I’ve written a general post on my views on how to approach L3 but I thought I would write one expanding on how to tackle essay questions since nobody seemed to be able to guide me on this when I was starting on L3.
The AM session is “constructed responses” meaning that you have to write out an answer. You will be given 8-15 questions which all come with many sub parts. Each sub part will have a number of minutes associated with it which correspond to the number of minutes (180) in the morning session and these in turn correspond to the number of points available. So an 18 minute question would be worth 18 pts = 10% of your AM points = 5% of your overall exam.
Location, location, location
You will have to write your response in either a space provided below the question or, frustratingly, on lined pages at the end of the question. it is crucial that you write your response in correct place. When the responses are several pages in the booklet beyond the question it adds another level of frustration flipping back and forth. If you need a cautionary tale to reinforce this, click here.
Mock and Practice Exams
Also, none of the practice tests (save the Schweser live mock) use this identical format. The Schweser mocks mostly ask you to write in the space below the question so you don’t get practice flipping back to the lined portion that you will find in the real deal. Also, very annoyingly, the past exams on the CFA website don’t give you any space to answer your questions so you have to simulate with scrap paper. Also, to add to your frustrations in this regard, none of the CFA mock or sample questions include AM style constructed responses so you only get PM practice with these. If you are like me and save that CFA mock for your final practice, this can be a real let down. I simulated it by using an AM session from a prior year but this is not valid since you won’t get a representative spread of topics across AM and PM for your practice purposes.
Read the F***ing Question
As I wrote before, but is worth repeating, sometimes the CFA questions may appear to ask one thing but expect another as a response. In L1 and L2, you could deduce the question’s true meaning from the responses presented. In L3, you may find yourself frustrated when you spent time honing a perfect response only to realise from the model answer that they wanted something else entirely (leaving you with pretty much zero points).
Writing the F***ing Answer
Once you have considered the question, really consider your response. The temptation due to time pressure is to just start writing but you will probably find that this means you spend the first few sentences figuring out what you REALLY want to say. Write as succinct a response as possible i.e. write only the information you need to answer the question (and sometimes this will be only a single sentence). If you give yourself too much rope, you might just hang yourself. Your answers can be bullets or sentence fragments. PRACTICE! The more practice exams you write, the more you will develop an intuition for the kinds of responses that get full marks.
What do the essays test
Almost every past exam has at least one question on an individual investor including IPS and behavioural biases and other things. Remember, one question may have several subparts and may be a significant percentage of the exam. Past exams also usually have an institutional investor question which seem across the years to favour pension funds. Beyond that, they can test ANYTHING. Ethics, you will be glad to know, is almost always tested in the selected response portion in the afternoon (based on past exams and Schweser profs) but GIPS and everything else can be tested ANYWHERE including the morning.
Show your work as I’ve mentioned before. You can receive partial credit if you have forgotten a term or transposed something. This means training yourself to slow down a bit. I’d trained myself to work out calcs largely on the calculator without any writing. I needed to reverse this. It also stinks because in mult choice you can see if you have the write answer - here you cannot so double checking is vital. Also, I was confused on how to show calculations made on a calculator e.g. a time value of money question. In this case, you will actually write out how you process it on the calculator i.e. “FV = -10,000, N = 144, I/R = 10” etc. and then put FV = whatever your answer is.
I mentioned this too before but it bears repeating: The CFA graders grade one question (and its subparts) each. So the person grading Q1 is not the same person grading Q2. Therefore, don’t be afraid to repeat info from Q1 in Q2 if you feel it is necessary to answer the question.
Manage your time
When a question says 4 minutes, look at your clock and only give yourself 4 mins. Move on. It’s easy to get mired in one question. There are some calcs (particularly in the IPS) that are given say 10 mins and there is NO WAY I could get it done in less than 15 mins and then play catch up. As a rule of thumb, give one sentence per minute allocated to the response e.g. a 4 minute question only deserves 4 sentences at most.
