Free CFA Level III: Private Markets Performance Measurement Practice Questions (2026)

Sample Questions

Question 1 Easy

The appraisal ratio measures:

Solution

C is correct.

The appraisal ratio is calculated as the portfolio's alpha (the return earned beyond what is explained by systematic risk exposure) divided by the portfolio's unsystematic (residual or idiosyncratic) risk. It measures the manager's ability to generate abnormal returns per unit of diversifiable risk taken.

Question 2 Medium

Based on Exhibit 1, the Brinson-Hood-Beebower allocation effect for Bayview is closest to:

Solution

A is correct. The BHB allocation effect is

\sum (w_p - w_b) \times R_b

. Technology:

(0.35 - 0.28)(12\%) = 0.84\%

. Financials:

(0.20 - 0.25)(8\%) = -0.40\%

. Healthcare:

(0.30 - 0.22)(7\%) = 0.56\%

. Energy:

(0.15 - 0.25)(2\%) = -0.20\%

. Total

= 0.84 - 0.40 + 0.56 - 0.20 = 0.80\%

Question 3 Hard

Using Exhibit 2 and Raghunathan's smoothing model, the annualized standard deviation of Fund VI's unsmoothed returns is closest to:

Solution

B is correct. Taking variances of the smoothing equation, and using the assumption that

r_t

is independent of

r_{t-1}^{obs}

\sigma_{obs}^2 = (1-\rho)^2\sigma^2 + \rho^2\sigma_{obs}^2

\sigma_{obs}^2\left(1-\rho^2\right) = (1-\rho)^2\sigma^2 \quad\Rightarrow\quad \sigma_{obs}^2 = \sigma^2\,\frac{1-\rho}{1+\rho}

so the unsmoothed standard deviation is

\sigma = \sigma_{obs}\sqrt{\frac{1+\rho}{1-\rho}} = 8.0\%\times\sqrt{\frac{1.50}{0.50}} = 8.0\%\times 1.732 = 13.86\%

Appraisal-based marks dampen period-to-period variation, so the reported 8.0% understates the fund's risk by roughly 42%. The 13.9% figure is the defensible volatility input for any risk-adjusted comparison with public equity ahead of the re-up decision; the reported mean return of 12.4% is unaffected by the adjustment.

Create a Free Account to Access All 96 Questions →

Browse CFA L3 Private Markets practice samples, free with step-by-step solutions and no signup.

Guides & Articles

About FreeFellow

Jeffrey Ting

FSA, CFA · Founder

FreeFellow was built by Jeffrey Ting, a credentialed actuary and CFA charterholder who has passed thirteen of the hardest exams in finance, all on his first attempt. He paid four-figure prep fees along the way.

So he started writing his own questions, then lessons, then mock exams, until it grew into a full prep platform covering 40 exams with more than 45,000 original practice questions. FreeFellow LLC is a CFA Institute Prep Provider. Its CFA® exam materials are validated by CFA Institute for substantial curriculum coverage and updated annually.

Cost shouldn't decide who gets in.

A CFA charter, a CPA license, an actuarial credential. Each opens a real career, but prep fees add to the cost of getting there. FreeFellow keeps its original question bank and written lessons free so you can study even if a paid course is out of reach.

Free should mean free.

The original question bank, the worked solutions, the topic lessons, mixed practice, and your readiness score stay free, forever. Full access needs a free account, and practice usage limits apply. Fellow adds AI grading on supported exams, spaced-repetition flashcards, full-length mock exams, analytics, and a study plan that adapts to your progress.

Meet the founder ›Read the values ›