CFA Level 3 Essay Answer Templates & Examples

Quick Reference

Part 1: Answer Templates

DISCUSS

Template:

[Topic] can be analyzed through the following [N] factors:
[Factor 1]: [concept definition]. In the vignette, [case evidence].
[Factor 2]: [concept definition]. Here, [case evidence].
...

Key rules:

• Use a table when Discuss asks about multiple items with multiple dimensions
• Use bullet points for simpler lists
• Every item must: (a) name the concept, (b) explain it briefly, (c) tie it to the case

Example: The policy is not appropriate.

• The expected real return of 3.54% is less than the spending policy rate of 6%.
• Therefore, the current allocation and investment objectives are not sustainable.

JUSTIFY

Template:

[Choice] is [correct/most appropriate] because [primary reason].
[Formula/reasoning]: [calculation or logic].
[Option A] is less suitable because [reason].
[Option B] is less suitable because [reason].

Key rules:

• Justify never stands alone — always paired with Determine, Identify, Select, etc.
• Answer both parts: the choice AND the justification
• If asked for N reasons, give exactly N (or more)
• Dont just restate case facts
• Reference the numbers.
• Compare when needed.

Example: ROSS most likely has the lowest interest rate risk, as measured by modified duration. ROSS has the lowest average modified duration (6.99) compared to ASH (7.07) and PER (7.38). Lower ==modified duration== indicates lower sensitivity to changes in interest rates.

DETERMINE

Template:

[Answer/conclusion].
[Calculation]: [step-by-step with numbers].
[Alternative] is not appropriate because [reason].

Key rules:

• State the answer immediately in the first sentence
• Then provide supporting evidence
• Explain why other options fail

Example: Portfolio C is the most appropriate portfolio. Because $120,000 / $5,000,000 = 2.4%, for any return less than 2.4%, Brown will need to access principal.

• Portfolio A: (8.2% − 2.4%) / 9.2% = 0.6304
• Portfolio B: (8.0% − 2.4%) / 8.5% = 0.6588
• Portfolio C: (7.7% − 2.4%) / 7.2% = 0.7361 Portfolio C has the highest probability of meeting the threshold return.

CALCULATE

Template:

[Formula name]: [formula]
where [variable 1] = [value], [variable 2] = [value]
Step 1: [intermediate result with arithmetic]
Step 2: [intermediate result with arithmetic]
Therefore, [final answer with units].

Key rules:

• Name the formula/model first
• Define all variables with their source values
• Show every arithmetic step
• State the final answer prominently

Example: The growth rate in aggregate market value of equity = growth rate of nominal GDP + change in profit share + change in P/E + dividend yield. Nominal GDP growth = labor input (0.5%) + productivity (1.3%) + inflation (2.2%) = 4.0%. Equity return (9.0%) = 4.0% + 0% + ΔP/E + 2.8% Therefore, ΔP/E = 9.0% − 4.0% − 2.8% = 2.2%.

EXPLAIN

Template:

[N] factors explain [topic]:
1. [Reason 1]: [theoretical statement]. In this case, [case evidence].
2. [Reason 2]: [theoretical statement]. Here, [case evidence].

Key rules:

• State the number of reasons upfront
• Each reason: theory → application
• Explicitly reference case facts by name

Example: Country C most likely has a higher expected currency return for the following reasons:

1. Country C expects a substantial increase in foreign direct investment over the next 5 years. FDI flows are favorable because they indicate long-term commitment.
2. Country C has a lower forecasted debt/GDP ratio compared to Country D. Debt must be serviced and refinanced, potentially triggering a crisis.

IDENTIFY

Template:

[Item 1]: [definition/description]. The vignette shows [case evidence].
[Item 2]: [definition/description]. This is evidenced by [case fact].

Key rules:

• Name the item first, then describe it, then connect to the vignette
• If identifying a bias: name it, define it, show where it appears in the case

Example: Mental accounting explains George’s decision. Mental accounting involves separating assets into distinct buckets based on their intended use. George is mentally allocating the company shares strictly for retirement and treating them separately from his other wealth, leading him to delay withdrawals despite the risk exposure.

DESCRIBE

Template:

[Topic] refers to [definition/clarification].
Its key characteristics are:
• [Characteristic 1]: [explanation].
• [Characteristic 2]: [explanation].

Key rules:

• Begin with a clear definition
• Enumerate characteristics
• Connect to the specific context if applicable

Example: Watson should present a covered call strategy. In a covered call, the portfolio manager owns the underlying stock and sells a call option on that stock. Income is generated through the option premium. The strategy limits upside from share price appreciation but provides income in a flat or moderately rising market.

RECOMMEND

Template:

[I/We] recommend [specific action].
This is because [primary reason].
Additionally, [supporting reason].
[Alternative] is less suitable because [reason]. (optional)

Key rules:

• Be specific: who does what, when, how much
• Lead with the action, then explain why
• Include numbers where applicable

Example: Casey should recommend that the Simpsons begin liquidating a portion of their concentrated position in Lattice shares over the next three years to meet their short-term liquidity needs. Since these shares have been held long-term, the realized capital gains will only be subject to a 10% tax.

EVALUATE

Template:

[Framework/metric] is used to evaluate [topic].
For [item 1]: [assessment with evidence from case].
For [item 2]: [assessment with evidence from case].
Therefore, [conclusion].

Key rules:

• Define the evaluation framework upfront
• Apply it consistently to each item
• End with a clear conclusion

Example:

1. G is describing active currency management based on market technicals. Market technicians believe historical price data incorporates all relevant information. The description of using price patterns and momentum indicators confirms this.

2. All else remaining constant, a change in discount rate from 5.5% to 4.75% will increase the PBO.

COMPARE / CONTRAST

Template:

[Item A] differs from [Item B] in the following dimensions:
• [Dimension 1]: A has [characteristic] vs B has [characteristic].
• [Dimension 2]: A has [characteristic] vs B has [characteristic].

Key rules:

• Use a table for structured comparison
• Compare the same dimensions for both items
• Cite numbers from exhibits

Example: Time Horizon: While both are long-term, the pension plan’s horizon is shorter due to its frozen status — no new participants will join. The DC plan has a longer horizon as participants accumulate over their careers. Liquidity Constraints: The pension plan has higher liquidity needs due to ongoing payout targets to retirees. The DC plan has lower liquidity needs since withdrawals are limited until retirement.

CONSTRUCT

Template:

[Strategy] involves [brief definition].
Step 1: [specific action with numbers]
Step 2: [specific action with numbers]
The [cost/profit/return] is [amount/percentage].

Key rules:

• Define the strategy first
• Show the trade construction step-by-step
• Calculate the expected outcome

Example: The carry trade involves borrowing in low-yield currencies and investing in high-yield currencies. Borrow in USD at 2.211% Invest in China at 5.667% Profit = 5.667% − 2.211% = 3.456% Risks include: (1) exchange rate risk — the high-yield currency may depreciate; (2) sudden reversal risk — carry trades tend to unwind rapidly during market stress.

SUPPORT

Template:

[Conclusion] is supported by [N] reasons.
[Indicator 1]: [what the indicator shows and why it implies the conclusion].
[Indicator 2]: [what the indicator shows and why it implies the conclusion].

Key rules:

• Restate the conclusion
• For each reason, explain both the direction AND the mechanism
• Connect each reason to the specific context

Example: Overconfidence bias occurs when people demonstrate unwarranted faith in their own abilities. Richard exhibits this through his conviction that his stock picks will outperform despite contrary evidence. He relies on his own research and dismisses analyst recommendations, which is consistent with overconfidence.

STATE

Template:

[Fact/conclusion]. [If asked to explain: brief one-sentence reason].

Key rules:

• One sentence, direct and factual
• No justification unless explicitly asked
• If paired with “Explain,” add one brief reason

Example: CHER’s justification is incorrect. Adding shorts to a portfolio may amplify, rather than reduce, tracking error by increasing the portfolio’s active share.

CLASSIFY

Template:

[Category label]. [Subject] exhibits [characteristics of category] because [case evidence].

Key rules:

• State the category first
• Map case facts to category criteria
• Use the vocabulary from the curriculum

Example: CHER’s approach should be classified as discretionary and bottom-up. On the systematic vs. discretionary spectrum, his approach is discretionary given the concentrated nature of the portfolio and focus on company fundamentals. On the top-down vs. bottom-up spectrum, it is bottom-up given its emphasis on company-specific factors.

SELECT

Template:

[Selection] is the most appropriate.
[Reason 1]: [quantitative or qualitative support from exhibits].
[Reason 2]: [additional supporting reason].
[Alternatives not selected]: [brief reason each].

Key rules:

• Lead with the selection
• Support with exhibit data
• Address why others were not chosen

Example: Allocation B is the most appropriate. It has the largest allocation to JPY assets (hedging not permitted), the largest allocation to developed equity with no volatile emerging markets, and global real estate that addresses both inflation and current income needs. Allocation A has excessive emerging market exposure. Allocation C has insufficient liability-hedging assets.