CFA® Level 3 Topics and Weight
The Final Chapter
Congratulations on passing the previous levels (Levels 1 and 2) of the CFA exam and getting so close to earning your CFA charter. The upcoming CFA Level 3 exam holds great significance as it will serve as a crucial juncture in determining your eligibility to become a charter holder. Consequently, cracking this exam is no easy feat. However, there's no need to fret as we've got you covered.
CFA Level 3 Exam Topics
For the CFA Level 3 exam, the candidates will be assessed in seven different topics, including:
| CFA Level 3 Topics Overview | |||
|---|---|---|---|
| Topics | Weight | No. of Learning Modules |
No. of Questions |
| Economics | 5-10% | 3 | 8-13 |
| Portfolio Management | 35-40% | 13 | 36-45 |
| Derivatives | 5-10% | 2 | 8-13 |
| Alternative Investments | 5-10% | 2 | 8-13 |
| Fixed Income | 15-20% | 4 | 24-30 |
| Equity Investments | 10-15% | 4 | 17-24 |
| Ethical and Professional Standards | 10-15% | 5 | 17-24 |
The Level 3 exam includes 22 items comprising multiple-choice or constructed response (essay) questions based on a vignette. You must answer questions based on the information in the vignettes; they are not standalone questions as in Level 1. The CFA Program curriculum topics for Level 3 will appear randomly in either the first or second session, or possibly both. Each vignette starts with the topic statement and total point value, and there's an optional break between sessions.
- Morning Session (2 hours, 12 minutes): 6 item sets and 5 essay sets or 5 item sets and 6 essay sets.
- Afternoon Session (2 hours, 12 minutes): 6 item sets and 5 essay sets or 5 item sets and 6 essay sets.
Source: CFAI®
Understanding the Constructed Response (Essay) Format
The constructed response format, known as an “essay” question, is fundamentally different from multiple choice: the answer is not provided. Each essay set vignette begins with a statement of the topic and the total point value, with each item in the set worth a variable number of points. Points per item are not disclosed. The essay sets supported by vignettes contain items that can be responded to using two different methods: statement and numerical entries.
- Statement entries: for these, command words in the question stem will be bolded, and a text box will be provided for the response. If more than one answer is required, a note will be included stating that each response should be provided in a separate paragraph. Bullet points are also acceptable. It is important to note that when multiple responses are requested, only the number requested will be evaluated, and in the order presented by the candidate.
- Numerical entry: calculations can be presented as either an essay or a numerical entry. The essay text box accepts typed words and numbers, with correct numerical values receiving full credit without the need for formulas or explanations. Candidates can also describe the steps used in the calculation or show values using a math editor function or typing variables in an equation. The numerical entry response box only accepts numbers, commas, and decimal points, with no room to show work. Specific guidance may be given on how to format the answer.
Within a single essay item, there could be several questions to answer. It's crucial to comprehend the number of responses required. To illustrate, three instances are provided below:
EXAMPLE 1
Determine which bond, Bond 1, Bond 2, or Bond 3, best meets the advisor’s objective.
Justify your response.
For this question, a candidate is expected to type two answers in the response box: the name of the bond that best meets the objective, and a reason why it meets the objective.
EXAMPLE 2
Determine, based on the client’s IPS, the most appropriate index (X, Y, or Z) to use as a benchmark.
Explain why the other two indices are less appropriate. Each explanation should be in a separate paragraph.
For this question, a candidate is expected to type three answers in the response box: the name of the index that is appropriate, and a reason why the two not selected are less appropriate.
EXAMPLE 3
Discuss one weakness in the risk management process for Company A and for Company K.
Note: Each discussion should be in a separate paragraph.
For this question, a candidate is expected to type two answers in the response box: a discussion of the weakness for Company A and a separate discussion of the weakness for Company K.
Source: CFAI®
Overview of CFA Level 3 Exam Subjects
The CFA Level 3 exam is the final step towards the prestigious CFA charter. It tests a candidate's knowledge of portfolio management and wealth planning, covering topics such as ethical standards, behavioral finance, private and institutional asset management, capital market expectations, risk management, and more. Candidates must demonstrate their mastery of these topics to manage investments effectively and ethically, making them valuable assets to the finance industry.
Economics (EC)
Economics is not a standalone topic on the CFA Level 3 exam, but economic concepts are integrated into several other topics covered in the curriculum, such as capital market expectations, risk management, and alternative investments.
It is important to have a solid understanding of economic principles, such as supply and demand, market equilibrium, inflation, and interest rates, as these concepts are fundamental to many investment decisions. Candidates should also be familiar with macroeconomic indicators, such as GDP, inflation, and unemployment, and their implications for investment markets.
