CFA Level 3 200+Questions, Answers and Formulas 100%
Verified 2024/2025
1. Cross-Sectional consistency across asset classes regarding portfolio risk
Consistency and return characteristics
2. Intertemporal consistency over various investment horizons regarding
Consistency portfolio decisions over time
3. Process to for- 1. determine allowable asset classes and investment hori-
mulate capital zons
market expecta- 2. investigate assets' historical performance and drivers
tions 3. identify the valuation model to be used and its require-
ments
4. collect the best data possible
5. interpret current investment conditions to decide values
for inputs
6. form capital market expectations
7. monitor performance and refine process
4. Challenges with -limitations of using economic data (time lag, revisions)
forecasting capi- -data measurement error/bias
tal market expec- -limitations of historical estimates
tations -using ex post data to determine ex ante risk and return
-non-repeating data patterns
-failing to account for conditioning information
-misinterpreting of correlations
-psychological bias
-model uncertainty
5. Exogenous unanticipated events that occur outside the normal
Shocks course of an economy; not built into current market prices
6. Causes of exoge- -changes in government policies
nous shocks -political events
-technological progress
-natural disasters
-discovery of natural resources
-financial crises
7. -may lead to increased stock returns
-economy can grow at a faster pace before inflation be-
, CFA Level 3 200+Questions, Answers and Formulas 100%
Verified 2024/2025
Assumptions of comes a major concern
increased trend -tends to generate increased gov bond yields
growth
8. Components of -labor input
economic -capital per worker
growth rate -total factor productivity
9. Econometric utilizes economic theory to formulate the forecasting mod-
Analysis - el; structural vs reduced-form models
Economic
Forecasting -pros: incorporates many variables, output based on a
consistent set of relationships
-cons: can't forecast turning points, model is complex,
output may be unrealistic
10. Economic Indi- statistics that measure variables in the economy; leading,
cators - Econom- coincident, lagging
ic Forecasting
-pros: easy to interpret, readily available
-cons: can give false signals, results have been inconsis-
tent, revised often
11. Checklist Ap- more subjective, analyst uses judgment and statistical
proach - Eco- modeling
nomic Forecast-
ing -pros: less complex, can incorporate judgment
-cons: subjective, time-consuming
12. Inflation within -cash: earn real rate of interest
expectations - -bonds: shorter-term yields more volatile than longer-term
Impact on Asset yields
Classes -equity: no impact given predictable economic growth
-real estate: neutral impact with typical rates of return
13. Inflation above -cash: positive with increasing yields; negative with de-
or below expec- creasing yields
tations - Impact -bonds: longer-term yields more volatile than shorter-term
on Asset Classes yields
-equity: negative impact given potential for central bank
, CFA Level 3 200+Questions, Answers and Formulas 100%
Verified 2024/2025
action or falling asset prices
-real estate: positive impact as real asset values increase
with inflation
14. Deflation - Im- -cash: positive impact if nominal interest rates are bound
pact on Asset by 0%
Classes -bonds: positive impact as fixed future cash flows have
greater purchasing power
-equity: negative impact as economic activity and busi-
ness declines
-real estate: negative impact as property values generally
decline
15. Business Cycle 1. initial recovery
2. early expansion
3. late expansion
4. slowdown
5. contraction
16. Initial Recovery -length: few months
Phase -stimulative economic policy, business confidence rising
-cyclical, riskier assets doing well
-low interest rates, risking stock prices (ow stocks, uw
bonds)
-decelerating inflation
17. Early Expansion -length: a year to several years
Phase -less stimulative economic policy, increasing growth and
confidence
-stable/rising interest rates and bond yields, risking stock
prices (ow stocks, uw bonds)
-low inflation
18. Late Expansion -economic policy becoming restrictive, high confidence
Phase and employment
-short and long-term rates increasing, stock prices peak-
ing and volatile (mixed view on stocks, uw bonds)
-inflation increasing
19. Slowdown Phase
, CFA Level 3 200+Questions, Answers and Formulas 100%
Verified 2024/2025
-length: a few months to a year or longer
-economic policy becoming less restrictive, declining con-
fidence
-short-term rates peak and decline, possibly inverted
curve, falling stock prices (uw stocks, ow bonds)
-inflation still rising
20. Contraction -length: 12 to 18 months
Phase -easing economic policy, declining confidence and profits,
increasing unemployment
-falling rates and yields, stock prices increase later (ow
stocks, ow bonds)
-inflation peaking
21. Taylor Rule determines the target interest rate using:
-the neutral rate
-expected GDP relative to its long-term trend
-expected inflation relative to its targeted amount
22. Stimulative Poli- yield curve upward sloping; economy likely to expand
cies - Shape of
Yield Curve
23. Restrictive Poli- yield curve downward sloping; economy likely to contract
cies - Shape of
Yield Curve
24. Stimulative Fis- yield curve is flat
cal, Restric-
tive Monetary -
Shape of Yield
Curve
25. Restrictive Fis- yield curve is moderately steep
cal, Stimula-
tive Monetary -
Shape of Yield
Curve
26.26.
