CFA Level III Exam 2026: Professional Certification Practice Test —
Portfolio Management, Asset Allocation, Wealth Planning, Risk
Management & Investment Strategy — 190 Multiple-Choice
Questions with Answers & Detailed Rationales
SECTION 1: ETHICAL AND PROFESSIONAL STANDARDS (Questions 1–19)
Question 1
A portfolio manager at a large asset management firm receives a gift of a luxury watch
valued at $2,500 from a client whose account she manages. The firm's policies permit gifts
up to $500 in value. According to the CFA Institute Code of Ethics and Standards of
Professional Conduct, the manager should most appropriately:
A. Accept the gift since it was given voluntarily by a grateful client.
B. Accept the gift but disclose it to her employer in writing.
C. Decline the gift because it exceeds the firm's gift limit and could compromise
independence.
D. Accept the gift and donate it to charity to avoid any conflict of interest.
Correct Answer: C
Explanation: Standard I(B) Independence and Objectivity requires members to reject gifts
that could compromise independence. Firm policy limits gifts to $500; accepting $2,500
violates both policy and professional standards.
Question 2
,An analyst prepares a research report on a biotechnology company. Before publication, the
analyst shares the report's conclusion with a hedge fund client who then trades on the
information. This action most likely violates:
A. Standard II(A) Material Nonpublic Information only.
B. Standard III(B) Fair Dealing only.
C. Both Standard II(A) and Standard III(B).
D. Neither standard since the report was the analyst's own work.
Correct Answer: C
Explanation: Sharing conclusions before publication violates Fair Dealing (III(B)) and if the
information is material and nonpublic, also violates Standard II(A). Selective disclosure prior
to publication harms other clients.
Question 3
A CFA charterholder serves as a board member for a nonprofit organization. The
organization asks her to recommend an investment advisor. She recommends her own firm
without disclosing her affiliation. This action most likely violates:
A. Standard I(A) Knowledge of the Law.
B. Standard VI(A) Disclosure of Conflicts.
C. Standard IV(C) Responsibilities of Supervisors.
D. Standard V(A) Diligence and Reasonable Basis.
Correct Answer: B
,Explanation: Standard VI(A) requires disclosure of all actual and potential conflicts of
interest. Recommending one's own firm without disclosing the affiliation is a clear conflict
that must be disclosed.
Question 4
A junior analyst discovers that his supervisor has been inflating performance returns for a
composite. The analyst reports this to the compliance department. According to the CFA
Institute Standards, the analyst has:
A. Violated confidentiality by reporting internally.
B. Acted appropriately by following the firm's procedures for reporting violations.
C. Violated Standard I(D) Misconduct by accusing a superior.
D. Failed to exhaust all internal channels before reporting.
Correct Answer: B
Explanation: Standard I(A) encourages members to report violations through appropriate
channels. Reporting to compliance is the proper internal mechanism and demonstrates
ethical conduct.
Question 5
A portfolio manager uses a broker-dealer that provides research services to execute client
trades. The research services are used to benefit all clients, but the brokerage commission is
higher than that of competing brokers. The manager:
A. Must use the cheapest broker available regardless of research quality.
B. May use the broker if the research benefits clients and is disclosed to them.
C. Violates standards by paying higher commissions for research.
, D. Must rebate the excess commission to clients.
Correct Answer: B
Explanation: Soft dollar arrangements are permissible if research benefits clients and proper
disclosure is made. Best execution considers both cost and research value under applicable
regulations.
Question 6
An investment advisor creates a model portfolio and allocates trades to client accounts. The
advisor allocates the best-performing trades to his own account and less favorable trades to
clients. This practice is known as:
A. Front running.
B. Cherry picking.
C. Directed brokerage.
D. Market timing.
Correct Answer: B
Explanation: Cherry picking occurs when an investment professional allocates favorable
trades to personal accounts and unfavorable trades to client accounts, violating fiduciary
duty and fair dealing.