In addition, candidates should understand the impact of global economic trends and events, such as international trade agreements, political unrest, and changes in monetary policy, on investment decisions.
Overall, a strong understanding of economic concepts and their relevance to investment markets is crucial for success on the CFA Level 3 exam. Economics accounts for 5 to 10% of the Level 3 exam. The section concludes with coverage of the business cycle and its effect on economic activity.
Portfolio Management (PM)
Portfolio Management covers a massive 35 to 40% of the Level 3 exam, and thus Portfolio Management (PM) is a crucial topic covered on the CFA Level 3 exam. It refers to the process of managing a portfolio of assets to achieve investment objectives. Here are some key points to know about this topic:
- Portfolio Management involves setting investment objectives and constraints, selecting an appropriate asset allocation strategy, selecting securities for the portfolio, and implementing and monitoring the portfolio.
- Asset allocation is a critical aspect of portfolio management, and it involves diversifying an investment portfolio among different asset classes based on the investor's risk tolerance, investment objectives, and market conditions.
- Risk management is an essential component of portfolio management. It involves identifying, measuring, and managing risks to achieve investment objectives.
- Investment strategies used in portfolio management include active management, passive management, and factor-based investing.
- Portfolio performance evaluation is critical to monitor the effectiveness of the investment strategy and make adjustments as necessary.
PM also covers the valuation of investment asset classes, including equities, fixed income securities, and alternative investments, such as real estate, commodities, and private equity.
The PM topic is closely related to other topics on the CFA Level 3 exam, such as Ethics, Capital Market Expectations, as well as the material on various asset classes, such as Equity, Fixed Income, Alternatives, and Derivatives. It is essential to understand how these topics relate to portfolio management to make informed investment decisions.
Derivative Investments (DI)
The Derivative Investments (DI) topic is an important part of the CFA Level 3 exam curriculum, and it covers the strategic use of derivatives in various hedging strategies involving combinations of calls, puts, forward, and futures, creating synthetic positions, and currency management. Overall, a good understanding of the DI topic is important for investment professionals who use derivatives as part of their investment strategy or who advise clients on derivative investments. It is also important for risk managers who need to understand the risks associated with derivative investments and how to manage them effectively. Derivative Investments covers about 5 to 10% of the Level 3 exam.
Alternative Investments (AI)
Alternative Investments (AI) is a topic covered in the CFA Level 3 exam that focuses on non-traditional investment assets such as hedge funds, private equity, real estate, and commodities. AIternative investments covers about 5 to 10% of the exam.
Fixed Income (FI)
The Fixed Income (FI) Portfolio Management topic on the CFA Level 3 exam covers the characteristics of fixed-income securities and the techniques used to manage the fixed-income allocation in a portfolio. Some important ideas covered involve liability-driven, index-based, and yield curve strategies, as well as more actively managed credit strategies; managing leverage; and bond market characteristics. Overall, a strong understanding of fixed-income portfolio management is essential for passing the CFA Level 3 exam and for success in the finance industry. Fixed income questions account for about 15 to 20% of the test.
Equity Investments (EI)
Equity Investments (EI) is a topic covered in the CFA Level 3 exam and focuses on managing allocations of equity securities equity portfolios. Topics include the role of equities in a diversified portfolio, passive and active strategies, and equity portfolio construction.
EI covers about 10 to 15% of the Level 3 exam.
Ethical and Professional Standards (ET)
As it does for all three exam levels, tThe Ethical and Professional Standards (ET) topic on the CFA Level 3 exam covers ethical principles and practices that finance professionals should follow. Here are some key points to know about this topic:
- The Code of Ethics and Standards of Professional Conduct: The Code of Ethics sets out the fundamental ethical principles that finance professionals should adhere to, while the Standards of Professional Conduct outline specific standards of behavior that members must follow.
- Fiduciary Duty: Finance professionals have a fiduciary duty to act in the best interests of their clients. They must place their clients' interests above their own and avoid any conflicts of interest.
- Conflicts of Interest: Conflicts of interest can arise when a finance professional's personal interests or relationships interfere with their duty to act in their clients' best interests. It is important to disclose any potential conflicts of interest and take steps to manage or avoid them.
- Professionalism: Finance professionals should conduct themselves in a professional manner and maintain a high level of competence and integrity. They should avoid conduct that could bring the profession into disrepute.
- Global Investment Performance Standards (GIPS): GIPS are a set of standardized, industry-wide ethical principles that govern the calculation and presentation of investment performance. It is important to understand these standards and how to apply them to ensure accurate and transparent reporting of investment performance.
