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October 2015 CMT LEVEL III

SAMPLE EXAM
Table of Contents
Section

Number of
Questions

1
2
3
4
5
6
7
8

6
3-10
3-10
3-10
3-10
3-10
3-10
3-10

Topics Covered

Ethics
Each of the exam questions will consist of an integrated
mix of two or three knowledge domains from among
those specified on the mta.org website:
Risk Management, Asset Relationships, Portfolio
Management, Classical Methods, Behavioral Finance,
Volatility Analysis.

Points in
Section
12
20-40
20-40
20-40
20-40
20-40
20-40
20-40

Instructions to Candidates:




This is a sample exam. Questions here are indicative of the style you will encounter when
taking the Level III examination, but they are not a comprehensive review of all topics that
will be tested on.
Not all topics in the reading list will appear on a given test. This sample exam attempts to
demonstrate one possible scenario. Any resemblance to actual test questions is neither
implied nor intended.
The scoring on the sample is shown as variable to demonstrate that actual exam sections
may vary in their point count. Individual point counts are placed within questions to
provide an indication of how various questions may be valued. In general the rule of
guidance is that one point will equal one minute of time spent. Though this will varies from
one question to the next, it is a general guideline to follow for study and time management
purposes during the exam.
This is first draft of this sample exam. If errors are evident please send your observation to
Gordon Scott (gordon@mta.org).
Updates and changes may occur on this exam. Check the ERRATA section at the end (page
31) of this document for a record of the changes made this administration. Latest addition
was made on 9/15.
This exam contains a Questions Section (pages 2 through 20), which can be printed out and
taken separately before reviewing any answers, and an Answers section, which goes from
pages 21 through 30

Sample Exam Questions
Section 1: Ethics (12 points)
1A. Lynn Fiorina, CMT is a securities technical analyst following energy stocks and a rising star
at her firm. Her boss has been carrying a “buy” recommendation on International Oil & Gas
and asks Fiorina to take over coverage of that equity. He tells Fiorina that under no
circumstances should the prevailing buy recommendation be changed.
Which of the following actions by Fiorina is least likely a violation of the Code and Standards?
(2 points)
A. Fiorina may be independent and objective in her analysis of International Oil & Gas.
B. If Fiorina believes that her boss’s instructions have compromised her then she does not have
any options but to follow through with his demands.
C. Fiorina must only issue recommendations that reflect her independent and objective opinion.
D. Fiorina does not have to make recommendations that reflect her independent and objective
opinion.

1B. Robert Farber, CMT recently left his job as a research technical analyst for a large
investment adviser. While looking for a new position, he was hired by an investor-relations
firm to write a technical research report on one of its clients, a small educational software
company. The investor-relations firm hopes to generate investor interest in the technology
company. The firm will pay Farber a flat fee plus a bonus if any new investors buy stock in
the company as a result of Farber’s report.
Given this information, which of the following statements is most accurate? (2 points)
A. If Farber accepts this payment arrangement, he will not be in violation of Standard I(B)
because the compensation arrangement cannot be expected to compromise his independence
and objectivity.
B. If Farber accepts this payment arrangement, he will be in violation of Standard I(B) because
the compensation arrangement can be expected to compromise his independence and
objectivity.
C. Issuer-paid research that is objective and unbiased cannot be performed under the right
circumstances.
D. Issuer-paid research that is subjective and biased may be performed under the right
circumstances.

1C. Charles Verdon, CMT, an analyst with Foster and Gibbons Incorporated, is assisting his
firm with a secondary offering for Brilliant Insight Technology Company. Verdon
participates, via telephone conference call, in a meeting with Foster and Gibbons investment
banking employees and Brilliant Ideas’ CEO. Verdon is advised that the company’s
earnings projections for the next year have significantly dropped. Throughout the telephone
conference call, several Foster and Gibbons salespeople and portfolio managers walk in and
out of Verdon’s office, where the telephone call is taking place. As a result, they are aware
of the drop in projected earnings for Brilliant Insight. Before the conference call is
concluded, the salespeople trade the stock of the company on behalf of the firm’s clients and
other firm personnel trade the stock in a firm proprietary account and in employees’
personal accounts.
Has Verdon violated Standard II(A) regarding his failure to prevent the transfer and misuse of
material nonpublic information to others in his firm? (2 points)
A. Verdon’s firm did not have to adopt information barriers to prevent the communication of
nonpublic information between departments of the firm.
B. The salespeople and portfolio managers who traded on the information have not violated any
applicable standard.
C. Verdon violated Standard II(A) in failing to prevent the transfer and misuse of material
nonpublic information to others in his firm.
D. Verdon did not violate Standard II(A).

