You’re going to get tired of me saying this, but the level 3 CFA exam is all about the essays. This is the first time you will be asked, not only to pick out the right solution but also to integrate the curriculum and create your own solution. This isn’t to say that the item sets are not important as well, they are still worth half of the exam. But using a condensed study program like FinQuiz will help you get through the afternoon section while spending most of your time concentrating on the morning essays.
The CFA Institute makes available the last three years’ essay questions and guideline answers on their website at: http://www.cfainstitute.org/cfaprogram/courseofstudy/samples/Pages/index.aspx
You should download the exam and the guideline answers to follow along as we work through the questions.
We will practice through all three years’ individual and institutional questions, looking at the guideline answers and learning HOW to approach the 2012 exam. We may cover some of the other essay questions time permitting or if they seem particularly important. You MUST practice through these exams to be ready for the test in June. Not only must you understand the material but you must also be able to be able to provide the solution that the grader is looking for in a timely fashion. ** Write out your practice** Not only will you learn better (active learning) but you will also train your hands to write for up to 3 hours straight without cramping up.
**Following is how I worked through the exam when I took it last year. If certain parts of the system do not feel comfortable to you, then experiment with other ways of doing it. No singular right way exists.**
The first questions in the morning are ALWAYS Individual followed by Institutional portfolio management. Learn these sections, be ready for them on the exam and finish your first two questions with confidence!
Question 1&2 of last year’s exam was a portfolio mgmt problem for the Becker’s. The instructions told you there was a total of 38 minutes (meaning 38 of 180 points as well) and 6 parts (A,B for #1 and A-D for #2).
I skim through the questions for the vignette to get an idea of what I am looking for. (I don’t do this for the item sets because the questions are often more involved and there are six as opposed to 2-4 in the essays). For part A, we have to determine the appropriate trust for each objective, for part B we have to identify who is illustrating the behaviors. Though we now know that we can probably just read the two objectives and the four behavioral/discussion statements I would still read quickly through the scenario to get a feel for the big picture.
** Note where the first questions say Answer Question 1-A in the Template provided on page 5** I would write “TEMPLATE” directly next to the question and underline it to remind myself not to write on the lined answer sheet but in the template boxes. As easy as it may seem to remember, a lot of candidates mess this up and do not get their answers graded because the did not use the template boxes.
Look at the template boxes provided (starting on page 5). This is typical of the template box questions. Three columns with the left being a question/description, the middle column being a multiple choice, and the right column a space to justify why you chose the middle column response.
The key to estate planning is transferring assets with minimal taxes and the specifics of ownership (legal claims, claw back provisions). Objective 1 in the question clearly asks about the tax issue and requires reading some of the vignette to decide taxation of capital gains. Objective two doesn’t even require the candidate to read through the vignette because we know that irrevocable trusts include protection of assets from legal claims because of ownership.
The candidate could just as easily use bullets here with something like:
The revocable trust will minimize total taxes by:
- Current taxes same for both trusts (20%*$1.8 million)
- No estate taxes in irrevocable trust
- Estate taxes not due in revocable until death, then cost basis increased to market value
This cuts the candidate’s writing in half and still gets the point across. Remember, graders are not looking for grammar or spelling. They have a checklist of points they want to see (did candidate mention: mark to market on revocable estate taxes, did they mention current taxes same, etc).
**These type of ‘circle one’ and give a reason questions are usually worth one point for the correct circled answer and the remaining points for your reason. Even if you are not sure (or have no idea) circle an answer and give a couple of intelligent guesses for the reasons. You may guess correctly or get a couple of partial-credit points. The question above (worth six points total) would be worth one point for circling each of the middle-column responses and a total of two points for each of the third-column responses.
The readings for behavioral finance in the level 3 CFA curriculum have changed, so there is little to be gained from going over the answers to part B specifically. Just pay attention to the format of the question. **Notice it asks for circling ONE item in the second column and give ONE reason in the third column. The grader will only look at the first reason given. Even if you know several reasons to explain a selection, you only need to give ONE. Don’t waste time providing information that is not required or will not be graded.
Question 2 represents one of two types of questions you will see on the individual portfolio mgmt section, either a single-period return calculation or required return (multi-period) calculation with IPS questions. This is an extremely important part so we’ll wait to cover it in the next blog post.
Let me know if you have any questions on the essay question covered or generally how to approach the essays.
Thanks for reading. Happy studying,
Joe Hogue, CFA