Free Practice CFA Institute CFA-Level-III Exam Questions 2025

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Total 365 Questions | Updated On: Mar 28, 2025
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Question 1

John Green, CFA, is a sell-side technology analyst at Federal Securities, a large global investment banking and
advisory firm. In many of his recent conversations with executives at the firms he researches, Green has heard
disturbing news. Most of these firms are lowering sales estimates for the coming year. However, the stock
prices have been stable despite management's widely disseminated sales warnings. Green is preparing his
quarterly industry analysis and decides to seek further input. He calls Alan Volk, CFA, a close friend who runs
the Initial Public Offering section of the investment banking department of Federal Securities.
Volk tells Green he has seen no slowing of demand for technology IPOs. "We've got three new issues due out
next week, and two of them are well oversubscribed." Green knows that Volk's department handled over 200
IPOs last year, so he is confident that Volk's opinion is reliable. Green prepares his industry report, which is
favorable. Among other conclusions, the report states that "the future is still bright, based on the fact that 67%
of technology IPOs are oversubscribed." Privately, Green recommends to Federal portfolio managers that they
begin selling all existing technology issues, which have "stagnated," and buy the IPOs in their place.
After carefully evaluating Federal's largest institutional client's portfolio, Green contacts the client and
recommends selling all of his existing technology stocks and buying two of the upcoming IPOs, similar to the
recommendation given to Federal's portfolio managers. Green's research has allowed him to conclude that only
these two IPOs would be appropriate for this particular client's portfolio. Investing in these IPOs and selling the
current technology holdings would, according to Green, "double the returns that your portfolio experienced last
year."
Federal Securities has recently hired Dirks Bentley, a CFA candidate who has passed Level 2 and is currently
preparing to take the Level 3 CFA® exam, to reorganize Federal's compliance department. Bentley tells Green
that he may be subject to CFA Institute sanctions due to inappropriate contact between analysts and
investment bankers within Federal Securities. Bentley has recommended that Green implement a firewall to
rectify the situation and has outlined the key characteristics for such a system. Bentley's suggestions are as
follows:
1. Any communication between the departments of Federal Securities must be channeled through the
compliance department for review and eventual delivery. The firm must create and maintain watch, restricted,
and rumor lists to be used in the review of employee trading.
2. All beneficial ownership, whether direct or indirect, of recommended securities must be disclosed in writing.
3. The firm must increase the level of review or restriction of proprietary trading activities during periods in
which the firm has knowledge of information that is both material and nonpublic.
Bentley has identified two of Green's analysts, neither of whom have non-compete contracts, who are preparing
to leave Federal Securities and go into competition. The first employee, James Ybarra, CFA, has agreed to
take a position with one of Federal's direct competitors. Ybarra has contacted existing Federal clients using a
client list he created with public records. None of the contacted clients have agreed to move their accounts as
Ybarra has requested. The second employee, Martha Cliff, CFA, has registered the name Cliff Investment
Consulting (CIC), which she plans to use for her independent consulting business. For the new business
venture, Cliff has developed and professionally printed marketing literature that compares the new firm's
services to that of Federal Securities and highlights the significant cost savings that will be realized by switching
to CIC. After she leaves Federal, Cliff plans to target many of the same prospects that Federal Securities is
targeting, using an address list she purchased from a third-party vendor. Bentley decides to call a meeting with
Green to discuss his findings.
After discussing the departing analysts. Green asks Bentley how to best handle the disclosure of the following
items: (1) although not currently a board member. Green has served in the past on the board of directors of a
company he researches and expects that he will do so again in the near future; and (2) Green recently inherited
put options on a company for which he has an outstanding buy recommendation. Bentley is contemplating his
response to Green.
According to Standard 11(A) Material Nonpublic Information, when Green contacted Volk, he:


