CFA三级密卷题目

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2023CFA 三级密卷
2023 LEVEL III Test Exam Session 1

Session 1 of the 2023 Practice Exam has 11 question sets. The format consists of either a free form
constructed response question set (essay), or a question set consisting of a vignette or a short case
followed by four multiple choice questions based on the vignette. Each question set is allocated 12
minutes for a total of 132 minutes.
Question Topic Minutes
1 Behavioral Finance 12
2 Capital Market Expectations 12
3 Derivatives And Currency Management 12
4 Fixed-Income Portfolio Management 12
5 Asset Allocation 12
6 Equity Portfolio Management 12
7 Alternative Investments For Portfolio Management 12
8 Ethics & professional standards 12
9 Portfolio Management For Institutional Investors 12
10 Trading Performance evaluation and manager selection 12

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11 Private Wealth Management 12

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QUESTION 1: BEHAVIORAL FINANCE
TOTAL POINT VALUE OF THIS QUESTION SET IS 12 POINTS
Walter White, CFA is a senior fund manager at Blended Securities. He annually reviews the
investment policy statements of his clients to monitor any change in their risk-taking ability and
willingness, behavioral biases, and personal circumstances. The following are the profiles of two of
White’s high-net-worth clients:
Client 1: Mr. Saul Goodman
Saul Goodman is a 45-year-old corporate lawyer employed by an international firm. He is
married with one eighteen-year-old son who is about to start his college education. Goodman is
successful and independent-minded. He has managed his investment portfolio and was the only one
in his family who earned a college degree and became known as an expert in his field. Goodman is
quick to make decisions, and his portfolio is concentrated in higher-risk stocks because he says that
he is a smart investor and knows when to pick the right stocks that will outperform the market.
Goodman considers himself self-made and believes he can control the outcomes of investing since
he has done very well in controlling non-investment activities. He is very particular about the
choices he has made in selecting stocks and has a portion of his investments in his employer’s stock.
A. Identify the two biases exhibited by Saul Goodman (Overconfidence, Illusion of control, Loss-
aversion and Confirmation). Justify your response with one reason for each bias.
(4 minutes)
Answer Q1-A:
Bias Justification
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Client 2: Mr. Jesse Pinkman
Jesse Pinkman, 35, together with a college classmate, set up a successful fast-growing business
of developing interactive content for digital publishers many years ago. He is strong-willed and a
fierce competitor, who claims his employees are not, “another brick in the wall.” During the meeting,
Pinkman discloses that he manages his portfolio without seeking investment advice from financial
advisors. He “trusts his gut” when making investment decisions and does his own research. Pinkman
has managed to hold on to positions even when the market changed. But lately as losses have
accumulated, Pinkman after seeking advice of few of his close friends has decided to meet with
White.
White after administrating a risk tolerance questionnaire ranks Pinkman from medium to high
on the risk tolerance scale. White after discussing his return and risk objectives, along with
constraints suggests an asset allocation for him, but he expresses his reservations about it.
B. Determine the behavioral investor type(BIT) most likely to be assigned to Pinkman. Justify
your response. Answer Part B in the template provided.
(4 minutes)
Answer Q1-B:
Determine the BIT (PP, FF, II, AA) most likely to be assigned to Pinkman. (circle one)
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Passive Preserver Friendly Follower Independent Individualist Active Accumulator

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Justify your response.

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White’s subordinate,Tyler Johnson, is a hedge fund manager with a history of outstanding
performance. For the past 15 years, Johnson’s reputation has grown over the years as his fund has
consistently beaten its benchmark. During the past six months, Johnson’s fund has been signicantly
underperforming against its benchmark due to the misjudgement of the of the uncertain short-term
economic activity. Furious about the recent loss, White fires Johnson for incompetency. In the
department meeting, White has stated, ”Johnson should have beaten the market, but unfortunately
he couldn’t even predict the short-term trend. The market indicator is so obvious that I have already
precisely forecasted the future economic activity.”
C. Identify the two biases exhibited by Walter White (Loss-aversion, representativeness,
hindsight and availability). Justify your response with one reason for each bias.
(4 minutes)
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Answer Q1-C:
Bias Justification
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QUESTION 2: CAPITAL MARKET EXPECTATIONS
Joseph Dawson, CFA, is a portfolio manager for Dunsby & Hillman, an investment firm that invests
in US and non-US assets. One of his clients, Mary Reid, has a well-diversified portfolio with
investments in various asset classes and in different countries worldwide. The investments are in
five specific countries, referred to below as countries A through E.
Reid closely follows her portfolio. She notices several economic events occurring in the
markets in which she has investments. She expresses concern to Dawson about the possible effects
these events may have on her portfolio.
As part of the annual review for his clients, Dawson meets with Linda Gonzalez, a member of
the investment strategy committee in his firm. Gonzalez monitors relevant global financial events
and their possible effects on the financial markets.
Dawson asks Gonzalez for insights and information regarding the countries where Reid has
investments. Gonzalez provides information for those countries, which is summarized in Exhibit 1.
For Country A, Dawson questions whether the allocation of equities in that country should be
increased in Reid’s portfolio. Among other factors, Gonzalez states that Country A has an expansion
rate of 0.35% per year for P/E multiples. In addition, Gonzalez has also monitored the annual long-
term corporate earnings growth rate, the rate of net share repurchases for equities, and the dividend
yield.
Gonzalez informs Dawson that the equities in Country B, an emerging market, have become
more fully integrated with the global investment market. As a result, Gonzalez believes that Country
B has a lower required rate of return. Her research also shows that Country B’s overall volatility
will decrease. Gonzalez has also compiled previous and new estimates of the financial aspects of
Country B as shown in Exhibit 1.

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While further exploring options for his clients, Dawson learns of the Taylor rule and asks
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Gonzalez about it. Gonzalez states that the investment strategy committee compiles data that may
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be needed to determine the Taylor rule for a particular country, including:

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1) the real policy rate that would be targeted if growth is expected to be at trend and inflation on
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target,
2) the expected and target inflation rates, and
3) the expected and trend nominal and real GDP growth rates.
Exhibit 1 Country Information
1) Expansion rate for P/E multiples of 0.35% per year.
2) Based on a 1 percentage point premium for corporate earnings growth over
Gonzalez’s expected Country A (nominal) GDP growth rate of 4.5%, the annual
Country A
long-term corporate earnings growth rate is 5.5%.
3) The rate of net share repurchases for Country A equities is 1.5%.
4) Based on the country’s main stock index, equities have a 2.75% dividend yield.
2020 2021
Category/Parameter Estimated Projected
Data Data
Country B Volatility 17% 21%
Correlation with global market 0.6 0.5
Degree of integration 0.65 0.55
Sharpe ratio (global and segmented markets) 0.25 0.25
1) The economy is in early expansion stage.
2) The front section of the yield curve is increasingly sloping upward.

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Country C 3) The back half of the yield curve is a flat curve.

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4)The central bank is deemphasizing its quantitative easing program and is

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purchasing fewer government bonds.

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Country D Secularly rising current account surplus.
Country E Secularly rising current account deficit.
Gonzalez’s research shows that the economy of Country C (in which Reid has an equity investment)
is in an early expansion stage. The front section of Country C’s yield curve is increasingly sloping
upward, while the back half exhibits a flat curve. Additionally, Country C’s central bank is
deemphasizing its quantitative easing program and is purchasing fewer government bonds.
Gonzalez has also examined the national savings and investment totals for Countries D and E. Reid
understands that a country’s current account balance is the difference between national saving and
investment. However, she is unsure about how a current account surplus or current account deficit
might impact the allocation of investments between Countries D and E. When asked by Dawson,
Gonzalez stated that her research shows that Country D has a secularly rising current account surplus
while Country E has a secularly rising current account deficit.
1. Using Exhibit 1, which of the following statements is least likely to have an impact regarding
reallocation of investments in Reid’s portfolio?
A. Capital account balances are trending and sustainable.

B. Markets are becoming more or less globally integrated.
C. Monetary and fiscal policies are consistent with long-term stability and the phases of the
business cycle.
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2. Which of the following information provided by Gonzalez is least likely required for a
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calculation of the Taylor rule?

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A. Expected and target inflation rates.

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B. Expected and trend nominal GDP growth rates.
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C. The real policy rate that would be targeted if growth is expected to be at trend and inflation on
target.
3. For Country C, which of the following trends is most likely to occur for current money market
rates and those in the short-term future?
A. Declining; pace may be expected to accelerate.

B. Moving up; pace may be expected to accelerate.
C. Above average and rising; expectations tempered by eventual peak/decline.
4. Based on the information presented, the preferred reallocation of Reid’s portfolio assets
between Country D and Country E is most likely:
A. to Country D, since a secularly rising current account surplus generally puts downward
pressure on asset prices in order to induce a lower saving rate in the surplus country to lessen
the narrowing surplus.
B. to Country E, since a secularly rising current account deficit generally puts downward pressure
on asset prices in order to induce a lower saving rate in the surplus country to mitigate the
narrowing surplus.
C. to Country E, since a secularly rising current account deficit generally puts upward pressure
on real required returns in order to induce a higher saving rate in the deficit country and to
attract the increased flow of capital from abroad required to fund the deficit.
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QUESTION 3: DERIVATIVES AND CURRENCY MANAGEMENT
Arthur Kane is a portfolio manager at Great Wall Asset Management (GWAM), asking his assistant
Miranda Mata about the GWAM’s equity investment in CCG Corporation (CCGC). The current
CCGC stock price is $50. Kane expects the market to be steady in the short term, but expects
uncertainty in the long term due to the escalating conflict between Russia and Ukraine. Kane
requested Mata to devise a profitable trading strategy based on his expectations. Mata gathered the
data of three call options, which are shown in Exhibit 1. Kane thinks calendar spread is a viable
strategy.
Exhibit 1 deltas of three call options
Exercise Price Option A Option B Option C
45 0.988 0.893 0.824
An institutional client based in France - ACG, has a fixed income portfolio of USD 30 million
in US Treasury bonds and is worried about the value of the bond investment against a rise in interest
rates. The portfolio has a modified duration of 9.50 and a market value of USD 29,715,000. The
chief investment officer (CIO) Allen Duhamel, speaks to Kane about the company’s concerns, and
Kane recommends fully hedging the bond portfolio. Kane gathers the following data presented in
Exhibit 2 to calculate the number of contracts for ACG.
Exhibit 2 Selected Data of US Treasury Bond Futures Contracts
Portfolio BPV $28,229.25
Futures settlement price 138.50
Cheapest-To-Deliver Bond
Modified duration 9.10
Bond price 114.34

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Conversion factor 0.9135

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Contract size $100,000

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Another institutional client, M&M Asset Management, a US investment firm focusing on

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industrial investments in Europe, has a risk management policy that requires fully currency hedging.
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M&M acquired a French milk manufacturer and the current value of the investment is 20 million
EUR. M&M decided to fully hedge the position with a six-month USD/EUR forward contract.
Details of the euro hedge at initiation and three months later are provided in Exhibit 3.
Three months after the acquisition, the market value of the milk manufacturer continued to rise,
therefore M&M decided to hold on to the position. At the same time, M&M expects that there is no
need to roll the hedge forward at its maturity, because M&M believes that further appreciation of
the euro was quite likely, and the increase in the notional size of the position was hedged using
currency options. M&M based their choices on the information provided in Exhibit 3.
Exhibit 3 Futures Contract Information

Maturity At Initiation Three Months Later At Maturity
Spot (USD/EUR) 1.3935/1.3983 1.4106/1.4210 1.4189/1.4289
3-month forward -8.1/-7.6 -21.6/-21.0
6-month forward -19.0/-18.3 -27.0/-26.2
M&M also owns imperial foods (IF), a UK listed sausage manufacturer valued at 35 million
GBP. M&M asks Kane how to hedge this currency risk through MVHR. Mata is asked to calculate
the minimum-variance hedge ratio. She collects the following statistics based on 10 years of
monthly data in Exhibit 4.
Exhibit 4 Selected statistical data
𝐒𝐭𝐝(%𝚫𝐒𝐔𝐒𝐃/𝐆𝐁𝐏 ) 𝝈(𝑹𝑫𝑪 ) 𝛒(𝑹𝑫𝑪 , %𝚫𝐒𝐔𝐒𝐃/𝐆𝐁𝐏 )
2.25% 4.5% 0.2
1. According to the data in Exhibit 1, the calendar spread is most likely involved to:
A. long the option A and short the option C.
B. short the option A and long the option C.
C. long the option A and short the option B.

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2. The BPVCTD of the futures contract hedging instrument is closest to:

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A. $108.62.
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B. $113.90.
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C. $104.05.
3. If the forward hedge of milk manufacturer had been rolled forward at its maturity, using Exhibit
3, the roll yield would most likely have been:
A. negative, but the currency change made it less negative.
B. negative, and the currency change made it even more negative.
C. positive, but the currency change reduced some of this effect.
4. Which of the following is the correct short position in GBP Mata will execute to implement a
minimum variance hedge for a 35 million GBP currency exposure?
A. 49 million.
B. 35 million.
C. 14 million.
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QUESTION 4: FIXED-INCOME PORTFOLIO MANAGEMENT
Frederick Polk, CFA, is a fixed income analyst. He is currently reviewing three fixed-income
funds of the firm for the quarterly client report. Selected financial data for the funds ECC Star,
Hybrid I, and Hybrid II are presented in Exhibit 1. Polk assumes that there is no reinvestment
income and that the yield curve remains unchanged.
Exhibit 1: Selected Information on the Fixed-Income Funds

ECC Star Hybrid I Hybrid II
Current average bond price €120.00 €93.80 €97.25
Expected average bond price in one year €115.00 €98.73 €100.35
Average modified duration 6.50 6.95 6.64
Average annual coupon payment €4.75 €6.75 €7.42
Present value of portfolio’s assets (millions) €140.00 €70.00 €75.00
Polk further collects additional information related to ECC Star shown in Exhibit 2.
Polk further implements CDS long-short strategy, the additional information related to CDS
contract details are as follows:
Issuer Tenor CDS Spread EffSpreadDurCDS
FM &Tele Issuer 5 years 110 bps 4.697
GM & Tele Issuer 5 years 130 bps 4.669
Polk further collects the X corporate bond has a spread duration of five years and a credit
spread of 2.75% (275 bps). And the parallel upward shift in the yield curve is expected.
A. Calculate the rolling yield of ECC Star over one year?
(3 minutes)
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B. Calculate the return of the long–short strategy if the FM issuer’s spreads widen by 10 bps and
those of the GM issuer narrow by 25 bps based on €10 million notional contracts?
(3 minutes)
Answer Q4-B:
C. Calculate the approximate excess return if the bond is held for six months and the credit spread
narrows 50 bps to 2.25%? Assume the spread duration remains at five years and that the bond
does not experience default losses.
Calculate the instantaneous (holding period of zero) excess return if the spread rises to 3.25%?
(2 minutes)
Answer Q4-C:
D. Identify which option strategy is best and justify your selection.
Long a put option on a bond futures

Long a receiver swaption Short a payer swaption
contract
(4 minutes)
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Solution Q4-D:
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QUESTION 5: ASSET ALLOCATION
Robin Lopez is a senior analyst for a large, multi-divisional asset management firm. Lopez reviews
the risk-budgeting information for the asset allocation from an UK institutional client.
Exhibit 1 Risk-Budgeting Statistics
Percent
Contribution Ratio of
Weight MCTR ACTR to Total Excess Return
Asset Class Standard to MCTR
(%) (%) (%)
Deviation
(%)
(%)
UK large cap 3.2 11.19 0.36 3.33 0.368

UK mid cap 0.9 12.02 0.11 0.98 0.368
UK small cap 0.3 12.44 0.03 0.30 0.368
US equities 34.4 14.51 5.00 45.94 0.368
Europe ex UK 8.7 16.68 1.45 13.34 0.368

equities
Asia Pacific ex 3.1 16.35 0.51 4.69 0.368

Japan equities
Japan equities 6.6 10.69 0.70 6.46 0.368
Emerging market 5.9 17.51 1.02 9.42 0.368
equities
Global REITs 1.8 17.79 0.31 2.86 0.368
Global ex UK 31.8 4.21 1.34 12.33 0.368
bonds
UK bonds 3.2 1.22 0.04 0.35 0.368
Cash 0.2 0.00 0.00 0.00 0.368

100.0 10.88 100.00
Determine whether the asset allocation is an optimal risk budget or risk parity portfolio.
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Answer Q5-A:
Lopez advises the MoneyLover Endowment and is asked to recommend an optimal asset
allocation. The objective of the endowment is to achieve a nominal return of 8.0% per year with the
lowest possible level of risk. The endowment board’s risk management policies include a maximum
standard deviation of 14.0% and prohibit the use of leverage. Exhibit 2 provides the results of a
mean-variance optimization based on annual inflation of 1.5% and a risk-free rate of 0.5%.
Exhibit 2
MoneyLover Endowment Corner Portfolios
Expected Asset Class Weights (%)
Expected Expected
Corner Standard Inter-
Return Sharpe Domestic Corporate Government
Portfolio Deviation national
(%) Ratio
(%) Equity Equity Bonds Bonds
1 9.00 18.0 0.47 100 0 0 0

2 8.90 16.2 0.52 90 10 0 0
3 8.60 13.8 0.59 75 20 5 0
4 7.65 11.2 0.64 60 15 15 10
5 7.00 10.5 0.62 50 10 25 15
B. Recommend which two corner portfolios Lopez should use for the optimal asset allocation to
achieve the endowment’s return requirement. Determine the weights for each of these two
corner portfolios.
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Answer Q5-B:
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Lopez also advises Nicholas Chris, a millionaire who recently retired with total assets of USD
10 million. Chris has two goals he wishes to achieve during his retirement:
Goal 1: Chris wishes to have an 85% chance of transferring USD 7.5 million to his children in 10
years.
Goal 2: Chris wishes to have a 75% chance of being able to donate USD 15 million to a charitable
organization in 25 years.
Lopez recommends implementing a goals-based approach to construct a portfolio. He develops
a set of sub-portfolio modules, which are presented in Exhibit 3. Lopez suggests investing any
excess capital in Module A.