The exams you take (both practice and otherwise) should have an index of all the questions and the total number of minutes allocated to each (i.e. the total fo the question’s subpart minute allotments). PAY ATTENTION TO THIS! You may find that the minutes are front or back loaded so you want to have an overview initially of how to plan your attack. I didn’t even get to answer the last 2-3 questions which is a huge percentage but I managed to make up for it in the afternoon. If you come out of the morning devastated and certain you have failed, SHAKE IT OFF, and go kick ass on the afternoon - that’s what saved me I think.
The IPS calculations are not particularly difficult yet they tripped me up almost every time. The key is to find a method of writing out these calculations so that you know WHAT IS PRE- AND POST TAX and where the cash flows are in the timeline. Some of it was not terribly obvious or intuitive to me.
On practice tests, you will be given model answers. These are the perfect answers but by no means the only one. Not only does the grader have discretion (i.e. you may give a convincing argument that is totally different from the model answer) but the model answers and just that: Models. They are the responses that someone with access to the materials and hours to spend on it might write. A shorter, less articulate, less complete answer may still get full marks.
If you don’t know the answer, you won’t get points for answering a question you wish they had asked. Try and use your general knowledge and intuition to answer the question. The most points are awarded for direct answers to the question asked.
There are some constructed responses which have several columns: The first might be statements made in the preceding question, the second might be whether they are true or false and the third might ask you to explain why ONLY if you marked false. These are deceptively tricky since if you get the True or False wrong, they don’t even look at your explanation so pay attention. Also, some of them resemble ethics questions in their ambiguity and you sit there going “well, sort of true and sort of false - it depends”.
On exam day, even the best handwriting starts to look like a dying man’s last words scrawled in blood, sweat, and tears. Don’t worry about this. The graders are used to it and it is rarely the case that something is so badly penned that it cannot be graded. I would recommend writing smaller than usual. When stressed/pressured, my writing gets quite big which means you might fill the allotted space with very few words. This decreases the amount of info you can convey and also leaves you no room for error if you decide you want to correct it if you are writing in pen.
each question has a command word (e.g. explain, define, calculate). The most points are awarded to answers that response directly to this command word so you should familiarise yourself with them. They are on the CFA website here.
Practice makes… well, a better result
The AM portion is a whole study session in itself and you will need time at the end of your reading to get a solid grasp of the kinds of responses required and also practice at a new skill - explaining concepts and ideas in a full thought. If you have a VERY tolerant and patient friend/partner/spouse, try explaining things like asset liability management to them. Otherwise, a study group would be good for this i.e. getting one member to present a topic each week.
Good luck! You’ve passed L2, which is a HUGE hurdle.
Arriving at CFA level 3 exam for the CFA charter is an accomplishment in itself. With a fail rate of around 50% at each level, you have made it where approximately 75% of candidates could not. While the final exam is not one to underestimate, there are some strategic decisions that will make it easier.
There are strategies that will get you through all three exams and those that you will need to change for each test. We will cover those strategies and advice specific to CFA Level 3 exam here and hold the broader suggestions for a future post. We will also look at two different schedules in the strategy post that could aid in planning.
CFA Level 3 Contents, Format and Basic Strategy:
CFA Level 3 exam can be the most intimidating for some because of the essay questions. Unlike the other two levels, you will be asked to take the concepts in the curriculum and develop your own recommendations and solutions. This can be tough for a lot of people and will almost certainly test your ability to manage time during the test. The good news is that the essay section does not have to be overly difficult, you just need to follow some basic preparation strategy. I was actually pretty surprised at how easy it seemed compared to what the monster I had built it up to be before exam day.
CFA Level 3 Exam – For those that can put everything together!
CFA level 3 exam is more conceptual and practically-based than the other two exams, making it easier for those that can put everything together. The morning session of the CFA Level 3 exam has a maximum score of 180 points and will include 10-15 essay questions with as many as 7-8 separate questions within each. Some questions will require that you write on lines directly under the questions, other questions will be answered in a template box on another page. Do not answer the ‘template’ box questions directly under the question on the exam. It will not be graded! It can be confusing answering some questions directly below while others are answered on separate pages so you want to go through and draw a line under the ‘template’ box questions so you are not tempted to put your answers under the question.
