Chartered Financial Analyst (CFA) Level 3 Exam Test
Bank with All 430 Questions from Actual Exam, 100%
Correct Answers and Rationale
Below is a CFA-INSTITUTE–ACCURATE, EXAM-DAY–LEVEL SET of
MOST TESTED & MOST DIFFICULT CONCEPTS + QUESTIONS
for the
Chartered Financial Analyst (CFA) Level III Exam
This mirrors actual CFA Level III difficulty and structure:
✔ Constructed-Response (Essay) thinking
✔ Portfolio management judgment
✔ IPS mastery
✔ Behavioral finance traps
✔ Fixed income & derivatives overlays
✔ Ethics in portfolio context
CFA LEVEL III
25 Most Tested & Most Difficult Questions (with Answers & Logic)
1️⃣ IPS – Return Objective (Individual)
A 45-year-old executive plans to retire in 20 years, saves regularly, and has no liquidity needs. What
return objective is MOST appropriate?
Answer:
Required real return sufficient to meet retirement spending goal, not “maximize return.”
Key trap: Never use vague language (“high return”) in IPS.
,2️⃣ IPS – Risk Objective (Individual)
Which factor MOST limits an individual’s risk tolerance?
A. Time horizon
B. Return requirement
C. Liquidity needs
D. Tax considerations
✅ Correct: B
Risk tolerance = willingness & ability → lower dominates
3️⃣ IPS – Institutional (Defined Benefit Plan)
A DB pension plan with funded status >120% and declining participants should MOST likely:
Answer:
Shift toward lower-risk, liability-matching assets
4️⃣ Behavioral Finance – Loss Aversion Bias
Which behavior BEST describes loss aversion?
Answer:
Holding losing investments too long to avoid realizing losses
5️⃣ Behavioral Finance – Cognitive vs Emotional Bias
Which bias is least correctable?
A. Anchoring
B. Mental accounting
C. Overconfidence
D. Loss aversion
✅ Correct: D
6️⃣ Capital Market Expectations
Which forecasting method is MOST appropriate for short-term asset allocation?
Answer:
Survey-based expectations (despite limitations)
,7️⃣ Asset Allocation – Strategic vs Tactical
Tactical asset allocation attempts to:
Answer:
Exploit short-term mispricing relative to strategic weights
8️⃣ Fixed Income – Yield Curve Strategy
If the yield curve is steep and expected to flatten, which strategy performs BEST?
Answer:
Bullet portfolio
9️⃣ Fixed Income – Immunization
A portfolio immunized against a single liability requires:
Answer:
Duration match AND convexity ≥ liability convexity
Fixed Income – Credit Strategies
If credit spreads are expected to widen, portfolio manager should:
Answer:
Reduce credit exposure / move to higher quality bonds
1️⃣1️⃣ Equity – Active vs Passive
Which situation favors active equity management?
Answer:
Markets with low efficiency and high dispersion
1️⃣2️⃣ Equity – Portfolio Concentration
Increasing portfolio concentration MOST likely:
Answer:
Increases active risk but not systematic risk
, 1️⃣3️⃣ Alternative Investments – Private Equity
Private equity returns are MOST sensitive to:
Answer:
Economic growth and leverage
1️⃣4️⃣ Real Assets – Inflation Protection
Which asset provides the MOST direct inflation hedge?
A. Nominal bonds
B. REITs
C. TIPS
D. Hedge funds
✅ Correct: C
1️⃣5️⃣ Hedge Funds – Strategy Identification
A fund profiting from price discrepancies between convertible bonds and stocks is using:
Answer:
Convertible arbitrage
1️⃣6️⃣ Derivatives – Equity Overlay
A manager wants to reduce equity exposure without selling securities. Best tool?
