2019 CFA Program: Level III Errata

20 September 2018
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
• The first paragraph of the equation before Exhibit 6 (page 294 of print) should be
deleted. The paragraph should begin as follows: “The size of the partial gift credit equals
the size of the gift times TgTe. For example, consider …”
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
range 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
• 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.
• 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.”
• 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.”

2
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:

• In the information for practice problems 10–15 (page 288 of print), 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

3
 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.

Volume 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 …”

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.”

Volume 6