2019 CFA Program: Level III Errata - CFA Institute
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2019 CFA Program: Level III Errata
17 April 2019
To be fair to all candidates, CFA Institute does not respond directly to
individual candidate inquiries. If you have a question concerning CFA
Program content, please contact CFA Institute (info@cfainstitute.org)
to have potential errata investigated.
• The eBook for the 2019 curriculum is formatted for continuous flow, so the text will fit all
screen sizes. Therefore, eBook page numbering—which is linked to section heads—does
not match page numbering in the print curriculum.
• Corrections below are in bold, and new corrections will be shown in red; page numbers
shown are for the print volumes.
• The short scale method of numeration is used in the CFA Program curriculum. A billion is
109 and a trillion is 1012. This is in contrast to the long scale method where a billion is 1
million squared and a trillion is 1 million cubed. The short scale method of numeration is the
prevalent method internationally and in the finance industry.
Volume 1
Reading 3
• The solution to practice problem 38 (page 232 of print) should read as follows: “C is
correct. All actual and potential conflicts of interest must be disclosed. Although Riser’s
recommendation may be based solely on his knowledge of the firm’s track record, his
prior relationship with Komm, including the job offer, should be disclosed so the
subsidiary will have all the information needed to evaluate the objectivity of his
recommendation.”
Volume 2
Reading 7
• The last paragraph of Example 3 (page 40 of print) should read as follows: “… but
cannot tolerate the portfolio declining below 1,800,000 euros. Construct the BPT optimal
portfolio for each investor. Construct the optimal portfolio for the first BPT investor. In
addition, evaluate whether the second BPT investor’s portfolio is optimal if the
investor puts 1,568,627 euros in layer 1 and 431,373 euros in layer 3.”
Reading 11
• Section 3.3 (pages 243 through 245 in print) should be marked optional and is therefore
nontestable.
Reading 12
• Section 4.1.3 (pages 293 to 294 of print) should be replaced with the following text:2
Reading 14
• In Example 1 (page 384 of print), the line defining y should read “y = risk premium
associated with occupational income volatility”
Volume 3
Reading 18
• In the paragraph after Example 4 (page 200 of print), the third sentence should read as
follows: “In financial theory, it is the portfolio that minimizes diversifiable risk, which in
principle is uncompensated.”
• In Example 8 (page 218 of print), The first paragraphs should read as follows: “The table
shows a simple four-asset strategic mix along with rebalancing ranges created under
different approaches. The width of the rebalancing range under the proportional
3range approach is 0.20 of the strategic target. State a reason that could explain
why the international equity range is wider than the domestic equity range using the
cost–benefit approach.”
Reading 19
• In the paragraph under the variable list for Equation 1 (page 232 of print), add the
following between the second and third sentences: “(In using Equation 1, omit %
signs.)”
• The first row of Exhibit 20 (page 264 of print) should have “Treasury bonds” in the first
column and “Long-term Treasury bonds” in the second column. The rest of the table
remains the same.
• In Section 4.4, the second-to-last sentence before Exhibit 38 (page 293 of print) should
read as follows: “In Exhibit 38, liquidity is measured as one minus the ratio of the
average number of days …”
• Practice Problem 2 (page 315 of print) should be rewritten as follows: “For clients
concerned about rebalancing-related transactions cost, which of Beade’s
suggested changes in the corridor width of the rebalancing policy is correct? The
change with respect to:” The solution (page 318 of print) should be rewritten as
follows: “A is correct. Theoretically, higher-risk assets would warrant a narrow
corridor because high-risk assets are more likely to stray from the desired
strategic asset allocation. However, narrow corridors will likely result in more
frequent rebalancing and increased transaction costs, so in practice corridor
width is often specified to be proportionally greater the higher the asset class’s
volatility. Thus, higher-risk assets should have a wider corridor to avoid frequent,
costly rebalancing costs. Her other suggestions are not correct. Less liquid asset
classes should have a wider, not narrower, corridor width. Less liquid assets
should have a wider corridor to avoid frequent rebalancing costs. For taxable
investors, transactions trigger capital gains in jurisdictions that tax them. For
such investors, higher tax rates on capital gains should be associated with wider
(not narrower) corridor widths.”
