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Free CFA Institute CFA-Level-III Exam Questions

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  • CFA Institute CFA-Level-III Exam Questions
  • Provided By: CFA Institute
  • Exam: CFA Level III Chartered Financial Analyst
  • Certification: CFA Level III
  • Total Questions: 365
  • Updated On: Mar 26, 2025
  • Rated: 4.9 |
  • Online Users: 730
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  • Question 1
    • Dan Draper, CFA is a portfolio manager at Madison Securities. Draper is analyzing several portfolios which
      have just been assigned to him. In each case, there is a clear statement of portfolio objectives and constraints,
      as welt as an initial strategic asset allocation. However, Draper has found that all of the portfolios have
      experienced changes in asset values. As a result, the current allocations have drifted away from the initial
      allocation. Draper is considering various rebalancing strategies that would keep the portfolios in line with their
      proposed asset allocation targets.
      Draper spoke to Peter Sterling, a colleague at Madison, about calendar rebalancing. During their conversation,
      Sterling made the following comments:
      Comment 1: Calendar rebalancing will be most efficient when the rebalancing frequency considers the volatility
      of the asset classes in the portfolio.
      Comment 2: Calendar rebalancing on an annual basis will typically minimize market impact relative to more
      frequent rebalancing.
      Draper believes that a percentage-of-portfolio rebalancing strategy will be preferable to calendar rebalancing,
      but he is uncertain as to how to set the corridor widths to trigger rebalancing for each asset class. As an
      example, Draper is evaluating the Rogers Corp. pension plan, whose portfolio is described in Figure 1.
      CFA-Level-III-page476-image124
      Draper has been reviewing Madison files on four high net worth individuals, each of whom has a $1 million
      portfolio. He hopes to gain insight as to appropriate rebalancing strategies for these clients. His research so far
      shows:
      Client A is 60 years old, and wants to be sure of having at least $800,000 upon his retirement. His risk tolerance
      drops dramatically whenever his portfolio declines in value. He agrees with the Madison stock market outlook,
      which is for a long-term bull market with few reversals.
      Client B is 35 years old and wants to hold stocks regardless of the value of her portfolio. She also agrees with
      the Madison stock market outlook.
      Client C is 40 years old, and her absolute risk tolerance varies proportionately with the value of her portfolio.
      She does not agree with the Madison stock market outlook, but expects a choppy stock market, marked by
      numerous reversals, over the coming months.
      In selecting a rebalancing strategy for his clients, Draper would most likely select a constant mix strategy for:

      Answer: C
  • Question 2
    • Milson Investment Advisors (MIA) specializes in managing fixed income portfolios for institutional clients. Many
      of MIA's clients are able to take on substantial portfolio risk and therefore the firm's funds invest in all credit
      qualities and in international markets. Among its investments, MIA currently holds positions in the debt of Worth
      inc., Enertech Company, and SBK Company.
      Worth Inc. is a heavy equipment manufacturer in Germany. The company finances a significant amount of its
      fixed assets using bonds. Worth's current debt outstanding is in the form of non-callable bonds issued two
      years ago at a coupon rate of 7.2% and a maturity of 15 years. Worth expects German interest rates to decline
      by as much as 200 basis points (bps) over the next year and would like to take advantage of the decline. The
      company has decided to enter into a 2-year interest rate swap with semiannual payments, a swap rate of 5.8%,
      and a floating rate based on 6-month EURIBOR. The duration of the fixed side of the swap is 1.2. Analysts at
      MIA have made the following comments regarding Worth's swap plan:
      • "The duration of the swap from the perspective of Worth is 0.95."
      • "By entering into the swap, the duration of Worth's long-term liabilities will become smaller, causing the value
      of the firm's equity to become more sensitive to changes in interest rates."
      Enertech Company is a U.S.-based provider of electricity and natural gas. The company uses a large proportion
      of floating rate notes to finance its operations. The current interest rate on Enertech's floating rate notes, based
      on 6-month LIBOR plus 150bp, is 5.5%. To hedge its interest rate risk, Enertech has decided to enter into a
      long interest rate collar. The cap and the floor of the collar have maturities of two years, with settlement dates
      (in arrears) every six months. The strike rate for the cap is 5.5% and for the floor is 4.5%, based on 6-month
      LIBOR, which is forecast to be 5.2%, 6.1%, 4.1%, and 3.8%, in 6,12, 18, and 24 months, respectively. Each
      settlement period consists of 180 days. Analysts at MIA are interested in assessing the attributes of the collar.
      SBK Company builds oil tankers and other large ships in Norway. The firm has several long-term bond issues
      outstanding with fixed interest rates ranging from 5.0% to 7.5% and maturities ranging from 5 to 12 years.
      Several years ago, SBK took the pay floating side of a semi-annual settlement swap with a rate of 6.0%, a
      floating rate based on LIBOR, and a tenor of eight years. The firm now believes interest rates may increase in 6
      months, but is not 100% confident in this assumption. To hedge the risk of an interest rate increase, given its
      interest rate uncertainty, the firm has sold a payer interest rate swaption with a maturity of 6 months, an
      underlying swap rate of 6.0%, and a floating rate based on LIBOR.
      MIA is considering investing in the debt of Rio Corp, a Brazilian energy company. The investment would be in
      Rio's floating rate notes, currently paying a coupon of 8.0%. MIA's economists are forecasting an interest rate
      decline in Brazil over the short term.
      Determine whether the MIA analysts' comments regarding the duration of the Worth Inc. swap and the effects
      of the swap on the company's balance sheet are correct or incorrect.

