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Page 122022 Mock Exam #2 Full Guideline AnswersLevel IIIAnswer Question 3-A on This Page (cont.)Based onVancaeyezeele’sanalysis, for three of thecomponents ofimplementation shortfall,determine which brokeris preferable.(Check one foreach component)MoreauOpportunity costFTCannot be determinedExplain each choice.Opportunity cost is the lost appreciation/depreciation of the stock price for unfilledshares. For unfilled shares on a purchase, theopportunity cost is positive if the cancellationprice is above the original decision price, andnegative if the cancellation price is below theoriginal decision price. For unfilled shares ona sale, the opportunity cost is positive if thecancellation price is below the originaldecision price, and negative if the cancellationprice is above the original decision price. Notethat Vancaeyezeele’s observation about thecancellation prices ensures that if there areunfilled shares on any trade, the opportunitycost is positive.The average percentage of trades executedfully (for which the opportunity cost is zero)when using Moreau is:42 70%60while the average percentage with FT is:46 77%60When the potential opportunity cost is knownto be positive, more trades executed fully isbetter than fewer trades executed fully; fullyexecuted trades have zero opportunity costs. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Level III2022 Mock Exam #2 Full Guideline AnswersPage 13Answer Question 3-A on This Page (cont.)Based onVancaeyezeele’sanalysis, for three of thecomponents ofimplementation shortfall,determine which brokeris preferable.(Check one foreach component)Explain each choice.However, for the trades executed only partially(which have nonzero opportunity costs), whenusing Moreau, the average portion of an orderthat is unfilled is:11% ( 100% 89% )MoreauOpportunity costFTCannot be determinedWhen using FT, the average portion of anorder that is unfilled is:22% ( 100% 78% )When the potential opportunity cost is knownto be positive, having less of an order unfilledis better than having more of it unfilled.Therefore, the percentage of trades executedfully argues for FT, but the percentageexecution for less-than-fully-executed tradesargues for Moreau. Overall, it is impossible tosay which is better 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Page 142022 Mock Exam #2 Full Guideline AnswersLevel IIIAllocation of marks:For each component:1 mark for checking the correct broker2 marks for a correct explanation for that choice(Note: no marks are earned for justifying an incorrect choice.)Reading:Trade Strategy and ExecutionLOS g: Explain how trade costs are measured and determine the cost of a trade. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Level III2022 Mock Exam #2 Full Guideline AnswersPage 15Answer Question 3-B on This PageFor each manager,determine whichalgorithmic tradingapproach is mostappropriate.(Check one foreach manager)ScheduledOpportunisticAl-QallafArrival priceDarkSORJustify each selection.Al-Qallaf has a large trade, is willing to use marketorders, and wants to ensure that the entire trade is filled.Opportunistic, or liquidity-seeking, algorithmic strategiesare useful for large trades, as they use multiple venues(both lit and dark), tend to use market orders morefrequently than limit orders, and, therefore, tend toensure that the entire order is filled.Scheduled algorithms (POV, VWAP, and TWAP),arrival-price algorithms, and smart order routers (SORs)are best suited to small trades, so they are inappropriate.Dark pool algorithms can handle large trades, but aremore likely to leave part of the trade unfilled as theyavoid lit venues. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Page 162022 Mock Exam #2 Full Guideline AnswersLevel IIIAnswer Question 3-B on This Page (cont.)For each manager,determine whichalgorithmic tradingapproach is mostappropriate.(Check one foreach manager)ScheduledOpportunisticTrọng HoàngArrival priceDarkSORJustify each selection.Takano has a small trade for which he wants to use alimit order on a security that trades on multiple venueswhere the best price can change quickly andunpredictably. He won’t complain if a portion of theorder goes unfilled.A smart order routing (SOR) algorithm is designed tohandle small orders on securities that trade on multiplevenues, when the best price can switch from one venue toanother quickly and unpredictably. Furthermore, it canhandle either market or limit orders. However, SORs canoccasionally leave orders less than 100% filled.Neither scheduled algorithms, opportunistic algorithms,arrival price algorithms, nor dark pool algorithms aredesigned to handle trades when the best price can switchfrom one venue to another quickly and unpredictably.Allocation of marks:For each manager:1 mark for checking the correct algorithm3 marks for a correct explanation for that choice(Note: no marks are earned for justifying an incorrect choice.)Reading:Trade Strategy and ExecutionLOS d: Select and justify a trading strategy (given relevant facts). 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Level III2022 Mock Exam #2 Full Guideline AnswersPage 17Answer Question 4-A on This PageDetermine whichmanager is mostappropriate for theFoundation.