1D. Alyssa Newmark, CMT is an investment advisor and technical analyst for high-net-worth
clients. A client with an aggressive risk profile in his investment policy statement asks
about investing in the Top Shelf hedge fund. This fund, based in Greenwich, Connecticut,
has reported 20% returns for the first three years. The fund prospectus states that its
strategy involves long and short positions in the energy sector using extensive leverage with
options. Based on her overall fusion analysis using a fundamental and technical
examination of the fund’s financial holdings, track record, the principals involved in
managing the fund, the fees charged, and the fund’s risk profile, Newmark recommends the
fund to the client and secures a position in it. The next week, the fund announces that it has
suffered a loss of 65% of its value and is suspending operations and redemptions until after
a regulatory review. Newmark’s client calls him in a panic and asks for an explanation.
Given this information, which of the following statements is most correct? (2 points)
A. Newmark’s actions were consistent with Standard V(A) as her analysis of an investment that
results in a reasonable basis for her recommendation does not guarantee that the investment
has no downside risk.
B. Newmark’s actions were not legitimate has her analysis of this investment is unfavorably
biased due to a lack of fundamental and technical analysis.
C. Newmark’s actions were legitimate as she did not have to discuss the matter with her client as
there was limited risk with this investment.
D. Newmark’s actions were inconsistent with Standard V(A).

D.00 a share by the end of the year because the dividend will increase by US$1. She estimates that Runnington Industries will increase its dividend by US$1. 1F. Turn down the additional compensation because it will result in conflicts with the interests of other clients’ accounts.75 as the trend is technically up on weekly and monthly timeframes. Turn down the additional compensation because it will create undue pressure on him to achieve strong short-term performance. She realizes that this increase is contingent on pending legislation that would. Roanna violated the Standards by basing her research on uncertain predictions of future government action and mere speculation. give Runnington a substantial tax break. Jordan Trump. . although she is lobbying hard for the bill and prospects for its passage are favorable. Obtain permission from his employer prior to accepting the compensation arrangement. B. Roanna did not violate the Standards because she did not use material inside information. Roanna violated the Standards because she failed to separate opinion from fact. Roanna writes in her research report.75 a share during the next year. One of his firm’s clients has told Jordan that he will compensate him beyond the compensation provided by his firm on the basis of the capital appreciation of his portfolio each year. The US representative for Runnington’s home district has told Roanna that. Investors buying the stock at the current time should expect to realize a total return of at least 20% on the stock. C. if enacted. Accept the additional compensation because it will result in conflicts with the interests of other clients’ accounts. CMT is a portfolio manager. “We expect Runnington’s stock price to rise by at least US$10. D. Roanna violated the Standards because she used material inside information. Jordan should: (2 Points) A. concern of the US Congress over the federal deficit could cause the tax bull to be voted down. CMT works for a regional brokerage firm. Roanna Maxwell. Runnington Industries has not made any statements about a change in dividend policy. C.” According to the Standards: (2 Points) A.1E. B.

a private equity firm that specializes in leveraged buyouts. and Portfolio Management.Section 2: 20 .> You work as an analyst for Space27. a short-term chart of the VIX compared to the VIX futures. It is indicative of the style of questions asked. and some performance data from the four funds you are choosing between. Chart 2-1 .40 points < This question combines Classical Methods. Volatility. You are tasked with evaluating market conditions and recommending liquid strategies for protecting against periods of market shock. Your inputs are a 1-year chart of SPY. a short-term chart of SPY for comparison. You are evaluating the performance of four managed futures funds strategies for your firm’s consideration. but actual exam questions will vary in their content and complexity. Your task is to write an opinion on which fund would be best for your firm to invest in over the next three to twelve months.

Chart 2-2. Chart 2-3. 30-min. 10 day. 10 day (for comparison to VIX charts) . 30-min.

This implies more bearish moves ahead. B. . The VIX moves were exaggerated. H. D. but the VIX futures still trend higher. The VIX moves mirrored the S&P and the VIX futures lagged because of a quick drop in price. The VIX moves are extreme and the VIX futures are not. Trend is weakening as shown by the RSI. This implies more bullish moves ahead. The VIX moves show lower peaks while the VIX futures show higher peaks suggesting that VIX futures imply a continued rise in implied volatility. Trend is rising. everything is ordinary. Trend has changed from upward to downward. The VIX moves were overdone for a few days but then got back into sync with the VIX futures. The S&P mirrors the VIX. B. in general terms. RSI is not oversold. implying that the futures market is in contango and likely to stay that way. C. 2C. This implies more bearish moves ahead. F. What observation is noteworthy about the VIX and VIX futures patterns? (3 points) A. How would you describe your observation of the S&P 500’s overall trend as shown in Chart 2-1? (3 points) A. diverging from the S&P 500 price action. 2B. This implies more bullish moves ahead. recent price drop is just a dip worth buying.2A. The VIX shows a current trend of lower highs and lower lows. but all lines are converging back into equilibrium. The VIX moves are greater than the VIX futures moves showing that the VIX futures imply the market has yet to price in bullish sentiment. C. Trend is likely to fail because a head-and-shoulders is forming. showing that the extreme move was anomalous. but has not failed yet. What would be the best interpretation of a comparison of the S&P 500’s intraday trend for the past two weeks with the VIX and VIX futures patterns? (4 points) E. D. G.

6% 617. Select a fund based on the data you have from Charts 2-1.4% +.10 Information ratio based on 10-year average return 1.23 1.2% 14.1 .8% 7.16 .5% 63. Drawdown (Trade Close to Trade Close) as % of Initial Capital 3. Deviation of 2008 Return -5.76 11.3% -.4% Previous Year’s Rate of Return 10-year Average Annual Return Std.7% 2. and 2-4 and specify three reasons to support your choice.6% Average Beta of stocks in fund -.18 -1.82 2. 2-3.5% 10.8% Net Return as % of Drawdown 297. 2-2.5% 21 79.2% 16. . Deviation of Annual Return Rate of Return for 2008 Std.2% -11.5% 23.3% 1.3% 12.24 73.6% 5.2% 8.4 10.2% 29.1% 12.9% 181.5% Percent of Time in the Market Correlation to SPX 16.81 Information ratio based on 2008 performance 2.1% 11.7% 1.8% 46. (15 points).6% +.7% 124.1% 12.8% -35.05 25.57 -1.74 Max.2 1.5% 450 42.7% 4.7% 20. Why would the Treynor Ratio be less helpful for this selection process than the Information Ratio? (4 points) 2E.8 Chart 2-4 2D.8% +.4% 2.6% 250 58.20 33.Fund A Fund B Fund C Fund D Average # of Trades Annually Percent Profitable 52 57.

light blue line) and the Thai Baht (THBUSD. The Malaysian Ringgit (MYRUSD) will likely remain in the “Lagging” quadrant over the next 10 weeks .Section 3: 20 . Two currencies stand out on the chart. Which statement below gives the most accurate interpretation of Chart 3-1? (3 points) A. As part of your research you observe the Relative Rotation Graph (Chart 3-1) to determine which currencies may provide evidence of a strengthening economy. B.40 points Chart 3-1 3A. this implies that they are poised to continue doing so. PHPUSD is likely to move into the “Leading” quadrant very soon. You publish an advisory newsletter that alerts readers to opportunities in the Asian markets. THBUSD and PHPUSD are equally likely to outperform all other currencies shown in this chart. D. darker blue line). the Philippines Peso (PHPUSD. C. The currencies in the “Improving” quadrant have outperformed all others over the past 10 weeks.

List three points of evidence in Chart 3-2 for either a bullish or bearish trade. Review Chart 3-2 of EPHE and its comparison to EEM (a general. suppose you had other research that helped you to conclude that the Philippines Peso was showing evidence of economic opportunity in the Philippines. 3B. You therefore look to see if it is appropriate to recommend a trade on EPHE. (12 points) .Chart 3-2 In addition to Chart 3-1. But this requires that the chart show evidence of a bullish trade. Explain how the evidence of Chart 3-2 confirms or contradicts a bullish trade (3 points) 3C. and identify the following. emerging-markets ETF). the ETF that tracks companies within that country.

The interpretation of this correlation coefficient is best described by which of the following phrases? (4 points) E. D. H. Three outside up or spring with hammer candle Above the Stomach or Piercing Three line strike or Upthrust . (3 points).3D. Bullish Engulfing with a high-wave candle following. The time interval for calculating the correlation in Chart 3-2 was 20 periods which equates to about 1 month of trading days. Over the past month the correlation to price comparison is strong and the correlation to percentage changes is very strong. The ending value of the correlation graph is +. A. F. Over the past month the correlation to price comparison is weak and the correlation to percentage changes is very weak. Identify what candlestick pattern can be found in the lowest bar of Chart 3-2 and the two bars on either side of it. B.76. G. Over the past month the correlation to price comparison is very strong and the correlation to percentage changes is medium 3E. C. Over the past month the correlation to price comparison is medium and the correlation to percentage changes is strong.

you are asked to supply opinions on the following questions. economy is currently positioned along the business cycle (shown as the blue circle in Chart 4-1).S. You are an analyst for Orange Valley Asset Management LLC. Industrials Consumer Staples Technology Utilities Financials .S. economic status relative to business cycle. and your firm just updated their business cycle model and designated where they believe the U. 4A. The current reading shows that the U.S. is positioned at the top of the full expansion phase. As the head of technical analysis. Select two of the following economic sectors would you recommend that the portfolio team should overweight (4 points) and explain your answers (6 points).40 points Chart 4-1: Position of U.Section 4: 20 .

02% +117.51% +62.82% +52.99% +94.24% +10.92% Utilities +2.99% +30.11% +95.71% +37.06% +4.18% +19.91% +1.70% +74.54% Consumer Staples +1.81% Chart 4-2 Sector Performance Dashboard 4C.23% +4.66% +85.40% +1.66% Materials +0.34% Financials -3. After reviewing the latest S&P sector performance dashboard in Chart 4-2.80% +20.90% -3.55% +62.64% +7. what observations can you make about whether the 3 Month and 1 Year sector performances confirm or conflict with the allocations that you chose in the previous two questions? (6 points) .25% +95.58% +15. Which two of the following economic sectors would you recommend the portfolio team underweight based on Chart 3-1? (4 points) Materials Technology Utilities Industrials Financials 4C.56% +1.91% +65.34% +24.79% -2.38% +10.23% +82.77% S&P 500 Index -0.19% +25.48% Consumer Discretionary +0.72% +24.89% +14.73% +11.01% +52.26% +12.16% +47.00% +54.66% +144.79% Telecommunication Services +1.26% -7.23% +51. One month after you made your allocation decisions the performance data for various sectors appears as follows: SECTORS 1 Month 3 Month 1 Year 3 Year 5 Year Energy +0.71% +40.56% +5.82% +63.76% +1.32% Industrials -0.92% -0.4B.22% Health Care +2.95% +4.62% Information Technology -1.

(15 points) 5B. The chart shown above reflects the recent jump in price based on the news. 5A.Section 5: (20-40 Points) Chart 5-1 Growth stock breaking out You work as a trader for a large investment banking. (6 points) . The management has disclosed to you that they believe that this stock (shown in Chart 5-1).000 shares in this stock and they want your opinion on whether a stop loss could be implemented for this trade without creating too much slippage? (5 points) 5C. Your management has asked you to identify whether attempting to purchase in the next two trading sessions is likely to be favorable timing or not. Explain 5 points of evidence you can see on this chart that support the possibility of a continuing upward trend. has significant potential for growth based on the information about who was hired as the new CEO. Assume your management wants to initiate and maintain a position of around 100. Name a logical place for a stop loss and specify a reason for your choice.

before session opening. which direction recommendation would you expect to start a trade LONG or SHORT? (2 points) 6B. 6A. Examine Chart 6-1: Jakarta Composite Index. Based on the majority of evidence in the chart of the index. (4 points) . You run a portfolio based on Southeast Asian equities and you see an opportunities building in Indonesia. reversal. You work for a hedge fund that specializes in global opportunities. your fund is currently employing very short-term trading strategies. with the ability to enter either LONG or SHORT positions. The Jakarta Composite Index looks promising to you. Give the name of the two most recent multi-day candlestick patterns and describe how each support your conclusion (i. continuation.e. but given the recent volatility in the global markets.Section 6: (20-40 Points) Chart 6-1: Jakarta Composite Index. etc). before session opening.

Use ATR as provided in Chart 6-1 to calculate your stop price. Use a factor of 2. ATR. Briefly note how each indicator works (the concept is more important than the actual formula). Select your short-term outlook for the index and explain how each of the 3 indicators applies to your short-term outlook for the index. Assume the following conditions. Position risk limited to $10. . Using Chart 6-1 determine how many shares of this ETF can be traded (long or short). the ETF would be priced at $52. if the index is currently trading at a level of 5225. Examine the three provided indicators in Chart 6-1: Jakarta Composite Index. (6 points).0 when you do your ATR stop calculation. and demonstrate how you arrived at your answer: (6 points)      Index will open at 5225 at the time of trade (for both long or short position). Be very specific. Assume the ATR reading at the time of the trade is 40. Name one additional point of evidence such as support. and RSI all use a 10-period calculation. rounded to the nearest 100 shares.25 per share in the market. (3 points) 6E. resistance or other price/candle patterns (not oscillators or trend indicators) found in the chart that helps to strengthen your conclusion? (3 points) 6D. So for example.6C.000. This ETF trades at 1/100 of the index’s actual value. 6F. Assume you decide to use an Exchange Traded Fund (ETF) that tracks the Jakarta Composite Index. Note that Bollinger Bands.

B. You work as a proprietary trader and are examining Chart 7-1 for a possible short-term. . which one of these patterns would be the most significant indicator of a reversal setup. if it occurred next on the Alerian MLP Index? (3 points) A. C. swing-trade entry. Of the following choices.Section 7: (20-40 Points) Chart 7-1 7A. D.

(3 points) 7C.7B. You have a rule that requires you to reduce your position size for the trade when these circumstances occur. The rule helps you select a stop-loss that is more logical and less likely to be hit. Position a stop above the last swing high near $472 7D. A smaller position size means you are taking on less risk. C. D. Position a stop at the sum of the last closing price and the Case Dev-Stop calculation (which uses ATR and Standard Deviation) D. Position a stop at the sum of the last closing prices and the annual VIX expected move C. This trade would enter the Alerian MLP Index $408 after breaking support. A. You need to determine a stop-loss price close enough to your entry price to maximize the trade potential. Suppose you notice that volatility is increasing on the Alerian MLP Index as well as for the market at large. You will be out of the market during volatile periods. Name the candlestick pattern at the most recent swing high price near $470 in Chart 7 -1. . The rule helps limit the volatility of returns in your trading. Which of the following strategies would be most likely to help you identify the best stop-loss price? (3 points) Explain your choice (6 points). Position a stop just a few cents above the broken support price B. B. but far enough away to not be stopped out by normal movement of the stock. Assume you saw a setup you wanted to trade for a bearish continuation swing trade. What influence would this rule have your trading? A.

Name and briefly describe that last two stages of a bubble ( 10 points). Its weekly price chart (Chart 81) shows that the position has recently moved strongly in your favor. Your firm is about to be acquired by a significantly larger investment company that has a few concerns about your investment selection process and your currently opened positions 8A. You currently have a sizable short position in a commodity. Weekly Commodity Chart You work as the portfolio manager and principal of a boutique investment firm. . When asked how you anticipated such a move you explained that this was a trade designed to capture the breaking of a classic bubble market.Section 8: (20-40 Points) Chart 8-1.

The investment company that wants to acquire your firm would like for you to consider making your selection decisions with a committee that would have a vote. You will stop out of all contracts if the price rises to 105. The final tier will be taken off through a trailing stop. Committee will vote on decisions using a secret ballot C. You explain that began your position with 25 contracts and you have now built it up to 43 contracts after adding to the position twice. The first tier of contacts close out profits if the price breaks through the 4-week support price. Your current selection process includes only you and the research you study. D. Assuming you had to accept some form of this change. Based on the pattern of a reflective pyramid. It has performed well so far. How many more contracts will you close out if the price drops to 62? (3 points) 8E. which of the following scenarios would you consider most likely to produce the best results? (4 points) A. 8C. You explain that you are using a reflective pyramid compounding structure. and they want to know your strategy for getting out. How many more contracts will you close out if the price drops to 52? (3 points) . and the second tier closes out if the price breaks through the 20-week support price. Committee will discuss best ideas screened by an analyst team. Making decisions that require all members vote unanimously on a decision before action can be taken B. The new company’s management has questions about your position size on the short commodity trade.8B. how many contracts will you close out if the price drops to 75? (4 points) 8D. Committee will meet each month to look over recent mistakes and discuss corrections. For taking profits you will do so in three tiers.

Charles Verdon. (reference in CFA SOP: Research Independence and Prior Coverage). Correct answer: C Comment: Fiorina must be independent and objective in her analysis of International Oil & Gas. (reference in CFA SOP: Research Independence and Compensation Arrangements). which provides an incentive to draft a positive report regardless of the facts and to ignore or play down any negative information about the company. Lynn Fiorina. and it they conflict with her boss’s opinion. she has two options: She can tell her boss that she cannot cover the company under these constraints.. is assisting his firm with a secondary offering for Brilliant Insight Technology Company… Correct Answer: C Comment: Verdon has violated Standard II(A) because he failed to prevent the transfer and misuse of material nonpublic information to others in his firm. 1C. If she believes that her boss’s instructions have compromised her. an analyst with Foster and Gibbons Incorporated. CMT. he will be in violation of Standard I(B) because the compensation arrangement can reasonably be expected to compromise his independence and objectivity. 1B. or she can take over coverage of the company. Farber will receive a bonus for attracting investors. Fiorina must issue only recommendations that reflect her independent and objective opinion. CMT is a securities technical analyst following energy stocks and a rising star at her firm. Robert Farber. The sales people and portfolio managers who traded on the information have also violated Standard II(A) by trading on inside information.Answers 1A. .. Farber should accept only a flat fee that is not tied to the conclusions or recommendations of the report. CMT recently left his job as a research technical analyst for a large investment adviser. share the conclusions with her boss or other supervisors in the firm so that they can make appropriate recommendations. Issuer-paid research that is objective and unbiased can be done under the right circumstances as long as the analyst takes steps to maintain his or her objectivity and includes in the report proper disclosures regarding potential conflicts of interest. (reference in CFA SOP: Controlling Nonpublic Information). reach her own independent conclusions. Correct Answer: B Comment: If Farber accepts this payment arrangement. Peter’s firm should have adopted information barriers to prevent the communication of nonpublic information between departments of the firm.

(reference in CFA SOP: Successful Due Diligence/Failed Investment). CMT works for a regional brokerage firm. She estimates that Runnington Industries will increase its dividend by US$1. 1E. Comment: The correct answer is C. although the private compensation arrangement could conflict with the interests of other clients and lead to short-term performance pressures. B and D are incorrect. even though they may be uncertain. members and candidates may enter into such agreements as long as they have disclosed the arrangements to their employer and obtained permission for the arrangement from their employer. Alyssa Newmark. Jordan Trump.75 a share during the next year… Correct Answer: B Comment: The correct answer is B. CMT is a portfolio manager… Correct Answer C. Newmark should discuss the analysis process with the client while reminding him or her that past performance does not lead to guaranteed future gains and that losses in an aggressive investment portfolio should be expected. Answers A. statement A is incorrect. She has made this statement knowing that the dividend will increase only if Congress enacts certain legislation. This question involves Standard IV(B)—Additional Compensation Arrangements. The arrangement described in the question—whereby Jordan would be compensated beyond the compensation provided by his firm. on the basis of an account’s performance—is not a violation of the Standards as long as Jordan discloses the arrangement in writing to his employer and obtains permission from his employer prior to entering into the arrangement. Analysis of an investment that results in a reasonable basis for recommendation does not guarantee that the investment has no downside risk. 1F. She could have been offering her opinion to anyone who asked. in part. therefore. and the question does not state whether the US representative gave Roanna her opinion on the passage of the legislation in confidence.Communication with Clients and Prospective Clients. Roanna Maxwell. Roanna failed to separate fact from opinion. This question related to Standard V(B). Roanna has issued a research report stating that she expects the price of Runnington Industries stock to rise by US$10 a share “because the dividend will increase” by US$1. It may be acceptable to base a recommendation. (reference in CFA SOP: Standard IV(B)Additional Compensation Arrangements). an uncertain prospect. on an expectation of future events. By stating that the dividend will increase. The information regarding passage of legislation is not material nonpublic information because it is conjecture.75 per share and that the trend should continue. CMT is an investment advisor and technical analyst for high-net-worth clients… Correct answer: A Comment: Newmark’s actions were consistent with Standard V(A).1D. . (reference in CFA SOP: Standard V(B)-Communication with Clients and Prospective Clients).

This implies more bearish moves ahead. but has not failed yet. diverging from the S&P 500 price action. Chapter 7. CMT III Text pages 272. References: (Katsanos. Trend is weakening as shown by the RSI. References: (Katsanos. References: (Weigand. Chapter 4. Why would the Treynor Ratio be less helpful for this selection process than the Information ratio? (4 points) Fund A has a negative score for the average beta of its stocks. The Treynor ratio is not applicable if the stocks have a negative beta. What observation is noteworthy about the VIX and VIX futures patterns? (3 points) A. References: (Brown. 497) 2B.2A. CMT III Text Chapter 22) . Chapter 4. Kaufman Chapter 20. Kaufman Chapter 23. What would be the best interpretation of a comparison of the S&P 500’s intraday trend for the past two weeks with the VIX and VIX futures patterns? (4 points) C. How would you describe your observation of the S&P 500’s overall trend as shown in Chart 2-1? (3 points) D. Chapter 1. Kaufman Chapter 20. CMT III Text Chapter 31) 2D. CMT III Text Chapter 31) 2C. The VIX moves show lower peaks while the VIX futures show higher peaks suggesting that VIX futures imply a continued rise in implied volatility. but the VIX futures still trend higher. The VIX moves were exaggerated.

CMT III Text Chapter 22. this implies that they are poised to continue doing so. Fund A – Best against market shocks since I am expecting possible bear moves in the next three months. 2-2. Weigand Chapter 7.2E. 2-3. The currencies in the “Improving” quadrant have outperformed all others over the past 10 weeks. Kaufman Chapter 20. 31) 3A. Chapter 9. References: (Katsanos. then Philippine company stocks should also be rising. With EPHE in a corresponding uptrend it confirms the expectation. (15 points). Explain how the evidence of Chart 3-2 confirms or contradicts a bullish trade (3 points) If Peso is rising. Any Three of these reasons: 1 – Slight negative correlation to the markets may help against market shocks 2 – Highest information ratio 3 – Lowest percentage of Time in Market 4 – Lowest Standard Deviation of Returns means consistency 5 – Best performance in 2008 (price shock environment) References: (Katsanos. Chapter 4. You publish an advisory newsletter that alerts readers to opportunities in the Asian markets… Which statement below gives the most accurate interpretation of Chart 3-1? (3 points) C. Select a fund based on the data you have from Charts 2-1. Chapter 2. CMT III Text Chapter 20) 3B. CMT III Text Chapter 19) . References: (Ciana. and 2-4 and specify three reasons to support your choice.

20) Bearish Trade Note: this shouldn’t be a bearish trade. 5. 13. The interpretation of this correlation coefficient is best described by which of the following phrases? (4 points) A. Chapter 2. References: (Ciana. EPHE and EEM show a high correlation. you could get partial credit for mentioning this ideas and maybe others if graders judge your reasoning to be sound. but some will. but if you select bearish. Elder Chapter 39.76. 1. CMT III Text Chapter 1. 13. Chapter 2. Better to focus on the side that has the most apparent evidence. EPHE shows two breakaway gap patterns in most recent 10 trading sessions. and EEM has just created evidence of a new upward trend by showing a pattern of higher highs and higher lows. Price shows a Breakout. Katsanos.3C. Identify what candlestick pattern can be found in the lowest bar of Chart 3-2 and the two bars on either side of it. 3. Three outside up or spring with hammer candle . Elder Chapter 39. (3 points). retest and continuation 2. Katsanos. and EEM may abruptly turn down and resume its downward trend. 3. EPHE and EEM show a high correlation. List three points of evidence in Chart 3-2 for either a bullish or bearish trade. EEM (emerging markets ETF) may be leading EPHE lower. Price is outperforming EEM (other emerging markets) showing relative strength during “improving” phase. B. The time interval for calculating the correlation in Chart 3-2 was 20 periods which equates to about 1 month of trading days. CMT III Text Chapter 1. Tip: Most questions will not have this level of ambiguity where at least partial points can be given for either direction. thus creating a new lower high. 3E. 20) 3D. Price shows higher highs and higher lows (upward trend) 3. 4. References: (Ciana. Over the past month the correlation to price comparison is strong and the correlation to percentage changes is very strong. The ending value of the correlation graph is +. (12 points) Bullish Trade (any three of these are acceptable): 1.

References: (Weigand.40 . Select two overweight sectors and explain your reasons Consumer Staples. Elder Chapter 39.16. Chapter 7. but also lead a downtrend into a recession as companies in these sectors begin to see sales and earnings shrink once full expansion is reached. 34) . (5 of any of the following)  Break of resistance with successful retest of the 16. CMT III Text Chapter 21) 4B.4A. Chapter 7. CMT III Text Chapters 1. such combined outperformance in the Consumer Staples. During this late economic phase these two sectors have not performed well until evidence of sustained and more predictable economic growth appears. 6. 3. Expectations for consumer and corporate spending tend to wane as less and less evidence of these activities can be found. Health Care and Utilities sectors have lead the market and all other sectors in this data. Kaufmann Chapter 4. CMT III Text Chapter 21) 4C. 8. 4. References: (Weigand. Nison Chapter 12. CMT III Text Chapter 21) 5A. Chapter 7. Select two underweight sectors and explain your reasons Both the Industrials and Information Technology sectors have underlying industries in which often have rallied in anticipation of economic recovery. and Utilities sectors typically lead the market and all other sectors at the beginning of a recession (late expansion-early recession) phases of the business cycle as investors seek defensive positions and anticipation economic contraction. References: (Weigand. Usually.  Higher highs and higher lows in last three months  Recent Bollinger Band widening  Fib pull back from resistance held at 38.2%  Stochastic bottoming inside 30-50 range consistent with new uptrend  High volume on the breakout References: (Brown Chapter 1.50 range  Bullish engulfing candle pattern as part of retest  Gap (Window) above the resistance range (likely based on earnings news)  Gap (Window) has not been filled. …what observations can you make about whether the 3 Month and 1 Year sector performances confirm or conflict… Consumer Staples. Health Care and Utilities sectors occur in the late-early recession phases of the business cycle which confirms the firm’s model.

References: (Kaufmann Chapter 13. but if gap fills (or trend line breaks) and continues to fall. the correct explanation for what price you chose is worth 4 points. 5C. Just below 14.70.6 million dollars—not a large sized for institutional orders in a stock this liquid. CMT III Text Chapters 3. 4) . then change of sentiment has disappeared. 14. Just below the Gap range (or trend line) at 15. Yes it would be feasible because 100K shares would represent less than ½ percent of the average daily volume. since gap represents a change of sentiment. (There are three possible answers.) Just below the Resistance at 16. Choosing one of these three prices is worth 2 points.5B. then change of sentiment has disappeared. since breakout represents a change of sentiment. With a share price of $16 this would represent a trade size of 1. but if resistance fails the test of support.40.60 since all previous lows are taken out and you can assume a new downtrend may be underway. any of these three are acceptable.

This is a bullish continuation pattern (1pt) A Harami immediately preceeds this pattern (the second candle of the harami is also a part of the 3-white soldiers pattern) (1 pt) A harami is a reversal pattern.Question 6 is built on a collection of ideas integrated into a single chart study. The following references apply to all questions in Section 6: (Brown Chapter 1. (4 points) Three that could work: Three Advancing White Soldiers (or 3 White Solders) is the most recent pattern (1pt). Elder Chapter 39. and in this case has reversed the past 4-5 day short-term pull back. Give the name of the two most recent multi-day candlestick patterns and describe how each support your conclusion (i. 8. (1 pt) . 6. etc). 4.e. Based on the majority of evidence in the chart of the index. continuation. reversal. 34. 7. Nison Chapters 10-17. which direction recommendation would you expect to start a trade LONG or SHORT? Long 6B. CMT III Text Chapters 1. Kaufmann Chapter 4. 3. 35) 6A.

Examine the three provided indicators in Chart 6-1: Jakarta Composite Index. 6E. As discussed earlier. (3 points) Bollinger Bands: These bands are formed by taking into account the standard deviation around a moving average (1 pt) ATR – average true range also displays volatility. Be very specific. This can be a sign that volatility will increase again over the short-term. (Any of the following information may be usable to answer this question) One purpose of the Bollinger bands is to help visually display volatility. (6 points). Prior resistance around the 5140 level in July 2014 has also just become support. Briefly note how each indicator works (the concept is more important than the actual formula). but it differs from Bollinger Bands in that volatility is displayed on a range of prices. ATR measures the average range (high to low) of the most recent prices (in this case 10 days). Other uses of the bands are to help measure trend strength. Select your short-term outlook for the index and explain how each of the 3 indicators applies to your short-term outlook for the index. . and RSI all use a 10-period calculation. Name one additional point of evidence such as support. If candles are riding the upper band. and is often used as an overbought / oversold indicator (1). the recent harami helps to secure that support line for the short-term. ATR. The 3 white soldiers pattern that showed increasing/larger white candles that have moved the index above the previous highest high – showing that resistance has just been broken. currently they are at/near their narrowest level. Note that Bollinger Bands. like in this example. (1 pt) RSI – Relative Strength Index helps to measure momentum. The index has been in an uptrend since June 2014. Generally bullish.6C. (1 pt). In looking at how the current bands compare to other areas of the chart. resistance or other price/candle patterns (not oscillators or trend indicators) found in the chart that helps to strengthen your conclusion? (3 points) Any one of the following: A bullish harami pattern which reversed a very short term pull-back. this can be a sign that the current trend is strong/will continue. 6D.

