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How to Pass the 2021 Level III CFA® Exam: Video Tutorial

By: Kaplan Schweser
January 8, 2021


Now that you’ve passed Level II, it’s time to start preparing for Level III of the CFA® exam. Join Kaplan Schweser as we discuss constructed response, common Level III pitfalls, and strategies for passing.



Video Transcription

2021 video transcript coming soon. For reference, below is the 2020 transcript.

Hello, and welcome to this video on how to pass the Level III CFA®; exam. My name is Stuart Jackman, I’m very happy to be here today, I’m part of the Level III tutor team here at Kaplan Schweser. And just to give a bit of background on myself, I’ve been providing training for the CFA exam, and Level III in particular, for about 12 years now. Prior to that, I was on the buy side in the investment management industry for about 10 years.

I am here today for me to give you lots of direction, and hints, and guidance on how to approach this final stage of your CFA program, and how to maximize the chances of your success. I guess, the first thing I should say is, congratulations. If you’re here watching this video, you’re probably cleared the dreaded Level II.

So, congratulations, that is no mean feat. But first word of warning and first piece of advice, do not kick back and take Level III for granted. I don’t want to be the bringer of doom and gloom, but that might be one of the reasons why the Level III pass rates are still down in the 50s. So, if you think, "I’ve earned my Level II spurs, therefore I deserve Level III, all I need to do is turn up and sign my name,” you might not get the result you want.

The good news is that if you repeat the application, the hard work, if you repeat the heavy question practice and the dedication that you’ve shown to get where you are right now, the chances of getting the result that you want at Level III are very, very high.

So, today we’re going to focus on the most productive way for you to prepare for the Level III exam and take a look at the pitfalls so you can avoid them. We’ll also talk about how Schweser can help you with your exam, you know, that’s a big part of the reason why we’re here as well.

CFA Level III Exam Pass Rates

We estimate that only about 25% to 35% of candidates actually reach Level III, and give it a go. And that is because, of course, the pass rates for previous levels are so low. The pass rate for Level I is round about 40%. And it’s less than half for Level II as well, 45-ish%. You know, you’re looking at 40% of people clearing Level I, 45% of people clearing Level II, all right? So, there right down in the, sort of, you know, 20s already, with regards to people that might do it first time. But of course, people might have success at the second attempt. So, that’s why we estimate only about a quarter to 35% of delegates that actually get through to reach Level III.

Level III Format

You’ll remember that the Level II exam had a vignette, a block of text, that was, on average, one and a half pages long, and you had to answer either four or six questions on that text. What you were being tested on there was the “A” in CFA, the analyst side of things. The way they were presenting that information, was to evaluate your ability to look at a lot of information, some of it relevant, some of it not so relevant, and really, sort of, cut through it and pick out the salient and important points. That is going to play a role in your Level III because it’s all based on case studies that are in front of you.

A vast majority of the exam is really looking at a case, an investment management situation, a client who wants to achieve something, or at least maybe you want to assess what the client needs to achieve. And there’s types of clients, there’s individual clients, there’s institutional clients, and there’s different steps in this process of helping them achieve their goal. That’s what Level III is about. Level III is about putting together the knowledge that you have gained at Level I and Level II and applying it to the situation that is in front of you. If you do this, you will not struggle.

The other thing that is different at Level III is that the morning is in a written format called constructed response. You’re going to pick up your pen and write a response to the examiner in the exam. People often struggle with their technique in writing the constructed response.

The afternoon is multiple choice questions—item sets like in Level II format. These can also be tricky, so, in your preparations, don’t overweight the written portion. Clearly, we’ve got to get comfortable with what this new style of question is, but not at the expense of the three hours in the afternoon.

The other thing that’s different at Level III is that, the morning paper, just the morning paper, is published, all right? It’s a matter of public record. The CFA Institute publishes that paper, and it’s something that you can see. The last three years is usually on the CFA website, that is subject to change, and obviously, we can’t control what they put on their website. But as a Level III candidate, you can usually see the last three years of paper.

Here’s a word that I haven’t used yet, essay. I’m gonna ban the word essay from any discussion about the Level III morning paper, because that’s a myth. Anybody who writes an essay is very likely to not be very successful at Level III. These questions are not, you know, “Credit crunch, discuss, 40 minutes.” That’s just not what happens; they’re very targeted questions.

