UniGeniusInvestment Analyst Level III Prep

Level III

Level III practice questions

Try a full Level III item set and an essay set below, written in the exam's format. The item set marks itself and shows the working. The essay set opens a model answer and a marking guide once you have typed every part, so you can mark yourself.

Sets11 item sets and 11 essay sets, 12 points each
TimeTwo sessions of 2 hours 12 minutes
Penalty for a wrong answerNone
2027 windowsFebruary and August

How to use them

  • Give the item set 12 minutes, as on the exam: read the four questions first, then the vignette.
  • Type every essay part before you open the model answer, and answer only as many responses as each part asks for.
  • Tick each marking-guide point your answer earns. Be strict: if a point is missing from what you wrote, it does not count.

What the course adds

  • Item sets and essay sets for every core topic and all three pathways, each with full working or a model answer and marking guide.
  • Full timed mocks of 22 sets in two 132-minute sessions, on your pathway.
  • Lessons for every topic, and a study plan built from your diagnostic.

Try 4 questions

Question 1Principles of Asset Allocation
Item set: Mereford Endowment: choosing an asset-only allocation

The Mereford University Endowment has no explicit liabilities, and its investment committee uses an asset-only approach to strategic asset allocation. Chief investment officer Sofia Brandt, CFA, presents three candidate portfolios from the endowment's efficient frontier.

Exhibit 1. Candidate portfolios (annual figures)

Portfolio A: expected return 7.2%; standard deviation 12.0%

Portfolio B: expected return 9.0%; standard deviation 16.0%

Portfolio C: expected return 5.4%; standard deviation 8.0%

Brandt explains two ways the committee could choose among them. The first uses the committee's risk aversion coefficient of 4 in the utility function U = E(R) - 0.005 x lambda x variance, with returns and standard deviations in percent. The second is Roy's safety-first criterion, using a minimum acceptable annual return of 3.0%, which a trustee proposed because the endowment's spending rule becomes politically difficult when returns fall below that level.

Brandt then turns to the inputs behind the frontier. The committee's own return forecasts produced, in earlier optimizations, allocations that were concentrated in two or three asset classes and that changed sharply when a forecast moved by a few tenths of a percent. Brandt wants a method that starts from the returns implied by global market capitalization weights and then adjusts them for the committee's views, weighted by the committee's confidence in each view.

To illustrate the starting point, she reverse-optimizes the expected excess return on global real estate securities. She uses the relation: implied excess return = lambda x covariance of the asset with the global market portfolio, with a market risk aversion coefficient of 3.0 and returns expressed as decimals.

Exhibit 2. Reverse optimization inputs

Standard deviation of global real estate securities: 20.0%

Standard deviation of the global market portfolio: 14.0%

Correlation of global real estate securities with the global market portfolio: 0.75

Market risk aversion coefficient: 3.0

Using the committee's utility function, the portfolio Brandt should recommend is:
Question 2Principles of Asset Allocation
Item set: Mereford Endowment: choosing an asset-only allocation

The Mereford University Endowment has no explicit liabilities, and its investment committee uses an asset-only approach to strategic asset allocation. Chief investment officer Sofia Brandt, CFA, presents three candidate portfolios from the endowment's efficient frontier.

Exhibit 1. Candidate portfolios (annual figures)

Portfolio A: expected return 7.2%; standard deviation 12.0%

Portfolio B: expected return 9.0%; standard deviation 16.0%

Portfolio C: expected return 5.4%; standard deviation 8.0%

Brandt explains two ways the committee could choose among them. The first uses the committee's risk aversion coefficient of 4 in the utility function U = E(R) - 0.005 x lambda x variance, with returns and standard deviations in percent. The second is Roy's safety-first criterion, using a minimum acceptable annual return of 3.0%, which a trustee proposed because the endowment's spending rule becomes politically difficult when returns fall below that level.

Brandt then turns to the inputs behind the frontier. The committee's own return forecasts produced, in earlier optimizations, allocations that were concentrated in two or three asset classes and that changed sharply when a forecast moved by a few tenths of a percent. Brandt wants a method that starts from the returns implied by global market capitalization weights and then adjusts them for the committee's views, weighted by the committee's confidence in each view.

To illustrate the starting point, she reverse-optimizes the expected excess return on global real estate securities. She uses the relation: implied excess return = lambda x covariance of the asset with the global market portfolio, with a market risk aversion coefficient of 3.0 and returns expressed as decimals.

Exhibit 2. Reverse optimization inputs

Standard deviation of global real estate securities: 20.0%

Standard deviation of the global market portfolio: 14.0%

Correlation of global real estate securities with the global market portfolio: 0.75

Market risk aversion coefficient: 3.0

Using Roy's safety-first criterion with the trustee's minimum return, the preferred portfolio is:
Question 3Principles of Asset Allocation
Item set: Mereford Endowment: choosing an asset-only allocation

The Mereford University Endowment has no explicit liabilities, and its investment committee uses an asset-only approach to strategic asset allocation. Chief investment officer Sofia Brandt, CFA, presents three candidate portfolios from the endowment's efficient frontier.

Exhibit 1. Candidate portfolios (annual figures)

Portfolio A: expected return 7.2%; standard deviation 12.0%

Portfolio B: expected return 9.0%; standard deviation 16.0%

Portfolio C: expected return 5.4%; standard deviation 8.0%

Brandt explains two ways the committee could choose among them. The first uses the committee's risk aversion coefficient of 4 in the utility function U = E(R) - 0.005 x lambda x variance, with returns and standard deviations in percent. The second is Roy's safety-first criterion, using a minimum acceptable annual return of 3.0%, which a trustee proposed because the endowment's spending rule becomes politically difficult when returns fall below that level.

