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CFA Level III Updated
How much diversification benefit do international equities actually provide?
International equity diversification still provides modest volatility reduction (~1–2 percentage points) and protection against country-specific shocks, though global correlations have risen to 0.78.
What is a GP-led continuation fund?
A GP-led continuation fund moves trophy assets into a new vehicle, offering existing LPs cash-or-roll choice, with strict conflict protocols.
What are bespoke CDS portfolios and how do they differ from standardized indices?
Bespoke CDS portfolios are customized synthetic credit baskets for specific investors, contrasting with standardized indices that have fixed constituents...
What is the mortality credit in an annuity and why does it matter?
Mortality credit is the extra yield an annuity pays above the risk-free rate because annuitants who die early subsidize those who live long.
How do I tune the proposal distribution in Metropolis-Hastings?
Acceptance rate diagnoses proposal quality. Target 23.4% for multi-dimensional problems. Too high means proposal too narrow; too low means proposal too wide...
How should an advisor manage a Passive Preserver client?
The Passive Preserver (PP) is low risk tolerance + emotional biases. Example: Ingrid Solvaag, 71-year-old widow with $5.8M inherited. Dominant biases: loss aversion, endowment, status quo, regret aversion. Advisor approach: MODERATE not educate — IPS 30-40% equity, heavy liquidity buffer...
What is regime-based dynamic asset allocation?
Regime-based DAA adjusts weights based on identified economic/market regimes (growth/inflation quadrants, cycle phases). Longer horizon than TAA, more active than SAA.
What is loss aversion and how does it distort portfolio decisions?
Loss aversion makes losses feel twice as painful as gains feel good. It drives the disposition effect, under-diversification, and panic selling. Mitigate via longer reporting horizons and IPS rules.
What are the main implementation issues with risk parity strategies?
Risk parity sets weights so each asset contributes equally to total portfolio risk, but has leverage, correlation, liquidity, and benchmarking issues...
How should multi-stage time horizons be described in the IPS?
Multi-stage horizons list each stage with objective. The shortest stage with a critical goal binds the low-risk sleeve; longer stages tolerate more risk. Goal-based allocation responds.
When do you need a particle filter instead of a Kalman filter?
Particle filters (sequential Monte Carlo) approximate the posterior distribution of hidden states by a cloud of weighted samples. Each particle represents one possible state trajectory...
How do I incorporate long-term care insurance into a retirement plan?
LTC analysis: quantify risk, assess self-insurance viability, compare traditional vs hybrid vs annuity-linked policies...
How do I set up a key rate duration hedge for a bond portfolio?
Decompose portfolio duration into 2/5/10/20/30Y KRDs. Compute DV01 at each point and short matching Treasury futures contracts.
How does herding behavior manifest among institutional investors and what are the market consequences?
Herding among institutional investors is more nuanced than simply 'following the crowd.' Professional fund managers herd for several rational and behavioral reasons, and the effects on markets can be significant.
What are soft dollars and when are they acceptable under CFA Institute standards?
Soft dollars are the practice of using client brokerage commissions to pay for research services beyond execution. CFA Institute permits soft dollars for research that benefits clients, but prohibits their use for administrative overhead, marketing, or personal expenses.
What are the main criticisms of MVO and how do you address them for CFA Level III?
MVO is highly sensitive to inputs, produces concentrated portfolios, and assumes a single period with normal returns. Key fixes include reverse optimization (Black-Litterman), shrinkage estimation, resampled MVO, adding constraints, and Monte Carlo simulation.
How are PE fund secondaries priced?
Secondaries price as a percent of reported NAV, discounted for staleness, duration, GP quality, and unfunded commitment.
How do CDS index tranches work and what risks do equity, mezzanine, and senior tranches carry?
CDS index tranches slice the default loss distribution into layers. Equity tranche absorbs first 3% of losses, mezzanine layers follow, super senior sits at top...
How do I integrate human capital and financial capital in a total-wealth framework?
The integrated total-wealth framework treats human capital as an asset on the investor's balance sheet and optimizes financial-capital holdings.
How does Gibbs sampling work and when is it preferred?
Gibbs sampling is an MCMC method that cycles through parameters, sampling each from its full conditional distribution given all others. When full conditionals have known form...
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