CFA Level 3 Study Guide

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In general, CFA Level 3 is mostly about Portfolio Management or PM. The path goes PM Framework → Asset Class Strategies → Client Needs → Execution → Performance Evaluation → Ethics. It is worth noting that this level is pretty different compared to the previous levels. What makes it different is that it has a more holistic approach with PM permeating most of the topics throughout.

As of now, there are a total of 35 readings or 16 study sessions in the CFA Level 3 syllabus across 7 topics. As one of the candidates, you may be wondering what is the thing that you have to study first. Fortunately, 300Hours gives you suggestions. Below is the process and strategy on CFA Level 3 topic’s study order:

  • Leave Ethics last
  • Begin strong with a challenging and important topic
  • Alternate the hard and easier topic
  • Portfolio Management’s flow of topic

In short, here is the recommended CFA Level 3 study order for the 2022’ curriculum:

Level 3 Topic Study Order 2022’s Curriculum (35 readings in total)
1. Fixed Income Reading 11-14
2. Equity Reading 15-18
3. Behavioral Finance Reading 1-2
4. Economics Reading 3-4
5. Asset Allocation, Derivatives & Currency Management Reading 5-10
6. Alternative Investment Portfolio Management & Private Wealth Management Reading 19-23
7. Institutional Investors, Other Portfolio Management Topics & Case Studies Reading 24-30
8. Ethics & GIPS Reading 31-35

As you can see above, CFA Institute has improved the overall flow of topics for the 2022’s CFA Level 3 curriculum so the recommended optional flow of topics follows the natural curriculum’s order except for the studying Fixed Income and Equity topics first.

Check out the little commentary that applies to 2022’s CFA Level 3 readings below:

1st: Fixed Income

It is better for you to start with a strong Fixed Income. The reason is because it has the second highest topic weight (15-20%). Besides, it is also known as one of the trickier topics of Level 3. The main focus on this includes:

  • Cash flow matching, duration matching, contingent immunization, roll down return, rolling yield
  • Some different kinds of durations (money duration, effective duration, key rate duration, modified duration, Macaulay duration, spread duration), convexity
  • Butterfly trade, condor trade
  • Some different kinds of spreads (G-spread, I-spread, Z-spread, option-adjusted spread (OAS))

2nd: Equity

After a strong Fixed Income, you need something that can make you breathe. The perfect option is Equity with 10-15% topic weight. It is the topic that can increase your average score as it is easier compared to Fixed Income. The focus of it is active equity investment strategies and portfolio construction. Lots of 4 readings across 2 sessions are more conceptual. However, recall the various definitions of Value at Risks such as VaR, CVaR, IVaR, MVaR.

3rd: Behavioral Finance & Economics

Actually, Behavioral Finance is classified under the Portfolio Management topic for weighting purposes. However, it is included with Economics (capital markets expectations) bookwise. This one is pretty interesting and easy to read. It mostly lists all the things that you have to remember. Do not forget to know some different kinds of behavioral biases.

In CFA Level 3, the focus of Economics is capital markets expectations. In general, it is easy to be approached. The focus areas include:

  • Some different kinds of stages of business cycle and its relationship to inflation
  • Some implications of inflation for cash, bonds, equity, and real estate returns
  • Some effects of monetary and fiscal policy on business cycles
  • The shape of the yield curve and its relationship with monetary and fiscal policies
  • Some different kinds of methods of forecasting asset returns

If possible, make some notes. However, you do not have to spend a long time and move on.

4th: Asset Allocation, Derivatives & Currency Management

Apparently, Asset Allocation is also classified under the Portfolio Management topic for weight purposes, just like Behavioral Finance. However, it is teamed with Derivatives & Currency Management (5-10% topic weight).

In this one, Derivatives & Currency Management are more challenging chapters than Asset Allocation even though each of them only has 3 readings. Derivative readings are also known as one of the more calculated-focused ones and known to be very testable. In this book, it is better for you to focus more on Derivatives.

5th: Alternative Investment Portfolio Management & Private Wealth Management

The Alternative Investments (5-10$ topic weight) is the start with 2 readings. In general, they are easy and mostly theory-based with a few calculations sprinkled throughout. You are encouraged to do summary notes as it will be useful for you for future reference.

Make sure to pay attention more on the Private Wealth Management readings as they are part of the giant Portfolio Management sections (35-40% topic weighting). They are focused on the private clients, including individual investor policy statements or IPS.

6th: Institutional Investors, Other Portfolio Management Topics & Case Studies

Performance evaluation is the most important thing in the portfolio management process. It is a must for you to know the ratios for measuring active management such as Sharpe ratio, Treynor ratio, Information ratio, Appraisal ratio, Sortino ratio, and Capture ratios. As for Trade Strategy and Investor Manager selection readings, they are relatively easy.

The last 2-3 readings are the real case studies. You will be taught the way to apply your consolidated knowledge holistically. While it is true that they are not readings per se, they are a good example of the feel of the exam style questions.

7th: Ethics & GIPS

Ethics has 10-15% topic weight for the Level 3 exam. It has some familiar materials. However, there is one that is new at this level, which is Global Investment Performance Standards or GIPS. This one is worth spending time on. Make sure to know the guidance on Standards I-VII and their application as it is the popular area to test on.

Keep in mind that this is the final challenge. Apparently, CFA Institute will consider the score of the candidate on Ethics. That’s why it is important to make time and to work hard for this section as it is important if you want to pass.

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