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 readings |
No. of Questions |
| Economics | 5-10% | 3-4 | 8-13 |
| Derivative Investments | 5-10% | 5-10 | 8-13 |
| Alternative Investments | 5-10% | 19-23 | 8-13 |
| Ethical and Professional Standards | 10-15% | 31-35 | 17-24 |
| Fixed Income | 15-20% | 11-14 | 24-30 |
| Portfolio Management | 35-40% | 24-30 | 36-45 |
| Equity Investments | 10-15% | 15-18 | 17-24 |
The Level 3 exam consists of 88 multiple choice questions, split between two 132-minute sessions (session times are approximate). The Level 3 exam consists of item sets comprised of vignettes with accompanying multiple-choice items and constructed response (essay) questions. All questions must be answered based on the information in the vignette. Hence, the items are not free-standing, as in the CFA Level 1 exam. You will need to refer to the vignette before answering each item. The CFA Program curriculum topic areas for Level 3 will be randomly placed on the exam. All topics may be covered in either the first or second sessions, and possibly both sessions. Each vignette will begin with a statement of the topic and total point value. There is 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
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 three different methods: essay, numerical entry, or multiple choice.
- Essay Questions: 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, 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.
- Multiple choice: questions may occasionally be used in the essay portion of the exam, with the number of answer choices varying.
Within a single essay item, there could be several questions to answer. It's crucial to comprehend the number of responses required from the candidate. To illustrate, three instances are provided below:
Example 1
- Determine which bond best meets the advisor’s objective.
- (Bond A, Bond B, Bond C)
- 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 to use as a benchmark.
- (Index X, Index Y, Index Z)
- Explain why the other two indices are less appropriate.
- Note: 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 each of the following:
- Company Smith, Inc.
- Company Wadley, Inc.
- 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 Smith, Inc. and a separate discussion of the weakness for Wadley, Inc..
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.
Derivative Investments (DI)
The Derivative Investments (DI) topic is an important part of the CFA Level 3 exam curriculum, and it covers financial instruments that derive their value from an underlying asset. Here are some key points to know about this topic:
- Types of Derivatives: It is important to know the different types of derivatives, including futures, forwards, options, and swaps, and their characteristics.
- Valuation and Pricing: You should understand the methods used to value and price derivatives, including the Black-Scholes model, binomial model, and Monte Carlo simulation.
- Risk Management: It is important to know how derivatives are used for risk management, including hedging, speculation, and arbitrage. You should understand the risks associated with derivatives and how to manage them.
- Trading Strategies: You should be familiar with the different trading strategies that involve derivatives, such as option spreads, futures spreads, and delta hedging.
- Regulation and Ethics: You should understand the regulatory environment for derivatives trading and the ethical issues related to their use.
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. Here are some important things to know about AI for the exam:
- Characteristics and Risks: It is important to understand the unique characteristics and risks of AI, such as liquidity, leverage, and operational risks.
- Portfolio Diversification: AI can offer portfolio diversification benefits, but it is important to understand how to evaluate and select AI investments that fit within a portfolio.
- Performance Evaluation: It is important to understand the different performance evaluation methods used for AI investments and their limitations.
- Due Diligence: AI investments require a high level of due diligence and analysis, so it is important to understand the key factors to consider when evaluating AI opportunities.
- Regulatory and Legal Issues: AI investments are subject to different regulations and legal issues, so it is important to understand the regulatory framework and legal considerations when investing in AI.
- Real Estate Investments: The real estate component of AI covers topics such as real estate valuation, investment characteristics, and risk management techniques.
Overall, understanding AI is important for the CFA Level 3 exam as it covers a significant portion of the exam's content and is becoming increasingly relevant in the investment industry. AIternative investments covers about 5 to 10% of the exam.
Ethical and Professional Standards (ET)
The 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.
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 fixed-income portfolios. Here are some important things to know about this topic:
- Characteristics of Fixed-Income Securities: Fixed-income securities are debt instruments that pay a fixed or variable rate of interest. They have a defined maturity date and may be issued by governments, corporations, or other entities. It is important to understand the various types of fixed-income securities, including bonds, notes, and bills, as well as their credit ratings and yield curves.
- Fixed-Income Portfolio Management: Fixed-income portfolio management involves constructing and managing a portfolio of fixed-income securities to achieve investment objectives. This includes analyzing interest rate movements, credit risk, and other factors that can affect fixed-income investments. It is important to understand the various strategies for managing fixed-income portfolios, such as active and passive management, and to know how to construct a diversified fixed-income portfolio.
- Yield Curve Analysis: Yield curve analysis is an important aspect of fixed-income portfolio management. It involves analyzing the yield curve, which is a graph that shows the relationship between interest rates and the maturity of fixed-income securities. It is important to understand the different shapes of the yield curve, such as upward-sloping, flat, and inverted, and the implications for fixed-income investments.
- Fixed-Income Risk Management: Fixed-income risk management involves identifying, measuring, and managing the various risks associated with fixed-income securities, such as interest rate risk, credit risk, and liquidity risk. It is important to understand the techniques for managing these risks, such as duration matching and credit analysis, and to know how to implement risk management strategies in a fixed-income portfolio.
