CFA三级密卷答案

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CN 专业·创新·增值
2023CFA 三级密卷
2023 LEVEL III Test Exam Session 1

Session 1 of the 2023 Practice Exam has 11 question sets. The format consists of either a free form
constructed response question set (essay), or a question set consisting of a vignette or a short case
followed by four multiple choice questions based on the vignette. Each question set is allocated 12
minutes for a total of 132 minutes.
Question Topic Minutes
1 Behavioral Finance 12
2 Capital Market Expectations 12
3 Derivatives And Currency Management 12
4 Fixed-Income Portfolio Management 12
5 Asset Allocation 12
6 Equity Portfolio Management 12
7 Alternative Investments For Portfolio Management 12
8 Ethics & professional standards 12
9 Portfolio Management For Institutional Investors 12
10 Trading Performance evaluation and manager selection 12

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11 Private Wealth Management 12

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QUESTION 1: BEHAVIORAL FINANCE
Answer Q1-A:
Bias Justification
Goodman believes that he is a smart
investor because of his past success in
choosing risky investments.
Overconfidence bias
Overconfidence bias leads market
participants to overestimate their intuitive
ability or reasoning.
He believes he can control the outcomes of
investments the way he has done with his non-
investing activities. Illusion of control leads
Illusion of control bias people to believe that they can control or
influence outcome, when in fact they cannot,
and consequently hold inadequately
diversified portfolios.
Answer Q1-B:
Determine the BIT (PP, FF, II, AA) most likely to be assigned to Pinkman. (circle one)
Passive Preserver Friendly Follower Independent Individualist Active Accumulator
Justify your response.

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Pinkman is most likely to be classified as an Independent Individualist (II).

⚫ Pinkman exhibits medium to high risk tolerance, as evidenced by his founding of a successful fast-
growing business with a former class-mate.
⚫ Pinkman seems self-assured and “trusts his gut” when making decisions; he also does his own
research. He does not like to consult anyone and has held onto positions with losses even when the
market changed.
⚫ Pinkman shows his reservation to the asset allocation offered by White.
Pinkman is an Independent Individualist because he is an active investor with medium to high risk
tolerance. He is personally involved in the investment decision-making process without consulting
financial advisors. He seems self-assured and “trusts his gut” when making decisions; relying on his own
research rather than getting corroboration from other sources. Further he has reservations about the asset
allocation made by White for him. All these personality traits show an independent mindset of an II.
Answer Q1-C:
Bias Justification
Representativeness bias leads people to adopt
a view or a forecast based almost exclusively
on new information or a small sample.
White fires Johnson due to the recent
Representavieness bias
underperformance, ignoring his past
long-term success.
Hindsight bias lead people to see past events

as having been predictable and reasonable to
expect.
Hindsight bias White believes that he has already known the
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uncertain economic activity in the past

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QUESTION 2: CAPITAL MARKET EXPECTATIONS
1. Solution: A
Possible questions suggested for the analyst in the reading explicitly include a reference as to
whether current account balances are trending and sustainable. However, it makes no mention of
capital account balances as in choice A.
Choices B and C are explicitly referenced in the reading and are referred to in the table.
2. Solution: B
The formula for the Taylor rule requires the real policy rate that would be targeted if growth is
expected to be at trend and inflation on target, the expected and target inflation rates, and the
expected and trend real GDP growth rates. The expected and trend nominal GDP growth rates
(choice B) are not explicitly part of the formula for the Taylor rule.
3. Solution: B
When bond yields and the yield curve are in a state where:
“Yields rising. Possibly stable at longest maturities. Front section of yield curve steepening, back
half likely flattening.”
and monetary policy and automatic stabilizers are:
“Withdrawing stimulus”
then money market rates are “Moving up. Pace may be expected to accelerate.”
Choice A could be expected during a contraction phase, while choice C could be expected in a late
expansion phase.
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4. Solution: C
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A rising current account deficit will tend to put upward pressure on real required returns so as to
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encourage a higher saving rate in the deficit country and to attract the increased flow of capital from
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outside the country needed to fund the deficit.
For choice A, a secularly rising current account surplus generally puts upward (not downward)
pressure on asset prices in order to induce a lower saving rate in the surplus country to lessen the
narrowing surplus. For choice B, a secularly rising current account deficit generally puts downward
pressure on asset prices in order to induce a higher (not lower) saving rate in the deficit country.
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QUESTION 3: DERIVATIVES AND CURRENCY MANAGEMENT
1. Solution: B.
For the three ITM call options, the option with the shortest maturity will have the largest delta. So
option A has the shortest term, while option C has the longest term. Based on Kane's expectation
that the short-term market is stable while long-term volatility will rise, Kane should build a long
Calendar spread strategy. Therefore, Kane should short nearest-term call option (option A) and
long the longest-term call option (option C).
2. Solution: C.
BPVCTD = MDURCTD × 0.01% × MVCTD where
MDURCTD = modified duration of CTD
MVCTD = (CTD price/100) × Futures contract size.
BPVCTD = 9.1 × 0.0001 × [(114.34/100) × $100,000] = $104.05. The BPV of the CTD bond
(BPVCTD) is $104.05.
3. Solution: B.
In implementing the hedge, euros (the base currency) must be sold against the US dollar. The base
currency is selling at a discount and thus would “roll up the curve” as the contract approaches
maturity. Settlement of the forward contract would entail buying euros at a higher price—that is,
selling low and buying high—resulting in a negative roll yield. Since the euro has appreciated by
the time the hedge needs to be extended, this tends to further increase the cost of euros to settle the
original contract and makes the roll yield even more negative—that is, sell low, buy even higher.
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4. Solution: C.
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The formula for the minimum-variance hedge ratio (h) is:

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𝜎(𝑅𝐷𝐶 ) 4.5%
h = ρ(𝑅𝐷𝐶 , 𝑅𝐹𝑋 ) × = 0.2 × = 0.4
𝜎(𝑅𝐹𝑋 ) 2.25%
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The slope coefficient for a regression of the foreign asset returns measured in the investor’s domestic
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currency (USD) is the MVHR. GBP 35,000,000 × 0.4 = GBP 14,000,000.
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QUESTION 4: FIXED-INCOME PORTFOLIO MANAGEMENT
Answer Q4-A:
Yield income = Annual average coupon payment/Current bond price
= €4.75/€120.00 = 0.03958, or 3.958%.
The rolldown return is equal to the bond’s percentage price change assuming an unchanged yield
curve over the horizon period. The rolldown return will be calculated as follows:
𝐵𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒𝐸𝑛𝑑 − 𝐵𝑜𝑛𝑑 𝑃𝑟𝑖𝑐𝑒𝐵𝑒𝑔 115 − 120
𝑅𝑜𝑙𝑙𝑑𝑜𝑤𝑛 𝑟𝑒𝑡𝑢𝑟𝑛 = = = −4.167%
𝐵𝑜𝑛𝑑 𝑃𝑟𝑖𝑐𝑒𝐵𝑒𝑔 120
Rolling yield = Yield income + Rolldown return = 3.958% – 4.167% = -0.209%.
Answer Q4-B:
The manager purchases protection on the FM issuer and simultaneously sells protection on the GM
issuer.
∆(𝐶𝐷𝑆 𝑃𝑟𝑖𝑐𝑒) ≈ −(∆(𝐶𝐷𝑆 𝑆𝑝𝑟𝑒𝑎𝑑) × 𝐸𝑓𝑓𝑆𝑝𝑟𝑒𝑎𝑑𝐷𝑢𝑟𝐶𝐷𝑆 )
Short risk (FM issuer): €46,970 =- €10,000,000 × (- (0.10% × 4.697))
Long risk (GM issuer): €116,725 =€10,000,000 × (-(-0.25% × 4.669))
The total gain on the long–short strategy is €163,695 = €46,970 + €116,725.
Answer Q4-C:
The excess return on the bond is approximately 3.875% = (2.75% × 0.5) – [(2.25% – 2.75%) × 5].
The instantaneous excess return on the bond is approximately −2.5% = (2.75% × 0) – [(3.25% –
2.75%) × 5].
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Solution Q4-D:
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Long a put option on a bond futures

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Long a receiver swaption Short a payer swaption

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With an expected upward shift in the yield curve, the portfolio manager would want to reduce
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portfolio duration in anticipation of lower bond prices. A put option increases in value as the yield
curve shifts upward, while the price of the underlying bond declines below the strike.
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QUESTION 5: ASSET ALLOCATION
Answer Q5-A:
Based on the risk-budgeting perspective, this asset allocation is optimal because the ratio of excess
return (over the risk-free rate) to MCTR is the same (0.368) for all assets. So in this case, the asset
allocation has an optimal risk budget.
A risk parity asset allocation is based on the notion that each asset should contribute equally to the
total risk of the portfolio. Since the percent contribution to total standard deviation is different for
all assets, the asset allocation is not risk parity.
Answer Q5-B:
The two corner portfolios Lopez should use for the optimal asset allocation to achieve MoneyLover
Endowment’s return requirement are Portfolio #3 and Portfolio #4. The stated return requirement
for the MoneyLover Endowment is 8.0%. Hence, the most appropriate allocation is a combination
of Corner Portfolios #3 and #4, which have expected returns just above and below the return
requirement.
The weights of the corner portfolios for the optimal strategic asset allocation are 36.8% of Portfolio
#3 and 63.2% of Portfolio #4.
Weighting calculated as follows (optional):
Return Requirement = (w) × Return Portfolio #3 + (1 – w) × Return Portfolio #4
8.0% = (w) × 8.60% + (1 – w) × 7.65%
8.0 = 8.60w + 7.65 – 7.65w
0.35 = 0.95w
w = 0.368, which means 36.8% of Corner Portfolio #3

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1 – w = (1 – 0.368) = 0.632, which means 63.2% of Corner Portfolio #4

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Since the standard deviation of both Corner Portfolio #3 and #4 are less than 14%, the
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standard deviation of the unleveraged asset allocation will not exceed 14%
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Answer Q5-C:
Module A Module B Module C
25.7% 46.0% 28.3%
The appropriate goals-based allocation for Chris is as follows (optional):

Goal 1 Goal 2 Surplus
Horizon (years) 10 25 N/A
Prob. of success 85% 75% N/A
Selected module B C A
Discount rate 5.0% 6.9% N/A
Dollar invested (USD millions) USD 4.60 USD 2.83 USD 2.57
As a % of total 46.0% 28.3% 25.7%
Goal 1 has a time horizon of 10 years and a required probability of success of 85%. As a result,
Module B should be chosen because its 5.0% expected return is higher than the expected returns of
all the other modules.
The present value of Goal 1, discounted using the 5.0% expected return, is calculated as:
N = 10, FV = –USD 7,500,000, I/Y = 5.0%; PV = USD 4,604,349 (or USD 4.60 million)
So, approximately 46.0% of the total assets of USD 10 million (= USD 4.60 million / USD 10.00
million) should be allocated to Module B.
For Goal 2, which has a time horizon of 25 years and a required probability of success of 75%,
Module C should be chosen because its 6.9% expected return is higher than the expected returns of
all the other modules. The present value of Goal 2, discounted using the 6.9% expected return, is
calculated as:
N = 25, FV = –USD 15,000,000, I/Y = 6.9%; PV = USD 2,829,102 (or USD 2.83 million)
So, approximately 28.3% of the total assets of USD 10 million (= USD 2.83 million / USD 10.00
million) should be allocated to Module C.

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Finally, the surplus of USD 2,566,549 (= USD 10,000,000 – USD 4,604,349 – USD 2,829,102),
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representing 25.7% (= USD 2.57 million / USD 10.00 million), should be invested in Module A
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following Lopez’s suggestion.

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QUESTION 6: EQUITY PORTFOLIO MANAGEMENT
1. Solution: C
C is correct. Fund B employs a market neutral strategy , the combination of long and short positions
allows for a greater diversification potential. Therefore, Statement III is correct.
Statement I is incorrect. The market beta of Fund B should be fully neutralized, while a long-only
small cap strategy should still has significant beta exposure.
Statement III is incorrect. Only Fund B’s strategy involves short selling. A short-selling
transaction is more complex. The investor first needs to find shares of stock to borrow. Investors
must also provide collateral to ensure that they can repay the borrowed stock if the price moves
up. Therefore, Fund B has higher collateral requirements than Fund A, not the other way around.
2. Solution: A.
Active Share is a measure of the differentiation of the holdings of a portfolio from the holdings of
a chosen benchmark portfolio. Replacing one bank stock with another bank stock that is not in the
benchmark will significantly increase active share, but it will not have significant effect on active
risk since bank stocks have high correlation.
3. Solution: B
B is correct. Introducing a low-volatility asset within a portfolio benchmarked against a high-
volatility index would increase the active risk and decrease the total volatility.
4. Solution: C
Company Z is the most appropriate choice. The company offers upside potential because of its
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ability to improve operating performance and cash payout. Neither Company X nor Company Z
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offers an attractive opportunity for activist investing: Company X is already operating efficiently,
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while Company Y is more suitable for investors that focus on restructuring and distressed investing.
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QUESTION 7: ALTERNATIVE INVESTMENTS
Answer Q7-A:
Net of Fees Return for PF = (20% – 2% – 3.6%) = 14.4%;
where 3.6% = 20% × (20% – 2%);
Net of Fees Return for UF = (–5% – 2% – 0%) = –7.0%;
Gross Return for SVFOF = (0.5 × 14.4% + 0.5 × – 7.0%) = 3.7%;
Net of Fees Return for SVFOF = (3.7% – 1% – 0.27%) = 2.43%,
where 0.27% = 10% × (3.7% – 1%).
Answer Q7-B:
The expected NAV of the fund at the end of the2024 is $16,056,320.
Year 2023
The expected distribution at the end of 2023 is calculated as
Expected distribution = [Prior-year NAV × (1 + Growth rate)] ×(Distribution rate).
Expected distribution = [($20,000,000 × 1.12) × 20%] = $4,480,000
Therefore, the expected NAV of the fund at the end of 2023 is
Expected NAV = [Prior-year NAV × (1 + Growth rate) + Capital contributions– Distributions)]
Expected NAV = [($20,000,000 × 1.12) + 0 − $4,480,000]=$17,920,000
Year 2024
Expected distribution = [($17,920,000 × 1.12) × 20%] = $4,014,080

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Expected NAV = [($17,920,000 × 1.12) + 0 − $4,014,080]=$16,056,320

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Answer Q7-C:
A FoF is appropriate.
FoFs have less operational risk because each separate underlying hedge fund is responsible for its
own risk management.
In MSFs, in contrast, teams of managers dedicated to running different hedge fund strategies share
operational and risk management systems under the same roof. This means that the MSF’s
operational risks are not well diversified because all operational processes are performed under
the same fund structure.

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QUESTION 8: ETHICS
1. Solution: B.
Proxy voting is part of Standard III(A): Loyalty, Prudence, and Care. Part of a member’s or
candidate’s duty of loyalty includes voting proxies in an informed and responsible manner. Proxies
have economic value to a client, and CFA members and candidates must ensure that they properly
safeguard and maximize this value.
2. Solution: C.
This is part of Standard VI(B): Priority of Transactions. All of the recommended procedures for
compliance conform to the Standards.
3. Solution: C.
Administrative sanction is not listed as one of the actions the CFA Institute Professional Conduct
staff can recommend.
4. Solution: B.
Confidentiality is part of Standard III(E): Preservation of Confidentiality. CFA members and
candidates must keep information about current, former and prospective clients confidential.
Statement 2 complies with the Standards.

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QUESTION 9: PORTFOLIO MANAGEMENT FOR INSTITUTIONAL INVESTORS
1. Solution: C.
The proportion of retired lives greater than active lives indicates a lower duration. This implies a
lower risk tolerance. However, the size of the plan is small relative to the CXN’s market
capitalization. This indicates more flexibility in taking investment risk and more tolerance for
volatility in employer contributions. The option of no early retirement also implies a higher risk
tolerance.
2. Solution: B.
The DB pension plan’s investment objective of seeking a higher rate of return than the discount rate
used for valuing liabilities will help in growing the asset base in line with the growth in liabilities.
The higher growth in assets will allow the plan to meet its contractual liabilities, thus reducing the
need for plan contributions. It typically will involve taking on more investment risk hence will likely
increase the volatility in funded status.
3. Solution: A.
Since A ÷E = 1/0.10 = 10; (A ÷E) –1 = 9; the standard deviation of asset returns (σ∆𝐴 ) = 0.05; the
𝐴
standard deviation of changes in liability values (σ∆𝐿 ) = 0.02; and the correlation between asset and
𝐿
liability value changes (ρ)= 0.2.
First, variance of shareholders’ capital value changes is as follows:
σ2∆𝐸 = 102 × 0.052 + 92 × 0.022 − 2 × 10 × 9 × 0.2 × 0.05 × 0.02 = 0.2464

𝐸
The standard deviation of shareholder capital valuation change is the square root of the variance.
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Thus,
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σ∆𝐸 = √σ2∆𝐸 = √0.2464 = 0.496 = 49.6% 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟.

𝐸 𝐸
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4. Solution: C.
The modified duration of the bank’s equity capital after restructuring is 5.45 years:
𝐴 𝐴 ∆𝑖 1 1
𝐷𝐸∗ = (𝐸 ) 𝐷𝐴∗ − (𝐸 − 1) 𝐷𝐿∗ (∆𝑦) = (0.20) × 2.35 − (0.20 − 1) × 2.1 × 0.75 = 5.45 𝑦𝑒𝑎𝑟𝑠
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QUESTION 10: TRADING PERFORMANCE EVALUATION AND MANAGER
SELECTION
1. Solution: B.
B is correct. Expanded implementation shortfall (IS) = Delay cost + Trading cost + Opportunity cost
+ Fees. Note that to reflect that shares are being sold rather than purchased, the “number of shares
sold” is a negative value.
Delay cost = (Number of shares sold ×Arrival price) – (Number of shares sold × Decision price) =
Value of shares sold at arrival price – Value of shares sold decision price
Delay cost = (–$5,175,800) – (–$5,124,300) = –$51,500, which reduces the expanded IS.
Trading cost = (Total shares sold ×Execution price) – (Number of shares sold ×Arrival price)
= Value of shares sold at execution price – Value of shares sold at arrival price
Trading cost = (–$5,545,600) – (–$5,175,800) = –$369,800, which reduces the expanded IS.
Opportunity cost: Based on not selling the desired number of shares. All shares were sold, which
makes this value zero. The trading cost component is the most favorable to Millennium Capital
because it reduces the expanded IS the most.
2. Solution: C.
C is correct. Trade cost evaluation calculates trading costs and performance relative to a specified
trading cost or trading performance benchmark. Costs are determined by the transaction amount
paid above the reference price benchmark for a buy order. The market-adjusted cost calculation
involves three steps:

𝑃̅ − 𝑃0
arrival cost = side × × 104 𝑏𝑝𝑠
𝑃0
50.55 − 50.45
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= +1 × × 104 𝑏𝑝𝑠
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50.45
= 19.8 𝑏𝑝𝑠
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𝑖𝑛𝑑𝑒𝑥 𝑉𝑊𝐴𝑃 − 𝑖𝑛𝑑𝑒𝑥 𝑎𝑟𝑟𝑖𝑣𝑎𝑙 𝑝𝑟𝑖𝑐𝑒

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index cost = side × × 104 𝑏𝑝𝑠

𝑖𝑛𝑑𝑒𝑥 𝑎𝑟𝑟𝑖𝑣𝑎𝑙 𝑝𝑟𝑖𝑐𝑒
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1,015 − 1,010
= +1 × × 104 𝑏𝑝𝑠
1,010
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= 49.5 𝑏𝑝𝑠
𝑀𝑎𝑟𝑘𝑒𝑡 − 𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑐𝑜𝑠𝑡 (𝑏𝑝𝑠) = 𝐴𝑟𝑟𝑖𝑣𝑎𝑙 𝑐𝑜𝑠𝑡 (𝑏𝑝𝑠) − 𝛽 × 𝐼𝑛𝑑𝑒𝑥 𝑐𝑜𝑠𝑡 (𝑏𝑝𝑠)
= 19.8 𝑏𝑝𝑠 − 1.3 × 49.5 𝑏𝑝𝑠
= −44.6 𝑏𝑝𝑠
(𝑃̅ − 𝑇𝑊𝐴𝑃)
TWAP cost(bps) = Side × × 104 𝑏𝑝𝑠
𝑇𝑊𝐴𝑃
(50.55 − 50.57)
= +1 × × 104𝑏𝑝𝑠
50.57
= −4 𝑏𝑝𝑠
(𝑃̅ − 𝑉𝑊𝐴𝑃)
VWAP cost(bps) = Side × × 104 𝑏𝑝𝑠
𝑉𝑊𝐴𝑃
(50.55 − 50.52)
= +1 × × 104𝑏𝑝𝑠
50.52
= 5.9 𝑏𝑝𝑠
Based on these calculations, the results look best relative to the market-adjusted cost benchmark (–
44.6 bps) instead of the TWAP (–4.0 bps) or VWAP (+5.9 bps).
3. Solution: B.
Given the trade urgency of the order, the very liquid market for YYDS shares, and the small order
size relative to YYDS’s expected volume, the trading team should use an arrival price algorithm to
execute the remaining shares close to market prices at the time the order is received.
TWAP algorithm is appropriate for orders in which portfolio managers or traders do not have
expectations of adverse price movement during the trade horizon, greater risk tolerance for longer
execution time periods. However the CIO concerned that overreaction would be short-lived.
Dark aggregator algorithms are used in trading when portfolio managers and traders are concerned
with information leakage, and often used when order size is large relative to the market. These
algorithms are appropriate for trading securities that are relatively illiquid or have relatively wide
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bid–ask spreads. Since YYDS is very liquid and the order size is relative small, dark aggregator
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algorithm is not the best choice.

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4. Solution: A.
A closing price is the most appropriate reference price benchmark for an index fund. Johnson needs
to trade to maintain the same security holdings and weights as the benchmark index. Since the index
fund will be valued using official closing prices, he should select the closing price as the reference
price benchmark for trading the rebalance names. By executing the buys and sells at the close, he
will be minimizing the fund’s potential tracking error to the benchmark index.
The previous close would not be an appropriate reference price benchmark since it would be the
security’s closing price on the previous trading day. A previous close benchmark is often used by
quantitative portfolio managers whose models or optimizers incorporate the previous close as an
input or who wish to use this price as a proxy for the decision price.
The opening price benchmark would not be an appropriate benchmark because it references the
security’s opening price on the day and is often selected by portfolio managers and traders who wish
to begin trading at the market open.

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QUESTION 11: PRIVATE WEALTH MANAGEMENT
Answer Q11-A:
The Hemsworths are subject to tax on the realized capital gains and income received year-to-date.
($300,000 + $600,000 + $410,000 = $1,310,000.)
The dividend and interest income may be eligible for preferential tax treatment depending on
the composition of the portfolio.
The taxable component of the real estate income may be reduced through deductions of
maintenance, interest, and depreciation.
The $400,000 in short-term losses should be evaluated for possible sale prior to year-end. The
losses could be used to offset the $300,000 in realized short-term gains and half of the realized long-
term gains while raising the cash needed to fund the planned withdrawal.
Any remaining long-term gain is subject to tax, typically at a rate lower than the investor’s
marginal income tax rate.
Answer Q11-B:
The Hemsworths would be taxed only on the $500,000 withdrawal. The applicable tax rate is the
client’s marginal income tax rate. The distinctions between realized and unrealized capital gains
and losses are irrelevant in a tax-deferred retirement account.
Answer Q11-C:
Additional life insurance need is $331,267.
Capital needs are determined as the present value of an annuity due: growth rate = 3.5%, discount
rate = 6.0%. Growth of payments is incorporated by adjusting the discount rate to account for the
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growth rate of earnings. As long as the discount rate is larger than the growth rate, the adjusted
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rate i can be calculated as follows: [(1 + Discount rate)/(1 + Growth rate)] – 1, or i = (1.06/1.035)
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– 1 = 2.42%.
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The present value of Olivia’s living expenses is calculated as follows:
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PMT = –$50,000; i = 2.42%, n = 44. Set for payments at beginning of year. PV = $1,377,175.
The present value of the children’s living expenses is calculated as follows:
PMT = –15,000; i = 2.42%, n = 6. Set for payments at beginning of year. PV = $84,848.
The present value of Olivia’s income is calculated as follows:
PMT = –$85,000 × (1– Tax rate); PMT = $85,000 × 0.70 = 59,500; i = 2.42%, n = 18. Set
for payments at beginning of year. PV =–$880,756.
Total capital needs are calculated as follows:
$1,377,175 + $84,848 – $880,756 = $581,267. Adding this amount to total cash needs of
$750,000 results in total financial needs of $1,331,267.
Cash Needs USD ($)
Final expenses and taxes payable 20,000
Mortgage retirement 400,000
Education fund 300,000
Emergency fund 30,000
Total cash needs 750,000
Capital Needs Present Value USD ($)
Olivia’s living expenses, 44 years 1,377,175
Children’s living expenses, 6 years 84,848
(Olivia’s income, 18 years) –880,756
Total capital needs 581,267
Total financial needs 1,331,267
Less total capital available 1,000,000
Additional life insurance need 331,267

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2023 LEVEL III Test Exam Session 2

Session 2 of the 2023 Practice Exam has 11 question sets. The format consists of either a free form
constructed response question set (essay), or a question set consisting of a vignette or a short case
followed by four multiple choice questions based on the vignette. Each question set is allocated 12
minutes for a total of 132 minutes.
Item Set Topic Minutes

1 Fixed-income portfolio management 12
2 Equity portfolio management 12
4 Private wealth management 12
5 Trading Performance evaluation and manager selection 12
6 Capital market expectations 12
7 Private wealth management 12
8 Derivatives and currency management 12
Total 132
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1. Solution: C.
High-yield bonds are more sensitive to credit risk than interest rate risk as compared to investment-
grade bonds. This is because there is typically a negative correlation between risk-free rates and
credit spreads. When risk-free rates rise (economy is on a growth trend) they tend to generate smaller
changes in corporate bond yields and have a more reduced effect on securities with high credit risk
and large credit spreads—that is, bonds with comparatively large credit spreads have less sensitivity
to interest rate changes than bonds with smaller credit spreads. Because investment- grade corporate
bonds have meaningful interest rate sensitivity, investment-grade portfolio managers focus closely
on portfolio durations and yield curve exposures as compared to high-yield portfolio managers.
2. Solution: B.
The G-spread is the spread over an actual or interpolated government bond, whereas the I-spread,
also an interpolated spread, and similar to the G-spread uses swap rates instead of government yields.
Both spreads are used for estimating yields and prices of option-free bonds. If the market perceives
credit risk in either a country’s government bonds or its banks, then yields on government bonds or
interbank rates will not be a useful representation of the risk-free rate, and thus G-spread and I-
spread will not be helpful.
3. Solution: A.
The Britta Industries’ bond is trading at 103, significantly above the price at which it can be called.
Therefore, there is a high probability of the bond being called on the next call date. The bond’s OAS
of 295 bps is lower than its G-spread, I-spread, or Z-spread because of the call option on the bond.
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4. Solution: C.
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For issuers with different credit-related risk, an investor has to decide if the additional spread is
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sufficient to compensate for the additional credit risk taken. When comparing issuers with different
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credit-related risks, one of the important considerations is the historical default rate information
based on credit rating categories.
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QUESTION 2: EQUITY PORTFOLIO MANAGEMENT
Answer Q2-A:
1) Fund Alpha has a high use of market-on-close trading, which could make portfolios
tracking their benchmarks more closely.
2) Fund Alpha’s average cash holding is smaller than Fund Beta’s, therefore it will generate
a smaller cash drag.
Answer Q2-B:
• Apex Fund 's turnover is high, which could make holdings-based style analysis less accurate
• Apex Fund’s trading towards the end of each quarter would make holdings-based style analysis
subject to window dressing.
Answer Q2-C:
List any two of the following drawbacks will receive full credit.
1) The information contained in the middle quantiles is not utilized, as only the top and bottom
quantiles are used in forming the hedged portfolio.
2) It is implicitly assumed that the relationship between the factor and future stock returns is linear
(or at least monotonic), which may not be the case.
3) Portfolios built using this approach tend to be concentrated, and if many managers use similar
factors, the resulting portfolios will be concentrated in specific stocks.
4) The hedged portfolio requires managers to short stocks. Shorting may not be possible in some
markets and may be overly expensive in others.
5) The hedged portfolio is not a “pure” factor portfolio because it has significant exposures to
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QUESTION 3: FIXED-INCOME PORTFOLIO MANAGEMENT（重录）
Answer Q3-A:
The notional principal (NP) on the interest rate swap needed to close the duration gap to zero can
be calculated with this expression:

𝑆𝑤𝑎𝑝 𝐵𝑃𝑉
Asset BPV + NP × = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝐵𝑃𝑉
100
Given that the Asset BPV is USD 495,000 and the Liability BPV is USD 2,368,000 using the PBO
measure, the required notional principal for the receive-fixed swap having a BPV of 0.1985 is as
follows:
495,000 + [NP × (0.1985/100)] = 2,368,000
NP = 943,576,826
Answer Q3-B:
Solution for Scenario 1:
A widening spread indicates a steepening yield curve.
A steeper yield curve and low volatility favors a bullet portfolio (concentrated in the intermediate
maturities—the 5-, 7-, and 10-year notes) because the intermediate maturities should perform better
than the combination of the short-end and long-end positions in the expected steepening
environment.
Portfolio B is the portfolio best positioned for this scenario.
Solution for Scenario 2:
A narrowing spread defines a flattening yield curve.

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A flatter yield curve and high volatility favors a barbell portfolio (concentrated in the short and
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long maturities—the 2-year notes and 30-year bonds, respectively).

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Portfolio A is the portfolio best positioned for this scenario.

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Answer Q3-C:
Purchase protection based on the 10-year and sell protection on an equivalent duration 5-year CDS
contract.
EffSpreadDur10yrCDS/EffSpreadDur5yrCDS = 8.68/4.669 =1.859
Confirm this equivalence by comparing BPV5yr and BPV10yr:
BPV5yr: €8,680 = €18,590,000 × 4.669/10,000
BPV10yr: €8,680 = €10,000,000 × 8.68/10,000
−Δ(CDS Spread) × EffSpreadDurCDS
5 year (long risk): −€86,796.71 (= €18,590,000 × (−0.1% × 4.669))
10 year (short risk): €173,600 (=−€10,000,000 × (−0.2% × 8.68))
Net portfolio gain: €86,803.29 = €173,600 − €86,796.61

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Answer Q4-A:
The tax-efficiency ratios for each of the funds are as follows:
Passive Equity ETF: 10.19/10.85 = 94%
Active Equity Mutual Fund: 10.21/12.05 = 85%
High-Yield Bond ETF: 1.72/4.28 = 40%
The Passive Equity ETF is most tax efficient, because of its tax-efficiency ratio is 94%.
Active Equity Mutual Fund
The Active Equity Mutual Fund has a higher pre-tax and after-tax return than the Passive Equity
ETF but is less tax efficient as evidenced by its 85% tax-efficiency ratio. The after-tax return is
1.84% lower than the pre-tax return over five years. Ongoing capital gains, including the
likelihood of some short-term gains, and dividend income on shares held for less than 61 days
contribute to the lower tax-efficiency ratio. Still, on a post-liquidation basis, the active fund
outperforms the passive fund by 34 basis points (9.05 − 8.71).
High-Yield Bond ETF
The tax-efficiency ratio is 40%, meaning that more than half of the compounded returns to High-
Yield Bond ETF are paid in taxes. Interest income from high-yield bond investments receives no
tax preferences. The after-tax return and post-liquidation returns are very low in this case, making
the High-Yield Bond ETF quite unattractive to a taxable investor, especially given that the fund
is likely to have significantly higher risks than other investments.

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Answer Q4-B:
Kevin will realize a $25,000 capital gain on her sale of MSFT (1,000 shares × $25 gain per share).
He will owe $13,375 in capital gains tax ($25,000 × 53.50% tax rate). Kevin does not qualify for
the long-term capital gains tax rate because he did not hold the stock for longer than a year.
The $500 MSFT dividend received (1,000 shares × $0.50 per share) creates a $267.50 tax liability
($500 × 53.50% tax rate). Kevin must pay the full tax rate because he did not hold the position for
longer than 61 days to qualify for the preferential dividend tax rate.
His after-tax return is 9.12%: [(25,000 + 500) − (500 × 0.535) − (25,000 ×0.535)]/130,000.
Answer Q4-C:
The pre-tax return of the municipal bond portfolio is 1.5% (1.0% gain +0.5% interest).
The after-tax return of the portfolio is 1.5%, the same as the pre-tax return. The capital gains are
unrealized gains, and the interest income on New York municipal bonds is exempt from federal and
state taxes.
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QUESTION 5: TRADING PERFORMANCE EVALUATION AND MANAGER
SELECTION (
1. Solution: C.
The return due to style is the difference between the benchmark and the market index, or S = (B −
M) = (21.7% − 25.2%) = −3.5%.
2. Solution: B.
Based on the yield curve effect, 12 bps were gained from changes in the shape of the yield curve.
The fund over-performed its benchmark by 32 bps, and 20 bps were lost due to corporate sector
allocation.
3. Solution: B.
The capture ratio (CR) measures the asymmetry of return. It is the upside capture divided by
downside capture = 1.5/1.2 =1.25. A capture ratio greater than 1 indicates positive asymmetry or a
convex return profile.
4. Solution: B
Statement 1 is incorrect. Firing a manager who subsequently outperforms or performs in line with
expectations is a Type II error. Type II errors are not transparent to the investors as it is difficult to
track fired managers or evaluate the performance of an unhired manager.
Statement 2 is correct. Retaining a manager who subsequently underperforms the expectations is a
Type I error. Type I errors create explicit costs because the portfolio holdings and managers
performance can be easily measured. Type I errors directly impact the decision maker’s
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compensation due to explicit costs.

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QUESTION 6: CAPITAL MARKET EXPECTATIONS
Answer Q6-A:
Fully integrated risk premiums:
Equities: 0.60 × 20.0% × 0.30 = 3.60%.
The following are the fully segmented risk premiums:
Equities: 20.0% × 0.28 = 5.60%.
Based on 65% integration (φ = 0.65), the final return estimates would be as follows:
Equities: (0.65 × 3.60%) + (1 – 0.65) × 5.60% = 4.30%.
Adding the 2.50% risk-free rate, the expected returns for EM country’s shares would be 6.80%.
Answer Q6-B:
The expected change in the cap rate from 5.2% to 5.0% = (5.0% – 5.2%)/5.2% = 3.85% decrease:
E(Rre) = CapRate + NOI growth rate – %ΔCapRate = 5.2% + (2.0% + 1.5%) – (–3.85%) = 12.55%.
Answer Q6-C:
The short-term expected rate of return on Canadian equities based on Walton’s assumptions would
be 9.5%, calculated as
E(Re) ≈ 2.25% + [6.0% – (–1.0%)] + 0.25% = 9.5%.
Based on Walton’s economic growth forecast, a more reasonable long-run expected return would
be 7.25% = 2.25% + 5.0%.

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1. Solution: B.
The Grahams’ net wealth is their total assets less their total liabilities ($7,512 – $5,098 = $2,414),
as calculated in the following economic balance sheet.
Assets Liabilities
Financial Capital Debts
Checking account 27 Residential mortgage $285
Home equity line of credit-
Taxable investment account 625 38
outstanding balance
Residence 525
Cash value of life insurance
119 University education for children 350
(combined Bradley and Reagan)
Human capital
3,940 Vacation home 325
(combined Bradley and Reagan)
Employer pensions Lifetime consumption
956 3,700
(combined Bradley and Reagan) (present value)
Military pension (Reagan) 1,320 Planned donations 400
Total Assets $7,512 Total Liabilities $5,098
Net Wealth $2,414
Total Liabilities and Net Wealth $7,512
A is incorrect. Human capital was not included in assets and lifetime consumption was not included
in liabilities: [(7,512 – 3,940) – (5,098 – 3,700)] = 3,572 – 1,398 = 2,174.
C is incorrect. The death benefit rather than the cash value of life insurance was included in the
calculation of assets: (7,512 + 250 + 250 – 119) – 5,098 = 7,893 – 5,098 = 2,795.
2. Solution: C.
The equity allocation of the Barksdale’s financial capital is calculated as follows:
Total economic wealth = Human capital + Financial capital = $2,900,000 + $900,000 = $3,800,000.
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Target equity allocation of total economic wealth = $3,800,000 × 40% = $1,520,000

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Human capital equity allocation = $2,900,000 × 35% = $1,015,000

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Financial capital equity allocation = $1,520,000 – $1,015,000 = $505,000

