I’ve already written about my tactics for passing CFA Levels I and II. Now I’d like to share my method of passing CFA Level III. As I’ve pointed out on previous occasions, I managed to pass all three levels in a period of 18 months.
The big problem with Level III is complacency. You get a whole year to prepare, making it tempting to do nothing until the exam is on the horizon. This is a mistake.
Bear in mind that Level III is different to levels I and II in that you get to write an essay. In this case, the term ‘essay’ is misleading: you don’t need to write a lot of text, but to set your answers out in bullet form. Make sure you’re totally familiar with the investments and investment strategies required by different classes of investor. Ensure you know keywords related to returns and risk tolerance.
As at CFA level II, you will also get an ‘Item-set’ asking you to extract information from a particular set of data. In Level III you may be expected to demonstrate a broader level of knowledge spanning different content areas. For example, you might get a question about the impact of economic fundamentals on equities. Some of the questions in Level III allow subjective answers – around asset allocation, for example.
The central element in Level III is, in my view, the Investment Policy Statement (IPS). Before you enter the exam, you need to know that you can create an IPS for a private investor or an institutional investor (or both). Take your time and evaluate all the information thoroughly. IPS are also subjective, which makes selecting the appropriate information difficult.
The good news is that you’ll have to make fewer calculations in CFA Level III than in Levels I and II. Nevertheless, you will need to familiarize yourself with the following mathematical functions:
- All calculations related to foreign exchange, derivatives, and duration and hedging
- Execution of portfolio decision, monitoring & rebalancing
- Performance and reporting evaluation
- Dismantling of total active return
- Calculations in equity valuation
- Key figures for risk management
- WACC adjustment with respect to pension and retirement risk associated with equity betas and asset betas.