CFA Level III study guide
CFA Level III · Work through your exam, one topic at a time.
The CFA Level III exam is the final of the three exams that make up the CFA Program, and it is the last exam step before the Chartered Financial Analyst designation. Where Level I asks candidates to learn and describe and Level II asks them to analyze and evaluate, Level III asks them to integrate and apply: the paper is a mix of vignette-supported constructed response (essay) questions and vignette-supported multiple choice questions, and candidates choose one of three specialized pathways. The CFA Level III study guide has 6 sections and about 2,058 words.
01Ethical and Professional Standards
The Code of Ethics and the Standards of Professional Conduct (seven Roman-numeral Standards with lettered sub-Standards), the Asset Manager Code of Professional Conduct, and GIPS. Internalise that the Standards are minimums of expected conduct, that the Code can reach personal behaviour which harms the profession's reputation, and that GIPS is a voluntary, firm-wide standard for performance reporting.
372 words, about 2 min02Asset Allocation
Capital market expectations (build-up, DCF, risk-premium and econometric approaches), the economic balance sheet (assets, liabilities, net worth including human capital and pension claims), strategic versus tactical allocation, asset-only versus liability-relative optimisation, the surplus efficient frontier and surplus Sharpe ratio, risk budgeting, Monte Carlo simulation, rebalancing policy, and goals-based investing. In liability-relative work the risk-free asset is the asset that hedges the liability, not T-bills or cash.
339 words, about 2 min03Portfolio Construction
Benchmark selection criteria (specified in advance, appropriate to the mandate, measurable, unambiguous, reflective of current investment opinions, accountable), passive replication methods (full replication, stratified sampling, optimisation), active approaches (fundamental, quantitative, factor-based, core-satellite), multifactor models and the distinction between factor beta and true alpha, tracking error and the information ratio, constraints and position sizing, risk budgeting and risk parity, and fixed-income construction (duration, curve, spread, liquidity). Tracking error measures relative (active) risk.
325 words, about 2 min04Performance Measurement
Time-weighted versus money-weighted return, annualisation, geometric versus arithmetic linking, risk-adjusted measures (Sharpe, Treynor, M-squared, Jensen's alpha, information ratio, Sortino, capture ratios), Brinson attribution of allocation, selection and interaction, macro versus micro attribution, fixed-income attribution by duration, curve and spread, GIPS requirements, and implementation shortfall with trading-cost measurement. Time-weighted return removes the effect of external cash flows; the money-weighted return (IRR) is shaped by their size and timing, so a client who adds money just before a rally looks better on MWR.
328 words, about 2 min05Derivatives and Risk Management
Option payoffs and classic strategies (covered call, protective put, collar, straddle, strangle, bull and bear spreads), put-call parity, the Greeks, binomial and Black-Scholes assumptions, delta hedging and dynamic replication, interest rate derivatives (swaps, swaptions, caps and floors), currency management (hedge ratio, minimum-variance hedge ratio, overlay versus asset-level hedging, forwards versus options), carry trades, volatility and variance swaps, and credit derivatives. Hedging notional value is not the same as hedging exposure.
352 words, about 2 min06Specialized Pathway: Portfolio Management, Private Wealth, and Private Markets
The specialised pathway rewards depth. Across Portfolio Management, Private Wealth and Private Markets the recurring themes are risk budgeting and manager/factor allocation, human capital and the economic balance sheet, goals-based investing, tax and asset location, concentrated positions and hedging, insurance, and the illiquidity premium.
342 words, about 2 min