Exhibit 3
“Highest Probability-and Horizon-Adjusted Return” Sub-Portfolio Modules
Under Different Horizon and Probability Scenarios.
Module A Module B Module C

Portfolio Characteristics
Expected return 6.1% 7.5% 8.3%
Expected volatility 5.9% 7.9% 10.1%
Annualized Minimum Expectation Returns
Time Horizon (years) 10
Required Success
85% 4.2% 5.0% 4.9%
75% 4.8% 5.8% 6.1%
Time Horizon (years) 25
Required Success
85% 4.9% 5.9% 6.2%
75% 5.3% 6.4% 6.9%
C. Construct the overall goals-based asset allocation for Chris given his two goals and Lopez’s
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suggestion for investing any excess capital. The answer should be the percentage of total assets
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Answer Q5-C:
Module A Module B Module C
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QUESTION 6: EQUITY PORTFOLIO MANAGEMENT
Mark Anderson is a consultant in Woodley Advisory, he specializes in analysis of active equity
portfolio management. One of Anderson’s clients asks him to evaluate two equity funds—Fund A
and Fund B, and hopes him can offer some advice. Fund A focuses on US small cap stock, while
Fund B employs a market neutral strategy. Regarding these two funds, Anderson makes the
following statements:
Statement I: Fund B has more market beta exposure than Fund A.
Statement II: Fund A has higher collateral requirements.
Statement III: Fund B has more benefits of diversification.
Next, Anderson reviews quarterly holdings reports for Fund C. In comparing the two most
recent quarterly reports, he notices Fund C executed a trade, which replaced a national bank stock
with a regional bank stock. The regional bank stock is not a benchmark constituent.
Mary Berg is portfolio manager at Woodley Advisory, she manages a client account that is
currently fully invested in US equity and benchmarked to S&P 500 index. Due to the recent
disappointing economic data and rising volatility, Berg decides to allocate 20% of the account assets
into money market instruments.
Frank Dillane is an analyst at Woodley Advisory. One of his clients is a hedge fund manager,
who has found three candidate companies, and asks Dillane to recommend the company that is most
suitable for activist investing. Dillane collects the company information and presents as follows:
Company X is a well-established, large-sized fashion retailer. Its profitability is ahead of
industry peers. The company is recognized for its high corporate governance standards and effective
communication with existing and potential investors.
Company Y is a medium-sized energy service company that has experienced a significant

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deterioration in profitability in recent years. More recently, the company has been unable to pay
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interest on its debt, and its new management team has recognized the need to restructure the business
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and negotiate with its creditors.

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Company Z is also a medium-sized energy service company, but its operating performance is
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below that of the rest of the industry. A number of company assets are underutilized, fixed-asset
investment level is higher than peers, while production is concentrated in fewer facilities. Dillane
believes that the management has significant potential to improve operating performance and cash
payout using asset disposals, a strategy being implemented by other companies in its sector.
1. Which statements of Anderson regarding the two funds is correct?
A. Statement I.
B. Statement II.
C. Statement III.
2. What was the effect of Fund C’s trade on its active share and active risk?
A. Active share had a significant increase, active risk was not significantly affected.
B. Active risk had a significant increase, active share was not significantly affected.
C. Both active risk and active share increased significantly.
3. Berg’s change in asset allocation will most likely cause:
A. an increase in volatility and a decrease in active risk.
B. a decrease in volatility and an increase in active risk.
C. decrease in both volatility and active risk.
4. Which company is most appropriate for Dillane to recommend to his client for activist
investing?
A. Company X
B. Company Y
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C. Company Z
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QUESTION 7: ALTERNATIVE INVESTMENTS
Paul George is an investment manager at Millionaire Asset Management (MAM). MAM invested
in a FOF that focuses on alternative investments, called Squaw Valley fund of funds (SVFOF).
SVFOF charges a 1% management fee and 10% incentive fee and invests an equal amount of
its assets into two individual hedge funds: Pyrenees Fund (PF) and Ural Fund (UF), each charging
a 2% management fee and a 20% incentive fee. One year later, PF's manager earns a gross return of
20%, but UF's manager loses 5%.
GK endowment is an institutional client of MAM. George examines the endowment's future
liquidity requirements and analyzes one of its holdings in a private energy fund. The NAV of the
private energy fund was $20,000,000 at the end of 2022. George expects a distribution of 20% to be
paid and an expected growth rate of 12% for the fund.
GUE fund is another institutional client of MAM. The Investments Committee of GUE is
considering investing in either of the two hedge funds – FoF or multi-strategy fund(MSF), and asks
George to do due diligence on both the groups and select the fund with lower operational risk.
A. Calculate the net return of MAM's investment in SVFOF.
Notes: Ignore fee compounding and assume that all fees are paid at year-end.
(4 Minutes)
Answer Q7-A:
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B. Calculate the expected NAV of the fund at the end of 2024, assuming all capital had been
called.
(4 Minutes)
Answer Q7-B:
C. Determine the most appropriate investment strategy to recommend to GUE’s investment

committee. Justify your response.
(4 Minutes)
Answer Q7-C:
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QUESTION 8: ETHICS
Lauren Li is a Level III CFA candidate working at pension management firm SOC Master Pension
Trust (SOC). SOC owns a significant number of shares of the fashion manufacturer Bellastyle across
several pension funds. Bellastyle is a publicly traded company and is considering a merger with one
of its competitors. The merger requires a change in Bellastyle’s legal structure that requires
shareholder approval at a scheduled special shareholder meeting. Li believes the firm has the
following options as it prepares to vote Bellastyle shares on behalf of the pension funds.
Option 1: Continue the firm’s custom of always aligning with management on shareholder votes
and following the recommendations of Bellastyle management.
Option 2: Do further research on the merger implications as they relate to the firm’s investment in
Bellastyle.
Option 3: Abstain from voting, thereby positioning the firm with the eventual outcome of the vote.
When asked whether the firm should sell shares of Bellastyle prior to the merger vote, Li
reminded colleagues about the firm’s obligations. Stock sales of Bellastyle would need to follow
Priority of Transactions, and violations may result in sanctions by the CFA Institute.
Li’s friend inquired about Bellastyle since the news of the potential merger was in the headlines.
Li made the following statements regarding what constitutes confidential information:
Statement 1: Confidential information must be material and nonpublic.
Statement 2: Information resulting from, and relevant to, a firm’s business that is the subject of the
special relationship is considered confidential.
Statement 3: Information that could reasonably be expected to impair the firm’s ability to render
unbiased and objective advice must be kept confidential.