Volume 4
Reading 23
• In Example 7 (pages 84 to 86 in print), the first paragraph of the Solution to 2 should
read as follows: “…as illustrated in Exhibit 16. If the view is that the swap rate will
exceed 3.80%, either the purchased receiver swaption or the swaption collar would
be preferred. The swaption collar would be preferred if the rate is expected to be
between 3.80% and approximately 4.25%. The purchase receiver swaption will be
preferred only if the swap rate is expected to be somewhat above 4.25%, in which
case its loss is limited to the premium paid.”
• In the numbered list before Example 9 (page 94 of print), list item 3 should read as
follows: “The time period is then multiplied by the vertex’s proportionate share of the
index. (The first cash flow at 6 months is equal to 1; the second cash flow at 12 months
is equal to 2; the third cash flow at 18 months is equal to 3, etc.) Because each cash
flow represents an effective zero-coupon payment in the corresponding period, the time
period reflects the duration of the cash flow. For example, if the third vertex represents
43% of all cash flows, the third period’s contribution to duration might be 1.5 years x
3.0%, or 0.045.”
• The solution to practice problem 8 (pages 120 to 121 of print), should read as follows:
“…This situation might allow such a divergence to persist to a much greater degree for a
bond ETF than might be the case in the equity market.”
Reading 24
• In Example 5, the calculation for CM yield change (page 181 of print) should equal –
1.07%.
• On page 204, immediately preceding Exhibit 74, the text should read as follows:
A positive (negative) “twist” is a flattening (steepening) of the curve, while in a positive
(negative) “butterfly,” the two ends of the curve move downward upward (upward
downward) and the middle of the curve moves upward downward (downward upward).
These three empirically derived movements correspond well with the more stylized
movements emphasized in the earlier discussion of trading strategies.
On pages 205 and 206, Example 8:
Delete questions 2, 3, and 4 and their solutions, and modify the Solution to 1 to read as
follows:
Although the portfolios all have the same effective duration, the impact of the shift factor
is largest (in absolute value) for the Bullet and smallest for the Barbell. This result
reflects the fact that actual shifts in the curve are not parallel. The larger rate increase at
the intermediate maturities disproportionately impacts the Bullet portfolio. The flattening
twist favors the Barbell as short rates rise and long rates decline—the gains at the long
end more than offset losses on the short end. The butterfly also favors the Barbell, which
is unaffected by the rise in rates at the intermediate maturities but profits from the
decline in rates at the long and short end of the curve.
• In the solution to practice probliem 20 (page 226-227 of print), the formula should read
as follows: “Predicted change = Portfolio par amount × partial PVBP × (–curve shift in
bps)/100”
Reading 25
• In section 3.1.1 (page 242 of print), third paragraph, the fourth sentence should be
rewritten as indicated: “The yields of the two government bonds are usually weighted so
that their weighted average maturity matches the credit security’s maturity.”
• Example 2 (page 243) has been rewritten as follows:
5• In section 4.1.4 (page 254 of print), the first bullet point, last sentence should read: “As
another example, callable debt often has a larger z-spread than otherwise comparable
non-callable debt.”
• The second paragraph after Exhibit 9 (page 260 of print) should be rewritten as follows:
“In summary, using arithmetic weighting to assess a portfolio’s average credit quality is
likely to overestimate its credit quality and underestimate its credit risk when the bonds
in the portfolio span a broad range of the credit spectrum. To illustrate this point,
consider a portfolio consisting of only Baa2/BBB bonds. It has a Moody’s rating factor of
360. Compare this to a portfolio consisting equally of Baa1/BBB+ and Baa3/BBB bonds.
Using the arithmetic rating approach, this portfolio would also have a Moody’s rating
factor of 360. Using the non-arithmetic weighting approach, however, results in a
6Moody’s rating factor of 435 = (50% × 260) + (50% × 610). While both portfolios have
the same credit risk under the arithmetic approach, the non-arithmetic approach
highlights the greater credit risk of the second portfolio.”
• In the information for practice problems 10–15 (page 288 of print), Comment 1 should
say “Callable debt has a smaller z-spread than comparable non-callable debt.” Easton’s
statement should read as follows: “Liquidity and trading issues for high-yield bonds, such
as investment-grade bonds, will be a key consideration in our security selection.
Although both high-yield and investment-grade bonds are quoted as spreads over
benchmark government bonds, we must be aware that dealers are likely to hold larger
inventories of high-yield bonds and their bid–offer spreads will be larger.”
• In practice question 10 (page 289 of print), answer C should read as follows: “reduces
the potential for maturity mismatch.”
• The solution to practice question 10 (page 290 of print) should read as follows: “C is
correct. The G-spread is the spread over an actual or interpolated benchmark (usually
government) bond. A benefit of the G-spread is that when the maturity of the credit
security differs from that of the benchmark bond, the yields of two government bonds
can be weighted so that their weighted average maturity matches the credit security’s
maturity.”
Reading 27
• In Exhibit 10 (page 349 of print), the labels “Tracking Error Gross of Trading Costs” and
“Trading Costs” should be switched.
• In Exhibit 13 (page 357 of print), last row (“[Cash]”), the columns for Sector Weight (B)
and Sector Weight (D) should both be 0.00. In the second-to-last paragraph on the page,
the second sentence should read “Telecommunications and Utilities holdings made up
15.24% of the portfolio’s holdings …"; the final sentence of the paragraph should be
deleted.
Reading 29
• In Example 7 (page 498 of print), “Size coefficient” row of the table, the “First Five Years”
column should be 0.30, and the “Last Five Years” column should be –0.10.
• In the information for questions 9-15, the last paragraph (page 520 of print) should read
as follows: “Chen and Garcia then turn their attention to portfolio management
approaches. Chen prefers an approach that emphasizes security-specific factors,
engages in factor timing, and typically leads to portfolios that are generally more
concentrated than those built using a systematic approach.”
• Practice problem 12 (page 521 of print) should read as indicated: “Based on Exhibit 1,
the contribution of Asset 2 to Manager C’s portfolio variance is closest to”
• In the solution to practice problem 15 (page 525 of print), the second sentence should
read as follows: “Chen prefers an approach that emphasizes security-specific factors,
engages in factor timing, and typically leads to portfolios that are generally more
concentrated than those built using a systematic approach.”
7Volume 5
Reading 30
• In the sub-section “The Role of Real Estate as a Risk Diversifier” (page 23 of print), the
final two paragraphs should be amended as follows: “Overall, for the sample period
REITs provided no diversification benefits relative to a stock/bond portfolio. This is in
strong contrast to that for other alternative investments, such as hedge funds, that did
provide diversification benefits when added to a stock/bond portfolio. These results may
indicate that real estate is an ex post redundant asset in the presence of hedge funds
and other alternative assets.”
• In section 4.2.3 (page 38 of print), the first sentence of the second paragraph should
read as follows: “In evaluating records of past returns of private equity funds, investors
often make comparisons among funds whose initial investments were made in the
same year (the funds’ vintage year).”
• In the sub-section “Special Risk Characteristics” (page 52 of print), list item 1 should be
amended as follows: “… First, commodities correlate positively with inflation whereas
stocks and bonds are negatively correlated with inflation. Stocks exhibit modest
positive correlation with inflation in the long run. Second, commodity …”
• In Exhibit 18 (page 54 of print), the fifth row should be “Correlation with commodity
index”
• Practice Problem 28 (page 117 of print) should be deleted.
Reading 31
• In section 5.6 (page 173 of print), second-to-last paragraph, the eighth sentence should
read as follows: “Therefore, to accurately measure credit VaR (specifically for
derivatives), a risk manager must focus on the upper tail …”
Reading 32
• In the information for practice problems 7-14 (page 266 of print), “Strategy 2” should
read as follows: “Create a synthetic cash position by temporarily converting the US
equity exposure in the fund into cash for a period of three months. The futures contract
used to execute this transaction is based on the S&P 500.”
Reading 33
• In the practice problem information for questions 7–12, Exhibit 1 (page 351 of print), the
columns for call delta and put delta are incorrect, but they are not needed for answering
questions 7–12.
Volume 6
Reading 37
• In the third paragraph of section 4 (page 217 of print), the fourth sentence should refer to
II.3 and II.4.
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