October 2015 CMT LEVEL III

SAMPLE EXAM

Table of Contents

Section Number of

Questions

Topics Covered Points in

Section

1 6 Ethics 12

2 3-10 20-40

3 3-10 20-40

4 3-10 20-40

5 3-10 20-40

6 3-10 20-40

7 3-10 20-40

8 3-10 20-40

Instructions to Candidates:

This is a sample exam. Questions here are indicative of the style you will encounter when taking the Level III examination, but they are not a comprehensive review of all topics that will be tested on.

Not all topics in the reading list will appear on a given test. This sample exam attempts to demonstrate one possible scenario. Any resemblance to actual test questions is neither implied nor intended.

The scoring on the sample is shown as variable to demonstrate that actual exam sections may vary in their point count. Individual point counts are placed within questions to provide an indication of how various questions may be valued. In general the rule of guidance is that one point will equal one minute of time spent. Though this will varies from one question to the next, it is a general guideline to follow for study and time management purposes during the exam.

This is first draft of this sample exam. If errors are evident please send your observation to Gordon Scott (gordon@mta.org).

Updates and changes may occur on this exam. Check the ERRATA section at the end (page 31) of this document for a record of the changes made this administration. Latest addition was made on 9/15.

This exam contains a Questions Section (pages 2 through 20), which can be printed out and taken separately before reviewing any answers, and an Answers section, which goes from pages 21 through 30

Each of the exam questions will consist of an integrated

mix of two or three knowledge domains from among

those specified on the mta.org website:

Risk Management, Asset Relationships, Portfolio

Management, Classical Methods, Behavioral Finance,

Volatility Analysis.

Sample Exam Questions

Section 1: Ethics (12 points)

1A. Lynn Fiorina, CMT is a securities technical analyst following energy stocks and a rising star

at her firm. Her boss has been carrying a “buy” recommendation on International Oil & Gas

and asks Fiorina to take over coverage of that equity. He tells Fiorina that under no

circumstances should the prevailing buy recommendation be changed.

Which of the following actions by Fiorina is least likely a violation of the Code and Standards?

(2 points)

A. Fiorina may be independent and objective in her analysis of International Oil & Gas.

B. If Fiorina believes that her boss’s instructions have compromised her then she does not have

any options but to follow through with his demands.

C. Fiorina must only issue recommendations that reflect her independent and objective opinion.

D. Fiorina does not have to make recommendations that reflect her independent and objective

opinion.

1B. Robert Farber, CMT recently left his job as a research technical analyst for a large

investment adviser. While looking for a new position, he was hired by an investor-relations

firm to write a technical research report on one of its clients, a small educational software

company. The investor-relations firm hopes to generate investor interest in the technology

company. The firm will pay Farber a flat fee plus a bonus if any new investors buy stock in

the company as a result of Farber’s report.

Given this information, which of the following statements is most accurate? (2 points)

A. If Farber accepts this payment arrangement, he will not be in violation of Standard I(B)

because the compensation arrangement cannot be expected to compromise his independence

and objectivity.

B. If Farber accepts this payment arrangement, he will be in violation of Standard I(B) because

the compensation arrangement can be expected to compromise his independence and

objectivity.

C. Issuer-paid research that is objective and unbiased cannot be performed under the right

circumstances.

D. Issuer-paid research that is subjective and biased may be performed under the right

circumstances.

1C. Charles Verdon, CMT, an analyst with Foster and Gibbons Incorporated, is assisting his

firm with a secondary offering for Brilliant Insight Technology Company. Verdon

participates, via telephone conference call, in a meeting with Foster and Gibbons investment

banking employees and Brilliant Ideas’ CEO. Verdon is advised that the company’s

earnings projections for the next year have significantly dropped. Throughout the telephone

conference call, several Foster and Gibbons salespeople and portfolio managers walk in and

out of Verdon’s office, where the telephone call is taking place. As a result, they are aware

of the drop in projected earnings for Brilliant Insight. Before the conference call is

concluded, the salespeople trade the stock of the company on behalf of the firm’s clients and

other firm personnel trade the stock in a firm proprietary account and in employees’

personal accounts.

Has Verdon violated Standard II(A) regarding his failure to prevent the transfer and misuse of

material nonpublic information to others in his firm? (2 points)

A. Verdon’s firm did not have to adopt information barriers to prevent the communication of

nonpublic information between departments of the firm.

B. The salespeople and portfolio managers who traded on the information have not violated any

applicable standard.

C. Verdon violated Standard II(A) in failing to prevent the transfer and misuse of material

nonpublic information to others in his firm.

D. Verdon did not violate Standard II(A).

1D. Alyssa Newmark, CMT is an investment advisor and technical analyst for high-net-worth

clients. A client with an aggressive risk profile in his investment policy statement asks

about investing in the Top Shelf hedge fund. This fund, based in Greenwich, Connecticut,

has reported 20% returns for the first three years. The fund prospectus states that its

strategy involves long and short positions in the energy sector using extensive leverage with

options. Based on her overall fusion analysis using a fundamental and technical

examination of the fund’s financial holdings, track record, the principals involved in

managing the fund, the fees charged, and the fund’s risk profile, Newmark recommends the

fund to the client and secures a position in it. The next week, the fund announces that it has

suffered a loss of 65% of its value and is suspending operations and redemptions until after

a regulatory review. Newmark’s client calls him in a panic and asks for an explanation.

