Advice for the Level III Essay Exam

CFA Level III
#1

The Level III exam is made up of two parts. The first is a structured response (essay) exam and the second, a vignette multiple choice exam. This post focuses on the structured response, which, in my opinion, is the greatest obstacle lying between you and the CFA charter.

Until now, you’ve only been answering multiple choice questions in your CFA exams. At Level I and II, if you had an idea of what the question was about, there was a reasonable chance of you picking the right answer.

Level III is an entirely different story. Suddenly, not only do you need to know your concepts well, but you need to communicate those concepts in a clear and precise manner. Every year approximately 50% of students who have cleared Level II, fail the Level III exam. This is primarily due to insufficient preparation and poor exam-taking approaches.

Exam Prep

  1. Know your concepts. There is no excuse for not knowing the core concepts before the exam. Create summary notes or watch summary or High-Yield videos.
  2. Practice, practice, practice. This includes examples and practice problems. As part of your practice, work through past essay exams. The CFA releases past exams yearly. Get your hands on these and go through them thoroughly. If you’re pressed for time, doing the past papers takes precedence over the curriculum exams and practice problems. As you practice, you’ll automatically understand which mistakes to avoid. (Note: the curriculum changes every year so if a question looks unfamiliar check the reading and learning outcome reference in the guideline answers.)

Pre-Exam Tips

Log on to the CFA Institute website > Candidate resources and go through the resources there. These include exam tips, mock and essay exams, documents of LOS command words and acronyms that are common in the CFA exams. It is important that you familiarize yourself with the exam, its structure and its execution.

Though it seems tedious, practice writing. It’s a three-hour exam of just penning down answers on paper, and you don’t want your hand to start cramping or your handwriting to become illegible mid-exam.

During the Exam – Manage your time & follow instructions.

On the first page of the exam, you are told what topic each question is based on, and how many questions there are. Spend the first few minutes jotting down the start time and end time for each question. It sounds inconvenient, but a plan will make you more likely to stay on track and not stress out about how much time is left towards the end of the exam.

You don’t have to do the questions in order, although it is highly recommended.

Exam Questions

Each question typically has two to six parts. Each question will be preceded by a short text explaining the scenario. First, scan the question and understand what is being asked. Then as you read, underline key information that you will need to solve the question.

Each question comes with a footnote telling you how long to spend on the question and where to answer it. It’s a good idea to stick to the time advised by the examination. Another thing to note is that the time allotted tells you how many marks a question is worth. For example, 5 minutes means 5 marks - so allocate your time accordingly.

When answering the questions:

  1. Pay attention to command words. Words such as formulate, calculate, etc., all mean different things, and these words determine how you should answer the questions. The command words document on the CFA Institute website, is a must-read for every student.
  2. Answer everything. Answer all subparts of all questions. Understand what the question is asking and state your answers clearly. Even if you are stuck, don’t skip the question, but write down the best answer you can think of. Best case scenario, you’ll get a few marks for it.
  3. Don’t get hung-up on a question you can’t answer. If your allotted time for that question is over, jot down the best answer you have and move on. If you have time in the end, come back and take another look.
  4. Keep your answers short and to the point. Bullet points are strongly recommended. Avoid irrelevant or tangential information. If the question asks you for 2 points and you write 4, the third and fourth points will be struck out by the examiners.
  5. Within a question your assumptions should be consistent. State important assumptions you make, and avoid contradictory statements.

I have made a video blog of this same post, so be sure to watch that too!

All the best,

Arif Irfanullah, CFA

#2

I’m finding your high-yield videos very useful as I’m revising and trying to keep on top of all the readings. Hoping I won’t need to pay you another $385 next year :slight_smile:

#3

That is great to hear! I hope you are also making use of the High-Yield mobile app You can find that on Google Play-store or the Apple App store. Just search for “IFT CFA”.

Best regards,

Arif

#4

Hi Arif, thank you for this very helpful post.

I was wondering what a good strategy is if I run out of time despite following all the advice.

Based on the recent Reddit AMA, I understand that only total score counts in the end and that it is not necessary to reach a minimum score in the different topic areas (save for a potential ethics kicker).

Let’s say I have two topic areas left but not enough time to answer both. I would therefore try to answer 100% of the topic area I feel more comfortable in, rather than 50% of both topic areas, as there is no benefit to spread the points/minimum passing score per topic area.

Do you or others agree?