<which next candle : graphic choices> Correct Answer: D. (2 pts). A rising ATR line doesn’t mean the security is in an uptrend. Position risk limited to $10.25. the ETF would be priced at $52. Use ATR as provided in Chart 6-1 to calculate your stop price. suggesting that the JKSE index may increase. 2 times an ATR of 40 cents = 80 cents. rounded to the nearest 100 shares. So for example. Assume you decide to use an Exchange Traded Fund (ETF) that tracks the Jakarta Composite Index. The stop would be placed 80 cents below the long entry price of 52.25 per share in the market. Some technicians interpret a very low ATR level is a sign that eventually volatility will increase again. = 51. Since the ATR level here is among the lowest on the whole chart.. (1 pts) The very recent level in RSI is now higher than the last peak .so RSI is not diverging from the overall direction of the index (1 pt). (2 pts for correct discussion of stop price). 7A. but is near the edge. 6F. and the bands may widen yet again to account for the move.000 position risk divided by 80 cents = 12. $10.45. this could be an indication of higher volatility.000. and demonstrate how you arrived at your answer: (6 points)      Index will open at 5225 at the time of trade (for both long or short position). Assume the following conditions. CMT III Text Chapters 33) . Using Chart 6-1 determine how many shares of this ETF can be traded (long or short). Answer: 1/100 of $40 = 40 cents. (1 pt) A rising ATR line merely states that the security’s volatility is increasing. Currently it is still below what many use as an overbought level (70) – and momentum indicators can stay overbought for some time in an extended uptrend (1 pt).0 when you do your ATR stop calculation. if the index is currently trading at a level of 5225. (2 pts for correct number of shares).The last white candle has not yet penetrated the upper band. But a technician needs other evidence to help determine which way the trend might move. (1 pt) ATR is not a directional indicator. This ETF trades at 1/100 of the index’s actual value. (Hammer candle that coincides with previous support) Reference: (Nison Chapter 15. Assume the ATR reading at the time of the trade is 40. Use a factor of 2.500 shares.

Compounding Structures. Investors are so scarred by market events that they don’t want to participate at all.which committee decision tactic will work best? Correct Answer: B. Reference: (Montier Chapter 38. Reference: (Kaufman Chapter 23. CMT III Text Chapters 34. .describe stage 4 and 5 of a bubble “The fourth stage of the bubble process is labeled the critical stage or the financial distress stage. 35) 7C. How many contracts closed at 75? . Reference: (Montier Chapter 17. …Volatility is increasing on Alerian MLP Correct Answer: A. Best stop-loss price… Correct answer C: Position a stop at the sum of the last closing price and the Case Dev-Stop calculation (which uses ATR and Standard Deviation) Reference: (Kaufman Chapter 23. CMT III Text Chapter 12. Revulsion continues a bear-market trend and usually ends with a collapse in volume. CMT III Text Chapter 12) 8A.. Name the Candlestick pattern… Bearish Engulfing Reference: (Nison Chapter 10.7B. The rule helps limit the volatility of returns in your trading. The critical stage is the point where a set of insiders decide to take their profits and cash out.” The detection of fraud is often coincident with this stage. Reflecting pyramid ) 8C. CMT III Text Chapter 28 ) Reference for next three questions: (Kaufman Chapter 23. The fifth stage is Revulsion. CMT III Text Chapter 29) 8B. and is the final stage of the bubble.. Committee will vote on decisions using a secret ballot. CMT III Text Chapter 12) 7D. .

How many contracts closed at 52? Correct Answer: 12 .Correct Answer: 6 8D. How many more contracts closed at 62? Correct Answer: None 8E.

6. 3. Changed Answer for 8B from D (committee) to B (Secret Ballot). Fixed number labels for 6C. Changes: 9/15 1. Removed the question formerly labeled 6C.Errata This is the first sample exam of its kind. 8.10/14/15 9. Fixed labels for answer section on questions 2B and 2C 2. It was poorly worded and its topic was too error prone because of differences between the alternative reading list and the new curriculum. 7. ----------------------------------------------. and thus the association expects to be able to revise and improve it over time. . 6E and 6F. 6D. Added point counts for questions 8B through 8E. Identified proper answer for 3A in answers section. Added label for EEM line for graphic 3-2 4. Fixed labels in answer section on questions 3D and 3E 5. Changes will be listed here up until the administration of the next exam (October 14th. Added more explanation for 5C. 2015).