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1. To comply with the Standards, Li’s firm would most likely follow which shareholder vote
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A. Option 1
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B. Option 2
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C. Option 3.
2. Regarding Li’s reference to the Priority of Transactions, which of the following recommended
procedures for compliance conforms with the Standards?
Limited Participation Restrictions on Establish Blackout/
in Equity IPOs Private Placements Restricted Periods
A. Does not conform Does not conform Does not conform
B. Does not conform Conforms Does not conform
C. Conforms Conforms Conforms
3. CFA Institute–authorized sanctions implied by Li least likely include a(n):
A. public censure.
B. cautionary letter.
C. administrative sanction.
4. Which statement made by Li regarding confidentiality most likely complies with the Standards?
A. Statement 1
B. Statement 2
C. Statement 3
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QUESTION 9: PORTFOLIO MANAGEMENT FOR INSTITUTIONAL INVESTORS
Nicolas Rowell, CFA, an investment advisor for Storm Investments, meets with Brandon Stark chief
investment officer of CXN’s defined benefit (DB) pension plan to discuss the plan’s investments.
The plan is currently fully funded, and the plan sponsor wants to maintain this status. CXN is a
mature company and is considering expanding into newer product lines. The company’s revenues
are not cyclical. It has issued debt to finance the expansion, which has raised its debt to total assets
to 0.61, whereas the industry average is 0.53. The returns on its pension assets have been sufficient
to meet pension payments to present retirees. It has not made contributions to its pension plan since
the last year and will hold contributions for a few years.
The DB pension plan has the following characteristics:
⚫ No provision for early retirement.
⚫ Size of the plan is 4.4% of the market capitalization of CXN.
⚫ Average age of the workforce is 47; the retirement age is 65.
⚫ Proportion of active lives to retired lives is 0.75.
Rowell discusses the investment objectives of the plan. Stark tells him that the plan seeks to
maximize returns for the level of risk taken. The plan desires to achieve a long-term market return
on plan assets of 5.5% - 6% per year. CXN uses high-grade bond yields to discount the plan’s
liabilities.
Ping An Insurance, a client of Storm Investments, is an international multiline insurance
conglomerate. Under its overall strategic financial plan, it computes the annualized standard
deviation of returns on investment assets as 5.0% and on liabilities as 2.0%. The bulk of its liabilities
are constituted by the net present value of expected claims payouts. The correlation between asset
and liability returns is therefore a very low 0.2. Ping An’s common equity to financial assets ratio
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is 10.0%.
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A&C, another client of Storm Investments, is a US bank which has an equity capital ratio for
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financial assets of 32%. Recently the bank plans to restructure the balance sheet so that the equity
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capitalization ratio drops to 20% and the modified duration of liabilities is 2.1. The bank also plans
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to rebalance its investment portfolio to achieve a modified duration of assets of 2.35. Given small
changes in interest rates, the yield on liabilities is expected to move by 75 bps for every 100 bps of
yield change in the asset portfolio.
1. Which of the following factors relate to a lower risk tolerance for the CXN DB pension?
A. No provision for early retirement.
B. Size of the plan.
C. Proportion of active lives to retired lives.
2. CXN DB plan’s investment objective of a higher long-term return on plan assets than the
discount rate used for the valuation of liabilities is appropriate because:
A. the liquidity profile of the plan will improve.
B. the asset base will grow minimizing contributions.
C. the volatility in funded status will decrease.
3. What is the standard deviation of changes in the value of Ping An’s shareholder capitalization?
A. 49.6%.
B. 32.0%.
C. 43.9%.
4. The modified duration of the bank’s equity capital after restructuring is closest to (years):
A. 3.35.
B. 3.45.
C. 5.45.
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QUESTION 10: TRADING PERFORMANCE EVALUATION AND MANAGER
SELECTION
Jerry Larson is the head trader at Millennium Capital. A fund manager in the firm intends to reduce
the holdings in the new technology sector to comply with the prospectus and instructs Larson to
execute these trades. Upon completion of the trades, Larson calculates an expanded implementation
shortfall to evaluate trade costs. The data are provided in Exhibit 1.

Exhibit 1: Expanded Implementation Shortfall Information ($) for the
Trades in the New Technology Sector
Value of shares sold based on:
decision price 5,124,300
arrival price 5,175,800
actual trade execution prices 5,545,600
Note: All shares were sold
Ming Liu, a trader in Larson’s team is instructed to execute a buy order of TEXX, a small-cap
technology stock. Liu was able to execute the order over the course of 30 minutes and received an
average price of $50.55. The price at the time the order was placed is $50.45. The volume weighted
average price (VWAP) over the trading horizon was $50.52, and the time-weighted average price
(TWAP) over the horizon was $50.57, with a closing price later that day of $50.60. The market rose
during the trading horizon, with an index arrival price of 1,010 and a VWAP of 1,015. Liu calculates
that TEXX has a beta to the index of 1.30.
The CIO of Millennium Capital also manages an equity fund. His fund is holding a significant
position in YYDS. The CIO believes that the market had overreacted during the pre-market trading
session to a strong earnings announcement from YYDS. He wants to sell a portion of the stock
position to capture this mispricing. The CIO then directs Larson’s team to execute this trade. He
also concerned that overreaction would be short-lived. The shares of YYDS are very liquid and the
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order would represent only about 2% of the expected daily volume.

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Mark Johnson is a global fixed-income index fund manager at the firm. The fund is required
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to trade for quarterly index changes taking place at the end of the trading day. To keep the fund in
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line with the anticipated index constituent changes, the Johnson generates a fund rebalance list
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consisting of buys and sells. He approaches the Larson to discuss the best trade strategy for the list.
1. Based on Exhibit 1, the component of the expanded implementation shortfall for the trading of
the securities from Millennium’s fund that is most favorable to Millennium Capital is the:
A. delay cost.
B. trading cost.
C. opportunity cost.
2. The TEXX trade most likely looks best relative to which trading benchmark?
A. Time-weighted average price (TWAP)
B. Volume-weighted average price (VWAP)
C. Market-adjusted cost
3. What type of algorithm should be used to sell the YYDS shares?
A. TWAP algorithm
B. Arrival price algorithm
C. Dark aggregator algorithm
4. Which of the following price benchmarks is most appropriate for Johnson trade?
A. Closing price
B. Previous close
C. Opening price
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QUESTION 11: PRIVATE WEALTH MANAGEMENT
Sally and Chris Hemsworth live in New Jersey, USA, in a rented apartment. Gary Neville is
Hemsworths' private wealth adviser. Neville is managing a portfolio of taxable accounts for
Hemsworths. Just a few weeks remain in the tax year. Neville collected some portfolio statistics,
which are shown in Exhibit 1.
Exhibit1 Statistics on the Hemsworths' portfolio

Year-to-
Unrealized Realized Unrealized Realized
Date
Market Short- Short- Long- Long-
Income
Value Term Term Term Term
(Dividends
Gain Gain Gain Gain
/Interest)
Domestic
$7,000,000 -$400,000 $300,000 $2,600,000 $600,000 $150,000
Equities
Domestic
Fixed $6,000,000 0 0 $1,200,000 0 $180,000
Income
Income-
Producing
$1,200,000 0 0 $800,000 0 $80,000
Real
Estate
Total $14,200,000 -$400,000 $300,000 $4,600,000 $600,000 $410,000
The Hemsworths also have a tax-deferred retirement account, from which they plan to take a
$500, 000 pre-tax withdrawal at the end of the year. But they are concerned about tax due.
The Barksdales are another of Neville's clients. Adrian and Olivia Barksdale live in Houston,
USA with their 16-year-old twins. Adrian, 47, works in a highly cyclical industry as an engineering
manager at a bauxite mine. Olivia, 46, is an accountant. The Barksdales are saving for their
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retirement and college funding for both children.

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Adrian’s annual salary is A$190,000; Olivia’s annual salary is $85,000. The family’s living
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expenses are currently $95,000 per year. Both Adrian and Olivia plan to work 18 more years, and
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they depend on their combined income and savings to fund their goals. Neville is also concerned
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about the Barksdales’ existing life insurance coverage. Currently, the Barksdales have a term life
policy insuring Adrian with a death benefit of $100,000. Neville assesses the family’s insurance
needs in the event Adrian were to die this year. To do so, Neville uses the needs analysis method
based on the financial data presented in Exhibit 2 and the following assumptions:
◼ The discount rate is 6.0%, and the tax rate is 30%.
◼ Salary and living expenses grow at 3.5% annually.
◼ Salary and living expenses occur at the beginning of each year.
◼ The following assumptions apply in the event of Adrian’s death:
⚫ Olivia will continue to work until retirement;
⚫ Family living expenses will decline by $30,000 per year;
⚫ Olivia’s projected living expense will be $50,000 per year for 44 years; and
⚫ The children’s projected living expenses will be $15,000 per year for 6 years.
Exhibit 2 Barksdale Family Financial Needs Worksheet
Cash Needs USD ($)
Final expenses and taxes payable 20,000
Mortgage retirement 400,000
Education fund 300,000
Emergency fund 30,000
Total cash needs 750,000
Capital Available USD ($)
Cash and investments 900,000
Adrian: Life insurance 100,000
Total capital available 1,000,000

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A. Justify tax considerations are likely to influence Hemsworths' portfolio decisions.