The examiner reaches out, grabs your hand, takes you to a point in the case, really, and says, “What do you think? What should we do? Should we,” you know, “Is this a good thing, is it a bad thing? Which one of these should we pick? What is the most appropriate theme? What does this client need to do? Out of these three or four things, what would be most appropriate for this client in this situation?”

Level III Curriculum

All right. So, the curriculum. You’re going to see a lot of old friends in the Level III curriculum. Ethics is there. GIPS is there. That’s the Global Investment Performance Standards of the CFA Institute. Behavioral finance is new. Behavioral finance is the psychology of investing. Yes. It is thinking about how we actually behave, rather than how some, sort of, theoretical model says we should behave if we were machines. Of course, we are organic, emotional beasts that make mistakes. And if we all make mistakes in the same way, that could lead to certain results in financial markets that can be explained by psychology, or our ability to think, or otherwise, rather than traditional finance models like CAPM, you know, Markowitz’s, efficient frontier, that sort of thing. So, that’s really interesting.

Ethics, traditionally, has been tested in the afternoon, but you never know, that could change. Behavioral finance has featured quite heavily in the morning, tends to get about 10 to 15 minutes in the morning of your 3-hour exam. And, yeah, you’ve really got to play the exam at Level III. If you know, this will come through when you do your studying later on. But if you know the key ideas that examiner wants you to know and you apply them to the case, very often the answer is a lot more straightforward than you might worry about when you’re reading through the curriculum.

Then you’ve got economic analysis, which is actually referred to as capital markets expectations. So, this is study session four here, capital markets expectations, kind of broken up into a very basic review of economics, sort of, macroeconomics, what drives markets, and the economic cycle. And then a discussion about forecasting, and basic models for forecasting, expected returns, and risk premiums, and so on.

There’s a big section on asset allocation: asset classes, derivatives, and currency management are all in Level III. Fixed income, equity and alternatives, they’re all part of this ecosystem, the role that they play in a portfolio, what types of clients would benefit from them, what types of clients, wouldn’t, okay?

A key part of Level III is the investment policy statement of the client, which is a formal written statement of the client’s objectives and the constraints that they are subject to for an individual client, high net worth individual, or for an institution like a pension fund, or a foundation, or a sovereign wealth fund. That’s a core part of Level III, and you’d expect to see that featuring heavily in the morning. About half, or just less than half, historically, of the Level III morning paper revolves around this IPS process for both an individual and for, maybe, one or two different of institution.

The back-end of the portfolio and wealth planning lifecycle is executing the decisions that have been made along the way, evaluating the performance, due diligencing managers that you’re allocating to externally. These are all parts of the portfolio management process. And that’s what Level III is about, applying this portfolio management process to the case that is in front of you, but in a way that’s granular and targeted. So, for example, 20 minutes is spent on economic analysis, and it’s broken down into 3 or 4 chunks, 5 or 6 minutes each, okay?

So, if you’ve got your curriculum knowledge, and you’re answering the question, and you’re referencing the case in front of you, chances are, there’s not a big discussion to be had about what the right answer is.

Constructed Response Questions: Pitfalls and Suggestions

You know, the classic mistake at Level III is writing too much, and writing stuff that isn’t relevant. That’s what happens when people are nervous. So, you should stay stay focused. The examiner will respect you a lot more if you’re succinct and to-the-point. You justify why what you’re saying is the answer. It’s a very important point, that you justify what you’re saying in that morning paper.

I think a lot of students don’t actually get that. I think some students are getting found out at Level III with regards to their ability to write an exam, a standard answer. But then again, you can kind of throw that into just not doing enough question practice and not working enough on technique. If you dedicate yourself to Level III, your studies at Level III, you’ll get the same result as you got for the previous two levels. So, just take heart from that. CFA is a very fair exam.

If you follow the guidance and the structure of the courses at Schweser, there’s no reason why you can’t have the same success at Level III as you did at Level I and ll. But you do need to get your technique right. That’s what we have been focusing on in this video, and we’ll be focusing on continuously as we go through our courses.