Question 7
A CFA candidate is preparing for Level III and posts on social media that she "passed Level II
easily because the exam is a joke." This statement most likely:
Portfolio Management, Asset Allocation, Wealth Planning, Risk
Management & Investment Strategy — 190 Multiple-Choice
Questions with Answers & Detailed Rationales
SECTION 1: ETHICAL AND PROFESSIONAL STANDARDS (Questions 1–19)
Question 1
A portfolio manager at a large asset management firm receives a gift of a luxury watch
valued at $2,500 from a client whose account she manages. The firm's policies permit gifts
up to $500 in value. According to the CFA Institute Code of Ethics and Standards of
Professional Conduct, the manager should most appropriately:
A. Accept the gift since it was given voluntarily by a grateful client.
B. Accept the gift but disclose it to her employer in writing.
C. Decline the gift because it exceeds the firm's gift limit and could compromise
independence.
D. Accept the gift and donate it to charity to avoid any conflict of interest.
Correct Answer: C
Explanation: Standard I(B) Independence and Objectivity requires members to reject gifts
that could compromise independence. Firm policy limits gifts to $500; accepting $2,500
violates both policy and professional standards.
Question 2
,An analyst prepares a research report on a biotechnology company. Before publication, the
analyst shares the report's conclusion with a hedge fund client who then trades on the
information. This action most likely violates:
A. Standard II(A) Material Nonpublic Information only.
B. Standard III(B) Fair Dealing only.
C. Both Standard II(A) and Standard III(B).
D. Neither standard since the report was the analyst's own work.
Correct Answer: C
Explanation: Sharing conclusions before publication violates Fair Dealing (III(B)) and if the
information is material and nonpublic, also violates Standard II(A). Selective disclosure prior
to publication harms other clients.
Question 3
A CFA charterholder serves as a board member for a nonprofit organization. The
organization asks her to recommend an investment advisor. She recommends her own firm
without disclosing her affiliation. This action most likely violates:
A. Standard I(A) Knowledge of the Law.
B. Standard VI(A) Disclosure of Conflicts.
C. Standard IV(C) Responsibilities of Supervisors.
D. Standard V(A) Diligence and Reasonable Basis.
Correct Answer: B
,Explanation: Standard VI(A) requires disclosure of all actual and potential conflicts of
interest. Recommending one's own firm without disclosing the affiliation is a clear conflict
that must be disclosed.
Question 4
A junior analyst discovers that his supervisor has been inflating performance returns for a
composite. The analyst reports this to the compliance department. According to the CFA
Institute Standards, the analyst has:
A. Violated confidentiality by reporting internally.
B. Acted appropriately by following the firm's procedures for reporting violations.
C. Violated Standard I(D) Misconduct by accusing a superior.
D. Failed to exhaust all internal channels before reporting.
Correct Answer: B
Explanation: Standard I(A) encourages members to report violations through appropriate
channels. Reporting to compliance is the proper internal mechanism and demonstrates
ethical conduct.
Question 5
A portfolio manager uses a broker-dealer that provides research services to execute client
trades. The research services are used to benefit all clients, but the brokerage commission is
higher than that of competing brokers. The manager:
A. Must use the cheapest broker available regardless of research quality.
B. May use the broker if the research benefits clients and is disclosed to them.
C. Violates standards by paying higher commissions for research.
, D. Must rebate the excess commission to clients.
Correct Answer: B
Explanation: Soft dollar arrangements are permissible if research benefits clients and proper
disclosure is made. Best execution considers both cost and research value under applicable
regulations.
Question 6
An investment advisor creates a model portfolio and allocates trades to client accounts. The
advisor allocates the best-performing trades to his own account and less favorable trades to
clients. This practice is known as:
A. Front running.
B. Cherry picking.
C. Directed brokerage.
D. Market timing.
Correct Answer: B
Explanation: Cherry picking occurs when an investment professional allocates favorable
trades to personal accounts and unfavorable trades to client accounts, violating fiduciary
duty and fair dealing.
Question 7
A CFA candidate is preparing for Level III and posts on social media that she "passed Level II
easily because the exam is a joke." This statement most likely:
