Suggestions for Level 3 preparations:
I used the assigned readings (75 % of total hours studied) and BPP material (prep course provider in London) for the remaining. Quality of the BPP material was ok, although some of the chapters were weak. Reason for supplementing with BPP was access to question bank and mock exams. Good experience.
Here's a couple of posts from last year (don't remember who posted it), giving some great advise on L3. Read it, and give L3 another chance. It worked for me.
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Folks
I just finished the CFA program by passing L3. I started the CFA journey by appearing for L1 in June 2003. I want to share my strategy for L3 preparation and hence this post. I will say that the 2005 L3 exam was very weird. I cannot describe it any better. Only people who have experienced the exam can understand what we underwent on June 4 esp in the afternoon. Nothing can prepare a candidate for badly constructed questions, poor writing skills on part of the people who write the questions or questions that border on the ridiculous. I believe that there are 2 major types of exams:
1. The first type tests a candidate's diligence. This type of exam is usually long but the problems are predictable, especially for the well prepared candidate. The CFA exam as advertised is this type of exam. If you are not diligent you will most likely fail.
2. The second type of exam tests a candidate's intelligence and application skill. This type of exam has unique type of problems that one cannot find in a textbook and a candidate has to apply his/her knowledge to be successful.
It is difficult to categorize the afternoon section of 2005 L3 into either type although it was meant to be the Type 2 exam. The morning session was a Type 1 exam although nobody on this planet is sure of what a correct answer to a PM question is except the person who wrote the answer key.
With this background in mind, I found the following things important for L3 preparation:
A. The sooner you forget the L2 experience, the better. The L3 exam is completely and diametrically opposite to the L2 exam. People with a quantitative bent of mind should especially be on their guard because the L3 exam is completely qualitative. So if you were super successful on the L2 exam, savor the success and move on. If you prepare for L3 in the same fashion you prepared for L2, you will fail.
B. If you believe that L3 is easier than L1 and L2 then you have already committed yourself to failing. The L3 material is deceptively simple. When you start thumbing thru the books and notes you cannot help feeling that the curriculum is a piece of cake. The problem is that CFAI takes this very straightforward material and comes up with an exam where you are not able to decipher what is being asked and what the right answer can be. Unlike an equity valuation question where the answer reduces to a single number, the PM questions can have at least a hundred different answers that can be backed by rationale but the trick is to get to the answer that CFAI wants.
C. 36 points on the L3 exam are devoted to Ethics which has been traditionally covered in the afternoon MC format. These 36 points are vital considering the fact that one had to guess on almost all other questions of the 2005 L3 MC. Yes, CFAI asks ridiculous minutae in the Ethics section but this minutae can be studied, memorized and converted into a >70% score on Ethics. Believe me, you will need every point in Ethics if the 2006 L3 exam is similar to the 2005 one. *Please* buy the ethics book and read it as many times as possible. It is easy to crib about CFAI asking minutae but it is your career and money on the line. CFAI has already made its profit when you signed up for the exam.
On a personal note, I did not study Ethics properly for the L3 exam. I thought i had gone through the book at least 3 times for L1 and L2, so why should i spend time on the same crap again. On exam day i got a 51-70 % score on Ethics. I relied on guesswork and was unable to nail the Ethics section. Reading and memorizing are a key to ethics and can help you pass the exam. Don't waste time reading Schweser or Stalla notes for ethics.
D. At least 50% of the exam is PM. There is no guarantee that you will be able to write the answer that CFAI wants. Most people get partial credit in PM by getting portions of the question right. The key to do OK on PM is to read the CFA candidate readings on PM and practise the actual CFA exam PM questions. Attempt the questions after reading the material. Even if you are not sure what the answer is, write something down and then compare it to the answer. Try to follow the thought and reasoning process outlined in the guideline answer. Repeated practice will make you more comfortable. Do NOT ignore the PM material in the International investments book by Solnik
E. Rest of the Exam: Quant, Fixed Income, Derivatives, Economics, Global Equity, Alternative Assets, Risk Management and GIPS.