Brandt then turns to the inputs behind the frontier. The committee's own return forecasts produced, in earlier optimizations, allocations that were concentrated in two or three asset classes and that changed sharply when a forecast moved by a few tenths of a percent. Brandt wants a method that starts from the returns implied by global market capitalization weights and then adjusts them for the committee's views, weighted by the committee's confidence in each view.

To illustrate the starting point, she reverse-optimizes the expected excess return on global real estate securities. She uses the relation: implied excess return = lambda x covariance of the asset with the global market portfolio, with a market risk aversion coefficient of 3.0 and returns expressed as decimals.

Exhibit 2. Reverse optimization inputs

Standard deviation of global real estate securities: 20.0%

Standard deviation of the global market portfolio: 14.0%

Correlation of global real estate securities with the global market portfolio: 0.75

Market risk aversion coefficient: 3.0

The implied expected excess return on global real estate securities is closest to:
Question 4Principles of Asset Allocation
Item set: Mereford Endowment: choosing an asset-only allocation

The Mereford University Endowment has no explicit liabilities, and its investment committee uses an asset-only approach to strategic asset allocation. Chief investment officer Sofia Brandt, CFA, presents three candidate portfolios from the endowment's efficient frontier.

Exhibit 1. Candidate portfolios (annual figures)

Portfolio A: expected return 7.2%; standard deviation 12.0%

Portfolio B: expected return 9.0%; standard deviation 16.0%

Portfolio C: expected return 5.4%; standard deviation 8.0%

Brandt explains two ways the committee could choose among them. The first uses the committee's risk aversion coefficient of 4 in the utility function U = E(R) - 0.005 x lambda x variance, with returns and standard deviations in percent. The second is Roy's safety-first criterion, using a minimum acceptable annual return of 3.0%, which a trustee proposed because the endowment's spending rule becomes politically difficult when returns fall below that level.

Brandt then turns to the inputs behind the frontier. The committee's own return forecasts produced, in earlier optimizations, allocations that were concentrated in two or three asset classes and that changed sharply when a forecast moved by a few tenths of a percent. Brandt wants a method that starts from the returns implied by global market capitalization weights and then adjusts them for the committee's views, weighted by the committee's confidence in each view.

To illustrate the starting point, she reverse-optimizes the expected excess return on global real estate securities. She uses the relation: implied excess return = lambda x covariance of the asset with the global market portfolio, with a market risk aversion coefficient of 3.0 and returns expressed as decimals.

Exhibit 2. Reverse optimization inputs

Standard deviation of global real estate securities: 20.0%

Standard deviation of the global market portfolio: 14.0%

Correlation of global real estate securities with the global market portfolio: 0.75

Market risk aversion coefficient: 3.0

The method that best fits Brandt's description for improving the inputs is:

Try an essay set

Essay set: Brannock Capital: three bond mandates (12 points)

Celia Brannock, CFA, is chief investment officer of Brannock Capital, which manages three fixed-income mandates.

Mandate 1: Ostler Settlement Trust. The trust must pay injured claimants a fixed schedule of monthly amounts over the next 15 years. Every amount and payment date is known today and none can change. The market value of the trust's assets is exactly equal to the present value of the payments, so there is no surplus. The trustees want to remove the risk of reinvesting coupons at unknown future rates, and they do not want a strategy that requires regular rebalancing. Brannock is considering three approaches: cash flow matching, duration matching and contingent immunization.

Mandate 2: foreign government bond fund. The fund buys bonds of a single foreign government, unhedged, for investors whose home currency is the US dollar. Brannock prepares a one-year expected return in US dollars as the sum of yield income, rolldown return, the expected price change from her view on yields, minus expected credit losses, plus the expected currency gain or loss (additive). She defines yield income as annual coupon income divided by the current price, and rolldown return as the expected price change over one year with an unchanged yield curve divided by the current price. She estimates the effect of the yield change as minus modified duration times the yield change plus one-half times convexity times the squared yield change.

Exhibit 1. Foreign bond fund data (per 100 of par)

Annual coupon income: 3.42

Current price: 95.00

Expected price in one year with an unchanged yield curve: 95.38

Modified duration: 5.0

Convexity: 40

Expected change in the foreign government yield curve: a fall of 30 basis points at all maturities

Expected credit losses: 0.20% a year

Expected change in the foreign currency against the US dollar: a fall of 1.00%

Mandate 3: domestic total return fund. The fund has $80 million of investors' equity and borrows $30 million through repurchase agreements at 2.80% a year. It invests the full $110 million in bonds that Brannock expects to return 4.00% over the next year. The return on the fund's equity is the return on all the bonds held, less the interest on the borrowed money, divided by investors' equity.

  1. Part 1, 4 points

    Recommend which approach (cash flow matching, duration matching, contingent immunization) best meets the Ostler Settlement Trust's objectives. Justify your response with two reasons.

    Note: Each response should be in a separate paragraph.

  2. Part 2, 5 points

    Calculate the foreign bond fund's expected one-year return in US dollars.

  3. Part 3, 3 points

    Calculate the expected return on equity of the domestic total return fund.

Type an answer to every part first, as you would on the exam.

Next step

Take the free diagnosticTry the free asset allocation lesson

CFA Institute's Level III exam page

Questions people ask

Are these real CFA Institute questions?

No. They are original questions written for this course in the format of CFA Institute's Level III exam page and sample sets.

Is the essay set marked for me?

No. You mark it yourself against the model answer and marking guide, the way you would check a past answer with a study partner.

Where can I find more Level III practice questions?

The free diagnostic has 20 more on the core topics and your pathway. The course has item sets and essay sets on every topic and full timed mocks.