CFA Level 3 essay question grading guidance/ advice

CFA Level III
#1

Hi all, I am hoping to get some idea on how the grading of the essay portion is really done and what constitutes as a correct answer versus incorrect answer. Example:

The committee is conducting liquidity planning, specifically to ensure adequate capital is available for planned private equity commitments. Miller provides a list of private equity funds for consideration:
• Buyout
• Growth equity
• Venture capital
• Real estate
• Energy
A few members of the committee have expressed concerns regarding the complex andlong-term nature of alternative investments, and have asked Miller if he has theresources to properly monitor a private equity portfolio. Miller asks Stern to research the key factors that must be considered to effectively monitor private equity managers.

Determine three key factors Miller should consider to monitor the foundation’s
private equity managers effectively

The answer key provides a list of factors. I wrote down ratios that measure how much return is being generated per dollar invested. But this is not mentioned in the list of answer choices. Would my answer fly? Looking for some guidance here b/c these essay questions are a needle in the haystack in terms of testing my knowledge. I read through the books and notes but am not able to pick out my answers exactly to the way the answer key is describing them. Struggling with this. Some guidance would be much appreciated.

#2

The real exam typically doesn’t have open-ended questions such as this. They’ll give you specific information in the vignette, and you’re expected to extract that and put it into an answer.

You’re seeing a typical problem with practice exams (from CFA Institute as well as from third-party prep providers).

#3

One problem with financial ratios is that they depend on the GAAP choices a financial-reporting entity makes. For instance, if a well-managed manufacturing company uses LIFO to price its inventory, and the vast majority of its peers use FIFO, then, all things being equal (which they never are, but which is useful for the point I’m trying to make), the LIFO-user will likely have lower Net Income. That, in turn, will affect free cash flow (both to the firm and to equity). In a period of rising prices, the LIFO-using company will have lower inventory turnover, which could lead an analyst to make negative statements about how the LIFO-user manages its inventory and perhaps even its purchasing function. I could go on, but the point is simple: Choices have consequences. That fact plays out in spades when it comes to how companies choose to account for the operations of their business. GAAP is not a one-size-fits-all undertaking.

#4

A more cogent problem is that those ratios don’t appear in the Level III curriculum.

You’d think that the people writing the practice exams would know that.

Sigh.

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