CFA Level 3 and time management
Time is many CFA level 3 candidate’s worst nightmare, but it doesn’t have to be. Just because you have five lines or a three-inch by three-inch box in which to answer does not mean that you must use this entire space. Nor does it mean that you cannot use bullets! Graders are not looking for spelling or grammatical ability, only that you understand the curriculum and can put together a solution.
CFA Level 3 – Topic Weight Differences on the Exam
Comparing the topic weights for CFA level 2 and CFA level 3 exam provided by the CFA Institute, there are a couple of things you should note.
- First, it is much harder to concentrate on ‘core’ topics because the Institute rolls up many of the topics into Portfolio Management. This means that, while the percentage weights for Investment Tools shows a zero weighting, these sections are still tested within the 45-55% of the exam under portfolio management.
- The topic weight ranges in Asset Classes is fairly wide and difficult to draw conclusions as well. Fixed Income is given a slightly higher weighting, but only on average. You are guaranteed of seeing at least one essay or item set from each topic, but could get more. This, combined with the fact that no clues are given as to which subjects within each topic are more important, means that you must cover these topics fairly broadly as well.
CFA Level 3 Exam and last three years’ essay exams
Fortunately, CFA level 3 exam revolves around the essay questions and the Institute makes available the last three years’ essay exams for practice. While the Institute changes the questions each year, practicing these essay exams is a great start to building your confidence and understanding of the material.
CFA Level 3 – Which questions to be answered first?
As with CFA level 2 strategy for item set questions, you may want to answer those essay questions which you feel strong in the material. This will get you the points you know, will help you bank some time and help your confidence. What I mean by ‘banking’ some time is that you will be able to do those questions you know in less time than the allotment leaving you more time for the more difficult questions.
Do not spend too much time on relatively low-point questions within the essay section. Time is a problem for many candidates, so If a question is only worth a few points it doesn’t make any sense spending 15 minutes trying to get it right. Spend time on the higher-point items and the easy ones, then return to unanswered questions if you have time.
Another critical point on the essay section is to show your calculations when the question asks for it. The graders are allowed to assign partial credit for correct procedures or partial answers. If you do not show your calculations in the exam booklet, not only will you not get partial credit you may not even get credit for correct answers.
Ethical and Professional Standards is off less importance on the last exam but still two item sets in the afternoon. You should have a good understanding of the Standards, so spend some time understanding the new material and move on to other topic areas.
Economics is again fairly conceptual section other than a few growth and market valuation formulas. The topic is also secondary, so make sure you understand the key points and reasoning then spend your time on other areas.
The asset classes (Alternative Investments, Derivatives,Equity Investments, Fixed Income) are also much less quantitatively intensive at the third exam but still include quite a few formulas. The impetus on the third exam is how these asset classes fit together in a portfolio. A large section is devoted to risk management and how the asset classes each have different fundamentals. Be sure to understand return drivers and risk characteristics for each class.
Focus of CFA Level 3 exam
Portfolio and Wealth Management is the focus of CFA level 3 exam. Your first two essay questions in the morning will be individual and institutional wealth questions. While these specifics of these two questions vary from year to year, there are a limited number of topics that are tested. This makes it extremely important to practice the old essay questions to get a feeling for what and how questions are asked.
Key in this section is the Investor Policy Statement (IPS) and its components. Spend as much time as you need to master this section because it will be big points on the exam. Understand the differences in risk and return needs for the institutional investors as well as their differences in IPS constraints. The biggest aid here is again the past essay exams posted by the Institute. Besides the exams, also available are guideline answers. These are important to get a feel for what the graders are looking for within the questions. Study the answers in detail to see what information you need to write in your own answers.
Joseph Hogue, CFA
Last updated: October 18, 2017 at 3:14 am