Given this information, which of the following statements is most correct? (2 points)

A. Newmark’s actions were consistent with Standard V(A) as her analysis of an investment that

results in a reasonable basis for her recommendation does not guarantee that the investment

has no downside risk.

B. Newmark’s actions were not legitimate has her analysis of this investment is unfavorably

biased due to a lack of fundamental and technical analysis.

C. Newmark’s actions were legitimate as she did not have to discuss the matter with her client as

there was limited risk with this investment.

D. Newmark’s actions were inconsistent with Standard V(A).

1E. Roanna Maxwell, CMT works for a regional brokerage firm. She estimates that Runnington

Industries will increase its dividend by US$1.75 a share during the next year. She realizes

that this increase is contingent on pending legislation that would, if enacted, give

Runnington a substantial tax break. The US representative for Runnington’s home district

has told Roanna that, although she is lobbying hard for the bill and prospects for its passage

are favorable, concern of the US Congress over the federal deficit could cause the tax bull to

be voted down. Runnington Industries has not made any statements about a change in

dividend policy. Roanna writes in her research report, “We expect Runnington’s stock price

to rise by at least US$10.00 a share by the end of the year because the dividend will increase

by US$1.75 as the trend is technically up on weekly and monthly timeframes. Investors

buying the stock at the current time should expect to realize a total return of at least 20% on

the stock.” According to the Standards: (2 Points)

A. Roanna violated the Standards because she used material inside information.

B. Roanna violated the Standards because she failed to separate opinion from fact.

C. Roanna violated the Standards by basing her research on uncertain predictions of future

government action and mere speculation.

D. Roanna did not violate the Standards because she did not use material inside information.

1F. Jordan Trump, CMT is a portfolio manager. One of his firm’s clients has told Jordan that he

will compensate him beyond the compensation provided by his firm on the basis of the

capital appreciation of his portfolio each year. Jordan should: (2 Points)

A. Turn down the additional compensation because it will result in conflicts with the interests of

other clients’ accounts.

B. Turn down the additional compensation because it will create undue pressure on him to

achieve strong short-term performance.

C. Obtain permission from his employer prior to accepting the compensation arrangement.

D. Accept the additional compensation because it will result in conflicts with the interests of

other clients’ accounts.

Section 2: 20 - 40 points

< This question combines Classical Methods, Volatility, and Portfolio Management. It is

indicative of the style of questions asked, but actual exam questions will vary in their

content and complexity.>

You work as an analyst for Space27, a private equity firm that specializes in leveraged buyouts.

You are tasked with evaluating market conditions and recommending liquid strategies for

protecting against periods of market shock. You are evaluating the performance of four

managed futures funds strategies for your firm’s consideration. Your task is to write an

opinion on which fund would be best for your firm to invest in over the next three to twelve

months. Your inputs are a 1-year chart of SPY, a short-term chart of the VIX compared to

the VIX futures, a short-term chart of SPY for comparison, and some performance data from

the four funds you are choosing between.

Chart 2-1

Chart 2-2; 30-min, 10 day.

Chart 2-3; 30-min, 10 day (for comparison to VIX charts)

2A. How would you describe your observation of the S&P 500’s overall trend as shown in Chart

2-1? (3 points)

A. Trend is rising, RSI is not oversold, recent price drop is just a dip worth buying.

B. Trend has changed from upward to downward.

C. Trend is likely to fail because a head-and-shoulders is forming.

D. Trend is weakening as shown by the RSI, but has not failed yet.

2B. What observation is noteworthy about the VIX and VIX futures patterns? (3 points)

A. The VIX moves show lower peaks while the VIX futures show higher peaks suggesting that

VIX futures imply a continued rise in implied volatility.

B. The VIX moves are greater than the VIX futures moves showing that the VIX futures imply

the market has yet to price in bullish sentiment.

C. The VIX moves are extreme and the VIX futures are not, implying that the futures market is

in contango and likely to stay that way.

D. The VIX moves were overdone for a few days but then got back into sync with the VIX

futures, showing that the extreme move was anomalous.

2C. What would be the best interpretation of a comparison of the S&P 500’s intraday trend for

the past two weeks with the VIX and VIX futures patterns? (4 points)

E. The S&P mirrors the VIX, in general terms, everything is ordinary. This implies more bearish

moves ahead.

F. The VIX shows a current trend of lower highs and lower lows. This implies more bullish

moves ahead.

G. The VIX moves were exaggerated, but the VIX futures still trend higher, diverging from the

S&P 500 price action. This implies more bearish moves ahead.

H. The VIX moves mirrored the S&P and the VIX futures lagged because of a quick drop in

price, but all lines are converging back into equilibrium. This implies more bullish moves

ahead.