Verified 2024/2025
1. Cross-Sectional consistency across asset classes regarding portfolio risk
Consistency and return characteristics
2. Intertemporal consistency over various investment horizons regarding
Consistency portfolio decisions over time
3. Process to for- 1. determine allowable asset classes and investment hori-
mulate capital zons
market expecta- 2. investigate assets' historical performance and drivers
tions 3. identify the valuation model to be used and its require-
ments
4. collect the best data possible
5. interpret current investment conditions to decide values
for inputs
6. form capital market expectations
7. monitor performance and refine process
4. Challenges with -limitations of using economic data (time lag, revisions)
forecasting capi- -data measurement error/bias
tal market expec- -limitations of historical estimates
tations -using ex post data to determine ex ante risk and return
-non-repeating data patterns
-failing to account for conditioning information
-misinterpreting of correlations
-psychological bias
-model uncertainty
5. Exogenous unanticipated events that occur outside the normal
Shocks course of an economy; not built into current market prices
6. Causes of exoge- -changes in government policies
nous shocks -political events
-technological progress
-natural disasters
-discovery of natural resources
-financial crises
7. -may lead to increased stock returns
-economy can grow at a faster pace before inflation be-
, CFA Level 3 200+Questions, Answers and Formulas 100%
Verified 2024/2025
Assumptions of comes a major concern
increased trend -tends to generate increased gov bond yields
growth
8. Components of -labor input
economic -capital per worker
growth rate -total factor productivity
9. Econometric utilizes economic theory to formulate the forecasting mod-
Analysis - el; structural vs reduced-form models
Economic
Forecasting -pros: incorporates many variables, output based on a
consistent set of relationships
-cons: can't forecast turning points, model is complex,
output may be unrealistic
10. Economic Indi- statistics that measure variables in the economy; leading,
cators - Econom- coincident, lagging
ic Forecasting
-pros: easy to interpret, readily available
-cons: can give false signals, results have been inconsis-
tent, revised often
11. Checklist Ap- more subjective, analyst uses judgment and statistical
proach - Eco- modeling
nomic Forecast-
ing -pros: less complex, can incorporate judgment
-cons: subjective, time-consuming
12. Inflation within -cash: earn real rate of interest
expectations - -bonds: shorter-term yields more volatile than longer-term
Impact on Asset yields
Classes -equity: no impact given predictable economic growth
-real estate: neutral impact with typical rates of return
13. Inflation above -cash: positive with increasing yields; negative with de-
or below expec- creasing yields
tations - Impact -bonds: longer-term yields more volatile than shorter-term
on Asset Classes yields
-equity: negative impact given potential for central bank
, CFA Level 3 200+Questions, Answers and Formulas 100%
Verified 2024/2025
action or falling asset prices
-real estate: positive impact as real asset values increase
with inflation
14. Deflation - Im- -cash: positive impact if nominal interest rates are bound
pact on Asset by 0%
Classes -bonds: positive impact as fixed future cash flows have
greater purchasing power
-equity: negative impact as economic activity and busi-
ness declines
-real estate: negative impact as property values generally
decline
15. Business Cycle 1. initial recovery
2. early expansion
3. late expansion
4. slowdown
5. contraction
16. Initial Recovery -length: few months
Phase -stimulative economic policy, business confidence rising
-cyclical, riskier assets doing well
-low interest rates, risking stock prices (ow stocks, uw
bonds)
-decelerating inflation
17. Early Expansion -length: a year to several years
Phase -less stimulative economic policy, increasing growth and
confidence
-stable/rising interest rates and bond yields, risking stock
prices (ow stocks, uw bonds)
-low inflation
18. Late Expansion -economic policy becoming restrictive, high confidence
Phase and employment
-short and long-term rates increasing, stock prices peak-
ing and volatile (mixed view on stocks, uw bonds)
-inflation increasing
19. Slowdown Phase
, CFA Level 3 200+Questions, Answers and Formulas 100%
Verified 2024/2025
-length: a few months to a year or longer
-economic policy becoming less restrictive, declining con-
fidence
-short-term rates peak and decline, possibly inverted
curve, falling stock prices (uw stocks, ow bonds)
-inflation still rising
20. Contraction -length: 12 to 18 months
Phase -easing economic policy, declining confidence and profits,
increasing unemployment
-falling rates and yields, stock prices increase later (ow
stocks, ow bonds)
-inflation peaking
21. Taylor Rule determines the target interest rate using:
-the neutral rate
-expected GDP relative to its long-term trend
-expected inflation relative to its targeted amount
22. Stimulative Poli- yield curve upward sloping; economy likely to expand
cies - Shape of
Yield Curve
23. Restrictive Poli- yield curve downward sloping; economy likely to contract
cies - Shape of
Yield Curve
24. Stimulative Fis- yield curve is flat
cal, Restric-
tive Monetary -
Shape of Yield
Curve
25. Restrictive Fis- yield curve is moderately steep
cal, Stimula-
tive Monetary -
Shape of Yield
Curve
26.26.
