There have been significant updates in CFA Level 3 curriculum content and topic weights since 2018.
In the latest Level 3 curriculum, there are 16 study sessions (38 readings) organized over 6 books.
A common question we get asked in 300Hours Forum is whether candidates should study the topics chronologically, or if there is a better CFA Level 3 study order?
Having passed the CFA Level 3 exam, here’s my view on the optimal order of topics to study (and why).
- The Recommended Study Plan for CFA Level 3 Topics
- 1st: Fixed Income (Book 4, Reading 18-21)
- 2nd: Equity (Book 4, Reading 22-25)
- 3rd: Behavioral Finance & Economics (Book 2, Reading 7-11)
- 4th: Asset Allocation, Derivatives & Currency Management (Book 3, Reading 12-17)
- 5th: Alternative Investment Portfolio Management & Private Wealth Management (Book 5, Reading 26-32)
- 6th: Institutional Investors, Other Portfolio Management Topics & Case Studies (Book 6, Reading 33-38)
- 7th: Ethics & GIPS (Book 1, Reading 1-6)
The Recommended Study Plan for CFA Level 3 Topics
CFA Level 3 is basically mostly Portfolio Management (PM), and the flow of topics follows the PM process:
- Ethics → PM Framework → Asset Class Strategies → Client Needs → Execution → Performance Evaluation
The good news is, CFA Institute confirmed that the design of the readings in each study session do not assume that the candidate approaches the study sessions in any particular order.
However, it is worth remembering that Level 3 is quite different from previous levels, as it has a more holistic approach with PM permeating most of the topics throughout.
Here’s my thought process and strategy on Level 3 topic’s study order:
- Leaving Ethics last: Based on previous experience, this helped with last minute memorization and understanding of this rather dry but crucial topic. The key is to budget sufficient time and not rush through.
- Start strong with a challenging & important topic: Having had a look through the updated content this year, Fixed Income seems to be fit this bill. One may argue that starting with a tricky one is demotivating, but I’d argue otherwise that there is a higher success rate of tackling a heavily weighted, tricky topic with a fresh mind first! Which leads me to the next point…
- Alternating the difficult and easier topics: This ‘sandwich method’ worked for me quite well in previous levels to stay motivated. By alternating trickier and easier topics one after another, it gives a sense of progress and momentum throughout your studies. Crucially, it provides the opportunity to catchup time-wise if you’re lagging behind by blitzing through the lighter topics. Difficulty in this sense is judged not just by content, but more importantly the topic weight.
- Portfolio Management’s flow of topic: As mentioned previously above, Level 3 is unique in the sense that PM pretty much permeates all the topics in this Level and has a natural flow to it that is worth following chronologically.
In short, this led me to the following suggested CFA Level 3 study order:
- Book 4 (Fixed Income & Equity)
- Book 2 (Behavioral Finance & Capital Markets Expectations)
- Book 3 (Asset Allocation, Derivatives & Currency Management)
- Book 5 (Alternative Investment Portfolio Management & Private Wealth Management)
- Book 6 (Institutional Investors, Other Portfolio Management Topics & Case Studies)
- Book 1 (Ethics & GIPS)
1st: Fixed Income (Book 4, Reading 18-21)
My strategy here is to start strong with Fixed Income, simply because it has the second highest topic weight (15-20%) and is one of the trickier topics of Level 3.
Key concepts to focus on this topic area are:
- cash flow matching, duration matching, contingent immunization, rolldown return, rolling yield;
- various durations (money duration, effective duration, key rate duration, modified duration, Macaulay duration, spread duration), convexity;
- butterfly trade, condor trade;
- various spreads (G-spread, I-spread, Z-spread, option-adjusted spread (OAS)).
2nd: Equity (Book 4, Reading 22-25)
After the fixed income section, this should give you a bit of a breather.
Given that Equity is still a big topic area with 10-15% topic weight, this could be the topic where you can really excel in to boost your average score, as it is definitely more straightforward than Fixed Income.