Fund A Fund B Fund C Fund D

Average # of Trades Annually 52 21 250 450

Percent Profitable 57.5% 79.6% 58.5% 42.4%

Previous Year’s Rate of Return -5.2% 63.1% 29.1% 23.1%

10-year Average Annual Return 8.7% 12.2% 11.6% 12.5%

Std. Deviation of Annual Return 4.8% 14.7% 5.2% 10.8%

Rate of Return for 2008 46.2% 2.3% -11.8% -35.7%

Std. Deviation of 2008 Return 16.5% 12.2% 7.5% 20.5%

Percent of Time in the Market 16.3% 25.8% 33.4% 73.6%

Correlation to SPX -.05 +.20 +.24 +.76

Max. Drawdown (Trade Close to Trade Close) as % of Initial Capital 3.8% 11.9% 1.6% 10.7%

Net Return as % of Drawdown 297.6% 181.4% 617.7% 124.3%

Average Beta of stocks in fund -.10 2.2 1.4 1.1 Information ratio based on 10-year average return 1.81 .82 2.23 1.16 Information ratio based on 2008 performance 2.8 .18 -1.57 -1.74

Chart 2-4

2D. Why would the Treynor Ratio be less helpful for this selection process than the Information

Ratio? (4 points)

2E. Select a fund based on the data you have from Charts 2-1, 2-2, 2-3, and 2-4 and specify

three reasons to support your choice. (15 points).

Section 3: 20 - 40 points

Chart 3-1

3A. You publish an advisory newsletter that alerts readers to opportunities in the Asian markets.

As part of your research you observe the Relative Rotation Graph (Chart 3-1) to determine

which currencies may provide evidence of a strengthening economy. Two currencies stand

out on the chart, the Philippines Peso (PHPUSD, light blue line) and the Thai Baht

(THBUSD, darker blue line). Which statement below gives the most accurate interpretation

of Chart 3-1? (3 points)

A. PHPUSD is likely to move into the “Leading” quadrant very soon.

B. THBUSD and PHPUSD are equally likely to outperform all other currencies shown in this

chart.

C. The currencies in the “Improving” quadrant have outperformed all others over the past 10

weeks, this implies that they are poised to continue doing so.

D. The Malaysian Ringgit (MYRUSD) will likely remain in the “Lagging” quadrant over the

next 10 weeks

Chart 3-2

In addition to Chart 3-1, suppose you had other research that helped you to conclude that the

Philippines Peso was showing evidence of economic opportunity in the Philippines. You

therefore look to see if it is appropriate to recommend a trade on EPHE, the ETF that tracks

companies within that country. But this requires that the chart show evidence of a bullish

trade. Review Chart 3-2 of EPHE and its comparison to EEM (a general, emerging-markets

ETF), and identify the following.

3B. Explain how the evidence of Chart 3-2 confirms or contradicts a bullish trade

(3 points)

3C. List three points of evidence in Chart 3-2 for either a bullish or bearish trade. (12 points)

3D. The time interval for calculating the correlation in Chart 3-2 was 20 periods which equates

to about 1 month of trading days. The ending value of the correlation graph is +.76. The

interpretation of this correlation coefficient is best described by which of the following

phrases? (4 points)

E. Over the past month the correlation to price comparison is strong and the correlation to

percentage changes is very strong.

F. Over the past month the correlation to price comparison is medium and the correlation to

percentage changes is strong.

G. Over the past month the correlation to price comparison is weak and the correlation to

percentage changes is very weak.

H. Over the past month the correlation to price comparison is very strong and the correlation to

percentage changes is medium

3E. Identify what candlestick pattern can be found in the lowest bar of Chart 3-2 and the two

bars on either side of it. (3 points).

A. Bullish Engulfing with a high-wave candle following.

B. Three outside up or spring with hammer candle

C. Above the Stomach or Piercing

D. Three line strike or Upthrust

Section 4: 20 - 40 points

Chart 4-1: Position of U.S. economic status relative to business cycle.

You are an analyst for Orange Valley Asset Management LLC, and your firm just updated their

business cycle model and designated where they believe the U.S. economy is currently

positioned along the business cycle (shown as the blue circle in Chart 4-1). The current

reading shows that the U.S. is positioned at the top of the full expansion phase. As the head

of technical analysis, you are asked to supply opinions on the following questions.

4A. Select two of the following economic sectors would you recommend that the portfolio team

should overweight (4 points) and explain your answers (6 points).

Industrials Consumer Staples Technology Utilities

Financials

4B. Which two of the following economic sectors would you recommend the portfolio team

underweight based on Chart 3-1? (4 points)

Materials Technology Utilities Industrials Financials

4C. One month after you made your allocation decisions the performance data for various

sectors appears as follows:

SECTORS 1 Month 3 Month 1 Year 3 Year 5 Year

Energy

+0.26% -7.90% -3.24% +10.71% +37.79%

Telecommunication

Services

+1.79% -2.95% +4.72% +24.16% +47.66%

Materials

+0.91% +1.38% +10.99% +30.51% +62.48%

Consumer

Discretionary

+0.56% +5.89% +14.70% +74.66% +144.34%

Financials

-3.92% -0.26% +12.91% +65.82% +63.32%

Industrials

-0.56% +1.73% +11.82% +52.99% +94.62%

Information

Technology

-1.76% +1.18% +19.01% +52.11% +95.54%

Consumer Staples

+1.23% +4.80% +20.23% +51.23% +82.22%

Health Care

+2.06% +4.19% +25.25% +95.02% +117.92%

Utilities

+2.64% +7.34% +24.71% +40.55% +62.77%

S&P 500 Index

-0.40% +1.58% +15.00% +54.66% +85.81%

Chart 4-2 Sector Performance Dashboard

4C. After reviewing the latest S&P sector performance dashboard in Chart 4-2, what

observations can you make about whether the 3 Month and 1 Year sector performances

confirm or conflict with the allocations that you chose in the previous two questions?

