Answer: Level 3 assets.

## Explanation Internal valuation models are most likely used for **Level 3 assets**. ### Understanding the Fair Value Hierarchy: **Level 1 Assets:** These are assets with quoted prices in active markets for identical assets. They have the highest reliability and transparency, and internal valuation models are not needed. **Level 2 Assets:** These are assets with observable inputs other than quoted prices in active markets. They might use market-based inputs like quoted prices for similar assets, interest rates, yield curves, etc. While some judgment may be involved, these still rely on observable market data. **Level 3 Assets:** These are assets with **unobservable inputs** where there is little or no market activity. These assets require significant judgment and estimation using internal valuation models, proprietary methodologies, or management assumptions. ### Why Level 3 Assets Require Internal Models: 1. **Lack of Market Data:** No observable market prices or inputs available 2. **Illiquid Investments:** Often include private equity, distressed debt, complex derivatives, or other hard-to-value instruments 3. **Hedge Fund Context:** Hedge funds frequently invest in complex, illiquid securities that fall into Level 3 categorization 4. **Manager Discretion:** Valuation requires significant management judgment and proprietary models ### CFA Curriculum Context: In the CFA curriculum, this relates to the fair value measurement hierarchy under IFRS 13 and ASC 820 (US GAAP). Level 3 fair value measurements are those that require the greatest use of unobservable inputs and internal valuation models. **Correct Answer: C - Level 3 assets**

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