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3. Solution: C.
Among the factors that would likely increase demand for an annuity are the following: longer-than-
average life expectancy, greater preference for lifetime income, less concern for leaving money to
heirs, more conservative investing preferences, and lower guaranteed income from other sources
(such as pensions).
4. Solution: A.
The Monte Carlo simulation shows that Garcia has a 75% probability of having an amount achieving
$4.6M in Year 20. That means that with a 70% probability, the portfolio will be worth over $4.6
million after 20 years, which is far more than Garcia's retirement plan, hence no additional action is
required.
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QUESTION 8: DERIVATIVES AND CURRENCY MANAGEMENT
Answer Q8-A:
According to the data in Exhibit 1, the implied volatility curve presents the volatility skew. When
Lee observed that put implied volatility is too high relative to the call implied volatility, the
appropriate strategy for Leer is to create a long risk reversal by selling OTM puts and buying OTM
calls with the same expiration date.
Both option positions have positive delta, hence the options position is delta-hedged by selling the
underlying asset.
Answer Q8-B:
Clients are worried about short-term declines and do not want to sell GF shares. Strategy B protects
GF shares from falling more than $45, offering unlimited potential upside, and does not sell GF
shares. Therefore, Strategy B meets the client's short and long term expectations for GF shares.
Both Strategy A and strategy C may result in the stock being sold, which is not in line with the
client's expectations.
Answer Q8-C:
Step 1: Compute the expected variance at maturity:

9 3
(212 × ) + (222 × ) = 330.75 + 121 = 451.75
12 12
Step 2: Compute the expected payoff at maturity:
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Vega notional $100,000

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Variance notional = = = $2,500

2×K 2 × 20
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Expected payoff at maturity= (σ2 - K2) × variance notional,

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where K2 = 202 = 400

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expected payoff at maturity = (451.75 - 400) × $2,500 =$129,375
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Step 3: Discount expected payoff from maturity to the valuation date (3 months):
Unannualized the interest rate = 2% ×（3/12） = 0.5%

$129,375
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠𝑤𝑎𝑝 = = $128,731
1.005
This is a gain to the purchaser (long) and a loss to the seller (short).
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑠𝑤𝑎𝑝

Vega notional 𝑡 2 𝑇−𝑡
= × 𝑃𝑉𝑡 (𝑇) × [(𝜎𝑡2 × + 𝐾(𝑇−𝑡) × ) − 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑠𝑡𝑟𝑖𝑘𝑒 2 ]
2×K 𝑇 𝑇
$100,000 1 9 3
= × × [(212 × + 222 × ) − 202 ]
2 × 20 1.005 12 12
= $128,731
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QUESTION 9: ETHICS
1. Solution: C.
Inconsistent regarding the reporting line: According to the recommendations of Section D(2) of the
Asset Manager Code, where possible, the compliance officer should be independent of the
investment and operations personnel and should report directly to the CEO or the board of directors.
Inconsistent regarding portfolio review: As per the recommendations of Section D(3) of the Asset
Manager Code, GA should employ the services of a third-party for carrying a portfolio review. An
independent third-party’s confirmation of portfolio information provides clients with additional
confidence that the information is correct. Such verification may serve as a risk management tool
to help GA identify potential problems.
2. Solution: C
Hayes should have disclosed her change in investment strategy to clients, allowing them to move
their accounts if not in agreement. Until the planned change in strategy’s disclosure, she should have
continued to manage in a manner consistent with the stated objectives and constraints of that fund.
3. Solution: B
By using TNI, Tylor does not seek the best execution terms that maximize the value of each client’s
portfolio. According to recommendations of Section C(4), when placing client trades, Managers
must seek the most favorable terms for client trades within each trades’ particular circumstances.
They should consider which brokers or venues offer the best execution in terms of commission rates,
timeliness of trade executions, maintaining anonymity, and minimizing market impact.
Tylor’s duty was to inform this client and others for whom she uses TNI that by limiting the selection
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of the broker, the client(s) may not be receiving the best execution. She should have also sought
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written acknowledgment from the client(s) of receiving this information.

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4. Solution: B.
Singh’s trading actions prior to report dissemination were inconsistent with the CFA Institute AMC
because they did not allow customers to trade in the options market before the firm did. By taking
action before the report was disseminated, GA may have created a price change for both puts and
calls. The firm could have avoided a conflict of interest if it had waited to trade for its own account
until its clients had an opportunity to receive and assimilate the Research Department’s
recommendations.
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Answer Q10-A:
The notional principal (NP) on the interest rate swap needed to close the duration gap to zero can
be calculated with this expression:
Solve for the annualized difference in roll-down return by calculating the change in price plus the
coupon income for both the corporate bond and the government bond.
1. Calculate the corporate bond roll-down return per ₤100 face value.
A. Initial price is 104.346 (= −PV (0.0275/2, 20, 3.25/2, 100, 0)).
B. Price in six months is 104.155 (= −PV (0.0275/2, 19, 3.25/2, 100, 0)).
Price depreciation is 0.18% (= (104.155 − 104.346)/104.346).
C. Six-month coupon income is 1.625 (= 3.25/2), or equal to 1.557% (=1.625/104.346),
which combined (without rounding) with −0.18% from B results in a 1.375% six-month
return (2.75% annualized).
2. Calculate the UK gilt price change and coupon income.
A. Initial price is 99.565 (= −PV (0.018/2, 19, 1.75/2, 100, 0)).
B. Price in six months is 99.586 (= −PV (0.018/2, 18, 1.75/2, 100, 0)).
Price appreciation is 0.021% (= (99.586 − 99.565)/99.565).
C. Six-month coupon income is 0.875 (=1.75/2), or equal to 0.879% (0.875/99.565), which
combined with +0.021% equals 0.9% for six months (1.80% annualized).
The annualized roll-down return difference is the 2.75% corporate bond realized return less
the 1.80% UK gilt realized return, or 0.95%.
Answer Q10-B:
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The investor sells 10-year CDS protection on the German issuer to overweight exposure and
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terminates the position in one year. As with the bond example, the sold protection strategy generates
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coupon income if the issuer does not default and price appreciation if credit spreads decline over
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time.
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1. The fixed coupon received at the end of one year equals the notional multiplied by the
standard 1% investment-grade coupon for the period, or €100,000, or €10,000,000 ×
1.00% for one year.
2. Estimate the CDS price change over one year by interpolating the 9-year issuer spread
under a static credit curve assumption.
Solve for the 5-year and 10-year CDS spread weights in the 9-year spread interpolation
calculation.
5-year CDS weight = w5 = 20% (= (10 − 9)/(10 − 5))
10-year CDS weight = w10 = 80% (or (1 − w5)
Note that (w5 × 5) + (w10 × 10) = 9
The 9-year spread is a weighted average of 5- and 10-year CDS spreads.
CDS Spread9yr = w5 × CDS Spread5yr + w10 × CDS Spread10yr
1.66% (=1.30% × 0.2 + 1.75% × 0.8)
Estimate the CDS contract price change,
10-year CDS per €1 par: 0.934 = (1 + (−0.75% × 8.68))
9-year CDS per €1 par: 0.947794 = (1 + (−0.66% × 7.91))
Calculate the price appreciation by multiplying the price change by the contract notional to
get €128,940 (= (0.947794 − 0.9349) × €10,000,000).
Total return equals the sum of the coupon income and price appreciation, or €228,940 (=
€100,000 + €128,940).
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QUESTION 11: ETHICS
1. Solution: C
Both statements comply with CFA Institute Standards. Firms cannot claim to be in compliance with
GIPS standards with regard only to certain asset classes, investment strategies, products or
composites that fall within the definition of the firm. Scrimm Capital is entitled to define the firm’s
real estate business as a distinct business entity.
2. Solution: A
Standard III(D) Performance Presentation requires members and candidates to provide credible
performance information to clients and prospective clients and to avoid misstating performance or
misleading clients and prospective clients about the investment performance of members or
candidates or their firms. This standard encourages full disclosure of investment performance data
to clients and prospective clients. Ariusu is in compliance with this standard by providing the real
estate fund’s performance since its inception.
3. Solution: B
Ariusu violated Standard III(D) Performance Presentation by failing to clearly identify simulated
performance results. Standard III(D) prohibits members and candidates from making any statements
that misrepresent the performance achieved by them or their firms and requires members and
candidates to make every reasonable effort to ensure that performance information presented to
clients is fair, accurate and complete. Use of the simulated results should be accompanied by full
disclosure as to the source of the performance data. Ariusu did not disclose to Wheeler that the
investment performance he discussed was simulated.