(6 points)

Section 5: (20-40 Points)

Chart 5-1 Growth stock breaking out

You work as a trader for a large investment banking. The management has disclosed to you that

they believe that this stock (shown in Chart 5-1), has significant potential for growth based

on the information about who was hired as the new CEO. The chart shown above reflects

the recent jump in price based on the news. Your management has asked you to identify

whether attempting to purchase in the next two trading sessions is likely to be favorable

timing or not.

5A. Explain 5 points of evidence you can see on this chart that support the possibility of a

continuing upward trend. (15 points)

5B. Assume your management wants to initiate and maintain a position of around 100,000

shares in this stock and they want your opinion on whether a stop loss could be implemented

for this trade without creating too much slippage? (5 points)

5C. Name a logical place for a stop loss and specify a reason for your choice. (6 points)

Section 6: (20-40 Points)

Chart 6-1: Jakarta Composite Index, before session opening.

You work for a hedge fund that specializes in global opportunities. You run a portfolio based on

Southeast Asian equities and you see an opportunities building in Indonesia. The Jakarta

Composite Index looks promising to you, but given the recent volatility in the global markets,

your fund is currently employing very short-term trading strategies, with the ability to enter

either LONG or SHORT positions.

Examine Chart 6-1: Jakarta Composite Index, before session opening.

6A. Based on the majority of evidence in the chart of the index, which direction

recommendation would you expect to start a trade LONG or SHORT? (2 points)

6B. Give the name of the two most recent multi-day candlestick patterns and describe how each

support your conclusion (i.e. continuation, reversal, etc). (4 points)

6C. Name one additional point of evidence such as support, resistance or other price/candle

patterns (not oscillators or trend indicators) found in the chart that helps to strengthen your

conclusion? (3 points)

6D. Examine the three provided indicators in Chart 6-1: Jakarta Composite Index. Note that

Bollinger Bands, ATR, and RSI all use a 10-period calculation. Briefly note how each

indicator works (the concept is more important than the actual formula). (3 points)

6E. Select your short-term outlook for the index and explain how each of the 3 indicators

applies to your short-term outlook for the index. Be very specific. (6 points).

6F. Assume you decide to use an Exchange Traded Fund (ETF) that tracks the Jakarta

Composite Index. This ETF trades at 1/100 of the index’s actual value. So for example, if

the index is currently trading at a level of 5225, the ETF would be priced at $52.25 per share

in the market. Using Chart 6-1 determine how many shares of this ETF can be traded (long

or short), rounded to the nearest 100 shares. Assume the following conditions, and

demonstrate how you arrived at your answer:

(6 points)

Index will open at 5225 at the time of trade (for both long or short position).

Position risk limited to $10,000.

Use ATR as provided in Chart 6-1 to calculate your stop price.

Assume the ATR reading at the time of the trade is 40.

Use a factor of 2.0 when you do your ATR stop calculation.

Section 7: (20-40 Points)

Chart 7-1

7A. You work as a proprietary trader and are examining Chart 7-1 for a possible short-term,

swing-trade entry. Of the following choices, which one of these patterns would be the most

significant indicator of a reversal setup, if it occurred next on the Alerian MLP Index?

(3 points)

A. B.

C. D.

7B. Name the candlestick pattern at the most recent swing high price near $470 in Chart 7-1.

(3 points) 7C. Assume you saw a setup you wanted to trade for a bearish continuation swing trade. This

trade would enter the Alerian MLP Index $408 after breaking support. You need to determine a

stop-loss price close enough to your entry price to maximize the trade potential, but far enough

away to not be stopped out by normal movement of the stock. Which of the following strategies

would be most likely to help you identify the best stop-loss price? (3 points) Explain your

choice (6 points).

A. Position a stop just a few cents above the broken support price

B. Position a stop at the sum of the last closing prices and the annual VIX expected move

C. Position a stop at the sum of the last closing price and the Case Dev-Stop calculation (which

uses ATR and Standard Deviation)

D. Position a stop above the last swing high near $472

7D. Suppose you notice that volatility is increasing on the Alerian MLP Index as well as for the

market at large. You have a rule that requires you to reduce your position size for the trade

when these circumstances occur. What influence would this rule have your trading?