(Check one)Support your selection with two reasons.For each manager not selected, state one reason that that manager isinappropriate.Either one of these reasons would suffice: PavónPavón’s large, negative size exposure indicates that her portfoliohas a large-cap tilt. However, the committee believes that largecap markets are efficient while small-cap markets might not be,suggesting a preference for a small-cap tilt over a large-cap tilt.– or – Pavón has a strong, positive exposure to momentum, which isgenerally considered a technical factor. The committee does notbelieve in technical analysis, so it would likely prefer a smallmomentum exposure.(Note that the equity reading does not specifically identify momentumas a technical factor, so the second bullet point is likely much weakerthan the first.)JimenezMoya Jimenez has a consistent, positive size exposure, indicating asmall-cap tilt. The committee believes that small-cap marketsmay be inefficient and, therefore, provide opportunities forenhanced returns. Jimenez’s factor exposures have not changed significantly overthe two periods covered by the exhibits, suggesting that she doesnot engage in market timing; the committee expressly does notendorse market timing. The large changes in Moya’s factor exposures (market beta: 1.28 0.97, size beta: 0.25 0.44, value beta: 0.20 0.16,quality: 0.24 0.11) suggest that he engages in markettiming, which the committee expressly does not endorse. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Page 182022 Mock Exam #2 Full Guideline AnswersLevel IIIAllocation of marks:1 mark for checking “Jimenez”2 marks for each correct reason (up to two reasons) supporting the choice of Jimenez(Note: no marks are earned for supporting an incorrect choice.)For each inappropriate manager:2 marks for one correct reasonReading:Active Equity Investing: StrategiesLOS d: Analyze factor-based active strategies, including their rationale and associatedprocesses. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Level III2022 Mock Exam #2 Full Guideline AnswersPage 19Answer Question 4-B on This PageDetermine, from the methods that Craane is considering, the most appropriatemethod for constructing the Foundation’s core equity portfolio.(Check one)Full replicationStratified samplingOptimizationJustify your response.The value of the Fund’s equity portfolio is USD 97.5 million, so the value of the core portfoliois 60% USD 97.5 million USD 58.5 million. With approximately 1,700 stocks in theMSCI World Index, that gives an average of approximately USD 34,400 per stock, which maynot be sufficient for full replication. Furthermore, full replication with 1,700 stocks will incursubstantial transaction costs for establishing and rebalancing the portfolio, which isinconsistent with the investment committee’s goal of minimizing transaction costs. Therefore,full replication is not an appropriate choice.Stratified sampling will reduce the transaction costs for establishing and rebalancing theportfolio, and, with 1,700 securities from which to choose, it should be possible to construct aportfolio with substantially fewer securities that still tracks the benchmark quite closely. Aportfolio of, say, 500 stocks will meet the minimum requirement of 300 securities, will likelyhave a low tracking error (if the stocks are chosen carefully), and will have transaction coststhat are roughly ⅓ that of full replication. Furthermore, stratified sampling does not involvecomplicated algorithms that would be difficult for committee members to understand.Therefore, stratified sampling is an appropriate choice.Optimization involves complex algorithms that may be difficult for the investment committeeto understand, so optimization is not an appropriate choice. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Page 202022 Mock Exam #2 Full Guideline AnswersLevel IIIAllocation of marks:1 mark for checking “Stratified sampling”1 mark for one reason that full replication is inappropriate2 marks for one comprehensive reason that stratified sampling is appropriate1 mark for one reason that optimization is inappropriateReading:Passive Equity InvestingLOS d: Compare the full replication, stratified sampling, and optimization approaches forthe construction of passively managed equity portfolios. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Level III2022 Mock Exam #2 Full Guideline AnswersPage 21Answer Question 4-C on This PageCharacteristicDiscuss four characteristics of Craane’s proposed portfolio thatfail to meet the investment committee’s guidelines.The proposed portfolio’s return is insufficient. The return net of fees is 9.61% calculated as:10.21% 0.60% 9.61%The excess return over the benchmark return is therefore 0.83% or 83 bps, calculated as:9.61% 8.78% 0.83% 83 bps83 bps is less than the 100 bps guideline excess return set by the investment committee.CharacteristicThe proposed portfolio’s standard deviation of returns is too high. The guideline standarddeviation of returns set by the investment committee is 10.93% calculated as:0.9 (12.14% ) 10.93%The proposed portfolio’s standard deviation of returns