Many Certified Financial Analysts will happily tell you about their struggles as CFA candidates. And when they get to the part about the most difficult exam they took, they’re usually divided between Level II and III. Technically, it might be easy to say that Level III is the toughest. This is considering it’s not purely multiple-choice, unlike the first two exams.
Its structured response approach, popularly referred to as the essay part, can be particularly challenging for those who are unpracticed. Another potential choke point for CFA Level III exam takers is the sea of review material recommendations. They aren’t only diverse but downright conflicting.
So how, where, and with what do you indeed begin?
The best way to begin any challenge in life is to be a step ahead. In short, know what to expect during the CFA Level III exam. You already know this is the last you need to take before earning your CFA charterholdership. Take note that, while CFA Level I and CFA Level II are focused on basic financial knowledge and investment valuation, Level III mainly tests your knowledge in portfolio management.
Knowing an exam’s format lets you prepare with the right mindset and answer-seeking techniques. You should expect a mix of multiple-choice questions, as in the two previous level exams, plus an essay section. The Level III exam is also split into two sessions. The first is in the morning and the second in the afternoon.
During the morning test, there will be around 10 to 15 essay-type questions. Each is made up of several parts that help you answer systematically. Such questions may present a scenario and let you write down your proposed solution or recommendation. In the afternoon, the test will consist of 10 items. Each one presents a case statement succeeded by 6 multiple-choice questions. The perfect score is 360, where one point is equivalent to one minute.
Like we said previously, the Level III exam will be mainly about portfolio management. But there are seven other subjects that fall either under Asset Classes, or Ethical and Professional Standards.
Ethics and Professional Standards are given as much weight in the Level III exam as they are in the two previous exams. Investment tools are lumped together, save for economics, which falls under Level III’s section for portfolio management. For most of the exam, the portfolio context is about portfolio management and asset classes.
Standards in Level III is mainly about the Code of Ethics and Global Investment Performance Standards (GIPS). Code of Ethics and GIPS will probably appear as item sets in the second session (afternoon), but there’s also a possibility that GIPS would come out as an essay question in the first session (morning)
The Assets section of the test will revolve around all the key asset classes, like alternative investments, fixed-income investments, etc. But the current focus will be on how to manage these investments as part of a portfolio.
For instance, an entire session could be devoted to managing active and passive fixed-income portfolios. This includes objectives, return analysis, return value analysis and the rest. Also, part of the syllabus is strategies employed in global and upcoming markets, and the use of derivatives in managing the credit risk and interest rate aspects of managing fixed-income portfolios.
Another asset class covered in this part of the test is equity securities. This is usually a vital component of investment portfolios and thus essential to their success. This includes equity investment techniques, along with equity fund assessment and equity indexes. The syllabus also covers corporate governance problems that arise from manager and shareholder conflicts, which diminish value and directly affect equity portfolio managers. Lastly, a section is dedicated to the measurement and management of portfolios in global and up-and-rising markets.
The Alternative Investments section chiefly covers the alternative investment classes and the use of swaps, futures and other derivatives in managing certain alternative investments.
The biggest portion of the test is allotted to Portfolio Management, which covers at least half of the exam’s total number of points. In short, portfolio management will be the dominant topic throughout the exam. The syllabus is so extensive and presents new concepts like behavioral finance, the foundation for financial decision making. Also tackled are risk management concepts, including risk measurement and management tools and strategies. On top of these, you may encounter items on institutional and individual wealth.
The exam will test you on a few but important concepts, such as the Investment Policy Statement and its components. Economics, which is covered in Levels I and II, is also part of the Level III exam under portfolio management. Moreover, included in the exam are other key concepts like asset allocation, portfolio performance evaluation, and more.
The CFA Institute is completely mum on which topics are included in the portfolio management section of the Level III exam, but previous essay questions are available and can come in handy for creating and practicing your exam strategy.
Top Tips for Passing the CFA Level III Exam
The CFA Level III exam is the last of the three-part exam series leading to CFA charterholdership. It also presents a whole new set of challenges with its essay questions and mini-case analysis sections, which examinees haven’t seen in the first two exams. Nonetheless, these challenges are completely surmountable with the right preparation and a few handy tips, such as the following:
1. Find your rhythm with the questions
Compared to Levels I and II, Level III is qualitative and conceptual, which means you have to capture the essence of the topics before you can answer the questions correctly. While Level III’s coverage doesn’t stretch so wide, it’s the constructed response format, accounting for half of the exam, which makes it intimidating.