What does the Institute say? The Institute says, well, you know, the constructive response questions in the morning, they have varying structures, and point values typically have several parts related to a case study that describes an investment challenge, and you need to apply the curriculum knowledge to it. Candidate responses require a higher degree of specificity. So, yeah, don’t be afraid of being very specific in your answer, don’t be afraid of being quite curt, and succinct, and to the point. Don’t leave anything out. That’s what the examiner is looking for.

What the examiner doesn’t want is meandering, waffling, people trying to pick up marks, you know, through some sort of alternative path, they’re just not interested in that. These days, there is an answer and you need to justify why you picked it, and that’s your challenge.

The key thing is, you need to get inside the shoes of the advisor, the portfolio manager that is applying this knowledge over here in the curriculum to the case in front of them. You need to answer the question. Now, you might think that’s trivial, but one of the biggest issues at Level III is not answering the question, kind of saying something that you know is correct, hoping that the examiner says, “Well, they didn’t really address the point in hand, but what they said is true so I’ll give them a mark.” No, no marks there. Answer the question, reference the case.

There will be 9 to 12 questions for the constructed response with multiple parts. The morning exam is three hours, so don’t use up too much time at the start of the exam. Generally speaking, about half of the morning paper is focused around the investment policy statement. And that’s applying to an individual, things like tax considerations, concentrated positions, risk management for individuals, and then on to institutions like pension funds, sovereign wealth funds, endowments, foundations, these different kinds of institutions that need portfolio management advice and services.

Make sure that you’re neat and you’re clear…What you’ll get marked down for is not conveying what the examiner wants to hear. Examiners are very clear with their guideline answers. Now, they tend to have these kinds of blocks where you answer question 1, part A, that sort of thing. There’s quite a lot of circling things. So, you have to circle one and justify why you circled it. So, in that sense, there’s still a bit of multiple choice, kind of, style going on.

Now, let’s have a look at a Level III question. This was in the 2018 exam. It was the last question, question 10. Look at this, very specific, it’s part A of question 10, “Support Kinloch’s conclusions regarding corridor widths for equities, commodities,” 6 minutes. So, the idea here is, you look at the marks that are available, six minutes, you divided it up for three for that one, three for that one. You’ve got to support someone’s conclusions. So, there’s some conclusions in the case, and you need to support them from what you know in the curriculum about corridor widths.

From a qualitative perspective, you can use formulas. You can use letters for certain characters, “A” for assets, “E” for equity, “D” for debt, and all that stuff. Those will be very, very reasonable that the examiner will know what you mean. But it’s very important that you write the formula out at the start, and then you use it. If you make a mistake, the examiner can still give you three marks out four, because they can look at what you’ve done and they say, “You know what? You actually had it, but it looks like you read a seven as a two, or something, and so, you just got the wrong answer. So, I’ll give you 3 out of 4,” and that’s 75 percent.

The bottom line is this, you can pass Level III without getting a full question out, you can get partial credit for the first time. No one’s ever gonna go, “Well, you didn’t get the whole thing out, so, zero,” as long as you show your working. Show your thought process and show your working in a calculation.

Preparing for Level III

How do you efficiently prepare for the Level III exam? What are you going to do? How do you maximize the chances of your success? The good news is, subject to all of the, kind of, new ideas that we’ve introduced in this video so far, is: repeat the application and the intense focus on question practice that you had at Levels I and II and you’re going to get the result that you want in all likelihood.

So, yes, well-structured study effort, you do not cram, you do not wait till the last minute, all right? The ideal time to start would be mid-December. Open the books, start doing some refreshing of your Ethics, that sort of thing, that’s a nice segue into Level III, and then really committing to serious study in January so you’re getting a good five and half, six months towards your exam. 300 hours, that’s the famous figure that’s touted out there. When you look at the CFA Institute surveys, they ask people how much work they’ve done. You know, the average at Level III was 328, something like that. I mean, that’s what people say.

I’m always wary of round numbers that apply to everybody. Everybody’s different, but for me, the most key thing, the most important thing is that you target, you must have done this before, target not June, when your exam is, but target a month, ideally six weeks before that, to get through the curriculum. Six weeks before your exam, get through the curriculum. Stop watching videos, stop reading your Schweser notes, and move onto starting to try and memorize stuff, all right?

