I’ve written a general post on my views on how to approach L3 but I thought I would write one expanding on how to tackle essay questions since nobody seemed to be able to guide me on this when I was starting on L3.
The AM session is “constructed responses” meaning that you have to write out an answer. You will be given 8-15 questions which all come with many sub parts. Each sub part will have a number of minutes associated with it which correspond to the number of minutes (180) in the morning session and these in turn correspond to the number of points available. So an 18 minute question would be worth 18 pts = 10% of your AM points = 5% of your overall exam.
Location, location, location
You will have to write your response in either a space provided below the question or, frustratingly, on lined pages at the end of the question. it is crucial that you write your response in correct place. When the responses are several pages in the booklet beyond the question it adds another level of frustration flipping back and forth. If you need a cautionary tale to reinforce this, click here.
Mock and Practice Exams
Also, none of the practice tests (save the Schweser live mock) use this identical format. The Schweser mocks mostly ask you to write in the space below the question so you don’t get practice flipping back to the lined portion that you will find in the real deal. Also, very annoyingly, the past exams on the CFA website don’t give you any space to answer your questions so you have to simulate with scrap paper. Also, to add to your frustrations in this regard, none of the CFA mock or sample questions include AM style constructed responses so you only get PM practice with these. If you are like me and save that CFA mock for your final practice, this can be a real let down. I simulated it by using an AM session from a prior year but this is not valid since you won’t get a representative spread of topics across AM and PM for your practice purposes.
Read the F***ing Question
As I wrote before, but is worth repeating, sometimes the CFA questions may appear to ask one thing but expect another as a response. In L1 and L2, you could deduce the question’s true meaning from the responses presented. In L3, you may find yourself frustrated when you spent time honing a perfect response only to realise from the model answer that they wanted something else entirely (leaving you with pretty much zero points).
Writing the F***ing Answer
Once you have considered the question, really consider your response. The temptation due to time pressure is to just start writing but you will probably find that this means you spend the first few sentences figuring out what you REALLY want to say. Write as succinct a response as possible i.e. write only the information you need to answer the question (and sometimes this will be only a single sentence). If you give yourself too much rope, you might just hang yourself. Your answers can be bullets or sentence fragments. PRACTICE! The more practice exams you write, the more you will develop an intuition for the kinds of responses that get full marks.
What do the essays test
Almost every past exam has at least one question on an individual investor including IPS and behavioural biases and other things. Remember, one question may have several subparts and may be a significant percentage of the exam. Past exams also usually have an institutional investor question which seem across the years to favour pension funds. Beyond that, they can test ANYTHING. Ethics, you will be glad to know, is almost always tested in the selected response portion in the afternoon (based on past exams and Schweser profs) but GIPS and everything else can be tested ANYWHERE including the morning.
Show your work as I’ve mentioned before. You can receive partial credit if you have forgotten a term or transposed something. This means training yourself to slow down a bit. I’d trained myself to work out calcs largely on the calculator without any writing. I needed to reverse this. It also stinks because in mult choice you can see if you have the write answer - here you cannot so double checking is vital. Also, I was confused on how to show calculations made on a calculator e.g. a time value of money question. In this case, you will actually write out how you process it on the calculator i.e. “FV = -10,000, N = 144, I/R = 10” etc. and then put FV = whatever your answer is.
I mentioned this too before but it bears repeating: The CFA graders grade one question (and its subparts) each. So the person grading Q1 is not the same person grading Q2. Therefore, don’t be afraid to repeat info from Q1 in Q2 if you feel it is necessary to answer the question.
Manage your time
When a question says 4 minutes, look at your clock and only give yourself 4 mins. Move on. It’s easy to get mired in one question. There are some calcs (particularly in the IPS) that are given say 10 mins and there is NO WAY I could get it done in less than 15 mins and then play catch up. As a rule of thumb, give one sentence per minute allocated to the response e.g. a 4 minute question only deserves 4 sentences at most.
The exams you take (both practice and otherwise) should have an index of all the questions and the total number of minutes allocated to each (i.e. the total fo the question’s subpart minute allotments). PAY ATTENTION TO THIS! You may find that the minutes are front or back loaded so you want to have an overview initially of how to plan your attack. I didn’t even get to answer the last 2-3 questions which is a huge percentage but I managed to make up for it in the afternoon. If you come out of the morning devastated and certain you have failed, SHAKE IT OFF, and go kick ass on the afternoon - that’s what saved me I think.
The IPS calculations are not particularly difficult yet they tripped me up almost every time. The key is to find a method of writing out these calculations so that you know WHAT IS PRE- AND POST TAX and where the cash flows are in the timeline. Some of it was not terribly obvious or intuitive to me.
On practice tests, you will be given model answers. These are the perfect answers but by no means the only one. Not only does the grader have discretion (i.e. you may give a convincing argument that is totally different from the model answer) but the model answers and just that: Models. They are the responses that someone with access to the materials and hours to spend on it might write. A shorter, less articulate, less complete answer may still get full marks.
If you don’t know the answer, you won’t get points for answering a question you wish they had asked. Try and use your general knowledge and intuition to answer the question. The most points are awarded for direct answers to the question asked.
There are some constructed responses which have several columns: The first might be statements made in the preceding question, the second might be whether they are true or false and the third might ask you to explain why ONLY if you marked false. These are deceptively tricky since if you get the True or False wrong, they don’t even look at your explanation so pay attention. Also, some of them resemble ethics questions in their ambiguity and you sit there going “well, sort of true and sort of false - it depends”.
On exam day, even the best handwriting starts to look like a dying man’s last words scrawled in blood, sweat, and tears. Don’t worry about this. The graders are used to it and it is rarely the case that something is so badly penned that it cannot be graded. I would recommend writing smaller than usual. When stressed/pressured, my writing gets quite big which means you might fill the allotted space with very few words. This decreases the amount of info you can convey and also leaves you no room for error if you decide you want to correct it if you are writing in pen.
each question has a command word (e.g. explain, define, calculate). The most points are awarded to answers that response directly to this command word so you should familiarise yourself with them. They are on the CFA website here.
Practice makes… well, a better result
The AM portion is a whole study session in itself and you will need time at the end of your reading to get a solid grasp of the kinds of responses required and also practice at a new skill - explaining concepts and ideas in a full thought. If you have a VERY tolerant and patient friend/partner/spouse, try explaining things like asset liability management to them. Otherwise, a study group would be good for this i.e. getting one member to present a topic each week.
Good luck! You’ve passed L2, which is a HUGE hurdle.
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.