Answer: C
Question 2

Milson Investment Advisors (MIA) specializes in managing fixed income portfolios for institutional clients. Many
of MIA's clients are able to take on substantial portfolio risk and therefore the firm's funds invest in all credit
qualities and in international markets. Among its investments, MIA currently holds positions in the debt of Worth
inc., Enertech Company, and SBK Company.
Worth Inc. is a heavy equipment manufacturer in Germany. The company finances a significant amount of its
fixed assets using bonds. Worth's current debt outstanding is in the form of non-callable bonds issued two
years ago at a coupon rate of 7.2% and a maturity of 15 years. Worth expects German interest rates to decline
by as much as 200 basis points (bps) over the next year and would like to take advantage of the decline. The
company has decided to enter into a 2-year interest rate swap with semiannual payments, a swap rate of 5.8%,
and a floating rate based on 6-month EURIBOR. The duration of the fixed side of the swap is 1.2. Analysts at
MIA have made the following comments regarding Worth's swap plan:
• "The duration of the swap from the perspective of Worth is 0.95."
• "By entering into the swap, the duration of Worth's long-term liabilities will become smaller, causing the value
of the firm's equity to become more sensitive to changes in interest rates."
Enertech Company is a U.S.-based provider of electricity and natural gas. The company uses a large proportion
of floating rate notes to finance its operations. The current interest rate on Enertech's floating rate notes, based
on 6-month LIBOR plus 150bp, is 5.5%. To hedge its interest rate risk, Enertech has decided to enter into a
long interest rate collar. The cap and the floor of the collar have maturities of two years, with settlement dates
(in arrears) every six months. The strike rate for the cap is 5.5% and for the floor is 4.5%, based on 6-month
LIBOR, which is forecast to be 5.2%, 6.1%, 4.1%, and 3.8%, in 6,12, 18, and 24 months, respectively. Each
settlement period consists of 180 days. Analysts at MIA are interested in assessing the attributes of the collar.
SBK Company builds oil tankers and other large ships in Norway. The firm has several long-term bond issues
outstanding with fixed interest rates ranging from 5.0% to 7.5% and maturities ranging from 5 to 12 years.
Several years ago, SBK took the pay floating side of a semi-annual settlement swap with a rate of 6.0%, a
floating rate based on LIBOR, and a tenor of eight years. The firm now believes interest rates may increase in 6
months, but is not 100% confident in this assumption. To hedge the risk of an interest rate increase, given its
interest rate uncertainty, the firm has sold a payer interest rate swaption with a maturity of 6 months, an
underlying swap rate of 6.0%, and a floating rate based on LIBOR.
MIA is considering investing in the debt of Rio Corp, a Brazilian energy company. The investment would be in
Rio's floating rate notes, currently paying a coupon of 8.0%. MIA's economists are forecasting an interest rate
decline in Brazil over the short term.
Determine whether the MIA analysts' comments regarding the duration of the Worth Inc. swap and the effects
of the swap on the company's balance sheet are correct or incorrect.


Answer: C
Question 3

Paul Dennon is senior manager at Apple Markets Associates, an investment advisory firm. Dennon has been
examining portfolio risk using traditional methods such as the portfolio variance and beta. He has ranked
portfolios from least risky to most risky using traditional methods.
Recently, Dennon has become more interested in employing value at risk (VAR) to determine the amount of
money clients could potentially lose under various scenarios. To examine VAR, Paul selects a fund run solely
for Apple's largest client, the Jude Fund. The client has $100 million invested in the portfolio. Using the
variance-covariance method, the mean return on the portfolio is expected to be 10% and the standard deviation
is expected to be 10%. Over the past 100 days, daily losses to the Jude Fund on its 10 worst days were (in
millions): 20, 18, 16, 15, 12, 11, 10, 9, 6, and 5. Dennon also ran a Monte Carlo simulation (over 10,000
scenarios). The following table provides the results of the simulation:
Figure 1: Monte Carlo Simulation Data
CFA-Level-III-page476-image157
The top row (Percentile) of the table reports the percentage of simulations that had returns below those
reported in the second row (Return). For example, 95% of the simulations provided a return of 15% or less, and
97.5% of the simulations provided a return of 20% or less.
Dennon's supervisor, Peggy Lane, has become concerned that Dennon's use of VAR in his portfolio
management practice is inappropriate and has called for a meeting with him. Lane begins by asking Dennon to
justify his use of VAR methodology and explain why the estimated VAR varies depending on the method used
to calculate it. Dennon presents Lane with the following table detailing VAR estimates for another Apple client,
the York Pension Plan.
CFA-Level-III-page476-image156
To round out the analytical process. Lane suggests that Dennon also incorporate a system for evaluating
portfolio performance. Dennon agrees to the suggestion and computes several performance ratios on the York
Pension Plan portfolio to discuss with Lane. The performance figures are included in the following table. Note
that the minimum acceptable return is the risk-free rate.
Figure 3: Performance Ratios for the York Pension Plan
CFA-Level-III-page476-image158
Using the historical data over the past 100 days, the 1-day, 5% VAR for the Jude Fund is closest to:


Answer: B
Question 4

Dynamic Investment Services (DIS) is a global, full-service investment advisory firm based in the United States. Although the firm provides numerous investment services, DIS specializes in portfolio management for individual and institutional clients and only deals in publicly traded debt, equity, and derivative instruments. Walter Fried, CFA, is a portfolio manager and the director of DIS's offices in Austria. For several years, Fried has maintained a relationship with a local tax consultant. The consultant provides a DIS marketing brochure with Fried's contact information to his clients seeking investment advisory services, and in return. Fried manages the consultant's personal portfolio and informs the consultant of potential tax issues in the referred clients' portfolios as they occur. Because he cannot personally manage all of the inquiring clients' assets, Fried generally passes the client information along to one of his employees but never discloses his relationship with the tax accountant. Fried recently forwarded information on the prospective Jones Family Trust account to Beverly Ulster, CFA, one of his newly hired portfolio managers. Upon receiving the information, Ulster immediately set up a meeting with Terrence Phillips, the trustee of the Jones Family Trust. Ulster began the meeting by explaining DIS's investment services as detailed in the firm's approved marketing and public relations literature. Ulster also had Phillips complete a very detailed questionnaire regarding the risk and return objectives, investment constraints, and other information related to the trust beneficiaries, which Phillips is not. While reading the questionnaire, Ulster learned that Phillips heard about DIS's services through a referral from his tax consultant. Upon further investigation, Ulster discovered the agreement set up between Fried and the tax consultant, which is legal according to Austrian law but was not disclosed by either party Ulster took a break from the meeting to get more details from Fried. With full information on the referral arrangement, Ulster immediately makes full disclosure to the Phillips. Before the meeting with Phillips concluded, Ulster began formalizing the investment policy statement (IPS) for the Jones Family Trust and agreed to Phillips' request that the IPS should explicitly forbid derivative positions in the Trust portfolio. A few hours after meeting with the Jones Family Trust representative, Ulster accepted another new referral client, Steven West, from Fried. Following DIS policy, Ulster met with West to address his investment objectives and constraints and explain the firm's services. During the meeting, Ulster informed West that DIS offers three levels of account status, each with an increasing fee based on the account's asset value. The first level has the lowest account fees but receives oversubscribed domestic IPO allocations only after the other two levels receive IPO allocations. The second-level clients have the same priority as third-level clients with respect to oversubscribed domestic IPO allocations and receive research with significantly greater detail than first-level clients. Clients who subscribe to the third level of DIS services receive the most detailed research reports and are allowed to participate in both domestic and international IPOs. All clients receive research and recommendations at approximately the same lime. West decided to engage DIS's services as a second-level client. While signing the enrollment papers, West told Ulster, "If you can give me the kind of performance I am looking for, I may move the rest of my assets to DIS." When Ulster inquired about the other accounts, West would not specify how much or what type of assets he held in other accounts. West also noted that a portion of the existing assets to be transferred to Ulster's control were private equity investments in small start-up companies, which DIS would need to manage. Ulster assured him that DIS would have no problem managing the private equity investments. After her meeting with West, Ulster attended a weekly strategy session held by DIS. All managers were required to attend this particular meeting since the focus was on a new strategy designed to reduce portfolio volatility while slightly enhancing return using a combination of futures and options on various asset classes. Intrigued by the idea, Ulster implemented the strategy for all of her clients and achieved positive results for all portfolios. Ulster's average performance results after one year of using the new strategy are presented in Figure 1. For comparative purposes, performance figures without the new strategy are also presented.


1

At the latest strategy meeting, DIS economists were extremely pessimistic about emerging market economies and suggested that the firm's portfolio managers consider selling emerging market securities out of their portfolios and avoid these investments for the next 12 to 15 months. Fried placed a limit order to sell his personal holdings of an emerging market fund at a price 5% higher than the market price at the time. He then began selling his clients' (all of whom have discretionary accounts with DIS) holdings of the same emerging market fund using market orders. All of his clients' trade orders were completed just before the price of the fund declined sharply by 13%, causing Fried's order to remain unfilled. Does the referral agreement between Fried and the tax consultant violate any CFA Institute Standards of Professional Conduct?


Answer: B
Question 5

Joan Weaver, CFA and Kim McNally, CFA are analysts for Cardinal Fixed Income Management. Cardinal
provides investment advisory services to pension funds, endowments, and other institutions in the U.S. and
Canada. Cardinal recommends positions in investment-grade corporate and government bonds.
Cardinal has largely advocated the use of passive approaches to bond investments, where the predominant
holding consists of an indexed or enhanced indexed bond portfolio. They are exploring, however, the possibility
of using a greater degree of active management to increase excess returns. The analysts have made the
following statements.
• Weaver: "An advantage of both enhanced indexing by matching primary risk factors and enhanced indexing
by minor risk factor mismatching is that there is the potential for excess returns, but the duration of the portfolio
is matched with that of the index, thereby limiting the portion of tracking error resulting from interest rate risk."
• McNally: "The use of active management by larger risk factor mismatches typically involves large duration
mismatches from the index, in an effort to capitalize on interest rate forecasts."
As part of their increased emphasis on active bond management, Cardinal has retained the services of an
economic consultant to provide expectations input on factors such as interest rate levels, interest rate volatility,
and credit spreads. During his presentation, the economist states that he believes long-term interest rates
should fall over the next year, but that short-term rates should gradually increase. Weaver and McNally are
currently advising an institutional client that wishes to maintain the duration of its bond portfolio at 6.7. In light of
the economic forecast, they are considering three portfolios that combine the following three bonds in varying
amounts.
CFA-Level-III-page476-image382
Weaver and McNally next examine an investment in a semiannual coupon bond newly issued by the Manix
Corporation, a firm with a credit rating of AA by Moody's. The specifics of the bond purchase are provided
below given Weaver's projections. It is Cardinal's policy that bonds be evaluated for purchase on a total return
basis.
CFA-Level-III-page476-image384
One of Cardinal's clients, the Johnson Investment Fund (JIF), has instructed Weaver and McNally to
recommend the appropriate debt investment for $125,000,000 in funds. JIF is willing to invest an additional
15% of the portfolio using leverage. JIF requires that the portfolio duration not exceed 5.5. Weaver
recommends that JIF invest in bonds with a duration of 5.2. The maximum allowable leverage will be used and
the borrowed funds will have a duration of 0.8. JIF is considering investing in bonds with options and has asked
McNally to provide insight into these investments. McNally makes the following comments:
"Due to the increasing sophistication of bond issuers, the amount of bonds with put options is increasing, and
these bonds sell at a discount relative to comparable bullets. Putables are quite attractive when interest rates
rise, but, we should be careful if with them, because valuation models often fail to account for the credit risk of
the issuer."
Another client, Blair Portfolio Managers, has asked Cardinal to provide advice on duration management. One
year ago, their portfolio had a market value of $3,010,444 and a dollar duration of $108,000; current figures are
provided below:
CFA-Level-III-page476-image383
The expected bond equivalent yield for the Manix Bond, using total return analysis, is closest to:


Answer: B
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Total 365 Questions | Updated On: Mar 28, 2025
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