Don’t worry about not memorizing stuff in January, February, March, April, and so on, but when you get to May, you get through the curriculum in good time, and then you can spend time memorizing stuff and enhancing your question practice technique, doing lots of questions. Put enough time in such that you get through the curriculum videos and Schweser notes, start of May would be ideal, earlier would be even better, okay? You know, that’s a significant investment. And then you’ve got a serious amount of questions to get through after that.

Focus on the losses, the learning outcome statements; think about what you could be asked. Schweser has done that for you, it’s a big, central, kind of, tenet of the way that we prepare our materials, is that we’re really focusing on how you get asked stuff. So, we’re not really focusing on kicking things into the weeds and chasing them to their most intricate extrapolation, we’re not doing that, we’re really focusing on what you could be asked in the exam. And the good thing about Level III is, there’s a lot of visibility, a lot of history that’s publicly available. There’s the visibility that we get from the morning paper being published. It’s also visible from the fact that we can see the learning outcome steps. It’s important that you focus on that in terms of how things can be tested in the exam, but Kaplan Schweser will do that for you.

Exam Study Techniques

There are a lot of pedagogical studies out there that look at the efficiency of different techniques, people who underline study notes, or just go through highlighting them. I always think, when I see study notes like that, that the things that stand out are the things that haven’t been highlighted, which is the opposite of what you’re trying to achieve. And that does bear out in academic studies, that’s pretty low utility with regards to retaining and understanding information.

Does it help to have a specific study space that’s organized and quiet? You might think it does, but rather surprisingly, academic studies tend to show that that doesn’t help, and studying in different conditions gives the brain a good, well-rounded workout, and it helps you on exam day. So, don’t be worried about studying at coffee shops; don’t be worried about studying on the train. But obviously, don’t study at the ballgame, or at the movies, or wherever.

By the way, if we’re talking about effective study methods, I’m a big fan of this one. I actually try and explain things to myself out loud. When you try and say something, if you understand it, you just say what it is. If you don’t understand it, there’s a lot of, sort of…And sometimes, take it from me, all right? Sometimes you don’t even realize that you don’t really get it until you try and explain it yourself. So, I’m a big fan of this one, I really like that one, but that’s just my personal view.

Another technique that has been shown to work is elaborate interrogation, which is thinking, inside your head. “Why does this work? Does it always work? Are there situations where it doesn’t work? Why does it work in this one situation and not another?” It’s really being inquisitive, and by doing that, you’re really kicking the tires of the issue at hand, and you’re not just staring at a bunch of words. And let’s be honest, folks, you need to think about whether you understand stuff as well. If you engage in elaborate interrogation, it allows you to extend where you are to where you want to get. And there isn’t, like, a step jump, or a chasm, where you’re just relying on a formula, remembering a formula or remembering a list of things, but you don’t really understand why it’s there.

Interleaving learning is highly effective. Spread your learning over time through structured study. Take quizzes quite quickly, spread it over time, and don’t be afraid of putting stuff down, letting it drift into the subconscious, but then reviewing it. And mix it up. Rather than just going ethics, and spending, you know, two or three weeks, or whatever it is, two weeks on Ethics, why don’t you interleave Ethics through, you know, make it like, kind of, a journey that you dip in. When your brain is, sort of, frazzled with technical stuff, you can dip in and spend some time with Ethics, have a look at some case studies. So, change of pace, all right? You don’t need to memorize anything, you just need to recognize things, and then you can go back to the formula, you know, the more technical stuff later once you’ve, kind of, refreshed.

Structuring Your Studying

Schweser helps you structure your studies with the activity feed, an automated study planner that helps you get through the curriculum in a good target time. At Schweser, we break readings down into modules; those modules have little tests and little videos that you can watch. And the key thing is that you stay on target, all right? You don’t cram, you set out a study plan and you stick to it.

It doesn’t always feel good. You get to study session 11, 12; you can’t even remember what study sessions 4, 5 were; that’s okay. This process involves a lot of material and a lot of discomfort along the way, and it comes together in the last few weeks. So, stay on target, stay on schedule.

Leave plenty of time for review and exam questions; that’s absolutely key. I would estimate four to six weeks. The good news is, using a prep provider works. You, seriously, have a better chance of passing if you use a prep provider. The other thing that works is getting some time off before the exam. I know we’re not all in the luxurious position of being able to navigate that, but if you can take one week off prior to the exam, the chances of passing go up. And if you take two weeks off prior to the exam, chances of passing go up again.