A. The rule helps limit the volatility of returns in your trading.

B. The rule helps you select a stop-loss that is more logical and less likely to be hit.

C. A smaller position size means you are taking on less risk.

D. You will be out of the market during volatile periods.

Section 8: (20-40 Points)

Chart 8-1. Weekly Commodity Chart

You work as the portfolio manager and principal of a boutique investment firm. Your firm is

about to be acquired by a significantly larger investment company that has a few concerns about

your investment selection process and your currently opened positions

8A. You currently have a sizable short position in a commodity. Its weekly price chart (Chart 8-

1) shows that the position has recently moved strongly in your favor. When asked how you

anticipated such a move you explained that this was a trade designed to capture the breaking

of a classic bubble market. Name and briefly describe that last two stages of a bubble

( 10 points).

8B. Your current selection process includes only you and the research you study. The

investment company that wants to acquire your firm would like for you to consider making

your selection decisions with a committee that would have a vote. Assuming you had to

accept some form of this change, which of the following scenarios would you consider most

likely to produce the best results? (4 points)

A. Making decisions that require all members vote unanimously on a decision before action

can be taken

B. Committee will vote on decisions using a secret ballot

C. Committee will meet each month to look over recent mistakes and discuss corrections.

D. Committee will discuss best ideas screened by an analyst team.

The new company’s management has questions about your position size on the short

commodity trade. It has performed well so far, and they want to know your strategy for

getting out. You explain that you are using a reflective pyramid compounding structure.

You will stop out of all contracts if the price rises to 105.

For taking profits you will do so in three tiers. The first tier of contacts close out profits if

the price breaks through the 4-week support price, and the second tier closes out if the price

breaks through the 20-week support price. The final tier will be taken off through a trailing

stop.

You explain that began your position with 25 contracts and you have now built it up to 43

contracts after adding to the position twice.

8C. Based on the pattern of a reflective pyramid, how many contracts will you close out if

the price drops to 75? (4 points)

8D. How many more contracts will you close out if the price drops to 62? (3 points)

8E. How many more contracts will you close out if the price drops to 52? (3 points)

Answers

1A. Lynn Fiorina, CMT is a securities technical analyst following energy stocks and a rising star

at her firm...

Correct answer: C

Comment: Fiorina must be independent and objective in her analysis of International Oil & Gas.

If she believes that her boss’s instructions have compromised her, she has two options: She

can tell her boss that she cannot cover the company under these constraints, or she can take

over coverage of the company, reach her own independent conclusions, and it they conflict

with her boss’s opinion, share the conclusions with her boss or other supervisors in the firm

so that they can make appropriate recommendations. Fiorina must issue only

recommendations that reflect her independent and objective opinion. (reference in CFA

SOP: Research Independence and Prior Coverage).

1B. Robert Farber, CMT recently left his job as a research technical analyst for a large

investment adviser.

Correct Answer: B

Comment: If Farber accepts this payment arrangement, he will be in violation of Standard I(B)

because the compensation arrangement can reasonably be expected to compromise his

independence and objectivity. Farber will receive a bonus for attracting investors, which

provides an incentive to draft a positive report regardless of the facts and to ignore or play

down any negative information about the company. Farber should accept only a flat fee that

is not tied to the conclusions or recommendations of the report. Issuer-paid research that is

objective and unbiased can be done under the right circumstances as long as the analyst

takes steps to maintain his or her objectivity and includes in the report proper disclosures

regarding potential conflicts of interest. (reference in CFA SOP: Research Independence

and Compensation Arrangements).

1C. Charles Verdon, CMT, an analyst with Foster and Gibbons Incorporated, is assisting his

firm with a secondary offering for Brilliant Insight Technology Company…

Correct Answer: C

Comment: Verdon has violated Standard II(A) because he failed to prevent the transfer and

misuse of material nonpublic information to others in his firm. Peter’s firm should have

adopted information barriers to prevent the communication of nonpublic information

between departments of the firm. The sales people and portfolio managers who traded on

the information have also violated Standard II(A) by trading on inside information.

(reference in CFA SOP: Controlling Nonpublic Information).

1D. Alyssa Newmark, CMT is an investment advisor and technical analyst for high-net-worth

clients…

Correct answer: A

Comment: Newmark’s actions were consistent with Standard V(A). Analysis of an investment

that results in a reasonable basis for recommendation does not guarantee that the investment

has no downside risk. Newmark should discuss the analysis process with the client while

reminding him or her that past performance does not lead to guaranteed future gains and that

losses in an aggressive investment portfolio should be expected. (reference in CFA SOP:

Successful Due Diligence/Failed Investment).

1E. Roanna Maxwell, CMT works for a regional brokerage firm. She estimates that Runnington

Industries will increase its dividend by US$1.75 a share during the next year…

Correct Answer: B

Comment: The correct answer is B. This question related to Standard V(B)- Communication

with Clients and Prospective Clients. Roanna has issued a research report stating that she

expects the price of Runnington Industries stock to rise by US$10 a share “because the

dividend will increase” by US$1.75 per share and that the trend should continue. She has

made this statement knowing that the dividend will increase only if Congress enacts certain

legislation, an uncertain prospect. By stating that the dividend will increase, Roanna failed

to separate fact from opinion. The information regarding passage of legislation is not

material nonpublic information because it is conjecture, and the question does not state

whether the US representative gave Roanna her opinion on the passage of the legislation in

confidence. She could have been offering her opinion to anyone who asked; therefore,

statement A is incorrect. It may be acceptable to base a recommendation, in part, on an

expectation of future events, even though they may be uncertain. (reference in CFA SOP:

Standard V(B)-Communication with Clients and Prospective Clients).

1F. Jordan Trump, CMT is a portfolio manager…

Correct Answer C.

Comment: The correct answer is C. This question involves Standard IV(B)—Additional

Compensation Arrangements. The arrangement described in the question—whereby Jordan

would be compensated beyond the compensation provided by his firm, on the basis of an

account’s performance—is not a violation of the Standards as long as Jordan discloses the

arrangement in writing to his employer and obtains permission from his employer prior to

entering into the arrangement. Answers A, B and D are incorrect; although the private

compensation arrangement could conflict with the interests of other clients and lead to

short-term performance pressures, members and candidates may enter into such agreements

as long as they have disclosed the arrangements to their employer and obtained permission

for the arrangement from their employer. (reference in CFA SOP: Standard IV(B)-

Additional Compensation Arrangements).

2A. How would you describe your observation of the S&P 500’s overall trend as shown in Chart

2-1? (3 points)

D. Trend is weakening as shown by the RSI, but has not failed yet.

References: (Brown, Chapter 1, Kaufman Chapter 23; CMT III Text pages 272, 497)

2B. What observation is noteworthy about the VIX and VIX futures patterns? (3 points)

A. The VIX moves show lower peaks while the VIX futures show higher peaks suggesting that

VIX futures imply a continued rise in implied volatility.

References: (Katsanos, Chapter 4, Kaufman Chapter 20; CMT III Text Chapter 31)

2C. What would be the best interpretation of a comparison of the S&P 500’s intraday trend for

the past two weeks with the VIX and VIX futures patterns? (4 points)

C. The VIX moves were exaggerated, but the VIX futures still trend higher, diverging from the

S&P 500 price action. This implies more bearish moves ahead.

References: (Katsanos, Chapter 4, Kaufman Chapter 20; CMT III Text Chapter 31)

2D. Why would the Treynor Ratio be less helpful for this selection process than the Information

ratio? (4 points)

Fund A has a negative score for the average beta of its stocks. The Treynor ratio is not applicable

if the stocks have a negative beta.

References: (Weigand, Chapter 7; CMT III Text Chapter 22)

2E. Select a fund based on the data you have from Charts 2-1, 2-2, 2-3, and 2-4 and specify

three reasons to support your choice. (15 points).

Fund A – Best against market shocks since I am expecting possible bear moves in the next three

months.

Any Three of these reasons:

1 – Slight negative correlation to the markets may help against market shocks

2 – Highest information ratio

3 – Lowest percentage of Time in Market

4 – Lowest Standard Deviation of Returns means consistency

5 – Best performance in 2008 (price shock environment)

References: (Katsanos, Chapter 4, Kaufman Chapter 20, Weigand Chapter 7; CMT III Text

Chapter 22, 31)

3A. You publish an advisory newsletter that alerts readers to opportunities in the Asian

markets… Which statement below gives the most accurate interpretation of Chart 3-1?

(3 points)

C. The currencies in the “Improving” quadrant have outperformed all others over the past 10

weeks, this implies that they are poised to continue doing so.

References: (Ciana, Chapter 2; CMT III Text Chapter 20)

3B. Explain how the evidence of Chart 3-2 confirms or contradicts a bullish trade

(3 points)

If Peso is rising, then Philippine company stocks should also be rising. With EPHE in a

corresponding uptrend it confirms the expectation.

References: (Katsanos, Chapter 9; CMT III Text Chapter 19)

3C. List three points of evidence in Chart 3-2 for either a bullish or bearish trade. (12 points)

Bullish Trade (any three of these are acceptable):

1. Price shows a Breakout, retest and continuation

2. Price shows higher highs and higher lows (upward trend)

3. Price is outperforming EEM (other emerging markets) showing relative strength during

“improving” phase.

4. EPHE and EEM show a high correlation, and EEM has just created evidence of a new

upward trend by showing a pattern of higher highs and higher lows.

5. EPHE shows two breakaway gap patterns in most recent 10 trading sessions.

References: (Ciana, Chapter 2, Elder Chapter 39, Katsanos, 3; CMT III Text Chapter 1, 13, 20)

Bearish Trade

Note: this shouldn’t be a bearish trade, but if you select bearish, you could get partial credit for

mentioning this ideas and maybe others if graders judge your reasoning to be sound.

Tip: Most questions will not have this level of ambiguity where at least partial points can be

given for either direction, but some will. Better to focus on the side that has the most

apparent evidence.

1. EEM (emerging markets ETF) may be leading EPHE lower. EPHE and EEM show a

high correlation, and EEM may abruptly turn down and resume its downward trend, thus

creating a new lower high.

References: (Ciana, Chapter 2, Elder Chapter 39, Katsanos, 3; CMT III Text Chapter 1, 13, 20)

3D. The time interval for calculating the correlation in Chart 3-2 was 20 periods which equates

to about 1 month of trading days. The ending value of the correlation graph is +.76. The

interpretation of this correlation coefficient is best described by which of the following

phrases? (4 points)

A. Over the past month the correlation to price comparison is strong and the correlation to

percentage changes is very strong.

