The CFA Level III exam is the last in the series of three exams conducted by the CFA Institute. Coupled with at least 48 months of relevant work experience, successful completion of the final level yields a charter membership. While the first two levels revolved around basic financial knowledge, investment valuation comprehension and the application of both, the CFA Level III exam focuses on portfolio management and wealth planning.
The format of the exam, which is only offered in June, is a mix of item set questions (similar to Level II) and essay type questions. Like the other exams, the Level III exam is also conducted in two parts - the morning and afternoon session. In the morning session, there are 10 to 15 essay type questions. Each question consists of multiple parts such as A, B, C, etc., which help you organize your answer in a template. These questions may provide you with a situation and ask you to develop your own recommendation or solution. In the afternoon session, there will be 10 item sets. Each item set consists of a case statement followed by six multiple-choice questions. The exam is graded for 360 points, which corresponds to one point per minute.
As mentioned earlier, the focus of the exam is on portfolio management and wealth planning, but it also covers seven topics that are grouped into two other areas, namely, Ethical and Professional Standards and Asset Classes. The following table provides weighting of these topics and broad areas for the exam:
|Topic Area||Level III|
|Ethical and Professional Standards (total)||10|
|Investment Tools (total)||0|
|Financial Reporting and Analysis||0|
|Asset Classes (total)||35-45|
|Portfolio Management and Wealth Planning (total)||45-55|
As is evident from the table, the Ethics and Professional Standards gets as much importance as in the other levels of the exam. The investment tools are not tested separately, except economics, which is a part of the portfolio management and wealth planning section for level III. The majority of the exam revolves around portfolio management and asset classes in the portfolio context.
In level III, standards primarily consist of the Code of Ethics and Global Investment Performance Standards (GIPS). Standards account for 10% (i.e., 36) of the 360 possible points. The Code of Ethics section will most likely be an item set in the afternoon session. However, GIPS could be tested either as an essay question in the morning session or as an item set in the afternoon session.
The exam tests your knowledge on all of the major asset classes, including alternative investments, derivatives, equity investments and fixed-income investments. However, the focus is now on the portfolio management aspects of these investments. For example, a whole session is dedicated to the management of active and passive fixed-income portfolios, covering investment objectives, benchmarking, return analysis, portfolio immunization strategies, relative value analysis and so on. The syllabus also covers strategies used in international and emerging markets and how derivatives are used to manage interest rate and credit risks in fixed-income portfolios.
The second asset class is equity securities, which are an essential component of most investment portfolios and crucial for the portfolio's success. The discussion here surrounds equity investment strategies, evaluation of equity fund managers and equity indexes. The syllabus also discusses the corporate governance issues related to conflicts between managers and shareholders that erode value and have a direct impact on equity portfolio managers. Finally, there is discussion on measuring and managing portfolios in international and emerging markets.
The section on alternative investments primarily discusses the alternative investment classes and how derivative instruments such as swaps, futures and forwards are used to manage some alternative investments.
Portfolio Management and Wealth Planning
This comprises the largest portion of the exam and will account for at least 180 points out of the 360 possible points. Portfolio management concepts will dominate both the morning and afternoon sessions. The syllabus is very comprehensive and introduces new concepts such as behavioral finance, which forms the basis for financial decision making. Risk management concepts, covering tools and techniques for measuring and managing risk are also discussed. Apart from these, you are likely to be tested on questions related to individual and institutional wealth.
The number of concepts that can be tested are limited but are important. One such important concept is the Investment Policy Statement and its components, which is highly testable. Economics, which was a part of the investment tools in level I and II, is included under portfolio management in the exam. Other important concepts are managing portfolios of institutional investors, asset allocation, risk management applications and evaluating portfolio performance.
Within the portfolio management section, the CFA Institute provides no hints about which topics are more important. However, it does make available essay questions from previous years, which can be very useful for practicing and developing your exam strategy.
The Bottom Line
The Level III exam is considerably one of the tougher exams for the CFA, as many of the questions are posed in essay format. The key to success is to practice as many essay type questions as possible and master topics specifically related to portfolio management, which is at the heart of this exam.
Answer section A, one (1) question from section B, and one (1) question from section C. Section A is worth only 10% of the available points, so do not spend too long on it. Sections B and C are each worth 45%.
SECTION A: MULTIPLE CHOICE
In the blue book write the question number and the letter that you think corresponds to the right answer. For example, if you think C is the correct answer to question 4, write 4C.
(1) Simon de Montfort: (A) led a group of rebellious barons against Henry III; (B) deposed Richard II and made himself king; (C) wrote a treatise on the workings of the Exchequer; (D) founded the Lollards.
(2) The 1381 Peasants' Revolt was led by: (A) John Wycliffe; (B) Wat Tyler; (C) Henry of Bolingbroke; (D) Geoffrey Chaucer.
(3) George Villiers, Duke of Buckingham, was: (A) one of the Lords Appellant who criticized Richard II's government in the 1380s; (B) Henry VIII's illegitimate son; (C) a favorite of James I and Charles I; (D) one of the generals of the Parliamentary army during the Civil War.
(4) Ship Money was: (A) duties on exports and imports collected by James I and Charles; (B) cash seized from the Spanish treasure fleet by Sir Francis Drake; (C) money donated by the East India Company to equip Cromwell's navy; (D) an unparliamentary levy collected by Charles I to supply his navy.
(5) The Humble Petition and Advice was: (A) a constitutional document drawn up by Parliament in 1657, and offering Cromwell the crown; (B) a document condemning monopolies and passed by the House of Commons in Elizabeth's last Parliament; (C) a document which condemned many of Charles I's policies, and which was narrowly approved by the House of Commons in 1641 after heated debate; (D) a Parliamentary ordinance of 1645 which reformed the army and put Cromwell in charge of it.
SECTION B: CUMULATIVE ESSAY
Answer one (1) of the following three questions:
(1) The kings and queens of England often had financial problems. How did royal financial difficulties, and the monarchs' efforts to solve them, affect the development of church, state and society in England between 1066 and 1660?
(2) In what ways and for what reasons did the functions and powers of Parliament change between the reigns of Henry III and Charles I?
(3)All medieval kings faced problems from ambitious and unruly barons. How, and how successfully, did these three cope with those problems: Henry III, Henry V, and Henry VII?
SECTION C: NON-CUMULATIVE ESSAY
Answer one (1) of the following three questions:
(1) James I used to be seen as a lazy, foolish and unsuccessful king. More recently, however, he has come to be regarded as quite an effective ruler. Which view do you think is right and why?
(2) What caused the English Civil War? Was it the inevitable result of long-term social, economic, or political developments, or was it simply the consequence of Charles I's stupidity and incompetence?
(3) What problems did the Rump Parliament and Oliver Cromwell face in the years between 1649 and 1660, how did they attempt to overcome them, and how successful were they?
1A; 2B; 3C: 4D; 5A