That's the way my daughter's school does it. All the kids are tested and placed by their ability. A 2nd grader could be in 4th grade reading and 2nd grade math. Or a 7th grader may be in 7 grade math, 6th grade reading and 5th grade spelling. It all depends on their abilities.
Most kids test at grade level, but some are behind and some ahead in different areas. They shouldn't be overwhelmed or bored by the work. We do group by age somewhat. A kid would not normally be in a class where the majority of kids are 3 grades ahead or 3 grades behind. The behavior differences are just too great.
Wow, Sounds great. What state or city is this taking place?
What kind of school does your daughter attend and where (state)?
I know there were tracking programs in most Florida high schools, but they are rare below middle school in Florida.