Constructed response is simply a type of questioning that makes you write your own answers down instead of choosing from a set of possible answers. It’s also what “essay” questions in Level III essentially are. Candidates are often told that the morning exam will come in “essay” format, but take note that “essay” here is not as we know it to be.
Let’s start by identifying the two broad categories that these questions fall under: calculation- based and word-based. When answering calculation-based questions, you simply show all the methods you used; for word-based questions, you need to provide the specific answers the questions are looking for. It’s the word-based questions that most exam takers have problems with, but you can be safe as long as you understand how to answer them using the right techniques.
First, be concise and straightforward. Remember, this is not actually an essay question, although it’s designed to look that way. The Institute wants to see your grasp of key concepts, not your novel-writing abilities. During the exam, you will find it’s either you know the answer and can write it down in a flash, or you don’t know it at all. If the second is true, don’t bother writing about other concepts you know because that’s not going to work.
Also, try to write as fast as possible while expressing your ideas. For example, use simple sentences, bullet points and symbols like arrows or equal signs, etc. This technique saves time without taking away substance from your answers. It’s not enough that you know the correct answer; you also have to show the thought process that led you to it, proving that you understand the concept enough to apply it correctly.
The third tip is simply to write down your answers where you’re told to. This may sound like a no-brainer, but many candidates have lost a significant number of points just because they used spaces they weren’t supposed to. Don’t take this for granted as there could be a real mix-up if you don’t take the time to read the instructions. Sometimes, the guidelines are clear as ice, but in other instances, you may be required to answer in a template (often on a different page). In any case, write your answers where they want you to, or lose points.
Lastly, keep in mind that Level III questions can be unpredictable, especially with all the conceptual readings that seem to float shapelessly in your mind. But don’t fret – if you review them constantly, they will begin to find form and become easier to apply when needed.
2. Supplement with the CFA curriculum if you review with third-party materials
The CFA curriculum is important for all CFA candidates but particularly crucial for Level III exam takers because of its conceptual approach. By using the CFA curriculum, you get a taste of how the essay questions will be developed and how to best answer them. After all, these are the same people behind the curriculum and the exam.
Indeed, your chances of passing Level III do not rest on whether you review with the curriculum or third-party materials. But if you go with the latter, supplementing with the curriculum sure has its benefits. The End-of-Chapter and Blue Box that follow each reading, for example, can be a good starting point. They give you a feel of how the exam questions are answered, which means you will be able to adjust your review approach accordingly and be better prepared come exam day.
Level III, by the way, is the sole level for which the CFA Institute releases questions that were actually part of past exams, plus guideline answers. You have to go through each of the questions to get an accurate sense of the exam itself. Don’t put this off either as you might end up in a panic later all. You can also go back to these questions once you have finished all of your readings. By frequently assessing your mastery of the curriculum, you increase your chances of passing the test. If you find any vague areas with the constructed-response practice questions or you just want to clarify a few points, you can always review the curriculum materials.
3. Listen to your body
At this point, you’ve likely spent so much of your mental strength, willpower and patience after passing Levels I and II. And that’s great, except for the chance that you might feel either too stressed or too comfortable, and start relaxing by Level III. Think of it this way: Level III is the last bridge you need to cross. After this, the struggle is over and you will be a CFA charterholder, period. You’ll be opening another chapter of unique challenges as a chartered analyst but that’s another story.
For now, just focus on getting chartered, and then you can give yourself a breather. But don’t overdo it either, such as by starting too early with your review. You can end up all burned out by the time you need to focus the most.
4. Never underestimate the afternoon session
Most Level III candidates are intimidated by the constructed- response format used in the morning session exam, and there’s probably a reason to be. Still, that’s not to say the afternoon exam, composed of multiple-choice questions, can be taken for granted.
While it’s relatively easier compared to the morning set, it can quickly pull down your score when you answer the questions haphazardly. On the other hand, you can also count on the afternoon session to boost your final score, compensating for any points you might lose in the morning exam, where most exam takers lose 20% to 30% of their scores.
5. Practice with as many timed mock exams as you can
As mentioned, Level III candidates are often anxious about the constructed response section in the morning exam. While you may have reason to be concerned about this part of the test, it could be a matter of taking as many timed practice tests with this format as possible. Devote at least 6 weeks of your review to timed practice exams after your readings.
This is also a great opportunity for you to plug any holes in your knowledge. And make it a point to practice writing with your hand – many of us have had very few chances to do that in this computer age. Remember, the test is good for three hours, so you will have to prepare for that much writing in one sitting.
