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CFA Level III — Portfolio Management Core flashcards

10 of 80 cards free to study here · 9 topics · the whole deck is built into Willys

Behavioural biases and how to handle them, capital market expectations, asset allocation methods, derivatives and currency overlays, fixed-income and equity strategies, attribution, appraisal measures, GIPS and ethics.

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Learn deck · part of CFA Program Level III · written against: CFA Program Level III curriculum (2026 and 2027 topic outlines): the core, plus Portfolio Management and Private Wealth pathway topics. Updated 2026-10-10.

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  1. How do belief perseverance biases differ from information-processing biases?
    Belief perseverance biases make people cling to prior views (conservatism, confirmation, representativeness, illusion of control, hindsight); information-processing biases misuse or mis-weight information (anchoring, mental accounting, framing, availability).
    Behavioral Finance
  2. After one blockbuster product launch, an investor labels a company a growth stock and expects years of rapid growth. Which bias is this, and how is it countered?
    Representativeness — judging by resemblance to a stereotype ('growth stock') and from a single event: base-rate and sample-size neglect. Counter it by checking base rates, such as how often single-hit firms sustain growth.

    Watch out: conservatism is the opposite error: under-reacting to new information and clinging to a prior view.
    Behavioral Finance
  3. Using the Grinold–Kroner model, estimate the expected equity return with a 2% dividend yield, 2% inflation, 2.5% real earnings growth, net buybacks shrinking the share count by 0.5% a year, and P/E expected to contract 0.5% a year.
    6.5%. E(R)≈DP+(i+g−ΔS)+ΔPE=2%+(2%+2.5%+0.5%)−0.5%E(R) \approx \frac{D}{P} + (i + g - \Delta S) + \Delta \frac{P}{E} = 2\% + (2\% + 2.5\% + 0.5\%) - 0.5\%⁠.
    Capital Market Expectations
  4. How do asset-only, liability-relative and goals-based asset allocation differ?
    Asset-only optimizes risk and return of the assets alone; liability-relative manages assets against liabilities (surplus); goals-based builds sub-portfolios for each of an individual's goals with their own horizons and success probabilities.
    Asset Allocation
  5. An executive holds a concentrated stock position and wants downside protection without paying a net premium. Which strategy fits?
    A zero-cost collar — buy an out-of-the-money put and sell an out-of-the-money call whose premium pays for it, giving up upside above the call strike.
    Derivatives and Currency Management
  6. A manager expects the yield curve to flatten and wants to stay duration-neutral. Should she hold a barbell or a bullet?
    A barbell — its long-maturity bonds gain as long yields fall relative to short yields; a bullet benefits from steepening.
    Fixed-Income Portfolio Management
  7. When is full replication practical for an equity index fund, and when do managers use optimization instead?
    Full replication suits indexes with liquid constituents and moderate numbers of holdings; optimization or sampling suits very broad or illiquid indexes, accepting some tracking error for lower trading cost.
    Equity Portfolio Management
  8. Which components make up implementation shortfall?
    Delay cost (price drift before the order reaches the market), execution cost (price impact on filled shares), opportunity cost (on unfilled shares) and explicit fees.
    Trading and Performance Evaluation
  9. Who can claim compliance with GIPS?
    Only an investment firm (or asset owner) as a whole; individuals, single products or composites cannot claim compliance on their own.
    GIPS
  10. A block trade is only partly filled. How should a manager allocate the shares among participating clients?
    Pro rata to the original order sizes, at the same average price, using a written allocation policy set before trading (Standard III(B) Fair Dealing).
    Ethics in Practice

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About these cards

Review status: Second-reader reviewed, with corrections applied.

Checked against:

  • CFA Program 2026 and 2027 Level III topic outlines, core and Portfolio Management pathway (topic outline only; no text copied)
  • Checked against the GIPS standards for firms, 2020 edition (reference only).

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