Answer:
Equity index futures – short position
1️⃣7️⃣ Currency Management – Hedging Decision
Currency hedging is MOST beneficial when:
Answer:
Volatility of currency returns is high relative to asset returns
1️⃣8️⃣ Risk Management – Value at Risk (VaR)
VaR fails MOST because it:
Bank with All 430 Questions from Actual Exam, 100%
Correct Answers and Rationale
Below is a CFA-INSTITUTE–ACCURATE, EXAM-DAY–LEVEL SET of
MOST TESTED & MOST DIFFICULT CONCEPTS + QUESTIONS
for the
Chartered Financial Analyst (CFA) Level III Exam
This mirrors actual CFA Level III difficulty and structure:
✔ Constructed-Response (Essay) thinking
✔ Portfolio management judgment
✔ IPS mastery
✔ Behavioral finance traps
✔ Fixed income & derivatives overlays
✔ Ethics in portfolio context
CFA LEVEL III
25 Most Tested & Most Difficult Questions (with Answers & Logic)
1️⃣ IPS – Return Objective (Individual)
A 45-year-old executive plans to retire in 20 years, saves regularly, and has no liquidity needs. What
return objective is MOST appropriate?
Answer:
Required real return sufficient to meet retirement spending goal, not “maximize return.”
Key trap: Never use vague language (“high return”) in IPS.
,2️⃣ IPS – Risk Objective (Individual)
Which factor MOST limits an individual’s risk tolerance?
A. Time horizon
B. Return requirement
C. Liquidity needs
D. Tax considerations
✅ Correct: B
Risk tolerance = willingness & ability → lower dominates
3️⃣ IPS – Institutional (Defined Benefit Plan)
A DB pension plan with funded status >120% and declining participants should MOST likely:
Answer:
Shift toward lower-risk, liability-matching assets
4️⃣ Behavioral Finance – Loss Aversion Bias
Which behavior BEST describes loss aversion?
Answer:
Holding losing investments too long to avoid realizing losses
5️⃣ Behavioral Finance – Cognitive vs Emotional Bias
Which bias is least correctable?
A. Anchoring
B. Mental accounting
C. Overconfidence
D. Loss aversion
✅ Correct: D
6️⃣ Capital Market Expectations
Which forecasting method is MOST appropriate for short-term asset allocation?
Answer:
Survey-based expectations (despite limitations)
,7️⃣ Asset Allocation – Strategic vs Tactical
Tactical asset allocation attempts to:
Answer:
Exploit short-term mispricing relative to strategic weights
8️⃣ Fixed Income – Yield Curve Strategy
If the yield curve is steep and expected to flatten, which strategy performs BEST?
Answer:
Bullet portfolio
9️⃣ Fixed Income – Immunization
A portfolio immunized against a single liability requires:
Answer:
Duration match AND convexity ≥ liability convexity
Fixed Income – Credit Strategies
If credit spreads are expected to widen, portfolio manager should:
Answer:
Reduce credit exposure / move to higher quality bonds
1️⃣1️⃣ Equity – Active vs Passive
Which situation favors active equity management?
Answer:
Markets with low efficiency and high dispersion
1️⃣2️⃣ Equity – Portfolio Concentration
Increasing portfolio concentration MOST likely:
Answer:
Increases active risk but not systematic risk
, 1️⃣3️⃣ Alternative Investments – Private Equity
Private equity returns are MOST sensitive to:
Answer:
Economic growth and leverage
1️⃣4️⃣ Real Assets – Inflation Protection
Which asset provides the MOST direct inflation hedge?
A. Nominal bonds
B. REITs
C. TIPS
D. Hedge funds
✅ Correct: C
1️⃣5️⃣ Hedge Funds – Strategy Identification
A fund profiting from price discrepancies between convertible bonds and stocks is using:
Answer:
Convertible arbitrage
1️⃣6️⃣ Derivatives – Equity Overlay
A manager wants to reduce equity exposure without selling securities. Best tool?
Answer:
Equity index futures – short position
1️⃣7️⃣ Currency Management – Hedging Decision
Currency hedging is MOST beneficial when:
Answer:
Volatility of currency returns is high relative to asset returns
1️⃣8️⃣ Risk Management – Value at Risk (VaR)
VaR fails MOST because it:
