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CFA Level III Full-Length Mock Exam

55 questions · CFA level 3

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Sample Question

Meridian Endowment Fund (MEF) is a $4.2 billion university endowment with a 5% annual spending policy and an inflation target of 2.5%. The Investment Committee is reviewing its current strategic asset allocation. The fund's current allocation is: Global Equity 45%, Fixed Income 25%, Real Assets 15%, Private Equity 10%, and Cash 5%. The Chief Investment Officer presents the following mean-variance optimization (MVO) results for three candidate portfolios: | Portfolio | Expected Return | Volatility | Sharpe Ratio | CVaR (95%) | |-----------|----------------|------------|--------------|------------| | A | 7.8% | 12.1% | 0.48 | -18.2% | | B | 7.2% | 10.4% | 0.47 | -14.9% | | C | 6.9% | 9.8% | 0.45 | -13.1% | The risk-free rate is currently 2.0%. The Committee notes that the endowment has a total return requirement (spending + inflation) of approximately 7.5% and that the university relies heavily on endowment distributions for 35% of its annual operating budget. One committee member argues that Portfolio B represents the best risk-adjusted choice because it has the highest Sharpe ratio after rounding. Another member contends that the CVaR metric should weigh more heavily given the university's operational dependency. Which portfolio is most appropriate for MEF given its investment policy constraints, and what is the most compelling justification?

  • A.Portfolio A, because it is the only portfolio with an expected return exceeding the 7.5% total return requirement, making it necessary to sustain the spending policy and preserve purchasing power over time.
  • B.Portfolio B, because it achieves the highest Sharpe ratio among the three options, indicating the most efficient risk-adjusted return regardless of the absolute return target.
  • C.Portfolio C, because the endowment's operational dependency on distributions makes downside risk minimization paramount, and Portfolio C has the lowest CVaR of the three candidates.
  • D.Portfolio B, because it balances the return requirement and downside risk, offering a return close to the 7.5% target while meaningfully reducing tail risk compared to Portfolio A.

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