CFA Level III — Practice Questions flashcards

6 of 60 questions free to study here · 11 topics · the whole deck is built into Willys

Multiple-choice practice questions, one best answer each, on behavioural biases, the IPS, private wealth, pensions, asset allocation, hedging, bond and equity strategies, attribution and GIPS.

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Practice 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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An analyst publishes a sell rating on a stock that Lena Ortiz has held for years. Ortiz calls the analyst biased, does not read the report, and forwards her adviser three bullish blog posts about the company. Which bias does Ortiz most clearly show?

A) Hindsight bias
B) Availability bias
C) Anchoring bias
D) Confirmation bias

D) Confirmation bias

Confirmation bias is a belief-perseverance error: she seeks out evidence that supports her view and dismisses evidence against it. Anchoring would involve sticking to a starting number, such as her purchase price, which the vignette does not mention.
Behavioral Finance
Grace Mensah, 45, has wealth far above her needs, a secure income and a long horizon. In interviews she says market falls make her anxious, and she wants a conservative portfolio. What should her adviser do?

A) Educate her, then follow her lower willingness if it persists
B) Set the allocation by her ability, since ability is objective
C) Defer writing the IPS until markets have calmed down
D) Invest at the midpoint of her ability and willingness

A) Educate her, then follow her lower willingness if it persists

With high ability but low willingness, the adviser first explains the long-run cost of a very conservative portfolio; if she stays reluctant, the adviser generally follows the lower willingness and documents it in the IPS. Imposing a riskier portfolio invites her to abandon it in the next fall.
Private Wealth Management
Using the Grinold-Kroner model, estimate the expected equity return given a 2.5% dividend yield, 2% expected inflation, 2% real earnings growth, net buybacks reducing shares outstanding by 1% a year, and a P/E ratio expected to fall 0.5% a year.

A) 7.5%
B) 5.0%
C) 7.0%
D) 4.5%

C) 7.0%

7.0%: 2.5% + (2% + 2% + 1%) − 0.5%. A falling share count adds to per-share growth; the 5.0% answer wrongly subtracts it.
Capital Market Expectations
An 80 million dollar equity portfolio has a beta of 0.9. The manager wants to raise its beta to 1.2 for three months using futures with a beta of 0.95 and a contract value of 200,000 dollars. What trade is needed?

A) Sell about 126 contracts
B) Buy about 126 contracts
C) Buy about 120 contracts
D) Sell about 120 contracts

B) Buy about 126 contracts

Buy about 126: $\frac{1.2 - 0.9}{0.95} \times \frac{80{,}000{,}000}{200{,}000} \approx 126$ ⁠. Raising beta means buying futures; 120 contracts ignores the futures' own beta.
Derivatives and Currency Management
A fund will track an index of 50 large, highly liquid stocks. Which indexing method is most appropriate?

A) Full replication of every index constituent
B) Stratified sampling of a few stocks per sector
C) Optimization using a multifactor risk model
D) A rules-based tilt toward value and size factors

A) Full replication of every index constituent

Full replication suits indexes with few, liquid constituents, giving the lowest tracking error at modest cost. Optimization and sampling are for very broad or illiquid indexes, where full replication is too costly.
Equity Portfolio Management
A GIPS-compliant firm wants to move a portfolio that has lagged its composite into a different composite with a similar strategy, to improve the first composite's record. Is this allowed?

A) Yes, if the portfolio's client consents to the move
B) No; portfolios may not move because of performance
C) Yes, once the portfolio has lagged for a full year
D) Yes, if the move is disclosed in the composite description

B) No; portfolios may not move because of performance

Under GIPS, a portfolio may not be moved between composites because its performance changed; moves are tied to documented changes such as a client-directed change in strategy or guidelines, or a redefined composite. Disclosure or client consent does not make a performance-driven move acceptable.
GIPS

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Portfolio Management Core Asset Allocation and Private Wealth

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About these cards

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

Checked against:

CFA Program 2027 Level III topic outlines, core and Portfolio Management pathway (topic outline only; no text copied)

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