The CFA Level III exam is the last in the series of three exams conducted by the CFA Institute. Coupled with at least 48 months of relevant work experience, successful completion of the final level yields a charter membership.

While the first two levels revolved around basic financial knowledge, investment valuation comprehension, and the application of both, the CFA Level III exam focuses on portfolio management and wealth planning.

Exam Structure

The format of the exam, which is offered in May and August of 2022 and in February and August of 2023, is a mix of item set questions (similar to Level II) and essay type questions. Like the other exams, the Level III exam is also conducted in two parts: the morning and afternoon sessions.

In the morning session, there are 10 to 15 essay-type questions. Each question consists of multiple parts such as A, B, C, etc., which help you organize your answer in a template. These questions may provide you with a situation and ask you to develop your own recommendation or solution. Each session will have either six item sets and five essay sets or five item sets and six essay sets.

Exam Curriculum

As mentioned earlier, the focus of the exam is on portfolio management and wealth planning, but it also covers seven topics that are grouped into two other areas, namely, Ethical and Professional Standards and Asset Classes. The following table provides weighting of these topics and broad areas for the exam:

As is evident from the table, the Ethics and Professional Standards gets as much importance as in the other levels of the exam. The investment tools are not tested separately, except economics, which is a part of the portfolio management and wealth planning section for level III.

The majority of the exam revolves around portfolio management and asset classes in the portfolio context.

Standards

In level III, standards primarily consist of the Code of Ethics and Global Investment Performance Standards (GIPS). Standards account for 10% (i.e., 36) of the 360 possible points. The Code of Ethics section will most likely be an item set in the afternoon session. However, GIPS could be tested either as an essay question in the morning session or as an item set in the afternoon session.

Asset Classes

The exam tests your knowledge on all of the major asset classes, including alternative investments, derivatives, equity investments, and fixed-income investments. However, the focus is now on the portfolio management aspects of these investments.

For example, a whole session is dedicated to the management of active and passive fixed-income portfolios, covering investment objectives, benchmarking, return analysis, portfolio immunization strategies, relative value analysis, and so on. The syllabus also covers strategies used in international and emerging markets and how derivatives are used to manage interest rate and credit risks in fixed-income portfolios.

The second asset class is equity securities, which are an essential component of most investment portfolios and crucial for the portfolio’s success. The discussion here surrounds equity investment strategies, evaluation of equity fund managers and equity indexes. The syllabus also discusses the corporate governance issues related to conflicts between managers and shareholders that erode value and have a direct impact on equity portfolio managers. Finally, there is a discussion on measuring and managing portfolios in international and emerging markets.

The section on alternative investments primarily discusses the alternative investment classes and how derivative instruments such as swaps, futures, and forwards are used to manage some alternative investments.

Portfolio Management and Wealth Planning

This comprises the largest portion of the exam and will account for at least 180 points out of the 360 possible points. Portfolio management concepts will dominate both the morning and afternoon sessions. The syllabus is very comprehensive and introduces new concepts such as behavioral finance, which forms the basis for financial decision making. Risk management concepts, covering tools and techniques for measuring and managing risk are also discussed. Apart from these, you are likely to be tested on questions related to individual and institutional wealth.

The number of concepts that can be tested are limited but are important. One such important concept is the Investment Policy Statement and its components, which is highly testable. Economics, which was a part of the investment tools in Level I and II, is included under portfolio management in the exam. Other important concepts are managing portfolios of institutional investors, asset allocation, risk management applications, and evaluating portfolio performance.

Within the portfolio management section, the CFA Institute provides no hints about which topics are more important. However, it does make available essay questions from previous years, which can be very useful for practicing and developing your exam strategy.

Exam Details

Time Limit: 6 hours
Cost: Varies
Number of Questions: 11 multi-part essay/structured response
Passing Score: Varies Annually
Passing Rates: As of August 2022, 54%
Format: Essay Questions
Prerequisites: Passing grade on CFA Levels I & II exam, and a U.S. Bachelor’s degree or equivalent.
Corequisites: In order to receive your designation as a CFA charter holder upon successful completion of level 3, you are required to have at least four years of experience in a related field.
Exam Date(s): February and August
Exam Results: Usually provided within 90 days. The Level III exam is graded by hand.
Official Exam Website: CFAInstitute.org

The Bottom Line

The Level III exam is considered one of the tougher exams for the CFA, as many of the questions are posed in essay format.

The key to success is to practice as many essay type questions as possible and master topics specifically related to portfolio management, which is at the heart of this exam.