Free CFA Level 3 Portfolio Management practice questions
Practise 10 CFA Level 3 Portfolio Management prompts on active equity, fixed income and trade execution, with explanations, model answers and rubrics.
Translate an investment view into portfolio and execution decisions. Work on benchmark-relative risk, equity construction, yield-curve exposure, credit and implementation shortfall. These are distinct pathway examples, not copies of the common-core set.
Write the decision, then the reason
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Use the supplied case facts
Do not invent income, liquidity, tax treatment or a client objective that the case does not give. If a question uses a hypothetical tax rate, use that assumption only for the example. Keep the base currency, time horizon and asset-versus-equity distinction visible throughout your reasoning.
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Your 10-question sample
Ten pathway-focused prompts: five selected-response and five written. They are a learning sample, not a complete pathway mock.
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- Question 1 of 10Active equityMultiple choice
Case facts
A manager has 4% forecast active return and 8% forecast tracking error. Forecasts use the same annual period.
What is the forecast information ratio?
Answer and explanations
Divide forecast active return by forecast tracking error: 4% / 8% = 0.50.
- A: 0.25 understates 4 / 8.
- B - correct: Divide forecast active return by forecast tracking error: 4% / 8% = 0.50.
- C: 2.00 reverses risk and return.
- Question 2 of 10Equity portfolio constructionWritten response
Case facts
An index-oriented manager owns 35 stocks from a 600-stock benchmark. She matches sector weights but substantially overweights small companies within each sector.
Explain two reasons sector matching alone does not establish low active risk.
Model answer and self-review rubric
The concentrated stock list retains idiosyncratic exposures and the small-company tilt introduces a size-factor exposure. Both can generate tracking error even when sector weights match.
Teaching checklist only. No official points or automated grade.
- Question 3 of 10Fixed-income positioningMultiple choice
Case facts
A manager expects a small parallel decline of 25 basis points in yield. A bond has modified duration 6.0. Ignore convexity and spread changes.
What is the duration-only percentage price change?
Answer and explanations
The duration approximation reverses the yield-change sign: -6 x -0.0025 = +1.50%.
- A: A yield decline gives a positive, not negative, price effect.
- B: 0.25% omits duration.
- C - correct: The duration approximation reverses the yield-change sign: -6 x -0.0025 = +1.50%.
- Question 4 of 10Yield-curve positioningWritten response
Case facts
Two bond portfolios have equal market value and overall duration. One concentrates exposure at two years, the other at ten years. The yield curve steepens because ten-year yields rise while two-year yields do not change.
Explain why the portfolios can have different returns despite equal overall duration.
Model answer and self-review rubric
Overall duration summarizes sensitivity to a parallel shift. The ten-year exposure is more affected by the described nonparallel change. Compare key-rate sensitivities and the actual curve move rather than assuming equal returns.
Teaching checklist only. No official points or automated grade.
- Question 5 of 10Trade executionMultiple choice
Case facts
A buy order for 1,000 shares has an arrival price of $40. All shares execute at $40.20 and commission is $10. There is no unfilled quantity.
Calculate implementation shortfall in dollars.
Answer and explanations
Add price slippage on every executed share to commission: 1,000 x ($40.20 - $40) + $10 = $210.
- A: $10 counts commission only.
- B: $200 is price slippage before commission.
- C - correct: Add price slippage on every executed share to commission: 1,000 x ($40.20 - $40) + $10 = $210.
- Question 6 of 10Execution strategyWritten response
Case facts
A manager must buy a thinly traded stock. The investment signal decays quickly, but a market order for the full amount may move the price.
Explain the execution trade-off and one way to manage it.
Model answer and self-review rubric
Trading faster reduces exposure to signal decay and adverse price movement while waiting, but can increase market impact. Use an urgency-aware execution schedule with limits or participation controls, balancing completion risk against impact.
Teaching checklist only. No official points or automated grade.
- Question 7 of 10Institutional liability hedgingMultiple choice
Case facts
A pension sponsor evaluates a bond mandate whose stated purpose is to hedge promised pension cash flows.
Which benchmark best reflects this objective?
Answer and explanations
A liability-based benchmark reveals cash-flow and interest-rate mismatches.
- A - correct: A liability-based benchmark reveals cash-flow and interest-rate mismatches.
- B: An equity index does not measure this liability-hedging objective.
- C: Past peer returns do not define the liabilities to hedge.
- Question 8 of 10Credit portfolio managementWritten response
Case facts
Two bonds have equal interest-rate duration. Bond A is government debt; Bond B is lower-quality corporate debt with material spread sensitivity. The manager expects spreads to widen but government yields to stay flat.
Explain why matching interest-rate duration does not neutralize the forecast risk.
Model answer and self-review rubric
Bond B can lose value when its credit spread widens even with unchanged government yields. Interest-rate duration matching does not remove spread duration, default or liquidity exposures.
Teaching checklist only. No official points or automated grade.
- Question 9 of 10Active shareMultiple choice
Case facts
A two-stock benchmark weights X and Y at 50% each. A fully invested portfolio weights X at 70% and Y at 30%.
Calculate active share.
Answer and explanations
Half the sum of absolute weight differences is (20% + 20%) / 2 = 20%.
- A - correct: Half the sum of absolute weight differences is (20% + 20%) / 2 = 20%.
- B: 40% omits the one-half multiplier.
- C: 70% is the weight in X, not active share.
- Question 10 of 10Performance evaluationWritten response
Case facts
An active equity strategy beats its benchmark by 2% before fees. Fees and transaction costs total 2.4%, and the benchmark return is stated before those strategy costs.
Calculate net active return and explain the investor-facing conclusion.
Model answer and self-review rubric
Net active return is 2.0% - 2.4% = -0.4%. The gross excess return did not cover the strategy costs in this period; evaluate net results over an appropriate horizon and risk context.
Teaching checklist only. No official points or automated grade.
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Sources
The questions and explanations are independently written; the sources below do not endorse these samples.
- CFA Institute Level III format and topic outlines (new tab)
- CFA Institute specialized pathways (new tab)
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