Use Schweser Notes. These books succinctly summarize information in the curriculum, and really look at how it can be tested so you get up to speed with your exam technique and your exam-relevant information as quickly as possible. There are videos that you can watch along the way to help put some color and put some intuition and context around some of the readings. And then you can do end-of-module questions, end-of-reading problems in the CFA curriculum, very important as you go along the way. Use the QBank as well to really drill down on areas that you’re not comfortable with, areas where you want to see, “How is this tested?” And then move onto the next session, the Schweser notes, when you’re feeling confident, okay?

Remember, you don’t have to be 100% in any area. If you’re confident of 90% of the material in a certain area, keep going, and don’t let any individual topic stop you from passing the exam. There might be unfamiliar areas that don’t sink in for you. If you freeze and get a week behind your schedule, psychologically, it’s damaging, and practically, it’s damaging as well.

What you should do is focus on the basics, or even note something as an area that needs further work, but you keep going. Keep going, stay on target, make sure you get through your topics in good time. There are checkpoint exams to take along the way, which should consolidate your learning, okay. And later on, there are review workshops and practice exams that you should be doing to really consolidate your understanding and enhance your exam technique. A performance tracker on the Schweser portal helps identify where you’re in the red zone and where you need to do more work. And you can use that to drill down in the QBank and practice exams to really help bolster your score. It’s also very important that you do look at actual past exams. They’re out there, they’re publicly available, and there are resources on the Schweser portal that review, relevant, past, and morning exam questions.

Level III Exam Topic Weights

So, here we have topic weights. You’ll remember earlier that I said that the asset classes, so fixed income, equity, alts, and derivs, they get their own weights. You see how important fixed income is at Level III? It’s one of the biggest standalone weights. Ethics is still a big deal, 10–15%, and economics gets a standalone weight as well. But everything else gets lumped into what I call the soup, the portfolio management soup.

Both successful and unsuccessful candidates overweight the surprising questions, which make up about 2% of the exam. These ask something that wasn’t in the curriculum, but can be answered with common sense. It was only two minutes out of 180 minutes, but that’s what people remember. Like I say, they are really just testing the A of CFA, because a good analyst needs to pick something up that they’ve never seen before, and kind of go, “Okay, if I apply a process to this, then it seems sensible that this is what I would say.”

Schweser Level III Exam Preparation Packages

If you’re in the States, there are live classrooms in the States and London. So, depending on where you are in the world, check out your local faculty, and there might be live face-to-face classrooms. There’s live online, internet-based classrooms that accommodate for different time zones. And there are on-demand videos as well, on-demand videos very much like this one, where you’re not actually there, but you’re watching it at your own pace.

These on-demand videos are included in these packages. The most basic package that you could buy is the premium instruction package. You’ll get:

  • A weekly class, either live or live online
  • Schweser notes
  • Practice exams, volumes one and two
  • Access to the QBank checkpoint exams
  • The activity feed that helps you structure your studies
  • The Schweser QuickSheet, which is summarizing key formula, the ability to ask your instructor
  • Resource library
  • PassProtection guarantee. If you come with us and you don’t have the success that you were hoping for, and you followed all of our advice, then there are discounts on any support should you choose to have a second crack at the Level III designation.

One up from the premium package is the premium plus, which gives you access to Schweser’s Secret Sauce, which is kind of an abridged version of the curriculum. And there are late-season reviews, which will really focus in on exam technique and picking up marks on exam day.

Wrapping Up

So, just to wrap up, this is where the sweet spot is. Answer the question in front of you, access the curriculum, from your studies, and make sure you can apply it to the case in front of you. Reference the case, justify why what you’re saying answers the question, and be a sound on the curriculum material itself.

If you commit in seriousness to the Level III program and you partner with us, you are going to be in a very, very strong position, and you should get the same result as what you got the previous two levels. In other words, the people who have done the work here productively get the result that they wanted.

Thank you for tuning in today, I wish you all the best with your studies. And it’s hard not to say good luck, but happy studying.


Looking for more tips on how to pass Level III of the CFA exam? Enroll in one of our CFA Exam Level III PremiumPlus™ or Premium study packages to receive expert instruction and study materials that provide a solid framework for preparing, practicing, and performing on the CFA exam.

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