      Answer: C
  • Question 3
    • 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."
      Assuming an immediate (today) increase in the immunized rate to 11%, the portfolio required return that would
      most likely make Price turn to an immunization strategy is closest to:

      Answer: B
  • Question 4
    • 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:

      Answer: C
  • Question 5
    • Walter Skinner, CFA, manages a bond portfolio for Director Securities. The bond portfolio is part of a pension
      plan trust set up to benefit retirees of Thomas Steel Inc. As part of the investment policy governing the plan and
      the bond portfolio, no foreign securities are to be held in the portfolio at any time and no bonds with a credit
      rating below investment grade are allowable for the bond portfolio. In addition, the bond portfolio must remain
      unleveraged. The bond portfolio is currently valued at $800 million and has a duration of 6.50. Skinner believes
      that interest rates are going to increase, so he wants to lower his portfolio's duration to 4.50. He has decided to
      achieve the reduction in duration by using swap contracts. He has two possible swaps to choose from:
      1. Swap A: 4-year swap with quarterly payments.
      2. Swap B: 5-year swap with semiannual payments.
      Skinner plans to be the fixed-rate payer in the swap, receiving a floating-rate payment in exchange. For
      analysis, Skinner always assumes the duration of a fixed rate bond is 75% of its term to maturity.
      Several years ago, Skinner decided to circumvent the policy restrictions on foreign securities by purchasing a
      dual currency bond issued by an American holding company with significant operations in Japan. The bond
      makes semiannual fixed interest payments in Japanese yen but will make the final principal payment in U.S.
      dollars five years from now. Skinner originally purchased the bond to take advantage of the strengthening
      relative position of the yen. The result was an above average return for the bond portfolio for several years.
      Now, however, he is concerned that the yen is going to begin a weakening trend, as he expects inflation in the
      Japanese economy to accelerate over the next few years. Knowing Skinner's situation, one of his colleagues,
      Bill Michaels, suggests the following strategy:
      "You need to offset your exposure to the Japanese yen by establishing a short position in a synthetic dual
      currency bond that matches the terms of the dual currency bond you purchased for the Thomas Steel bond
      portfolio. As part of the strategy, you will have to enter into a currency swap as the fixed-rate yen payer. The
      swap will neutralize the dual-currency bond position but will unfortunately increase the credit risk exposure of
      the portfolio."
      Skinner has also spoken to Orval Mann, the senior economist with Director Securities, about his expectations
      for the bond portfolio. Mann has also provided some advice to Skinner in the following comment:
      "1 know you expect a general increase in interest rates, but I disagree with your assessment of the interest rate
      shift. I believe interest rates are going to decrease. Therefore, you will want to synthetically remove the call
      features of any callable bonds in your portfolio by purchasing a payer interest rate swaption."
      After his lung conversation with Director Securities' senior economist, Orval Mann, Skinner has completely
      changed his outlook on interest rates and has decided to extend the duration of his portfolio. The most
      appropriate strategy to accomplish this objective using swaps would be to enter into a swap to pay:

      Answer: B
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