is 11.18%, which is greater than10.93%.Alternatively,11.18% 92.1% 90%12.14%CharacteristicThe tracking error of the proposed portfolio exceeds the guideline tracking error set by theinvestment committee:6.25% 6.00% 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Page 222022 Mock Exam #2 Full Guideline AnswersLevel IIIAnswer Question 4-C on This Page (cont.)CharacteristicDiscuss four characteristics of Craane’s proposed portfolio thatfail to meet the investment committee’s guidelines.The allocation to the consumer staples sector deviates too much from the benchmarkallocation. The deviation is 5.5% calculated as:14.0% 8.5% 5.5%This deviation exceeds the maximum deviation of 5.0% set by the investment committee.CharacteristicThe proposed portfolio’s annual turnover of 8.37% does not minimize transaction costs. The8.37% turnover is substantially greater than the benchmark’s annual turnover of 2.11%.Note: any four of these characteristics are sufficient.Allocation of marks:For each characteristic:1 mark for identifying the characteristic1 mark for explaining or justifying the characteristic(Note: no marks are earned for explaining an incorrect characteristic.)Reading:Portfolio Management for Institutional InvestorsLOS h: Evaluate the investment portfolio of a private DB plan, sovereign wealth fund,university endowment, and private foundation. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Level III2022 Mock Exam #2 Full Guideline AnswersPage 23Answer Question 5-A on This PageIdentify one limitation of historicalestimates and two data measurementerrors/biases that Kozak has faced.Limitation of historical estimatesRegime change / nonstationarityJustify each response with one reason based solelyon the information given.Kozak has had to translate foreign currency valuesbefore, during, and after hyperinflation into domesticcurrency values.Economic conditions changing from normal inflationto hyperinflation or vice versa constitutes a regimechange.Data measurement error/biasTranscription errorKozak has had to correct a return reported as 41.7%(which should have been 14.7%).Clearly, the reported number switched the “1” andthe “4”, which is a transcription error.Data measurement error/biasSurvivorship biasKozak has had to try to get meaningful risk andreturn values from index data when many of theconstituent companies have gone out of business.When a company included in an index goes out ofbusiness, it drops out of the index, so the index nolonger reflects its lack of profitability. Consequently,the index returns are biased upward. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Page 242022 Mock Exam #2 Full Guideline AnswersLevel IIIAllocation of marks:For each item:1 mark for identifying a correct limitation/error/bias2 marks for one correct justification(Note: no marks are earned for justifying an incorrect limitation/error/bias.)Reading:Capital Market Expectations, Part 1: Framework and Macro ConsiderationsLOS b: Discuss challenges in developing capital market forecasts. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Level III2022 Mock Exam #2 Full Guideline AnswersPage 25Answer Question 5-B on This PageEvaluate each of the statements (Mora’s and Williams’).MoraMora’s statement is inaccurate.Mora is correct that econometric models can be difficult and time-consuming to create, and heis also correct that they generally give quantitative estimates of the impacts of changes in thevalues of exogenous variables (exogenous shocks).He is incorrect when he states that econometric models generally forecast economic turningpoints well. In fact, econometric models are generally poor at forecasting economic turningpoints.WilliamsWilliams’ statement is accurate.Williams is correct that a leading economic indicator (LEI) approach is generally good atforecasting turning points; indeed, that is the very definition of LEIs: that they reach a turningpoint before the economy as a whole does.She is also correct about having to be careful about forecasts made when LEI data are firstreleased. Because the data are revised frequently, the corresponding forecasts may have to berevised as well. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Page 262022 Mock Exam #2 Full Guideline AnswersLevel IIIAllocation of marks:For each statement:1 mark for stating a conclusion: whether the statement is accurate or inaccurate2 marks for justifying the conclusion(Note: no marks are earned for justifying an incorrect conclusion.)Reading:Capital Market Expectations, Part 1: Framework and Macro ConsiderationsLOS e: Compare major approaches to economic forecasting. 2022 Financial Exam Help 123 All Rights ReservedCFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA andChartered Financial Analyst are registered trademarks owned by CFA Institute.

Level III2022 Mock Exam #2 Full Guideline AnswersPage 27Answer Question 5-C on This PageBased on the data in Exhibit 1, determine the Eurozone’s expected long-term annual d

2022 Level III Mock Exam . Page 2 2022 Mock Exam #2 Full Guideline Answers Level III 2022 Financial Exam Help 123 . CFA Institute does not endorse, promote or warrant the accuracy or quality of Financial Exam Help 123 . CFA .