Passing the CFA exams is an important step in your career as an asset manager or analyst. The three, six-hour exams are based on approximately 2,000+ pages of curriculum each and encompass a wide range of financial and investment knowledge. While learning the material is just as important for your long-term future, your immediate goal is to pass the exams.
There are strategies that will get you through all three exams and those that you will need to change for each test. We will cover those strategies and advice specific to the Level I CFA exam here and hold the broader suggestions for a future post.
The best tip to passing the level I exam is to understand that there are no ‘tricks’ or easy-outs. You need to learn an incredible amount of information and be able to recall it from memory within a six-hour period. The average candidate spends approximately 300 hours studying for each exam, and even then faces a pass rate that is around 50 percent for each test. You need to set your mind to putting in the considerable amount of time and effort to study the material. With that, we at FinQuiz can help you focus on the most important sections of the exams and help you use your time most efficiently.
The first thing you need to do with the Level I is to look at the topic weightings on the CFA Institute website. While the Institute does not release the exact percentages of the topic area proportions on the exam, they give range estimates. Looking at the topic area weights, there are some things that should influence your preparation.
- Ethics is extremely important to the Institute and they hit it heavily in the exams. It will be between 10-15% of each of the exam levels. Further, the ethics material does not change considerably between levels so hard work spent on the first exam will take you through the other levels as well. The Institute has even publicly stated that those candidates close to the passing score will either pass or fail depending on their score in the ethics portion of the exam. Do not underestimate this section. The Institute is particularly adept at designing questions that are ambiguous or not intuitively easy.
- The Ethics, Financial Reporting & Analysis, Equity and Fixed Income topic areas are more than half (57%) of the exam points. You will not pass the CFA exams without mastering these topic areas. Further, these topic areas are heavily tested in the other two levels as well so your hard work before the first exam will be rewarded. Consider these areas the ‘core’ of the exam.
With the quantity and depth of material on each exam, you need an organized and efficient study plan to get through them. This involves planning, not only your schedule but also which resources you should use to best use your time. While the tests are based directly off of the official curriculum, relying exclusively on the curriculum is not the best method for most candidates. While much of the curriculum is extremely practical and interesting, there are some areas that can be a little academic and monotonous. This is where condensed study guides like FinQuiz become extremely important. By using the study guides to focus in on the most important information, you can cover the material in far less time than through the curriculum.
Another important idea for the exam is using multiple variations of study resources. To really learn the material, you need to go over it multiple times. Trying to do all your studying through just study guides is a recipe for boredom and frustration. This makes resources like summary sheets, flash cards and question banks extremely important to round out your study methods.
Ethical and Professional Standards is arguably the most important section of the three exams. Many candidates underestimate the topic because they think the questions will be intuitive and simple. Unfortunately, it is not as simple as merely don’t lie, cheat, or steal. First, concentrate on learning the basic idea behind each standard then do the problems in the curriculum multiple times. You need to get comfortable with the Institute’s reasoning and these questions are the best way to do it.
Corporate Finance and Economics are largely conceptual topic areas. These are sort of in-between in importance because while they do not offer as many points it is fairly easy material to pick up. Understand the basic reasoning behind financial decisions at the corporate and macroeconomic levels and you shouldn’t have a problem.
Quantitative methods, while probably not as important as some other areas at the first level, is still extremely important as an aid to the rest of the material. The first level can be tough for those that do not have a strong basis in mathematics but you will need to be able to do these types of calculations in other topic areas. Spending a little extra time on quant methods here will pay off in the exams and probably your career as well. Be sure to learn the mathematics involved in portfolio measurement, such as volatility and return.
Financial Reporting and Analysis is one of the most important, and possibly most difficult areas for many candidates. Fortunately, you are given the opportunity to start slow on the first exam. Most of the first exam points revolve around a basic understanding of the three financial statements and some fundamental metrics. You must absolutely learn these three statements or you will not be able to pass the level II exam. Understand how the three statements are related to each other and how management can manipulate individual line items to change reporting. You will probably end up spending most of your study time in this topic area.
Alternative Investments and Derivatives are secondary topics on the first exam. They will be a little more important on the second exam, but still not ‘core’ material. Understand the differences between each ‘alternative’ investment type and how they are each different from other asset classes. Pay attention to differences in liquidity, risk, time horizon, and returns. The derivatives section is mostly quantitative and fairly easy types of calculations. If you understand what each derivative product allows the investor to accomplish, usually some form of risk hedging, and the calculation then you should be ready for the exam.
Equity and Fixed Income Investments are also very important on the first exam, not only for points here but also as a lead-in to the second exam. Both topic areas area mix of conceptual and quantitative material so you really need to study and do practice problems. Your study in these two areas on the first exam will build your base of knowledge for the second exam which is extremely focused on analysis.
Portfolio Management is not an important topic at the first level but there is still some information here that you will need for the other two exams. The topic is largely conceptual, so understanding the basic idea of the material will get you the majority of the points on the exam.
Most of the material on the level one CFA exam is conceptual and fairly basic. It might not take you a great deal of time to master the concepts enough to pass the exam, but any extra time spent on the Level I will pay off when studying for the other two exams. These tests are built well in the sense that each one is a progression of difficulty and depth within the 18 study sessions.
We will cover the other two exams in separate posts and then an overall strategy for the exams.
‘til next time, happy studyin’
Joseph Hogue, CFA