AnalystPrep's Level III of the CFA® Exam Mock Exams

Achieving success in the Level III CFA exam requires more than just long hours of study. It demands effective application of knowledge, emphasizing practical proficiency.

AnalystPrep’s Level III mock exams for the CFA Program are specifically tailored to align with the most recent exam format, incorporating both essay-type cases and multiple-choice questions, reflecting the style and complexity of past exams administered by the CFA Institute®. Engaging in these comprehensive simulations is crucial for candidates, as they replicate the varied formats they will encounter in the actual exam. It has been consistently observed that candidates who practice with these mock exams show superior performance in the final exam compared to those who rely solely on traditional study methods. We strongly recommend these practice exams as a vital strategy to familiarize oneself with the nuances of the real exam environment, including time management and topic mastery in both written and multiple-choice formats.

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Start your Level III CFA exam preparation with AnalystPrep’s mock exams for the CFA Program today, and give yourself ample opportunity to refine your skills, bolster your knowledge, and elevate your performance.

The Whitakers

Kenn and Kelly Whitaker, a couple aged 35 and 38, meet Julian Sands, their new investment adviser. Throughout their careers, Kenn and Kelly have worked for Wallstreet Group, a multinational security company. The couple has two children who will begin high school soon.

Sands evaluates the Whitakers’ financial situation. Investments in their portfolio consist of ¥950,000 in stocks and ¥650,000 in fixed-income securities. WG shares account for 75% of their stock portfolio. Also, they own real estate worth ¥550,000, with a mortgage debt of ¥350,000. The Whitakers’ future expected consumption expenditures have a total present value of ¥850,000, and their pre-retirement earnings from WG are valued at ¥1,300,000.

The Whitakers aim to spend ¥350,000 on their children’s high school education. Furthermore, they plan to establish an endowment fund at their alma mater in 10 years, estimated to cost ¥400,000. In their communication with Sands, they expressed their desire to finance the endowment fund with high certainty. Based on this information, Sands creates a Whitaker economic balance sheet.

Determine Whitaker’s economic net worth using the economic balance sheet method. Show your workings.

Using an economic balance sheet approach, determine which of Whitakers’ current financial assets is the most concerning from an asset allocation perspective.

According to Sands, the Whitakers’ previous adviser specified the following asset classes in their financial plan.

Equity: Japan’s equities

Debt: Real estate and corporate bonds of investment-grade around the world

Derivatives: Foreign equities primarily with large capitalizations

The former adviser’s report indicates that equity returns and derivatives are highly correlated. There is, however, a weak correlation between the returns on debt and those on equity and derivatives.

Among Whitakers’ asset classes, Sands believes the portfolio has overlapping risks due to the asset allocation strategy their previous financial adviser employed. To determine the portfolio’s optimal exposure to each risk factor, Sands intends to analyze its sensitivity to inflation, liquidity, and volatility.

Based on Sands’ belief that the previous adviser’s asset class specifications for equity and derivatives are inappropriate, the asset classes should be:

1. Diversifying
2. Mutually exclusive
3. Relatively homogeneous

Mention the appropriate answer and justify your explanation.

For moderately important objectives, Sands recommends mixing 80% global equities and 20% bonds for a 15-year period to balance expected return and risk. Exhibit 1 presents relevant data for three potential portfolios. Sands advises the Whitakers to consider one of the portfolios for their asset allocation strategy, according to their goals.

$$ \textbf{Exhibit 1: Whitaker Family Portfolio Allocations} \\
\begin{array}{c|c|c|c|c}
\textbf{Portfolios} & \textbf{Cash} & \textbf{Fixed} & \textbf{Global} & \textbf{Diversifying} \\
& & \textbf{Income} & \textbf{Equities} & \bf{\text{Strategies}^{\ast}} \\ \hline
A & 40\% & 60\% & 15\% & 0\% \\ \hline
B & 15\% & 20\% & 70\% & 15\% \\ \hline
C & 15\% & 35\% & 45\% & 25\% \\ \hline
\end{array} \\
\textbf{Note: } {{}^\ast} \text{ Investing in hedge funds is part of diversifying strategies} $$

Based on Exhibit 1, determine the portfolio that best meets the Whitakers’ education goal for their children. Explain your answer.