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4. Solution: C
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Except with the prior consent of their employer, which Ariusu did not obtain, employees may not
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take employer property, which includes books, records, reports and other confidential information.
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Taking any employer records, even those the member or candidate prepared, violates Standard IV(A)
Loyalty.
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金程教育WWW.GFEDU.

2023 LEVEL III Test Exam Session 1

Question Topic Minutes

2 Capital Market Expectations 12

3 Derivatives And Currency Management 12

4 Fixed-Income Portfolio Management 12

6 Equity Portfolio Management 12

7 Alternative Investments For Portfolio Management 12

8 Ethics & professional standards 12

9 Portfolio Management For Institutional Investors 12

10 Trading Performance evaluation and manager selection 12

11 Private Wealth Management 12

QUESTION 1: BEHAVIORAL FINANCE

Passive Preserver Friendly Follower Independent Individualist Active Accumulator

Justify your response.

Pinkman is most likely to be classified as an Independent Individualist (II).

Hindsight bias lead people to see past events

uncertain economic activity in the past

QUESTION 2: CAPITAL MARKET EXPECTATIONS

capital account balances as in choice A.

half likely flattening.”

and monetary policy and automatic stabilizers are:

outside the country needed to fund the deficit.

QUESTION 3: DERIVATIVES AND CURRENCY MANAGEMENT

long the longest-term call option (option C).

BPVCTD = MDURCTD × 0.01% × MVCTD where

MDURCTD = modified duration of CTD

MVCTD = (CTD price/100) × Futures contract size.

The formula for the minimum-variance hedge ratio (h) is:

currency (USD) is the MVHR. GBP 35,000,000 × 0.4 = GBP 14,000,000.

QUESTION 4: FIXED-INCOME PORTFOLIO MANAGEMENT

Yield income = Annual average coupon payment/Current bond price

= €4.75/€120.00 = 0.03958, or 3.958%.

∆(𝐶𝐷𝑆 𝑃𝑟𝑖𝑐𝑒) ≈ −(∆(𝐶𝐷𝑆 𝑆𝑝𝑟𝑒𝑎𝑑) × 𝐸𝑓𝑓𝑆𝑝𝑟𝑒𝑎𝑑𝐷𝑢𝑟𝐶𝐷𝑆 )

Short risk (FM issuer): €46,970 =- €10,000,000 × (- (0.10% × 4.697))

Long risk (GM issuer): €116,725 =€10,000,000 × (-(-0.25% × 4.669))

The total gain on the long–short strategy is €163,695 = €46,970 + €116,725.

Long a put option on a bond futures

Long a receiver swaption Short a payer swaption

QUESTION 5: ASSET ALLOCATION

allocation has an optimal risk budget.

all assets, the asset allocation is not risk parity.

#3 and 63.2% of Portfolio #4.

Weighting calculated as follows (optional):

Return Requirement = (w) × Return Portfolio #3 + (1 – w) × Return Portfolio #4

8.0% = (w) × 8.60% + (1 – w) × 7.65%

8.0 = 8.60w + 7.65 – 7.65w

w = 0.368, which means 36.8% of Corner Portfolio #3

1 – w = (1 – 0.368) = 0.632, which means 63.2% of Corner Portfolio #4

The appropriate goals-based allocation for Chris is as follows (optional):

all the other modules.

million) should be allocated to Module B.

million) should be allocated to Module C.

following Lopez’s suggestion.

QUESTION 6: EQUITY PORTFOLIO MANAGEMENT

allows for a greater diversification potential. Therefore, Statement III is correct.

small cap strategy should still has significant beta exposure.

risk since bank stocks have high correlation.

B is correct. Introducing a low-volatility asset within a portfolio benchmarked against a high-

QUESTION 7: ALTERNATIVE INVESTMENTS

Net of Fees Return for PF = (20% – 2% – 3.6%) = 14.4%;

where 3.6% = 20% × (20% – 2%);

Net of Fees Return for UF = (–5% – 2% – 0%) = –7.0%;

CFA三级密卷答案

CFA三级密卷答案