Free CFA Level III: Private Wealth Preserving the Wealth Practice Questions
Wealth preservation on CFA Level III covers asset protection strategies, insurance planning for affluent clients, liability management, and inflation-hedging strategies for maintaining long-term purchasing power.
Sample Questions
Question 1
Easy
Human capital in the context of wealth management is best defined as:
Solution
A is correct.
Human capital is the economic concept representing the present value of all expected future earnings from an individual's labor over their remaining working years. For younger workers, human capital is typically their largest asset, often exceeding their financial capital (investment portfolio). As an individual ages and accumulates financial assets while approaching retirement, human capital declines and financial capital grows.
Human capital is the economic concept representing the present value of all expected future earnings from an individual's labor over their remaining working years. For younger workers, human capital is typically their largest asset, often exceeding their financial capital (investment portfolio). As an individual ages and accumulates financial assets while approaching retirement, human capital declines and financial capital grows.
Question 2
Medium
Based on the volatility figures in Exhibit 3, the effect of currency exposure on Dr. Larsson's unhedged equity sleeve is best described as:
Solution
A is correct. Exhibit 3 reports unhedged equity volatility of 14% in local currency and 17% in SEK terms. Because the SEK-denominated figure exceeds the local-currency figure, currency movements add risk rather than diversifying it. For a Swedish investor whose liabilities and spending are in SEK, raising the hedge ratio on the unhedged 45% sleeve reduces total portfolio volatility.
Question 3
Hard
Based on Exhibits 1–3, which integrated recommendation best reflects wealth-preservation principles for Whitfield's circumstances?
Solution
A is correct. A salaried or fee-for-service physician's income is relatively stable and predominantly bond-like in character, so a meaningful equity tilt in the financial portfolio is appropriate to balance the total-wealth (financial + human capital) risk profile. The mortality-protection need is finite in both amount ($6,500,000) and horizon (10 years), which matches Policy A's $8,000,000 / 10-year term structure at the lowest cost. A partial hedge of the euro exposure (15% of financial capital) addresses short-term uncompensated volatility while preserving the long-run diversification benefit of foreign currency, which is the standard integration across the human-capital, insurance-planning, and currency-management pillars of wealth preservation.