CHATERED FINANCIAL ANALYST (CFA@) LEVEL III
EXAM QUESTIONS AND CORRRECT ANSWERS
(VERIFIED ANSWERS) PLUS RATIONALES Q&A
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1. Which of the following are typical components of the CFA
Level III portfolio management process?
A) Setting investment objectives
B) Security analysis only
C) Asset allocation
D) Performance evaluation
Rationale:
• A) Correct – Defining objectives is the first step in portfolio
management.
• B) Security analysis is part of research but not the entire
portfolio management process.
• C) Correct – Asset allocation is a central step in
implementing portfolio strategy.
• D) Correct – Performance evaluation is part of monitoring
the portfolio.
Answer: A, C, D
,2. In evaluating a bond portfolio, which measures capture
interest rate risk?
A) Duration
B) Convexity
C) Beta
D) Sharpe ratio
Rationale:
• A) Correct – Duration measures sensitivity to interest rate
changes.
• B) Correct – Convexity accounts for non-linear price
changes due to rate shifts.
• C) Beta measures market risk, not interest rate risk.
• D) Sharpe ratio measures risk-adjusted return, not interest
rate risk.
Answer: A, B
3. Which of the following are benefits of diversification in a
portfolio?
A) Reduction of unsystematic risk
B) Elimination of systematic risk
C) Smoothing of returns
D) Increase in expected return without additional risk
Rationale:
, • A) Correct – Diversification reduces unsystematic risk
specific to securities.
• B) Systematic risk cannot be eliminated through
diversification.
• C) Correct – Diversification helps smooth portfolio returns.
• D) Risk-adjusted return improves, but expected return
does not automatically increase.
Answer: A, C
4. For a defined benefit pension plan, which of the following
are typical risks?
A) Longevity risk
B) Interest rate risk
C) Inflation risk
D) Credit risk
Rationale:
• A) Correct – Paying benefits over longer lifetimes increases
risk.
• B) Correct – Liabilities are sensitive to interest rate
changes.
• C) Correct – Inflation erodes the real value of fixed
benefits.
, • D) Credit risk is generally borne by the plan’s investments,
not the pension obligation itself.
Answer: A, B, C
5. Which of the following statements about the efficient
frontier are correct?
A) It shows portfolios with the highest return for a given level of
risk.
B) All portfolios on the frontier have the same level of risk.
C) Portfolios below the frontier are sub-optimal.
D) Risk-free assets are included in the traditional efficient
frontier.
Rationale:
• A) Correct – The frontier represents optimal risk-return
combinations.
• B) Incorrect – Risk varies along the frontier.
• C) Correct – Portfolios below the frontier are dominated by
efficient portfolios.
• D) Traditional frontier includes risky assets only; risk-free
assets are used in the capital market line extension.
Answer: A, C
EXAM QUESTIONS AND CORRRECT ANSWERS
(VERIFIED ANSWERS) PLUS RATIONALES Q&A
|INSTANT DOWNLOAD PDF
1. Which of the following are typical components of the CFA
Level III portfolio management process?
A) Setting investment objectives
B) Security analysis only
C) Asset allocation
D) Performance evaluation
Rationale:
• A) Correct – Defining objectives is the first step in portfolio
management.
• B) Security analysis is part of research but not the entire
portfolio management process.
• C) Correct – Asset allocation is a central step in
implementing portfolio strategy.
• D) Correct – Performance evaluation is part of monitoring
the portfolio.
Answer: A, C, D
,2. In evaluating a bond portfolio, which measures capture
interest rate risk?
A) Duration
B) Convexity
C) Beta
D) Sharpe ratio
Rationale:
• A) Correct – Duration measures sensitivity to interest rate
changes.
• B) Correct – Convexity accounts for non-linear price
changes due to rate shifts.
• C) Beta measures market risk, not interest rate risk.
• D) Sharpe ratio measures risk-adjusted return, not interest
rate risk.
Answer: A, B
3. Which of the following are benefits of diversification in a
portfolio?
A) Reduction of unsystematic risk
B) Elimination of systematic risk
C) Smoothing of returns
D) Increase in expected return without additional risk
Rationale:
, • A) Correct – Diversification reduces unsystematic risk
specific to securities.
• B) Systematic risk cannot be eliminated through
diversification.
• C) Correct – Diversification helps smooth portfolio returns.
• D) Risk-adjusted return improves, but expected return
does not automatically increase.
Answer: A, C
4. For a defined benefit pension plan, which of the following
are typical risks?
A) Longevity risk
B) Interest rate risk
C) Inflation risk
D) Credit risk
Rationale:
• A) Correct – Paying benefits over longer lifetimes increases
risk.
• B) Correct – Liabilities are sensitive to interest rate
changes.
• C) Correct – Inflation erodes the real value of fixed
benefits.
, • D) Credit risk is generally borne by the plan’s investments,
not the pension obligation itself.
Answer: A, B, C
5. Which of the following statements about the efficient
frontier are correct?
A) It shows portfolios with the highest return for a given level of
risk.
B) All portfolios on the frontier have the same level of risk.
C) Portfolios below the frontier are sub-optimal.
D) Risk-free assets are included in the traditional efficient
frontier.
Rationale:
• A) Correct – The frontier represents optimal risk-return
combinations.
• B) Incorrect – Risk varies along the frontier.
• C) Correct – Portfolios below the frontier are dominated by
efficient portfolios.
• D) Traditional frontier includes risky assets only; risk-free
assets are used in the capital market line extension.
Answer: A, C
