Top 2 CFA level 3 exam tips

Congratulations, you passed the level 2 exam and are on your way to qualifying! You might be wondering, after reading my first 2 articles on CFA preparation, why you should be reading my tips at all! Maybe I am one of those lucky smart guys, passing exams easily and not having the faintest idea what it feels like to fail an exam.

Don’t worry! After passing the first 2 exams, level 3 turned out to be more challenging than I expected and I had to re-sit. Although I studied like crazy for the exam, this turned out to be insufficient, and I was pretty depressed when the results came out. In hindsight, it was a good life lesson which increased my stamina and helped me to pass the exam 1 year later. For you it is beneficial as well: the best sport trainers are surprisingly not the coaches who have excelled during their sport career, but the ones who have also dealt with failure. Excellent sportsmen usually underperform as a trainer as they suffer from the inability to put themselves in another man’s shoes: if it is so easy for you, why would someone else find it difficult? So hereby the top 2 level 3 exam tips from a (seasoned!) level 3 participant.

1. Morning session – read the questions

This might seem like trivial advice, but it is a vital one: in my opinion CFA level 3 is too much of a reading exam instead of a finance exam. The calculations you are expected to know and the financial instruments you need to be aware of, won’t be as difficult as the dividend discount models or forward rate agreements which you encountered during level 2. Instead, CFA will present you with plenty of text from which you have to distil the relevant information. Whereas in levels 1 and 2, the text was usually restricted to the bare minimum you needed to perform your calcs, CFA will provide you with additional information which is either irrelevant, or needs to be transformed before you can use it. As said before, in my opinion the morning session is sometimes too much of an “understanding English” test, but I am afraid that these are the rules, so you better be aware of them.

A list of the loopholes you can expect to encounter:

  • The inflation adjustment: the question of this type provides a current expense and an asset base so it is quite attractive to derive the required return straight away. However, the required return is derived from the expenses over 1 year time.  E.g. the current annual pre-tax income need is 100,000, and the long term inflation rate is 2%. Hence to determine the annual required return, increase the current expense with inflation and divide by the asset base to derive the required return.
    A variation on this theme is the following: “family expenses last year were 150,000”. Again, ensure that you adjust these expenses with inflation before you determine the required return.
  • The irrelevant expense: CFA will try to trick you by providing a stream of expenses in numbers and then mention somewhere in the text that one of these expenses is irrelevant when calculating the required return. E.g. “Mister X has expected health expenses of 10,000 a year…. His employer covers health insurance”. CFA will make it even more appealing to ignore the last sentence, by mentioning the expense as a numerical value, while mentioning the irrelevance of the expense as a non-numerical item. It is hence quite natural in these portfolio management questions to sum up all expenses, determine the asset base and derive the required return. Don’t fall into the trap of quickly adding everything, but read the text carefully to determine if some of the expenses are redundant or if there are any offsetting income and expense items.
  • The pension payment that doesn’t mean anything: question 1 in the morning 2006 exam is quite exemplary. A football player has retired at age 35, has an asset base of €44mln, and annual expenses of €2mln. The question was “calculate the required return during his first year of retirement”.
    From a sensible point of view you would reason the following: you estimate the life expectancy, and based on that determine the required return. E.g. suppose the expected age is 80 years, time horizon is hence 45 years, expenses €2mln, and asset base €44mln, therefore the required return would be 3.62% + inflation adjustment.
    However, the “correct” CFA answer is 2mln/44mln is 4.55% + inflation adjustment. This implies that the football player retains his asset base until death, even if this requires a higher return, and hence a more risky investment strategy.
    Again reading the question correctly, leads to the correct answer, as the client wants to “maintain the real value of his portfolio during retirement”. Although estate tax in Europe is sky-high, and hence it does not seem to make a lot of sense to preserve €44mln, this is not reflected in the question.

2. Afternoon session – Take it SLOW

The CFA level 3 afternoon session is the odd man out compared to all other sessions: it will be the only session in which you won’t face any time pressure (unless you fall asleep!). You will have 10 item sets consisting of 6 questions each totalling 60 questions in total. Due to the limited number of choices (A, B, C), and the 2 ethics items which won’t take too much of your time, you can easily become overconfident and race to the finish line in no time, which is actually pretty close to what happens in reality! Don’t be surprised to see people handing in their afternoon work after 90 minutes (something quite impossible during one of the other sessions). The reward looks indeed very attractive: you have spent 3 times more than 200 hours studying and can now finish it off quickly, so let’s get it over with! The same mistake I made, which made me have to re-sit the exam…

Hence, take your time, take it slow, and don’t get disturbed when other people are leaving: as mentioned under bullet 1, CFA level 3 is mainly a reading exam, so CFA will treat you with some nice loopholes. Hence, read the questions slowly and carefully, don’t get relieved when your expected answer is listed (this is the only exam you have plenty of time to check your calcs!) but look over the question again and ask yourself if this is really what they are looking for.


Although the level 3 exam is not as difficult as level 2, it is probably the hardest to pass as your competition will be fierce as everyone still around is determined to get it over with. Hence, don’t get depressed when the first time doesn’t work out for you, but learn from your mistakes and improve the year after.

One final advice: CFA will contact you after the exam to check if you want to sign up for membership. CFA will claim that due to exam results, signing up after the exam results will become public, will be more time consuming as plenty of people will sign up for membership. Resist the temptation (even when you think you have done really well) and wait until your exam results are out.


About Servaas Houben

I am a Dutch actuary and worked in the Netherlands for the first 4 years of my career. Thereafter, I worked for 2 years in Dublin and 4 years in London. I am now heading the actuarial department of ENNIA in Curacao.
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