3E. Identify what candlestick pattern can be found in the lowest bar of Chart 3-2 and the two

bars on either side of it. (3 points).

B. Three outside up or spring with hammer candle

4A. Select two overweight sectors and explain your reasons

Consumer Staples, and Utilities sectors typically lead the market and all other sectors at the

beginning of a recession (late expansion-early recession) phases of the business cycle as

investors seek defensive positions and anticipation economic contraction.

References: (Weigand, Chapter 7, CMT III Text Chapter 21)

4B. Select two underweight sectors and explain your reasons

Both the Industrials and Information Technology sectors have underlying industries in which

often have rallied in anticipation of economic recovery, but also lead a downtrend into a

recession as companies in these sectors begin to see sales and earnings shrink once full

expansion is reached. Expectations for consumer and corporate spending tend to wane as less

and less evidence of these activities can be found. During this late economic phase these two

sectors have not performed well until evidence of sustained and more predictable economic

growth appears.

References: (Weigand, Chapter 7, CMT III Text Chapter 21)

4C. …what observations can you make about whether the 3 Month and 1 Year sector

performances confirm or conflict…

Consumer Staples, Health Care and Utilities sectors have lead the market and all other sectors in

this data. Usually, such combined outperformance in the Consumer Staples, Health Care

and Utilities sectors occur in the late-early recession phases of the business cycle which

confirms the firm’s model.

References: (Weigand, Chapter 7, CMT III Text Chapter 21)

5A. (5 of any of the following)

Break of resistance with successful retest of the 16.40 - 16.50 range

Bullish engulfing candle pattern as part of retest

Gap (Window) above the resistance range (likely based on earnings news)

Gap (Window) has not been filled.

Higher highs and higher lows in last three months

Recent Bollinger Band widening

Fib pull back from resistance held at 38.2%

Stochastic bottoming inside 30-50 range consistent with new uptrend

High volume on the breakout

References: (Brown Chapter 1, Nison Chapter 12, Elder Chapter 39, Kaufmann Chapter 4; CMT III

Text Chapters 1, 3, 4, 6, 8, 34)

5B. Yes it would be feasible because 100K shares would represent less than ½ percent of the

average daily volume. With a share price of $16 this would represent a trade size of 1.6

million dollars—not a large sized for institutional orders in a stock this liquid.

5C. (There are three possible answers, any of these three are acceptable. Choosing one of these

three prices is worth 2 points, the correct explanation for what price you chose is worth 4

points.)

Just below the Resistance at 16.40, since breakout represents a change of sentiment, but if

resistance fails the test of support, then change of sentiment has disappeared.

Just below the Gap range (or trend line) at 15.70, since gap represents a change of

sentiment, but if gap fills (or trend line breaks) and continues to fall, then change of

sentiment has disappeared.

Just below 14.60 since all previous lows are taken out and you can assume a new downtrend

may be underway.

References: (Kaufmann Chapter 13, 14; CMT III Text Chapters 3, 4)

Question 6 is built on a collection of ideas integrated into a single chart study. The following

references apply to all questions in Section 6: (Brown Chapter 1, Nison Chapters 10-17, Elder

Chapter 39, Kaufmann Chapter 4; CMT III Text Chapters 1, 3, 4, 6, 7, 8, 34, 35)

6A. Based on the majority of evidence in the chart of the index, which direction

recommendation would you expect to start a trade LONG or SHORT?

Long

6B. Give the name of the two most recent multi-day candlestick patterns and describe how each

support your conclusion (i.e. continuation, reversal, etc). (4 points)

Three that could work:

Three Advancing White Soldiers (or 3 White Solders) is the most recent pattern (1pt).

This is a bullish continuation pattern (1pt)

A Harami immediately preceeds this pattern (the second candle of the harami is also a part of the

3-white soldiers pattern) (1 pt)

A harami is a reversal pattern, and in this case has reversed the past 4-5 day short-term pull back.

(1 pt)

6C. Name one additional point of evidence such as support, resistance or other price/candle

patterns (not oscillators or trend indicators) found in the chart that helps to strengthen your

conclusion? (3 points)

Any one of the following:

A bullish harami pattern which reversed a very short term pull-back.

The 3 white soldiers pattern that showed increasing/larger white candles that have moved the

index above the previous highest high – showing that resistance has just been broken.

The index has been in an uptrend since June 2014.

Prior resistance around the 5140 level in July 2014 has also just become support. As discussed

earlier, the recent harami helps to secure that support line for the short-term.

6D. Examine the three provided indicators in Chart 6-1: Jakarta Composite Index. Note that

Bollinger Bands, ATR, and RSI all use a 10-period calculation. Briefly note how each

indicator works (the concept is more important than the actual formula). (3 points)

Bollinger Bands: These bands are formed by taking into account the standard deviation around

a moving average (1 pt)

ATR – average true range also displays volatility, but it differs from Bollinger Bands in that

volatility is displayed on a range of prices. ATR measures the average range (high to low)

of the most recent prices (in this case 10 days). (1 pt)

RSI – Relative Strength Index helps to measure momentum, and is often used as an overbought /

oversold indicator (1).