- Regulatory Environment: Finance professionals must comply with all applicable laws and regulations governing their profession. It is important to understand the regulatory environment and to maintain appropriate licenses and registrations.
Overall, understanding the Ethical and Professional Standards (ET) topic is crucial for finance professionals to maintain the integrity and reputation of the profession and to build trust with their clients.. Ethical and Professional Standards cover 10 to 15% of the Level 3 exam.
Decoding the CFA Level 3 Exam: Essential, Challenging, and Manageable Topics
Each year, the CFA Institute (CFAI) adjusts the CFA Level 3 exam content, potentially making it more or less challenging. The difficulty of each topic is mainly assessed using historical candidate performance data. It's crucial to emphasize that all topics, regardless of their perceived simplicity, must be studied thoroughly as they are essential for passing the Level 3 exam.
- Institutional and Private Wealth Management – The exam covers institutional and private wealth management, which involves managing portfolios for organizations and individuals, respectively. It is essential to understand the different investment strategies for managing these portfolios effectively.
- Fixed Income and Equity Portfolio Management – The exam covers fixed income and equity portfolio management, which involves managing investments in bonds and stocks. It is important to understand the different valuation techniques and investment strategies used in managing these assets.
- Risk Management – The exam covers risk management, which involves identifying and managing risks associated with different investments. It is important to understand the different risk management techniques and how to apply them to different investment portfolios.
- Ethical and Professional Standards – The exam covers ethical and professional standards, which are essential for any financial professional. It is important to understand the Code of Ethics and Standards of Professional Conduct and how to apply them to different investment scenarios.
Regarding the subjective nature of challenging topics in the CFA Level 3 exam, note that the constructed response (essay) section can be particularly tough for candidates used to multiple-choice questions. To excel in this section, practice composing responses is essential, though time-consuming. Most Level 3 exam topics fall under portfolio management (PM), consistently reflected in their order. While there’s no specific study order requirement, remember that PM is integrated into most topics at Level 3.
The exam’s difficulty varies with the candidate’s finance experience. Those with limited investment experience may find asset management and other practical topics challenging. Lastly, Portfolio Management and Wealth Planning are the lengthiest and most content-rich sections, demanding considerable stamina to master.
- Ethics and Professional Standards: This topic is also covered in the previous two levels and requires candidates to demonstrate their knowledge of ethical and professional behavior in the finance industry.
- Fixed Income Portfolio Management: This topic covers the principles of managing fixed-income portfolios and is considered more straightforward than equity portfolio management.
- Private Wealth Management: This topic covers the principles of managing individual portfolios and can be more straightforward for candidates who have experience in personal finance.
- However, it is important to note that every topic is essential for passing the Level 3 exam, and candidates should not underestimate the difficulty of any of them.
Changes to the CFA Level 3 Curriculum
As part of CFAI’s evolution, the Level 3 candidates will be offered three versions of the exam, that is, one for each pathway: Portfolio Management, Private Wealth, and Private Markets. Each version will cover the core curriculum, with specialized content for its respective pathway. Candidates can choose the version that aligns with their interests and goals. The specialized pathway changes will be effective from 2025.
CFA Level 3 Exam Tips
- Exam questions referring to Financial Statement Analysis are based on International Financial Reporting Standards (IFRS) unless otherwise specified. When a question is based on US GAAP, it will be stated in the question.
- Be comfortable with your calculator. Make sure you know how to use the calculator features needed to address the learning outcome statements (LOS).
- Answer all questions. There is no penalty for incorrect answers.
- Take a mock exam in the Learning EcoSystem to practice answering exam questions.
- Familiarize yourself with the software features of the exam in this software tutorial.
- Learn how hardware/software at the test centers may impact your exam-day experience.
- Dress comfortably. There is no dress code, but dress in layers for comfort.
- Review the CFA exam calendar for key dates and to meet pre-exam deadlines.
Frequently Asked Questions
How many readings does the CFA Level 3 exam have?
How often do the CFA Level 3 exam’s topic-weight change?
What is the historical candidate performance data for the CFA Level 3 exam?
| Year | Level 3 |
|---|---|
| 2015 | 53% |
| 2016 | 54% |
| 2017 | 54% |
| 2018 | 56% |
| 2019 | 56% |
| 2020 | 56% |
| 2021 | 42.5% |
| 2022 | 48.5% |
| 2023 | 47.5% |
Which subjects require a calculator for the CFA Level 3 exam?
The following topics will require a calculator for the CFA Level 3 exam:
- Economics
- Equity Valuations
- Fixed Income
- Alternative Investments
- Derivative Investments