share, irrespective of its market capitalization. Here, Stock C has the highest price at $100 per share.
Question 2: Market Efficiency
An analyst discovers that by trading on the public announcement of a company's quarterly earnings, she can consistently generate abnormal returns. This finding is a violation of which form of the efficient market hypothesis (EMH)?
The semi-strong form of the EMH states that all publicly available information is already incorporated into stock prices. This includes past prices, trading volume, and fundamental data like earnings announcements. The ability to profit from this public information directly contradicts the semi-strong form.
Why the others are wrong:- A (Weak form): This form only claims that past price and volume data are reflected in current prices. It does not cover public fundamental information like earnings. The analyst is using more than just historical trading data.
- C (Strong form): This form posits that all information, both public and private (insider), is reflected in prices. While the analyst's discovery also violates the strong form, the question specifically involves public information. The semi-strong form is the most precise answer. The exam demands the best answer, not just a technically correct one.
Question 3: Equity Valuation (DDM)
You are valuing a stable, mature company, Apex Manufacturing. You have gathered the following information:
- Current annual dividend (D₀): $2.00
- Constant dividend growth rate (g): 4%
- Required rate of return on equity (k): 10%
What is the intrinsic value of Apex Manufacturing's stock?
This is a direct application of the Gordon Growth Model (a constant growth Dividend Discount Model).
Step 1: Calculate the next year's dividend (D₁)
The problem provides the current dividend (D₀), not the expected dividend (D₁). This is a classic Level I trap. You must grow the current dividend by the growth rate to find D₁.D₁ = D₀ × (1 + g) D₁ = $2.00 × (1 + 0.04) D₁ = $2.08
Step 2: Apply the Gordon Growth Model formula
Now, insert D₁, k, and g into the main formula.V₀ = $2.08 ÷ (0.10 − 0.04) V₀ = $2.08 ÷ 0.06 V₀ = $34.67
Question 4: Porter's Five Forces
In an industry analysis, which of the following factors would most likely indicate a high degree of rivalry among existing competitors?
High fixed costs create intense pressure for firms to operate near full capacity to spread those costs over more units. This frequently leads to price cutting and aggressive competition for market share, which increases industry rivalry.
Why the others are wrong:- A (High industry growth rate): High growth tends to reduce rivalry. When the market is expanding, firms can grow without needing to steal market share from one another. Low growth is what intensifies competition.
- C (Significant product differentiation): Strong product differentiation, such as brand loyalty or unique features, tends to reduce rivalry. It allows firms to compete on factors other than price and creates loyal customer bases, insulating them from direct competition.
Question 5: Valuation Multiples
An analyst is comparing two companies in the same industry. Company X has a P/E ratio of 15, while Company Y has a P/E ratio of 25. Which of the following is the most plausible explanation for Company Y's higher P/E ratio, assuming all else is equal?
The justified leading P/E ratio can be derived from the Gordon Growth Model.
From this formula, you can see a direct relationship between the dividend payout ratio (1-b) and the P/E ratio. A higher payout ratio leads to a higher numerator, resulting in a higher P/E, holding k and g constant.
- A (Lower growth): A lower growth rate (g) would increase the denominator (k-g), leading to a lower P/E ratio.
- B (Higher risk): Higher risk implies a higher required rate of return (k), which also increases the denominator and results in a lower P/E ratio.
Question 6: CAPM and Required Return
An analyst needs to calculate the required rate of return (k) for a stock to use in a valuation model. She has the following data:
- Risk-free rate (Rfr): 3%
- Expected market return (Rm): 9%
- Stock's beta (β): 1.5
What is the required rate of return for this stock?
This calculation uses the Capital Asset Pricing Model (CAPM).
The term (Rm − Rfr) is the Equity Risk Premium (ERP). Getting this input right is half the battle.
Step 1: Calculate the Equity Risk Premium (ERP)
ERP = 9% − 3% = 6%Step 2: Apply the CAPM formula
k = 3% + 1.5 × (6%) k = 3% + 9% k = 12.0%- A (9.0%): This is simply the expected market return, ignoring the stock's specific risk (beta) and the risk-free rate.
- C (13.5%): This is the result of incorrectly calculating k = β × Rm (1.5 × 9%). This error omits the risk-free rate entirely and misapplies the formula.
Question 7: Free Cash Flow (FCFF)
An analyst is calculating the free cash flow to the firm (FCFF) for Sterling Corp. The company's financial statements provide the following (in millions):
- Net Income: $200
- Depreciation: $50
- Interest Expense: $40
- Tax Rate: 25%
- Investment in Fixed Capital (FCInv): $70
- Investment in Working Capital (WCInv): $20
What is Sterling Corp.'s FCFF?
Calculating FCFF from Net Income is a common, multi-step problem on the exam.
Step 1: Start with Net Income
NI = $200Step 2: Add back Non-Cash Charges (NCC)
Depreciation is the most common NCC. $200 + $50 = $250Step 3: Add back after-tax Interest Expense
Interest was deducted to get to Net Income, but it's available to both debt and equity holders, so we add it back on an after-tax basis. After-tax Interest = $40 × (1 − 0.25) = $40 × 0.75 = $30 $250 + $30 = $280Step 4: Subtract investments in capital
The firm reinvested in its operations, so this cash is not "free." Subtract FCInv: $280 − $70 = $210 Subtract WCInv: $210 − $20 = $190Final FCFF = $190 million.
Calculate Your CFA Level 1 Score & Study Hours by Domain
Adjust your practice scores across official CFA Level 1 blueprint domains to predict your pass probability and generate a domain-weighted study schedule.
How to Analyze Your Performance
Your raw score is less important than the pattern of your mistakes. Go back through the questions you missed or guessed on.
If you missed conceptual questions (like 2 or 4): This suggests you need to spend more time with the underlying theory. Don't just memorize definitions. Understand the implications of each concept. VoraPrep's textbook-grade lessons are built for this, using interactive exercises to solidify conceptual understanding instead of forcing you to watch hours of passive videos. If you missed calculation questions (like 3, 6, or 7): This points to two potential issues: not knowing the formula, or making a small mistake in applying it (like using D₀ instead of D₁ or mishandling an input like working capital).- Create a Formula Sheet: Dedicate a sheet just for Equity. Write out the formulas by hand.
- Drill Specific Problem Types: Use a high-quality question bank to isolate these calculation types. VoraPrep's adaptive learning engine is perfect for this. It identifies that you're weak on FCFF calculations and serves you more of those questions until you master them.
A score of 5 out of 7 or better is a good sign. Below that, you should consider Equity a priority. To see how your performance might translate to an exam score, review this analysis of CFA Level I Pass Rates (2026 Historical Benchmark Data).
Get More CFA Level I Practice on VoraPrep
A few sample questions are a great start, but they are not enough to prepare for a 180-question exam. To pass, you need volume, variety, and intelligent feedback.
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