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Exam Code: CFA-Level-III
Exam Questions: 365
CFA Level III Chartered Financial Analyst
Updated: 24 Jul, 2026
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Question 1

Pace Insurance is a large, multi-line insurance company that also owns several proprietary mutual funds. The
funds are managed individually, but Pace has an investment committee that oversees all of the funds. This
committee is responsible for evaluating the performance of the funds relative to appropriate benchmarks and
relative to the stated investment objectives of each individual fund. During a recent investment committee
meeting, the poor performance of Pace's equity mutual funds was discussed. In particular, the inability of the
portfolio managers to outperform their benchmarks was highlighted. The net conclusion of the committee was
to review the performance of the manager responsible for each fund and dismiss those managers whose
performance had lagged substantially behind the appropriate benchmark.
The fund with the worst relative performance is the Pace Mid-Cap Fund, which invests in stocks with a
capitalization between S40 billion and $80 billion. A review of the operations of the fund found the following:
• The turnover of the fund was almost double that of other similar style mutual funds.
• The fund's portfolio manager solicited input from her entire staff prior to making any decision to sell an existing
holding.
• The beta of the Pace Mid-Cap Fund's portfolio was 60% higher than the beta of other similar style mutual
funds.
• No stock is considered for purchase in the Mid-Cap Fund unless the portfolio manager has 15 years of
financial information on that company, plus independent research reports from at least three different analysts.
• The portfolio manager refuses to increase her technology sector weighting because of past losses the fund
incurred in the sector.
• The portfolio manager sold all the fund's energy stocks as the price per barrel of oil rose above $80. She
expects oil prices to fall back to the $40 to S50 per barrel range.
A committee member made the following two comments:
Comment 1: "One reason for the poor recent performance of the Mid-Cap Mutual Fund is that the portfolio
lacks recognizable companies. I believe that good companies make good investments."
Comment 2: "The portfolio manager of the Mid-Cap Mutual Fund refuses to acknowledge her mistakes. She
seems to sell stocks that appreciate, but hold stocks that have declined in value."
The supervisor of the Mid-Cap Mutual Fund portfolio manager made the following statements:
Statement 1: "The portfolio manager of the Mid-Cap Mutual Fund has engaged in quarter-end window dressing
to make her portfolio look better to investors. The portfolio manager's action is a behavioral trait known as overreaction."
Statement 2: "Each time the portfolio manager of the Mid-Cap Mutual fund trades a stock, she executes the
trade by buying or selling one-third of the position at a time, with the trades spread over three months. The
portfolio manager's action is a behavioral trait known as anchoring."
Indicate whether Statement 1 and Statement 2 made by the supervisor are correct.

Options :
Answer: C
Question 2

John Green, CFA, is a sell-side technology analyst at Federal Securities, a large global investment banking and
advisory firm. In many of his recent conversations with executives at the firms he researches, Green has heard
disturbing news. Most of these firms are lowering sales estimates for the coming year. However, the stock
prices have been stable despite management's widely disseminated sales warnings. Green is preparing his
quarterly industry analysis and decides to seek further input. He calls Alan Volk, CFA, a close friend who runs
the Initial Public Offering section of the investment banking department of Federal Securities.
Volk tells Green he has seen no slowing of demand for technology IPOs. "We've got three new issues due out
next week, and two of them are well oversubscribed." Green knows that Volk's department handled over 200
IPOs last year, so he is confident that Volk's opinion is reliable. Green prepares his industry report, which is
favorable. Among other conclusions, the report states that "the future is still bright, based on the fact that 67%
of technology IPOs are oversubscribed." Privately, Green recommends to Federal portfolio managers that they
begin selling all existing technology issues, which have "stagnated," and buy the IPOs in their place.
After carefully evaluating Federal's largest institutional client's portfolio, Green contacts the client and
recommends selling all of his existing technology stocks and buying two of the upcoming IPOs, similar to the
recommendation given to Federal's portfolio managers. Green's research has allowed him to conclude that only
these two IPOs would be appropriate for this particular client's portfolio. Investing in these IPOs and selling the
current technology holdings would, according to Green, "double the returns that your portfolio experienced last
year."
Federal Securities has recently hired Dirks Bentley, a CFA candidate who has passed Level 2 and is currently
preparing to take the Level 3 CFA® exam, to reorganize Federal's compliance department. Bentley tells Green
that he may be subject to CFA Institute sanctions due to inappropriate contact between analysts and
investment bankers within Federal Securities. Bentley has recommended that Green implement a firewall to
rectify the situation and has outlined the key characteristics for such a system. Bentley's suggestions are as
follows:
1. Any communication between the departments of Federal Securities must be channeled through the
compliance department for review and eventual delivery. The firm must create and maintain watch, restricted,
and rumor lists to be used in the review of employee trading.
2. All beneficial ownership, whether direct or indirect, of recommended securities must be disclosed in writing.
3. The firm must increase the level of review or restriction of proprietary trading activities during periods in
which the firm has knowledge of information that is both material and nonpublic.
Bentley has identified two of Green's analysts, neither of whom have non-compete contracts, who are preparing
to leave Federal Securities and go into competition. The first employee, James Ybarra, CFA, has agreed to
take a position with one of Federal's direct competitors. Ybarra has contacted existing Federal clients using a
client list he created with public records. None of the contacted clients have agreed to move their accounts as
Ybarra has requested. The second employee, Martha Cliff, CFA, has registered the name Cliff Investment
Consulting (CIC), which she plans to use for her independent consulting business. For the new business
venture, Cliff has developed and professionally printed marketing literature that compares the new firm's
services to that of Federal Securities and highlights the significant cost savings that will be realized by switching
to CIC. After she leaves Federal, Cliff plans to target many of the same prospects that Federal Securities is
targeting, using an address list she purchased from a third-party vendor. Bentley decides to call a meeting with
Green to discuss his findings.
After discussing the departing analysts. Green asks Bentley how to best handle the disclosure of the following
items: (1) although not currently a board member. Green has served in the past on the board of directors of a
company he researches and expects that he will do so again in the near future; and (2) Green recently inherited
put options on a company for which he has an outstanding buy recommendation. Bentley is contemplating his
response to Green.
According to Standard 11(A) Material Nonpublic Information, when Green contacted Volk, he:

Options :
Answer: C
Question 3

William Bliss, CFA, runs a hedge fund that uses both managed futures strategies and positions in physical
commodities. He is reviewing his operations and strategies to increase the return of the fund. Bliss has just
hired Joseph Kanter, CFA, to help him manage the fund because he realizes that he needs to increase his
trading activity in futures and to engage in futures strategies other than fully hedged, passively managed
positions. Bliss also hired Kanter because of Kantcr's experience with swaps, which Bliss hopes to add to his
choice of investment tools.
Bliss explains to Kanter that his clients pay 2% on assets under management and a 20% incentive fee. The
incentive fee is based on profits after having subtracted the risk-free rate, which is the fund's basic hurdle rate,
and there is a high water mark provision. Bliss is hoping that Kanter can help his business because his firm did
not earn an incentive fee this past year. This was the case despite the fact that, after two years of losses, the
value of the fund increased 14% during the previous year. That increase occurred without any new capital
contributed from clients. Bliss is optimistic about the near future because the term structure of futures prices is
particularly favorable for earning higher returns from long futures positions.
Kanter says he has seen research that indicates inflation may increase in the next few years. He states this
should increase the opportunity to earn a higher return in commodities and suggests taking a large, margined
position in a broad commodity index. This would offer an enhanced return that would attract investors holding
only stocks and bonds. Bliss mentions that not all commodity prices are positively correlated with inflation so it
may be better to choose particular types of commodities in which to invest. Furthermore, Bliss adds that
commodities traditionally have not outperformed stocks and bonds either on a risk-adjusted or absolute basis.
Kanter says he will research companies who do business in commodities, because buying the stock of those
companies to gain commodity exposure is an efficient and effective method for gaining indirect exposure to
commodities.
Bliss agrees that his fund should increase its exposure to commodities and wants Kanter's help in using swaps
to gain such exposure. Bliss asks Kanter to enter into a swap with a relatively short horizon to demonstrate how
a commodity swap works. Bliss notes that the futures prices of oil for six months, one year, eighteen months,
and two years are $55, S54, $52, and $5 1 per barrel, respectively, and the risk-free rate is less than 2%.
Bliss asks how a seasonal component could be added to such a swap. Specifically, he asks if either the
notional principal or the swap price can be higher during the reset closest to the winter season and lower for the
reset period closest to the summer season. This would allow the swap to more effectively hedge a commodity
like oil, which would have a higher demand in the winter than the summer. Kanter says that a swap can only
have seasonal swap prices, and the notional principal must stay constanl. Thus, the solution in such a case
would be to enter into two swaps, one that has an annual reset in the winter and one that has an annual reset in
the summer.
Given the information, the most likely reason that Bliss's firm did not earn an incentive fee in the past year was
because:

Options :
Answer: C
Question 4

Robert Keith, CFA, has begun a new job at CMT Investments as Head of Compliance. Keith has just completed a review of all of CMT's operations, and has interviewed all the firm's portfolio managers. Many are CFA charterholders, but some are not. Keith intends to use the CFA Institute Code and Standards, as well as the Asset Manager Code of Professional Conduct, as ethical guidelines for CMT to follow. In the course of Keith's review of the firm's overall practices, he has noted a few situations which potentially need to be addressed. Situation 1: CMT Investments' policy regarding acceptance of gifts and entertainment is not entirely clear. There is general confusion within the firm regarding what is and is not acceptable practice regarding gifts, entertainment and additional compensation. Situation 2: Keith sees inconsistency regarding fee disclosures to clients. In some cases, information related to fees paid to investment managers for investment services provided are properly disclosed. However, a few of the periodic costs, which will affect investment return, are not disclosed to the clients. Most managers are providing clients with investment returns net of fees, but a few are just providing the gross returns. One of the managers stated "providing gross returns is acceptable, as long as I show the fees such that the client can make their own simple calculation of the returns net of fees." Situation 3: Keith has noticed a few gaps in CMT's procedure regarding use of soft dollars. There have been cases where "directed brokerage" has resulted in less than prompt execution of trades. He also found a few cases where a manager paid a higher commission than normal, in order to obtain goods or services. Keith is considering adding two statements to CMT's policy and procedures manual specifically addressing the primary issues he noted. Statement 1: "Commissions paid, and any corresponding benefits received, are the property of the client. The benefit(s) must directly benefit the client. If a manager's client directs the manager to purchase goods or services that do not provide research services that benefit the client, this violates the duty of loyalty to the client.” Statement 2: "In cases of "directed brokerage," if there is concern that the client is not receiving the best execution, it is acceptable to utilize a less than ideal broker, but it must be disclosed to the client that they may not be obtaining the best execution." Situation 4: Keith is still evaluating his data, but it appears that there may be situations where proxies were not voted. After completing his analysis of proxy voting procedures at CMT, Keith wants to insert the proper language into the procedures manual to address proxy voting. Situation 5: Keith is putting into place a "disaster recovery- plan," in order to ensure business continuity in the event of a localized disaster, and also to protect against any type of disruption in the financial markets. This plan includes the following provisions: • Procedures for communicating with clients, especially in the event of extended disruption of services provided. • Alternate arrangement for monitoring and analyzing investments in the event that primary systems become unavailable. • Plans for internal communication and coverage of crucial business functions in the event of disruption at the primary place of business, or a communications breakdown. Keith is considering adding the following provisions to the disaster recovery plan in order to properly comply with the CFA Institute Asset Manager Code of Professional Conduct: Provision 1: "A provision needs to be added incorporating off-site backup for all pertinent account information." Provision 2: "A provision mandating testing of the plan on a company-wide basis, at periodical intervals, should be added." Situation 6: Keith is spending an incredible amount of time on detailed procedures and company policies that are in compliance with the CFA Institute Code and Standards, and also in compliance with the CFA Institute Asset Manager Code of Professional Conduct. As part of this process, he has had several meetings with CMT senior management, and is second-guessing the process. One of the senior managers is indicating that it might be a

better idea to just formally adopt both the Code and Standards and the Asset Manager Code of Conduct, which would make a detailed policy and procedure manual redundant. Keith wants to assure CMT's compliance with the requirements of the CFA Institute Code and Standards of Professional Conduct. Which of the following statements most accurately describes CMT's responsibilities in order to assure compliance?

Options :
Answer: B
Question 5

Eugene Price, CFA, a portfolio manager for the American Universal Fund (AUF), has been directed to pursue a
contingent immunization strategy for a portfolio with a current market value of $100 million. AUF's trustees are
not willing to accept a rate of return less than 6% over the next five years. The trustees have also stated that
they believe an immunization rate of 8% is attainable in today's market. Price has decided to implement this
strategy by initially purchasing $100 million in 10-year bonds with an annual coupon rate of 8.0%, paid
semiannually
Price forecasts that the prevailing immunization rate and market rate for the bonds will both rise from 8% to 9%
in one year.
While Price is conducting his immunization strategy he is approached by April Banks, a newly hired junior
analyst at AUF. Banks is wondering what steps need to be taken to immunize a portfolio with multiple liabilities.
Price states that the concept of single liability immunization can fortunately be extended to address the issue of
immunizing a portfolio with multiple liabilities. He further states that there are two methods for managing
multiple liabilities. The first method is cash flow matching which involves finding a bond with a maturity date
equal to the liability payment date, buying enough in par value of that bond so that the principal and final coupon
fully fund the last liability, and continuing this process until all liabilities are matched. The second method is
horizon matching which ensures that the assets and liabilities have the same present values and durations.
Price warns Banks about the dangers of immunization risk. He states that it is impossible to have a portfolio
with zero immunization risk, because reinvestment risk will always be present. Price tells Banks, "Be cognizant
of the dispersion of cash flows when conducting an immunization strategy. When there is a high dispersion of
cash flows about the horizon date, immunization risk is high. It is better to have cash flows concentrated around
the investment horizon, since immunization risk is reduced."
Regarding Price's statements on the two methods for managing multiple liabilities, determine whether his
descriptions of cash flow matching and horizon matching are correct.

Options :
Answer: B
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