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Answer Q11-A:
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B. Justify their decision differently than their taxable account, according to Hemsworths' plan to
withdraw $500,000 from their tax-deferred retirement account.
(2 minutes)
Answer Q11-B:
C. Calculate the additional amount of life insurance coverage needed, based on the given
assumptions and the data in Exhibit 2.
(6 minutes)
Answer Q11-C:
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2023 LEVEL III Test Exam Session 2

Session 2 of the 2023 Practice Exam has 11 question sets. The format consists of either a free form
constructed response question set (essay), or a question set consisting of a vignette or a short case
followed by four multiple choice questions based on the vignette. Each question set is allocated 12
minutes for a total of 132 minutes.
Item Set Topic Minutes

1 Fixed-income portfolio management 12
2 Equity portfolio management 12
4 Private wealth management 12
5 Trading Performance evaluation and manager selection 12
6 Capital market expectations 12
7 Private wealth management 12
8 Derivatives and currency management 12
Total 132
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Zoe Kravitz is a credit portfolio manager at Southern Investment Advisors (SIA), a firm that invests
in investment-grade corporate bonds, government bonds, and high-yield bonds. She meets with a
newly hired fixed-income analyst Zayn Ali to discuss changes in the composition of her current
portfolio. The two discuss selecting investment-grade and high-yield bonds for Kravitz’s portfolio.
Kravitz remarks, “High-yield bonds are defined primarily by their credit risk, and their price
behavior resembles that of equities rather than fixed-income.” She states the following differences
and similarities between investment-grade and high-yield bonds.
Statement I: “Credit risk is the most important factor to consider for high-yield bonds. For
investment-grade bonds interest rate, spread, and credit migration (downgrade) risks are typically
the most relevant considerations.
Statement II: The risk of investment-grade bonds is usually measured by spread duration as
opposed to high-yield bonds where credit risk and market value of the position are used to evaluate
high-yield risk.
Statement III: Both investment-grade corporate bonds and high-yield bonds are sensitive to interest
rate changes; portfolio managers of both types of bonds usually manage their yield curve exposures
closely.”
Next, Kravitz talks about credit spreads. She states, “Credit spread measures are helpful
because they provide a way to estimate the return an investor can receive for assuming credit risks.
Among the various credit spread measures, the G-spread, and the I-spread are particularly useful for
pricing and hedging credit securities, but Z-spread and option-adjusted spread (OAS) are used for
comparing the relative values of bonds.” Kravitz shows Ali the following information presented in
Exhibit 1 and asks him, “Why does the OAS differ from the other spread measures?”
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Exhibit 1: The Call Schedule of Britta Industries 6.00% bond issue due 10 March 2026
Callable on or after At a Price of
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10 September 2021 101.92

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10 September 2022 100.95

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10 September 2023 100

On 06 June 2019, the bond issue is trading at 103. Spread measures are as follows:
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G-Spread 360
I-Spread 362
Z-Spread 363
OAS 295
Kravitz and Ali then discuss credit strategy approaches. SIA uses a bottom-up approach by
establishing a universe of eligible bonds and then applying relative value analysis to select the most
attractively valued bonds from this universe. Ali makes the following comments on the aspects of a
bottom-up approach:
Comment I: “The bottom-up relative value decisions depend upon determining the expected excess
return of bonds. The bond with the highest expected excess return is typically purchased.
Comment II: If two issuers have similar credit-related risks, then a portfolio manager will usually
compare credit spread measures and buy bonds with the higher spread.
Comment III: For issuers with different credit-related risks, to decide whether the additional spread
compensates for the credit risk recent default rate information is used.”
1. Regarding the Kravitz’s statements about investment-grade and high-yield bonds, which one
is least likely correct?
A. Statement I.
B. Statement II.
C. Statement III.
2. The most likely difference between the G-spread and the I-spread is that:
A. the G-spread is useful for estimating yield and price changes for fixed-rate bonds with no
options, whereas the I-spread gives similar estimates for bonds with embedded options.
B. the G-spread is a spread over an interpolated government bond, whereas the I-spread is a spread
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C. only I-spread provides a useful representation of risk-free rates when there is perceived credit
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risk in either the country’s government or banking system.

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3. Based on Exhibit 1, the best response to Kravitz’s question is: The OAS spread is different
from other spread measures because of the:
A. value of the embedded call option.
B. value of the call option sold by Britta.
C. value of the put option.
4. Regarding comments on the bottom-up approach for selecting bonds, Ali is least likely correct
with respect to:
A. Comment I.
B. Comment II.
C. Comment III.
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QUESTION 2: EQUITY PORTFOLIO MANAGEMENT
Trino Capital specializes in equity portfolio management for his clients. It manages its own funds
and also select external funds for its high-net worth clients.
Victor Chow is a senior analyst at Trino Capital, he is evaluating two passive funds, Fund
Alpha and Fund Beta, as candidate investments for his client. The relevant information for each
fund is presented in Exhibit . Both funds use stratified sampling for portfolio construction, invest in
domestic mid-cap equities, and have the same benchmark. Chow believes Fund Beta will have lower
tracking error than Fund Alpha.

Exhibit 1
Fund Alpha Fund Beta
Proportion of index constituents held 33% 54%
Use of market-on-close trading High Low
Average cash holding 1.0% 1.20%
Expense ratio 30 bps 13 bps
One of Chow’s client is particularly interested in an actively managed equity fund called Apex
Fund. To better analyze this fund, Chow decides to perform a style analysis first. According to
Chow’s due diligence, the Apex Fund executes its investment strategy with trading towards the end
of each quarter. The strategy results in high portfolio turnover. the Apex Fund reports returns for
each month and reports portfolio holdings at the end of each quarter.
Mike Solo is one of Trino Capital’s equity fund managers, his fund applies a factor-based
strategy. Solo employs the hedged portfolio approach to implement his factor-based portfolio.
A. Support with two reasons that Chow’s belief about Fund Beta’s tracking error could be
incorrect.
(4 Minutes)
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Answer Q2-A:
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B. Sate two reasons why the use of holdings-based style analysis for the Apex Fund is
inappropriate.
(4 Minutes)
Answer Q2-B:
C. Describe two drawbacks of the hedged portfolio approach that Solo employs.
(4 Minutes)
Answer Q2-C:
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QUESTION 3: FIXED-INCOME PORTFOLIO MANAGEMENT（重录）
John Gallup, an advisor for Aquiline Capital Management, is working with a pension fund client.
George Steinbeck, Gallup’s colleague, advises his pension fund client on management of a
duration gap. The Asset BPV of the pension fund is USD 495,000, and the Liability BPV using the
PBO measure is USD 2,368,000. Steinbeck suggests that his client enter a 25-year, receive-fixed,
interest rate swap against the three-month Libor. The fixed-rate on the swap is 5.5%. Its effective
duration is +19.85, and its BPV is +0.1985 per USD 100 of notional principal.
Gallup observes the two US government Treasury bond portfolios in Exhibit 1— Portfolio A,
and Portfolio B. Each has the same market value of $60 million.
Exhibit 1 US government Treasury bond portfolios
Portfolio A Portfolio B
Security Market price Par Amount Weight Par Amount Weight
US 2 year 99.836 45,000,000 0.75 - -
US 3 year 99.992 - - - -
US 5 year 99.008 - - 5,000,000 0.08
US 7 year 99.000 - - 45,000,000 0.75
US 10 year 97.781 - - 10,000,000 0.17
US 30 year 96.453 15,000,000 0.25 - -
Scenario 1: The 2s–30s spread is expected to widen by 100 bps as short and intermediate rates
fall and long rates remain stable. Also, interest rate volatility is expected to be low during the next
year.
Scenario 2: The 2s–30s spread is expected to narrow by 100 bps as short and intermediate
rates rise and long rates fall. Also, interest rate volatility is expected to be high during the next year.
Gallup decides instead to position his portfolio for a steepening of the credit curve using the
CDS market. Details of on-the- run 5- and 10-year CDS contracts outstanding are as follows.
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Issuer Maturity CDS Spread EffSpreadDurCDS

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Sanger Corp. 5 130 bps 4.669

