Posted on 08-08-25 at 4:30 pm
Each reading of the Level III CFA® Program exam contains the Learning Outcome Statements (LOS) to indicate what you should learn from each assignment. The CFA Level III essay exam’s questions consist of the LOS command words, which you should be able to address appropriately to achieve full credit. In other words, you should be able to answer the exam questions if you can successfully accomplish the learning outcomes described by the command words in the LOS.
To help you with your exam preparation, IFT has compiled a list of a few LOS Command words that appear in the CFA LIII curriculum and the exam, with explanations and examples. You should read them carefully, then incorporate your understanding while attempting the IFT Q Bank/Mocks and CFA Mocks for comprehensive preparation.
Here are the common command words and examples used throughout the CFAI curriculum. Some examples have detailed answers given for your reference, while others are self-explanatory.
Analyze
Explanation: Analyze means to be able to take apart something for study (e.g., a financial statement or an investment strategy) to understand the whole in full detail.
Examples:
Calculate
Explanation: This command requires you to show that you can find a correct numerical value for a quantity of interest, such as a rate of return, a present value, or a cost of capital. When the numerical value is not found using math but by some other means, determine may replace calculate. Calculate or “calculate and interpret,” in which interpret addresses the ability to explain verbally the numerical result.
Examples:
expected change in the P/E.
Compare
Explanation: This word asks you to be able to explain how two (or more ) things are similar and how they differ. Compare subsumes the ability to describe and explain each thing individually.
Examples:
Contrast
Explanation: Contrast, rather than compare, is used when the key points of understanding several related things relate only to their differences.
Example:
Describe
Explanation: To state characteristic features of something, to portray it in words.
Example:
Answer: Human capital is an implied asset commonly defined as the mortality-
weighted net present value of an individual’s future expected labor income. Financial capital is explicit assets that include the tangible and intangible assets (outside of human capital) owned by an individual or household. For example, a home, a car, stocks, bonds, etc.
Discuss
Explanation: To examine critically from various points of view, considering pros and cons and relevant details.
Example:
Answer: Kwun Tong is long the ZAR against the HKD, and HKD/ZAR is selling at a
forward discount of −2.5% compared with the current spot rate. Implementing the hedge would require the firm to sell the base currency in the quote, the ZAR, at a price lower than the current spot rate. All else equal, the roll yield would go against the firm; that is, the expected cost of the hedge would be 2.5%. But the firm’s strategist also forecasts that the ZAR will depreciate against the HKD by 2.11%. This makes the decision to hedge less certain. A risk-neutral investor would not hedge because the expected cost of the hedge is more than the expected depreciation of the
ZAR. However, HKD/ZAR spot rate might depreciate by more than the 2.5% cost of the hedge. The decision to hedge the currency risk would depend on the trade-offs between (1) the level of risk aversion of the firm, and (2) the conviction in the currency forecast.
Determine
Explanation: To process facts about alternative ways to address a problem and choose the best alternative. Depending on the question, it can also ask to find a breakeven point, and the associated content will show a graphical method (so calculation is not used). “Determine whether …” addresses the ability to come to a “yes” or “no” conclusion.
Examples:
Explain
Explanation: This asks you to incorporate the expectation that you can clarify meaning and relationships.
Example:
Answer. Returns-based style analysis regresses the portfolio’s historical returns against the returns of the corresponding style indexes (over 60 months in this example). Its output indicates the average effect of investment styles employed during the period. While the holdings-based analysis suggests that the current investment style of the equity fund is value-oriented, the returns-based analysis indicates that the style actually employed was likely in the growth category for some time within the past five years.
Formulate
Explanation: To state something —for example, a hypothesis test — where precision is important. To develop or create something —for example, a strategy — suitable to fulfill some purpose.
Example:
Identify
Explanation: To pinpoint what something is. To correctly name or pick out.
Example:
Source: https://www.cfainstitute.org/sites/default/files/-/media/documents/support/programs/cfa-and-cipm-los-command-words.pdf
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