These study sessions are mostly focused on active equity investment strategies and portfolio construction. Most of the 4 readings across 2 sessions are more conceptual, but do remember your various definitions of Value at Risks (e.g. VaR, CVaR, IVaR, MVaR).
3rd: Behavioral Finance & Economics (Book 2, Reading 7-11)
Strictly speaking, behavioral finance is classified under Portfolio Management topic for weighting purposes, but grouped with Economics (capital Markets expectations) in Book 2.
Behavioural finance is quite interesting and readable, mostly lists of things you should remember. Make sure you know the various behavioral biases (Reading 8-9).
Economics in CFA Level 3 is focused on capital markets expectations, and is generally quite approachable. Areas to focus on are:
- the various stages of business cycle and its relationship to inflation;
- the implications of inflation for cash, bonds, equity, and real estate returns;
- the effects of monetary and fiscal policy on business cycles;
- shape of the yield curve, and its relationship with monetary & fiscal policies;
- various methods of forecasting asset returns (Reading 19 is important).
If time permits, these study sessions could benefit from making summary notes for future easy reference. Don’t spend too long a time though and move through these topics quickly for the next few big chapters.
4th: Asset Allocation, Derivatives & Currency Management (Book 3, Reading 12-17)
Just like Book 2, Asset Allocation is classified under Portfolio Management for topic weight purposes, but grouped with Derivatives & Currency Management (5-10% topic weight).
In this book, Derivatives & Currency Management are the more challenging chapters compared to Asset Allocation, despite having 3 readings each. Derivatives readings are also one of the more calculation-focused ones and very testable. So make sure you allocate more time for Derivatives in this book.
5th: Alternative Investment Portfolio Management & Private Wealth Management (Book 5, Reading 26-32)
Now we are about halfway through the curriculum!
Book 5 starts with Alternative Investments (5-10% topic weight), which consists of 2 completely new readings. Overall, these are relatively straightforward, mostly theory-based with some calculations sprinkled throughout. Again, doing summary notes could be useful here (time permitting) for future reference.
Instead, you should concentrate most of your time on the 5 readings of Private Wealth Management, part of the giant Portfolio Management sections (35-40% topic weighting). These PWM topics are focused on private clients’ (including individual) investor policy statement (IPS).
6th: Institutional Investors, Other Portfolio Management Topics & Case Studies (Book 6, Reading 33-38)
The last bit of Portfolio Management consists of 6 entirely new readings (Reading 33-38), but it is not as scary as it sounds.
Book 6 starts off with a large and key chapter on Institutional Investor’s IPS, which you should know well. Performance evaluation is a critical part of the portfolio management process, make sure you are familiar with the ratios for measuring active management (e.g. Sharpe ratio, Treynor ratio, Information ratio, Appraisal ratio, Sortino ratio, Capture ratios). Trade Strategy and Investor Manager selection readings are relatively straightforward.
Finally, the last 2 readings are actually case studies, where you’ll learn how to apply your consolidated knowledge holistically. In a way, they are not readings per se, but a good example of the feel of the exam style questions (although in the real exams you’ll just have mini versions of these case studies).
7th: Ethics & GIPS (Book 1, Reading 1-6)
Saving the ‘best’ for last, Ethics constitutes 10-15% topic weight for the Level 3 exam. That’s joint 3rd place with Equity – do not leave this section too late!
While most material may be familiar, Global Investment Performance Standards (GIPS) is new at this Level, and definitely worth spending time on. You’ll need to know the guidance on Standards I-VII and their application, as it is a popular area to test on.
Remember guys, this is the final challenge. For those candidates who are deemed a borderline case, CFA Institute will factor in the candidate’s score on Ethics, so do make time and effort for this section as has strong influence on a pass or fail.
Hope you found the CFA Level 3 study order above a helpful boost to your Level 3 preparation. Best of luck for exams!
P.S – these resources may be helpful: