October 2015 CMT LEVEL III

SAMPLE EXAM
Table of Contents
Section

Number of
Questions

1
2
3
4
5
6
7
8

6
3-10
3-10
3-10
3-10
3-10
3-10
3-10

Topics Covered

Ethics
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.

Points in
Section
12
20-40
20-40
20-40
20-40
20-40
20-40
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

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 bosss 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 Farbers 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 companys
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 Verdons 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 firms 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. Verdons 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 funds financial holdings, track record, the principals involved in
managing the fund, the fees charged, and the funds 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. Newmarks 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. Newmarks 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. Newmarks actions were not legitimate has her analysis of this investment is unfavorably
biased due to a lack of fundamental and technical analysis.
C. Newmarks actions were legitimate as she did not have to discuss the matter with her client as
there was limited risk with this investment.
D. Newmarks 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 Runningtons 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 Runningtons 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 firms 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 firms 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 500s overall trend as shown in Chart
2-1? (3 points)
A.
B.
C.
D.

Trend is rising, RSI is not oversold, recent price drop is just a dip worth buying.
Trend has changed from upward to downward.
Trend is likely to fail because a head-and-shoulders is forming.
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 500s 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

Percent Profitable

52
57.5%

21
79.6%

250
58.5%

450
42.4%

Previous Years Rate of Return

10-year Average Annual Return
Std. Deviation of Annual Return
Rate of Return for 2008
Std. Deviation of 2008 Return

-5.2%
8.7%
4.8%
46.2%
16.5%

63.1%
12.2%
14.7%
2.3%
12.2%

29.1%
11.6%
5.2%
-11.8%
7.5%

23.1%
12.5%
10.8%
-35.7%
20.5%

Percent of Time in the Market

Correlation to SPX

16.3%
-.05

25.8%
+.20

33.4%
+.24

73.6%
+.76

11.9%
181.4%
2.2

1.6%
617.7%
1.4

10.7%
124.3%
1.1

.82

2.23

1.16

.18

-1.57

-1.74

Max. Drawdown (Trade Close to Trade Close)

as % of Initial Capital
3.8%
Net Return as % of Drawdown
297.6%
Average Beta of stocks in fund
-.10
Information ratio
based on 10-year average return
1.81
Information ratio
based on 2008 performance
2.8

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.
B.
C.
D.

Bullish Engulfing with a high-wave candle following.

Three outside up or spring with hammer candle
Above the Stomach or Piercing
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 indexs 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.
B.
C.
D.

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

The rule helps you select a stop-loss that is more logical and less likely to be hit.
A smaller position size means you are taking on less risk.
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 81) 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 companys 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 bosss 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 bosss 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. Peters 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: Newmarks 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 questionwhereby Jordan
would be compensated beyond the compensation provided by his firm, on the basis of an
accounts performanceis 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 500s 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 500s 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 shouldnt 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 firms 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 percent of the
average daily volume. With a share price of $16 this would represent a trade size of 1.6
million dollarsnot 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 doesnt mean the security is in an uptrend.
(1 pt) A rising ATR line merely states that the securitys 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 indexs 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 dont 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).