#5

sure - but you’re already going to fail if that relates to too many problems. Start practicing with a timer, and make sure that if you do run out of time you’re debating between 2 problems you’re not comfortable with…

#6

as a retaker who left 35 points completely blank…i can say you should definitely try to finish the exam. that said, you need to START the exam strong. hit the low hanging fruit. look at the topics, go to where you feel strong, and then work from there. bank the easy points, you dont wanna be in a situation where you dont answer a 15 point question in a strong area where you wouldda gona 12/15.

at the same time, if you go to the pass fail threads youll find MANY instances of people leaving 10-20 points completely blank and still passing with flying colors because they did 105/160 on what they did answer and ripped a 45/60 on the MC. take the easiest points for you first is what i would say.

#7

Looking into the past essay exams, one thing confused me - some questions are given designated space to give answer but others are not. How is this going to be presented on the actual exam - will they provide some empty space on the paper for those questions?

#8

Look at the 2017 or 2018 exams; that’s what you should expect for 2019: a full-page template for each question.

#9

Hi Arif ,

Need your suggestoin… I just finished reading all books for level III on my own…

Based on the information below… what is a good sequence for review…

Topic Exam Weight

Ethical and Professional Standards 10–15%

Economics 5–10%

Equity Investments 10–15%

Fixed Income 15–20%

Derivatives 5–10%

Alternative Investments 5–10%

Portfolio Management & Wealth Planning 35–40%

Thanks

#10

Hi DannyOcean. Yes, if you have no clue what to say to a particular question it is better to focus on questions where you do have good answers. However, I strongly recommend that you cover all topics during your studies so you have something sensible to say for each question. Generally speaking getting the first 50% marks on a question is easier than the next 50%. Also I don’t want you to fall in the trap of writing too much just because you know a lot. If you’ve answered a question properly you get your marks… then you should move on. Best regards,

Arif Irfanullah, CFA

#11

That is the point, I always think that if I am synthetic in my answer I will not get all the points… so I write…too much.

For example:

Question: Justify why XY has below average risk tolerance (Let’s say it has a long time horizon).

Could be enough to stay because it has longer time horizon or we should also say the consequence of having a longer time horizon i.e. having a longer time horizon it has enough time to recover from bad investment returns and short term volatility…… ??

Another example, doing essay 2014 I had a comparison between a foundation and a DB pension plan. It is enough enough to say DB plan has shorter duration of liabilities (for example 4 years in that case) and the foundation has a longer time horizon (perpetuity) and so foundation has higher ability to take risk?

Or in another question for another topic in the same 2014 essay.

Situation:

  1. Transaction cost of Bonds expected to decrease 2) Volatility of Bonds expected to increase 3) Correlation of Bonds with portfolio expected to increase

Justify why XY is correct in stating that no conclusion could be reached if the corridor width should be widened or narrowed:

We know that… the consequences are: 1) narrower 2) narrower 3) wider So no conclusion can be made…

But for each point above, should we say why narrower or wider?

#12

Sometimes the question will say restating facts from the story will get no points. To be safe, Back up the ‘long time horizon’ with why…

#13

but if you do this in each question then you will for sure run out of time…

#14

Where can I find these? Someone posted a link from 2007-2016 but I cannot find the last two past essay exams.

#15

Not really. It doesnt take that much more time.

State why the ability to take risk is high:

Option 1: long time horizon

Option 2: The guy has a long time horizon as shown by 30+ years of retirement. THe long time horizon extends his ability to take risk because he has more time on his side to whether the volatile of the market.

#16

And even more time to _ weather _ it.

:wink:

#17

not in this case I agree, but for the other example I did you would run out of time comparing to the allocated time for that answer

#18

if you look at prior exams guidelines, they state a reason for each rebalancing … Usually they give some options and you would circle “narrow” or “wider” and then it says justify in the box to the right. its not much time:

  1. Transaction cost of Bonds expected to decrease so we narrow the corridor because it would be cheap to rebalance often 2) Volatility of Bonds expected to increase so we narrow the corridor to ensure we stay close to the SAA. If we don’t narrow, the higher volatile could cause our SAA to get out of proportion 3) Correlation of Bonds with portfolio expected to increase so we widen our corridor because positions are now moving in sync with higher correlations, so they are less likely to stray from SAA

Took me 30 seconds to type that.

#19

Yes, more time horizon means you can see lots of weather patterns. Sunshine, rain, everything!

#20

Where do you guys get past paper exams for 2017 and 2018