6E. Select your short-term outlook for the index and explain how each of the 3 indicators

applies to your short-term outlook for the index. Be very specific. (6 points).

Generally bullish.

(Any of the following information may be usable to answer this question)

One purpose of the Bollinger bands is to help visually display volatility. In looking at how the

current bands compare to other areas of the chart, currently they are at/near their narrowest

level. This can be a sign that volatility will increase again over the short-term. (1 pt).

Other uses of the bands are to help measure trend strength. If candles are riding the upper

band, like in this example, this can be a sign that the current trend is strong/will continue.

.The last white candle has not yet penetrated the upper band, but is near the edge, suggesting

that the JKSE index may increase, and the bands may widen yet again to account for the

move. (1 pt)

ATR is not a directional indicator. A rising ATR line doesn’t mean the security is in an uptrend.

(1 pt) A rising ATR line merely states that the security’s volatility is increasing. Some

technicians interpret a very low ATR level is a sign that eventually volatility will increase

again. But a technician needs other evidence to help determine which way the trend might

move. Since the ATR level here is among the lowest on the whole chart, this could be an

indication of higher volatility. (1 pts)

The very recent level in RSI is now higher than the last peak - so RSI is not diverging from the

overall direction of the index (1 pt). Currently it is still below what many use as an

overbought level (70) – and momentum indicators can stay overbought for some time in an

extended uptrend (1 pt).

6F. Assume you decide to use an Exchange Traded Fund (ETF) that tracks the Jakarta

Composite Index. This ETF trades at 1/100 of the index’s actual value. So for example, if

the index is currently trading at a level of 5225, the ETF would be priced at $52.25 per share

in the market. Using Chart 6-1 determine how many shares of this ETF can be traded (long

or short), rounded to the nearest 100 shares. Assume the following conditions, and

demonstrate how you arrived at your answer:

(6 points)

Index will open at 5225 at the time of trade (for both long or short position).

Position risk limited to $10,000.

Use ATR as provided in Chart 6-1 to calculate your stop price.

Assume the ATR reading at the time of the trade is 40.

Use a factor of 2.0 when you do your ATR stop calculation.

Answer: 1/100 of $40 = 40 cents. 2 times an ATR of 40 cents = 80 cents. (2 pts).

The stop would be placed 80 cents below the long entry price of 52.25. = 51.45. (2 pts for

correct discussion of stop price).

$10,000 position risk divided by 80 cents = 12,500 shares. (2 pts for correct number of shares).

7A. <which next candle : graphic choices>

Correct Answer: D. (Hammer candle that coincides with previous support)

Reference: (Nison Chapter 15; CMT III Text Chapters 33)

7B. Name the Candlestick pattern…

Bearish Engulfing

Reference: (Nison Chapter 10; CMT III Text Chapters 34, 35)

7C. Best stop-loss price…

Correct answer C: Position a stop at the sum of the last closing price and the Case Dev-Stop

calculation (which uses ATR and Standard Deviation)

Reference: (Kaufman Chapter 23; CMT III Text Chapter 12)

7D. …Volatility is increasing on Alerian MLP

Correct Answer: A. The rule helps limit the volatility of returns in your trading.

Reference: (Kaufman Chapter 23; CMT III Text Chapter 12)

8A. ..describe stage 4 and 5 of a bubble

“The fourth stage of the bubble process is labeled the critical stage or the financial distress stage.

The critical stage is the point where a set of insiders decide to take their profits and cash

out.” The detection of fraud is often coincident with this stage. The fifth stage is Revulsion, and is the final stage of the bubble. Investors are so scarred by

market events that they don’t want to participate at all. Revulsion continues a bear-market

trend and usually ends with a collapse in volume.

Reference: (Montier Chapter 38; CMT III Text Chapter 29)

8B. ..which committee decision tactic will work best?

Correct Answer: B. Committee will vote on decisions using a secret ballot.

Reference: (Montier Chapter 17; CMT III Text Chapter 28 )

Reference for next three questions: (Kaufman Chapter 23; CMT III Text Chapter 12,

Compounding Structures, Reflecting pyramid )

8C. How many contracts closed at 75?

Correct Answer: 6

8D. How many more contracts closed at 62?

Correct Answer: None

8E. How many contracts closed at 52?

Correct Answer: 12

Errata

This is the first sample exam of its kind, and thus the association expects to be able to revise and

improve it over time. Changes will be listed here up until the administration of the next exam

(October 14th

, 2015).

Changes: 9/15

1. Fixed labels for answer section on questions 2B and 2C

2. Identified proper answer for 3A in answers section.

3. Added label for EEM line for graphic 3-2

4. Fixed labels in answer section on questions 3D and 3E

5. Added more explanation for 5C.

6. Removed the question formerly labeled 6C. It was poorly worded and its topic was too

error prone because of differences between the alternative reading list and the new

curriculum.

7. Fixed number labels for 6C, 6D, 6E and 6F.

8. Added point counts for questions 8B through 8E.

----------------------------------------------- 10/14/15

9. Changed Answer for 8B from D (committee) to B (Secret Ballot).