For Fixed Income, read Fabozzi and do the back of the book problems and the worked out examples. I went thru the Fabozzi book thrice before the exam and got a >70% score on FI. The L3 book is thin and the material is easily understood. SS6 and SS7 are covered if one concentrates on the Fabozzi readings.
For Quant: practice practice practice. Get a good testing software and use it to the maximum. Spend 2 - 3 weeks on quant.
The Economics question in 2005 appeared in the morning and it was very straightforward. Anybody who had opened the economics material and studied it properly was guaranteed a good score. I would recommend a textbook + Schweser approach for Economics as some of the readings are long (shiller and Seigel) and Schweser does a good job in condensing them.
Derivatives: I used the Chance & Fabozzi book exclusively. Solved all the problems at least twice and reviewed the material at least 3 times. My score in Derivatives for L3 was in the <50% range. I used the same technique on the 2004 L2 exam and scored >70% on all derivatives material. So this gives you an idea of the MC questions on the 2005 L3. One thing needs to be noted for derivatives. There is a ton of material to be studied (if you wish to study it all). Easily the largest section after PM. Start early on derivatives. You will need the time. I spent at least 4 weeks on it.
Alternative Assets. I believe this might have been my only perfect score in the afternoon session. The alternative asset question related to the real estate material. One should know all the calculations. I practiced calculating CFAT, ERAT etc multiple times and reviewed them before the exam. Schweser had good examples and i did a lot of practice questions. Due to the nature of the candidate readings, i would recommend using a combination of Schweser and candidate readings. Practice is essential here.
Global Equity: The material was easy. Schweser does an OK job. The only SS where you get some breathing room.
Risk Management: Read the chance book once. Also used Schweser for notes and question practice. the material is easy, though some of it requires memorization. Making notes of your own is a good idea. Also know how to do the basic calculations even if the LOS does not ask you to.
GIPS: I nailed GIPS. I read the GIPS workbook twice, went thru Schweser twice. I did all the Schweser and GIPS workbook questions. GIPS is another section where CFAI loves to ask minutae. A little time spent here would net you another 12-24 points depending on the weightage given to GIPS on the exam. Devote at least 2 weeks to GIPS. Once during the normal course of study and then once before the exam as a refresher. GIPS can help you pass. Know how to calculate returns using different methods even if the LOS does not ask for it. It is better to be on your guard on sections that you can score a 100%
The order of preparation I used was: Fixed Income (SS6, 7), Derivatives(12, 13), Global Equity(5, 18), Economics(4), GIPS(17), PM(9,10,11,14), Alternative Assets (8) Risk Management(15), Quant(3) and Ethics(1,2). I am not recommending this order. I read FI first because i just had to read one book to get SS6 and 7 out of the way and i liked that. Derivatives followed for the same reason and for the sheer quantity of material. Global Equity and Economics were next because i had exhausted myself after Fixed Income and Derivatives and this gave me some breathing room. I followed this with GIPS as a warm up to PM. After completing PM, i read Alternative assets simply because i do not like the subject and i knew that if i did not read it early enough, i would not do justice to it. I then moved to Risk Management which is unfortunately (for me) entirely qualitative in the CFA curriculum. I followed this by Quant since i am mathematically inclined and i devoted only a day or two to ethics which i regretted on exam day. The order of preparation should always be a function of knowledge in the area and the volume of material to be covered.
Materials used for preparation: CFAI books, Schweser notes and Schweser Pro
Started preparation: December 2004. Approximately 300 hrs of study.
# of Mocks attempted: 0 (had no time left after reviewing)
To sum it all: The L3 exam was the toughest out of all 3 levels. After the afternoon session, I was not sure whether i would pass or not. I was so depressed that i did not visit this board until August 2005. I simply did not discuss the exam with anybody because i knew it would make me feel worse.
Anyways, I would like to wish everybody appearing for the 2006 L3 exam a lot of luck. Please do not take L3 lightly. I did not do exceptionally well on it because i underestimated it after my stellar L2 performance. Find something to motivate yourself because you do not want to fail L3 after passing L1 and L2. The complacence is just not worth it. Study hard (do not forget Ethics) and hope for the best.
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- FI is the largest portion of marks in the afternoon, not derivatives
- I would also add that in addition to studying the ethics book, probably MORE important is studying the case book in SS2, where AIMR seems to pull their questions from.
- If I were doing this again (which I'm not!!) I'd start studying the hard stuff FIRST, probably in this order ss13, then 12, then SS.6/7...it's smooth sailing after you get through those 4 MF's. Yeah Cat is right...do the texts, not Schweser.
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I agree with most of the points, but allow me to play devil's advocate:
the L3 exam is completely qualitative.
not really. the derivatives stuff is tough, as is the quant. If you just skim this stuff and assume you "get it" qualitatively, you're going to get killed. Know it inside and out, do the problems and understand the formulas (don't just memorize them). There is a huge quant element to this exam that I think people underestimate. The whole thing about the afternoon change-up we got served (hedging a CTD with a CTD) was probably not that hard to handle if you had a good understanding of what the formula was trying to do.
you will need every point in Ethics
I don't think there's any way anyone could have been well prepared for the ethics questions that were asked on this exam... not unless they spent a hundred hours on this subject alone. The details tested were just too obscure. I failed ethics, but passed the exam. I don't think it's as important as everyone says it is, and I think your time is better spent getting a solid understanding of quant, FI, derivs, etc. than it is obsessing about soft dollars and the rest of that crap. Just have a good sense of what the code and standards are about, and use that to guess on the questions (since you'll end up guessing regardless of how much time you spend studying).
The L3 exam was the toughest out of all 3 levels.
agreed.
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Folks,
Thanks for the kind comments. A few more things i remember from my L3 experience. There are some concepts that show up again and again in the CFA curriculum. A few of them that come to mind are:
1. CAPM equation (a no-brainer), CAL, CML and SML. Efficient frontiers, market portfolio are all things that you should know very clearly and be able to differentiate between them.
2. Interest Rate Parity: This is a very important topic in L2 and L3. A lot of questions in International investments, Fixed Income (international bond portfolio management) and economics are based off this concept.
3. No arbitrage principle in derivatives. Also in L3, the basic concepts of puts and calls need to be reviewed because a lot of derivatives material hinges on this.
4. Sharpe ratio (supplemented by Treynor and Jensen's measure) is a must know concept.
5. If you are not comfortable with regression, spend some time reviewing linear regression and then go on to multiple regression. You should know how to use the t-statisitc, F-statistic and chi square in various situations. Understanding the meaning of covariance and correlation in a portfolio management context is reinforced in L3 and is very important.
6. Know the meaning of Bond Equivalent yield (BEY) and be able to calculate BEY from Effective annual rate and vice versa. Understand Duration (both effective and modified). It is the basis for a lot of FI material in L3 including portfolio immunization. Know how to calculate Bond Present and Future values at different time horizons (a brush up of calculator skills. Schweser does an excellent job in this area for fixed income)
7. Basic Algebra skills for L3 include: solving simultaneous equations with 2 and 3 variables, weighted average of a number of numbers, arithmetic and geometric means and their properties.
I am sure other folks can add to this list. I want to make a few other points on certain sections of the exam
A. Quant: A very simple trick used by CFAI, Schweser etc is to provide Standard Deviation where Variance is required and vice versa. People just plug in the wrong number and get the wrong answer. Be careful with Standard Deviations and Variances. They are used a lot and one can easily mix them up while trying to go fast. Also know how to solve for correlation, covariance and betas when you are given 2 of the 3. Although not necessary one should know how to calculate covariance from a table of values and Expected values.
The time series material is not difficult but requires lot of practice and so does the Portfolio concepts chapter. You will enjoy the Portfolio concepts chapter if you like algebra.
B. PM: An important element of PM is behavioral finance. Please buy and read the Nosfinger book. Schweser does an Ok job but the Nosfinger book has examples and nuances that the notes do not carry. Plus the Nosfinger book is very thin and an enjoyable read. It will help you on the exam. Expect a behavioral finance question on the PM. In 2005 CFAI introduced corner portfolios to the curriculum. This is really interesting material and is covered well both by Schweser and the CFAI readings. Know the rules to select a portfolio and calculate the return, Standard Deviation etc
C. GIPS: Read the GIPS from the candidate readings before you read the condensed Schweser verision. GIPS is sometimes very boring and lengthy but if you are able to read the CFAI material once you will not go wrong even if you use Schweser after that. GIPS has a few lists that you need to memorize. Also, work out all the CFAI GIPS problems from the exams and workbook and you will be in good shape.
D. Global Equity: Even though the material is straigthforward, definetely attempt the questions in the Solnik book. SS18 has 2 case studies that you need to read and understand. You will not see anything of that sort on the exam but CFAI will take elements from those case studies and may ask you similar questions. SS5 is easy and if you do the Schweser problems along with the Solnik worked out examples and back of chapter problems you will be well prepared.
E. Derivatives: Once again i want to stress in the end that the quantity of materials in Derivatives is huge. You will need extra time for this unless your job involves trading and valuing derivatives. 2 weeks as suggested by Schweser is *not* enough. You need more than that if you want to learn the material. Use the Chance book. Schweser does not do a good job on derivatives and uses notations different from the Chance book. On the 2004 L2 there was a Swaps question that used the book notation. It was a simple question similar to the one in the book but if you were not comfortable with the notation you might struggle. Your mantra for Derivatives should be to put in more than 2 weeks (if you are not studying selectively), try to revise the material at least once and if possible use the Chance & Fabozzi books. Schweser is a very weak alternative in this area.
Enjoy your success on L2 and in a few months start preparing for the next battle. Best of luck.
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The sureshot way to practice answering the "CFAI way" is to work out past exam questions and answers; but dont expect to get any patterns out of it - you won't
I dont think there is any other standardized way of answering Port.Mgt. questions because CFAI itself uses different approaches each time. By the way, 2005 exam takers each had a different answer on almost all the sub questions in the individual IPS and many could justify their different answers too.
There were lengthy threads on AF closer to exam date on the following topics
1) Before tax versus after tax Required Return on PF - no one knows the answer to this for sure - which is better, which is the method that CFAI expects etc. are pretty difficult to define
2) Risk tolerance = Ability + willingness to take risk - what does high, medium low or above average, average and below average mean fior risk tolerance (which can be drawn up as a 3X3 grid) - with 3 levels of willingness on the X axis, 3 levels of ability on Y axis and tolerance in the intersecting data area
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I believe shennigan_hunter provided a very good answer to your question. There are no set rules for PM. You should look up PM exam questions from 2001 onwards (the 2001 exam questions were included in the CFAI candidate readings for 2005, the others exams are available on the CFAI website). Start PM by understanding Objectives and Constraints. Read the CFAI readings followed by Schweser which gives some good hints on how to approach each section of the IPS. You will not find distinctive patterns while answering questions because each IPS question is so unique. The guideline answers are helpful yet i believe it is impossible to come up with the guideline answer. Also you will notice inconsistencies in the answers from year to year. For example: CFAI itself calculates returns both on a before and after tax basis in different years. That is why i noted that only the person writing the answer key knows the *correct* answer that CFAI wants. All others can only attempt to get as close as possible to the *correct* answer
CFAI has certain rules for IPS and you should follow that. If you look at IPS in the industry, you will see that firms and individuals have their own format and style. This will not work on the CFA exam. You need to play by CFAI's rules. For example: If they say anything above 10 yrs is a long term horizon then you have to accept it. If you feel that stock market reversals can take up to 7 yrs to correct and 12-15 yrs should be the long term horizon cut off you will get a 0 for the time horizon constraints portion of the IPS.
So stick to their definitions and methods as outlined in the readings. Always support your answer with rationale. Maybe CFAI gives partial credit for well thought out answers that do not correspond to the answer key. Practice as many questions as you can. Make it a point to use the template that CFAI provides. Be consistent. For example: If you are using the before tax return convention then stick to it (Schweser recommends after tax). Be concise and to the point. You will not have enough time on the exam for verbose answers.
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