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Mann Corp. 10 175bps 8.680

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A. Calculate the notional principal (NP) on the interest rate swap needed to close the duration
gap to zero. Show your calculations.
(4 minutes)
Answer Q3-A:
B. Determine and justify which portfolio (A or B) would be preferred to under each of the
following yield curve scenarios?
Scenario Justify your response with each choice
Portfolio A
Scenario 1
Portfolio B
Portfolio A
Scenario 2
Portfolio B
(4 minutes)
Answer Q3-B:
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C. Discuss an appropriate long–short CDS strategy to meet this goal assuming a €10,000,000 10-
year CDS contract notional. Calculate the return if the 5-year spreads rise 10 bps and the 10-
year spreads rise 20 bps.
(4 minutes)
Answer Q3-C: :
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Kevin Garnett lives in New York City and holds a portfolio of stocks, bonds, and funds in a taxable
brokerage account. The following table lists the federal and state tax rates that apply to her various
investments. The marginal tax rate is the combined income tax rate—federal, state, and local—that
applies to an incremental dollar of investment income that the investor earns. In this case, the highest
marginal rate adds up to well over 50%, which is a difficult environment for an investor attempting
to compound wealth over time. Tax-related information is presented in Exhibit 1.
Exhibit 1 Income Tax Rates by Jurisdiction
US Federal income tax rate 37.00%
NY State income tax rate 8.82%
NY City income tax rate 3.88%
Federal net investment income (NII) tax rate 3.80%
Total tax rate on ordinary investment income 53.50%
Some asset classes qualify for preferential income tax rates.
Income Tax Rates by Asset Tax Rate Requirement
NY State municipal bond interest income 0.00% For NY state residents
Out-of-state municipal bond interest income 12.70%
Capital gains 36.50% If held longer than 1 year
Qualified dividend income from stocks 36.50% If held longer than 61 days
US Treasury interest income 40.80%
Dividend income from REITs 43.50%
Other fixed-income instruments 53.50%
Non-qualified dividend income from stocks 53.50%

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Kevin’s adviser, Chris Paul, has constructed a diversified portfolio using mutual funds and
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exchange-traded funds. The following Exhibit 2 highlights some characteristics of those funds,
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Exhibit 2 Characteristics of Diversified Funds

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Annualized 5- 5-Year Return 5-Year Post-
Year Pre-Tax after Taxes on Liquidation
Return Distributions Return
Passive Equity ETF 10.85% 10.19% 8.71%
Active Equity Mutual Fund 12.05% 10.21% 9.05%
High-Yield Bond ETF 4.28% 1.72% 1.36%
Kevin bought 1,000 shares of Microsoft (MSFT) in her brokerage account for $130 per share
at the beginning of the month and sold all 1,000 shares at the end of the month for $155 per share.
He also received a dividend on MSFT of $0.50 per share during the month.
Kevin’s portfolio also holds several NY State tax-exempt municipal bonds. He plans to hold
the bond to maturity. During the month, interest rates declined and the value of the bonds increased
by 1%. While Kevin didn’t buy or sell during the month, he did receive 0.5% of the value of the
bonds in interest payments.
A. Calculate the tax-efficiency ratio for each of the funds in the Exhibit 2. Determine the fund
with the most tax-efficient? Explain why other funds are less tax efficient. Justify each response.
(4 minutes)
Answer Q4-A:
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B. Calculate the after-tax return on MSFT, assuming transaction costs are ignored.
(4 minutes)
Answer Q4-B:
C. Calculate the pre-tax and after-tax returns of his NY state municipal bond portfolio.
(4 minutes)
Answer Q4-C:
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QUESTION 5: TRADING PERFORMANCE EVALUATION AND MANAGER
SELECTION (
Luke Skywalker, an analyst at the Jedi Asset Management (JAM), is evaluating the performance of
one of their funds – Galaxy Investment Plan (GIP), analyzing its return components. The fund’s
prospectus provides the following information:
⚫ GIP is a US large-cap value portfolio returned 18.9% during the first three quarters of
2019.
⚫ During the same time period, a US large-cap value index had a return of 21.7% and a
broad US equity index returned 25.2%.
One of JAM’s clients - a large pension fund of Falcon Electric Company, is considering
investing with a fixed-income manager of JAM. The CEO of the pension fund would like to review
the performance results of the fund. Skywalker conducts an exposure decomposition analysis.
Exhibit 1 below gives the fixed-income fund’s attribution results.

Exhibit 1
Total
Duration Duration Curve Interest Sector Bond
Sector Total
bucket Effect Effect Rate Allocation Selection
Allocation
Government 0.00% 0.00%
Short to Mid Corporate -0.25% 0.10% -0.15%
Total -0.60% 0.02% -0.58% -0.25% 0.10% -0.73%
Government 0.00% 0.00%
Long Corporate 0.05% 0.00% 0.05%
Total 0.90% 0.10% 1.00% 0.05% 0.00% 1.05%
Total 0.30% 0.12% 0.42% -0.20% 0.10% 0.32%
JAM’s Head of Research asks Skywalker to analyze the capture ratios and drawdown of
Manager M to help assess manager suitability for JAM’s high-net-worth investors. Skywalker
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Exhibit 2
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Average annual return 10.50%

Upside capture 1.5
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Downside capture 1.2
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Maximum drawdown -28%

Drawdown duration 5 months
As a senior performance analyst, during a new employee traning session, Skywalker makes the
following statements to describe the risks involved in manager selection:
Statement 1: Firing a manager who subsequently outperforms or performs in line with
return and risk objectives/targets is more transpant to investors, so have
to explain this decision to the investors.
Statement 2: Retaining a manager who subsequently underperforms has directly impact
on the compensation of the person making the manager selection decision.
1. The style return of GIP is most likely:
A. -6.3%
B. -2.8%
C. -3.5%
2. Given the data in Exhibit 1, which one of the following statements is most likely correct?
A. The fund over-performed its benchmark by 105 bps.
B. As a result of changes in the shape of the yield curve, 12 bps were gained.
C. By overweighting the corporate sector, 10 bps were gained.
3. Based on Exhibit 2, the capture ratio most likely indicates:
A. underperformance relative to a benchmark.
B. a convex return profile.
C. a concave return profile.

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B. Statement 2
C. Both Statement 1 and Statement 2

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QUESTION 6: CAPITAL MARKET EXPECTATIONS
PCCM is a global multi-disciplinary investment management firm. Samuel Walton, CFA, a senior
investment advisor at the firm, discusses equity returns with Angela Ruth, a research analyst at
PCCM. He asks Ruth to estimate the returns for equities of an emerging market (EM) country. Ruth
develops the projections for the EM country presented in Exhibit 1 below:
Exhibit 1 Equities
Volatility (σi) 20%
Correlation with global market (ρi,M) 0.60
Degree of integration (φ) 0.65
Segmented market Sharpe ratio 0.28
Global Sharpe ratio 0.30
Risk-free rate 2.50%

Walton obtains the following information from the research division of PCCM to estimate the
expected return for office spaces over the next year.
Exhibit 2
Current Office Buildings capitalization rate (“cap” rate) 5.2%
Expected cap rate at the end of the period 5.0%
NOI growth rate (real) 2.0%
Inflation expectation 1.5%
Walton uses the Grinold–Kroner model in forecasting developed market equity returns. Walton
makes the following forecasts:
⚫ a 2.25% dividend yield on Canadian equities, based on the S&P/TSE Composite Index;
⚫ a 1% rate of net share repurchases for Canadian equities;

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a long-term corporate earnings growth rate of 6% per year, based on a 1 percentage point
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(pp) premium for corporate earnings growth over her expected Canadian (nominal) GDP
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growth rate of 5%; and

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⚫ an expansion rate for P/E multiples of 0.25% per year.
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A. Calculate the expected return for equities of the EM country using the Singer–Terhaar model.
(4 minutes)
Answer Q6-A:
B. Calculate the expected return from the office spaces based on the data provided in Exhibit 2.
(4 minutes)
Answer Q6-B:
C. Based on the information given, Calculate the short-term and long-term expected rate of return
on Canadian equities.
(4 minutes)
Answer Q6-C:
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William Clinton is a private client financial consultant with US-based Waterman Wealth
Management LLC. Clinton has been engaged by Bradley and Reagan Graham to develop a personal
wealth management plan. Prior to meeting with Clinton, the Grahams filled out a personal profile
questionnaire that will be used in developing their wealth management plan. Using information from
the questionnaire, Clinton prepares Exhibit 1.
Exhibit 1 Graham Family: Personal and Financial Information

Occupations and Family Structure
Bradley is a 50-year-old electrical engineer at a major utility company. His annual income of
$175,000 is projected to increase 3% per year. He has a defined-contribution pension plan and
expects to retire at age 65.
Reagan is a 48-year-old pharmacist with a pharmaceutical company. Her annual income of
$132,000 is projected to increase 3% per year. She has a defined-contribution pension plan and
expects to retire at age 65. Prior to joining the pharmaceutical company, Reagan had a 20-year
career in the US Navy, retiring at the rank of commander.
The family has two children, ages 10 and 8.
Financial Information
Checking account $27,000
Taxable investment account 625,000
Residence 525,000
Residential mortgage 285,000
Outstanding balance on a $100,000 home equity line of credit 38,000
Bradley’s defined-contribution plan (vested; normal retirement age for the 796,000
plan is 65)
Cash value of Bradley’s life insurance ($250,000 death benefit) 67,000
Estimated present value of Bradley’s future earnings 2,150,000
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Present value of Reagan’s military pension (vested; inflation indexed; 1,320,000

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survivor benefit)
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Cash value of Reagan’s life insurance ($250,000 death benefit) 52,000

Estimated present value of Reagan’s future earnings 1,790,000
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Estimated present value of the Grahams’ future consumption 3,700,000
Aspirational and Other Goals

Cost of four years of university for the two children, with an estimated present value of $350,000
Purchase of a vacation home in the next five years, with an estimated present value of $325,000
Donations to charitable organizations during the next 15 years, with an estimated present value
of $400,000
Harvey Garcia, another Clinton's client, lives in New York. Clinton is talking to Garcia about
Garcia's investment portfolio and how total economic wealth (human capital plus financial capital)
might affect asset allocation decisions. The Garcia' human capital is valued at $2.9 million and
estimated to be 35% equity-like. Clinton determines that an overall target allocation of 40% equity
is appropriate for the Garcia' total assets on the economic balance sheet. Additional financial data
are shown in Exhibit 2.
Exhibit 2 Garcia’s additional financial data
Capital Available
Cash and investments $900,000
Garcia: Life insurance $100,000
Total capital available $1,000,000
Next, Clinton and Garcia discussed the pros and cons of annuities. Garcia expressed interest in
buying an annuity and wanted to know under what circumstances we would need an annuity.
Garcia is also planning for retirement. Garcia wants to retire in 20 years and maintain her
current lifestyle. Clinton estimates that Garcia will require 4 million to cover his ongoing living
expenses when he retires. And Garcia doesn't want the probability of achieving his goal to be less
than 70 percent. Clinton then produced the final results based on Monte Carlo simulations, shown
in Exhibit 3.
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Exhibit 3 Monte Carlo Simulation Results for Garcia retirement plan

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Year 10 Portfolio Value Year 15 Portfolio Value Year 20 Portfolio Value

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75th % 3.2M 3.9M 4.6M

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90th % 1.8M 2M 2.3M
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1. Using the data in Exhibit 1, the Grahams’ net wealth (in thousands) is closest to:
A. $2,174.
B. $2,414.
C. $2,795.
2. Based on Exhibit 2, and meeting the Garcia’s target equity allocation for total economic wealth,
the financial capital equity allocation should be closest to:
A. $145,000.
B. $190,000.
C. $505,000.
3. Which of the following factors is generally most likely to support Garcia purchasing an annuity?
A. Higher risk tolerance
B. No preference for lifetime income
C. No need to leave children an inheritance
4. Based on the data in Exhibit 3, which of the following actions should be taken in order to
achieve Garcia's retirement plan?
A. Do nothing.
B. Additional contributions are required.
C. Pursuing higher investment returns.

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QUESTION 8: DERIVATIVES AND CURRENCY MANAGEMENT
Steven Lee is an advisor under Core Capital Management (CCM), which advises high-net-worth
clients. Lee is meeting with three clients today to discuss their positions. All three clients’s own
shares in Golden Friends (GF), a listed company that specializes in financial training.
The first client was very interested in implied volatility, so he asked Lee to introduce some
knowledge of implied volatility to him.
Lee collected implied volatility data of GF three-month options, as shown in Exhibit 1. Lee
considers a delta-hedged trade to profit from this observation.
Exhibit 1. Implied Volatilities by Moneyness: Three-Month Option for GF
Stock ATM Put: 80% Put: 90% Call: 110% Call: 120%
GF 17.60 26.31 22.40 15.54 14.65
Another client holds large GF shares, the current price is $50, and he doesn't want to sell them
because of personal preference. The client is optimistic about GF's long-term performance because
of GF's excellent development momentum. However, due to the recurrence of the Coronavirus
outbreak worldwide, clients expect GF's share price to fall in the short term. Lee developed three
alternative strategies for clients based on the client's expectations:
Strategy A: A covered call using the $60-strike option
Strategy B: A protective put using the $45-strike option
Strategy C: A collar using both the $45- and $60-strike options
Oak Foundation, the third client of CCM, is discussing its equity position in GF. Richard Tully
heads the investment committee of the foundation and informs Lee that the foundation’s portfolio
holds 200,000 shares of GF. His research team sees the coming year as a more volatile year for
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global capital markets because of tensions between Russia and Ukraine. They hope to take
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advantage of this opportunity to generate benefits that will offset any adverse move in GF's stock
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price. After analyzing the market, Lee advised Tully to gain benefits through variance swaps. Tully
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has purchased a one-year variance swap on the S&P 500 with a Vega notional of $100,000 and a
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strike of 20%. Nine months have passed and the S&P 500 has realized a volatility of 21%. The strike
price for a three-month variance swap at this time is quoted at 22%, and the three-month interest
rate is 2%.
A. Based on Lee’s collected data in Exhibit 1, Determine the most appropriate GF options trade.
Explain how this trade makes a delta-hedge.
(4 minutes)
Answer Q8-A:
B. Determine which strategy is most appropriate based on customer expectations. Justify your
response.
(4 minutes)
Answer Q8-B:
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C. Calculate the current valuation of variance swap contracts.
(4 minutes)
Answer Q8-C:
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QUESTION 9: ETHICS
Global Advisors LLC (GA), a USA-based asset management company, offers a variety of actively
managed equity funds that provide diversification across accomplished portfolio managers. It
follows both domestic and international investment strategies with varying investment approaches,
styles, and capitalizations. GA follows the Asset Manager Code of Professional Conduct (the Code)
adopted five years ago. Clay Jensen, CFA, the Compliance Director’s is in charge of investigating
and documenting all complaints. He reports directly to the chief investment officer (CIO).
His responsibilities fall into three broad categories:
Administration & Investigation: administering the policies and procedures and investigating
complaints regarding the conduct of GA’s personnel.
Risk Management: establishing a firmwide risk management process that measures and
manages the risk position and risk exposure of all investments.
Portfolio review: ensuring that portfolio information provided to clients by the manager is
accurate and complete.
GA’s Active Growth Fund has consistently outperformed its mid-to-small-cap benchmark
index, though not significantly over the last three years. However, recently the Fund’s performance
has been lagging the broad market indexes, so Connie Hayes, its portfolio manager, decides to alter
the strategy. After researching, she adds large-cap, emerging market stocks to the Fund and
overweights certain sectors significantly relative to the benchmark index. As a result, the Fund
achieves a stronger performance against its benchmark and emerging market indexes. Hayes
formulates the main points of the new strategy and sends it to all her institutional clients. She plans
to send the strategy’s salient points in the company’s next quarterly newsletter to all others.
GA charges a commission for extra services offered to a few select large clients. The use of
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soft commission and its benefits are disclosed to the clients. A client calls Jensen asking about the
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firm’s soft commission policies. He angrily complains about the misappropriation of his soft dollars’
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arrangement with GA. On investigation of the complaint, Jensen discovers that the client’s
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investment manager, Sophie Tylor, has recently started using the research and brokerage services of
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a firm, TNI, for her large clients in exchange for sending new accounts her way. TNI’s commission
structure is high in comparison with charges for similar brokerage services from other firms. After
discussion with other investment managers, Jensen finds that TNI’s research services are remarkable,
but execution capabilities are average. He confronts Tylor, who insists that she follows the firm’s
disclosure policies and always informs clients about the brokerage arrangement who have no
objection about directing their business through TNI.
Jensen then reviews a complaint against GA’s senior traders, Suneeta Singh, who closed out
GA’s put position in Callem Soup (CaS) stock. Shortly thereafter, Singh had established a sizable
“call” position in the CaS stock after hearing news of its earnings beating its quarterly profit
estimates. For its pooled fund, GA invests its own capital alongside clients to align its interests with
the clients’ interests. Singh claims that she has followed the CaS stock closely, keeping abreast of
all market news, including its research coverage. She took the actions to facilitate anticipated buys
by institutional clients after listening to GA’s Research Department’s positive commentary on CaS,
broadcasted internally last week. The internal broadcast was followed by a recommendation report
sent to clients.
1. Are the three main responsibilities, including reporting line of Jensen consistent with both the
required and recommended standards of the CFA Institute Asset Manager Code of Professional
Conduct?
A. Yes.
B. No, the procedures regarding risk management and reporting line are inconsistent.
C. No, the procedures for portfolio review and reporting line are inconsistent.
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2. Does Hayes violate the CFA Institute Asset Manager Code of Professional Conduct with
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respect to her new investment strategy?

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A. No.
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B. Yes, regarding reasonable and adequate basis only.
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C. Yes, regarding client disclosure only.
3. By using TNI’s services, does Tylor violate the CFA Institute Asset Manager Code of
Professional Conduct?
A. No, because she had disclosed the brokerage arrangement to the client.
B. Yes, because she does not seek the best execution for all clients.
C. No, because TNI’s research services are superior.
4. Are Singh’s trading actions consistent with the CFA Institute Asset Manager Code of
Professional Conduct?
A. Yes.
B. No, because she traded for GA’s account prior to report dissemination.
C. No, because she closed a put position.

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Edward Harrison wants to estimate roll-down return attributable to a fixed-rate, option-free
corporate bond versus UK gilts over the next six months assuming a static, upward-sloping
government yield curve and a constant credit spread. The corporate bond has exactly 10 years
remaining to maturity, a semiannual coupon of 3.25%, and a YTM of 2.75%, while the closest
maturity UK gilt is a 1.75% coupon currently yielding 1.80%, with 9.5 years remaining to maturity.
Harrison decides instead to overweight exposure to this name by taking a long risk position in
the single-name 10-year CDS market for one year. Details of today’s 5-year and 10-year CDS
contracts are as follows.
Issuer Tenor CDS Spread EffSpreadDurCDS
A Company 5 years 130 bps 4.669
B Company 10 years 175 bps 8.680
A. Calculate the annualized roll-down return to the UK corporate bond versus the government
bond over the next six months.
(6 minutes)
Answer Q10-A:
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B. Describe the roll-down strategy using CDS and calculate the one-year return in euros on a
€10,000,000 position assuming an annual coupon payment and a 9-year EffSpreadDurCDS of
7.91.
(6 minutes)
Answer Q10-B:
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QUESTION 11: ETHICS
Rejie Ariusu recently passed Level II of the CFA exam. Ariusu’s elation at passing the exam is
tempered by the current uncertain economic environment. His firm, Scrimm Capital, is an asset
manager for several closed-end, pooled investment funds for institutional investors. Ariusu works
in the real estate investment division, identifying real estate investment opportunities that are
presented to Scrimm Capital’s real estate investment committee for approval. Other groups within
the firm include a high-yield loan group and a small-cap equity growth fund.
Scrimm Capital was founded in 2010. All three funds were established and started trading in
that year. Ariusu joined the firm in 2013. Scrimm Capital encourages a culture of cooperation and
rewards employees who help the firm prosper. Lahi Tami is the supervisor of the real estate
investment group. Tami championed the adoption of the Global Investment Performance Standards
(GIPS) for the real estate group, which promotes its adherence to GIPS in its marketing materials.
Ariusu made the following statement to Tami:
Statement 1: Scrimm Capital cannot claim compliance with GIPS standards for only certain
asset classes that fall within the definition of the firm.
Tami replied:
Statement 2: The real estate investment group claims GIPS compliance because it is a distinct
business entity.
Tami requests the returns for each investment fund as of December 31, 2019, for an
upcoming request for proposals from a large public pension plan.
Ariusu calculates the investment performance of the real estate group and determines that the
performance results are better when calculated over the lifetime of the fund (since 2010) than when
calculated since his arrival to the group in 2013. Ariusu is concerned that the performance of the
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real estate investment group has declined since he joined the firm, and due to this, elects to report
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the performance of the real estate investment group since the fund’s inception.
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At a professional networking event, Ariusu discusses the investment environment with Vert
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Wheeler of Pam Capital, an asset management firm in the same city as Scrimm. Ariusu describes to
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Wheeler the performance of the Scrimm real estate fund using investments he recommended, but
not approved by the real estate investment committee. Wheeler does not know that the investment
performance described by Ariusu is simulated. Wheeler is interested in Ariusu’s investment ideas
and invites him to share his work over dinner, where Ariusu shares the simulated investment returns
for the Scrimm Capital real estate fund.
Ariusu states that the real estate portfolio can be easily replicated by Pam Capital, showing
Wheeler all of the investment positions held by the real estate fund, including those Ariusu
recommended, but were not approved. Wheeler calls Tami the following day to propose a potential
joint marketing opportunity, and to discuss his previous night’s dinner conversation with Ariusu.
Wheeler does not want to interfere with Pam Capital and asks for Tami’s permission to use the
investment information provided by Ariusu as a way to market the real estate investment vehicle to
existing investors of Pam Capital with the potential for them to invest with Scrimm Capital. Tami
tells Wheeler that Scrimm will pay a solicitation fee for each new investor Wheeler brings. Since
Tami is eager to attract new investors, she agrees to share the investment performance information
with Wheeler.
1. Do the statements by Ariusu and Tami most likely comply with CFA Institute Standards?
Statement 1 Statement 2
A. Complies Does not comply
B. Does not comply Complies
C. Complies Complies
2. Does Ariusu’s calculation of the real estate investment group’s performance since the inception
of the fund comply with CFA Institute Standards?
A. Yes.
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presentation of investment performance.

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C. No; it would be considered false and misleading not to provide the risk-adjusted performance
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results since Ariusu’s arrival.
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3. Was Ariusu’s presentation to Wheeler of the real estate fund’s simulated investment returns in
compliance with CFA Institute Standards?
A. Yes.
B. No, because reporting simulated returns does not provide a fair and complete presentation of
performance information.
C. No; CFA Institute Standards allow for simulated investment results only if the simulation is
applied retroactively to investment performance.
4. Is Ariusu’s use of real estate performance data in his discussion with Wheeler in compliance
with CFA Institute Standards?
A. Yes, because Wheeler received permission from Tami to use the information.
B. Yes, because CFA Institute Standards allow for knowledge gained at one employer to be used
in discussions with other firms.
C. No.
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金程教育WWW.GFEDU.

2023 LEVEL III Test Exam Session 1

Question Topic Minutes

2 Capital Market Expectations 12

3 Derivatives And Currency Management 12

4 Fixed-Income Portfolio Management 12

6 Equity Portfolio Management 12

7 Alternative Investments For Portfolio Management 12

8 Ethics & professional standards 12

9 Portfolio Management For Institutional Investors 12

10 Trading Performance evaluation and manager selection 12

11 Private Wealth Management 12

QUESTION 1: BEHAVIORAL FINANCE

TOTAL POINT VALUE OF THIS QUESTION SET IS 12 POINTS

White’s high-net-worth clients:

Client 1: Mr. Saul Goodman

Saul Goodman is a 45-year-old corporate lawyer employed by an international firm. He is

Client 2: Mr. Jesse Pinkman

your response. Answer Part B in the template provided.

Passive Preserver Friendly Follower Independent Individualist Active Accumulator

Justify your response.

White’s subordinate,Tyler Johnson, is a hedge fund manager with a history of outstanding

precisely forecasted the future economic activity.”

C. Identify the two biases exhibited by Walter White (Loss-aversion, representativeness,

QUESTION 2: CAPITAL MARKET EXPECTATIONS

TOTAL POINT VALUE OF THIS QUESTION SET IS 12 POINTS

five specific countries, referred to below as countries A through E.

these events may have on her portfolio.

and their possible effects on the financial markets.

Country B as shown in Exhibit 1.

be needed to determine the Taylor rule for a particular country, including:

2) the expected and target inflation rates, and

Exhibit 1 Country Information

1) Expansion rate for P/E multiples of 0.35% per year.

2) Based on a 1 percentage point premium for corporate earnings growth over

3) The rate of net share repurchases for Country A equities is 1.5%.

Category/Parameter Estimated Projected

Country B Volatility 17% 21%

Correlation with global market 0.6 0.5

Degree of integration 0.65 0.55

Sharpe ratio (global and segmented markets) 0.25 0.25

1) The economy is in early expansion stage.

2) The front section of the yield curve is increasingly sloping upward.

Country C 3) The back half of the yield curve is a flat curve.

4)The central bank is deemphasizing its quantitative easing program and is

purchasing fewer government bonds.

Country D Secularly rising current account surplus.

Country E Secularly rising current account deficit.

while Country E has a secularly rising current account deficit.

A. Capital account balances are trending and sustainable.

calculation of the Taylor rule?

A. Expected and target inflation rates.

B. Expected and trend nominal GDP growth rates.

A. Declining; pace may be expected to accelerate.

the narrowing surplus.

QUESTION 3: DERIVATIVES AND CURRENCY MANAGEMENT

TOTAL POINT VALUE OF THIS QUESTION SET IS 12 POINTS

CFA三级密卷题目

CFA三级密卷题目

CFA三级密卷题目