- Valuation of Fixed-Income Securities: Valuation of fixed-income securities involves determining their fair value based on market conditions and other factors. It is important to understand the various valuation techniques used for fixed-income securities, such as yield to maturity and discounted cash flow analysis, and to know how to apply these techniques in fixed-income portfolio management.
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.
Portfolio Management (PM)
Portfolio Management covers a massive 35 to 40% of the Level 3 exam. 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, and implementing and monitoring the portfolio.
- Asset allocation is a critical aspect of portfolio management, and it involves dividing 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 evaluation of investment products, 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, Behavioral Finance, Capital Market Expectations, and Derivatives. It is essential to understand how these topics relate to portfolio management to make informed investment decisions.
Equity Investments (EI)
Equity Investments (EI) is a topic covered in the CFA Level 3 exam and focuses on the characteristics of equity securities and the techniques used to manage equity portfolios. Here are some important things to know about this topic:
- Equity Security Characteristics: It is important to understand the characteristics of equity securities, such as common and preferred stock, and the factors that affect their valuation, such as dividends, earnings, and growth prospects.
- Equity Market Valuation: It is important to understand the different valuation methods used to evaluate equity securities, such as discounted cash flow (DCF) analysis, price-to-earnings (P/E) ratio, and price-to-book (P/B) ratio.
- Equity Analysis: It is important to know how to perform fundamental analysis of equity securities, such as analyzing financial statements, evaluating management, and assessing industry trends.
- Equity Portfolio Management: It is important to know how to construct and manage a diversified equity portfolio, taking into account investment objectives, risk tolerance, and market conditions.
- Equity Market Efficiency: It is important to understand the efficient market hypothesis and how it applies to equity markets, as well as the different forms of market efficiency, such as weak, semi-strong, and strong forms.
- Equity Investment Strategies: It is important to know the different equity investment strategies, such as value investing, growth investing, and momentum investing, and how to evaluate their performance.
Overall, a solid understanding of the characteristics of equity securities, equity market valuation, equity analysis, equity portfolio management, equity market efficiency, and equity investment strategies is crucial for success in the Equity Investments topic of the CFA Level 3 exam.
EI covers about 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) makes changes to the topics covered in the CFA Level 3 exam by adding or removing specific areas within a topic, which alters the intensity of the exam. While the subjective nature of exam topics and their difficulty cannot be overlooked, determining the complexity of each topic is primarily based on historical candidate performance data. It is important to note that even though a topic may be perceived as simple, it is still essential to study it thoroughly since each topic is important and required to pass the Level 3 exam.
The CFA Level 3 exam covers various topics such as portfolio management, behavioral finance, private wealth management, institutional asset management, fixed income, equity portfolio management, derivatives, and alternative investments. It is important to pay special attention to the following topics:
- 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.
- Behavioral Finance – The exam covers behavioral finance, which studies the impact of psychological biases on investment decisions. It is important to understand the various biases and how they affect investment decisions.
- 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, it is important to note that the exam’s constructed response approach, also known as the “essay” segment, may be challenging for candidates who are accustomed to answering multiple-choice questions. To master this approach, candidates need to practice composing essays, which can be time-consuming. Most of the CFA Level 3 exam topics fall under the area of portfolio management (PM), and the order of the topics consistently reflects this. While there is no requirement to approach the study sessions in any specific order, it is essential to remember that Level 3 takes a more comprehensive approach by integrating PM into most topics.
The difficulty of Level 3 can vary based on the candidate’s finance experience. For example, someone with little investment experience may find the asset management topic challenging, along with other issues that require real-life experience to understand and implement correctly. Finally, Portfolio Management and Wealth Planning are the longest and most voluminous topics, requiring considerable stamina to master.
While the difficulty of each topic on the CFA Level 3 exam can be subjective, some candidates tend to find certain topics more straightforward or easier than others. Some topics that are generally considered easier or more straightforward include:
- 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.
- Behavioral Finance: This topic covers how psychological biases can impact investment decisions and is generally considered more straightforward as it does not involve complex calculations.
- 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
For the 2023 exam cycle, the Level 3 curriculum will remain frozen from that of 2022. Furthermore,as part of CFAI’s evolution 2024 updates, the Level 3 candidates will be offered three versions of the exam: Portfolio Management, Private Wealth, and Private Markets. Each version will have a 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?
| Topics/Weight | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|---|
| Economics | 5-10% | 5-10% | 5-10% | 5-10% | 5-10% | 5-10% |
| Derivative Investments | 5-15% | 5-10% | 5-10% | 5-10% | 5-10% | 5-10% |
| Alternative Investments | 5-15% | 5-10% | 5-10% | 5-10% | 5-10% | 5-10% |
| Ethical and Professional Standards | 10-15% | 10-15% | 10-15% | 10-15% | 10-15% | 10-15% |
| Fixed Income | 10-20% | 15-20% | 15-20% | 15-20% | 15-20% | 15-20% |
| Portfolio Management | 40-55% | 35-40% | 35-40% | 35-40% | 35-40% | 35-40% |
| Equity Valuations | 5-15% | 10-15% | 10-15% | 10-15% | 10-15% | 10-15% |
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