You should also keep in mind that when you’re taking these timed mock exams, you’re not just practicing what to answer to the test questions, but HOW. Be sure to give both equal importance.
6. Learn the science of moving on
Whether you’re taking Level I, II or III, time management is crucial. But as we said earlier, this skill is all the more important for the last exam. You already know how to do this for the multiple-choice section as you’ve done in the two past exams: give yourself around 1.5 minutes for each item; pick the best answer when 1.5 minutes is finished; circle the questions you don’t know the answers to (so you can return to them later); and start with the next question.
For the “essay” or constructed-response section in the morning exam, it’s basically the same principle that you have to apply. When time is up, go to the next question or subquestion. You need to be able to recognize when you’re just wasting time with a question so you can give it up temporarily and jump to the next.
This may not sound right if you’re trying to maximize your points, but the technique allows you to go over the entire exam and nail those that you’re confident with, giving you more time to get the most points from those items you’ve skipped. Give yourself 30 seconds to read the question and decide if you can answer it immediately or if you should go back to it later.
The wisdom behind this technique is to get the highest overall score possible by securing points from the easier questions first. If you go by the exam’s question sequence and stay too long with each difficult question, you’ll lose out on the sure scores from the easier ones because you’ll likely run out of time.
7. Don’t panic
It would be very hard to tell which particular areas of the CFA curriculum are sure to come out in the exams, regardless of the level. But one thing’s for certain though: you have to expect this to happen. Otherwise, you can end up panicking and putting to waste most of the prepping you’ve made. When it does happen, carry on with the score-maximizing technique we’ve mentioned earlier.
This is hardly the time to surrender and there’s a chance you might make it just by sticking to this strategy alone.
- Don’t be fooled by thin curriculum books.
- While you have fewer LOS’s and readings for Level III, that only means questions can come from all nooks and crannies of the curriculum.
- Level III exam questions, especially under individual portfolio management, are totally unique, so practice thinking on your feet.
- A single essay question in Level III can include many sub-questions, unlike Levels I and II questions, which are standalone.
- Essay questions in Level III can be huge (1-3 pages), so learn to get to the point quickly.
- Brush up on your timed writing skills. You may know the answer, but unless you can articulate it with speed, you’ll lose precious points.
- The Level III exam is given once a year, so failure means you’ll have to wait another full year to retake it.
Common Reasons People Fail the CFA Level III Exam
Tricky is an accurate description of all three CFA exams, but especially for the third and final level. That said, you shouldn’t only be concerned with what to do to pass the test, but also what not to, to avoid failing it. Here are the most common reasons people failed the CFA Level III exam at least once:
Trying Too Hard
It should be clear by now that the morning session is the tougher one. It’s also the main area where most people fail simply because they try too hard. They write too much to impress the grader, showing knowledge that isn’t relevant to the question nor to the curriculum. If anything, this only wastes time and reduces your total score.
Less Time Spent Prepping
Another reason people fail the final CFA exam is the lack of time spent prepping for it. Usually, by Level III, candidates would now have jobs that restrict the time they have for review. Because of this, examinees may not even complete their review nor have time to take as many timed exams as they can. As a result, they take the exam unprepared and likely to perform poorly.
Lack of Mastery of Key Sections
Sometimes, people spend the right amount of time prepping for the Level III exam – readings, mock exams, etc. They still fail. Based on the accounts of unsuccessful CFA candidates, this could be due to a lack of mastery in the dominant topics, specifically portfolio planning. Obviously, if you don’t master those topics where the majority of the questions are focused on, you will probably fail.
Lack of Timing Strategies
Lack of timing techniques is yet another factor that can cause you to fail. We’ve said it countless times – time management is key (not just for Level III, but the first two exams as well). Plan for a distribution of minutes per question, depending on the total number of items in the test. Here, time management is not just a concept but a concrete, systematic practice.
Finally, some people who failed Level III were unsuccessful. They thought it was just another mountain to climb as the first two levels. They likely overlooked the fact that this one is particularly high and wild. The problem, therefore, was when they overestimated themselves and underestimated the exam, leading to disastrous consequences. In short, forget about that ego boost you got from passing the first two levels. Charterholdership is close, so keep your guard up and your head low to focus on your review.
The Bottom Line
The Level III exam is considered one of the most, if not the most, difficult exams leading to CFA charterholdership. This is often linked to the constructed response or essay format that makes up half of the test. In any case, the secret to success is to focus on the CFA curriculum and take as many timed and essay-type mock exams as possible. Focus on the dominant topic, portfolio management.