Staying Focused on your CFA Schedule without Burning Out

It’s a big week for Level 1 CFA Candidates. Saturday is the big day and many of you will be using this last week for an intensive review of the curriculum.

Studying for eight to 12 hours a day can get you those last few points you need to pass but you’ll need to use your time effectively and avoid burning out. You’ve spent the last few months studying the curriculum and it can be easy to zone out if you stare at it for too much time before taking a break.

The MIT Center for Academic Excellence recommends planning your schedule around one-hour blocks with 50 minutes of studying and a ten minute break. This helps you stay focused without zoning out and getting tired during those long days of studying for the CFA exam.

But there’s more to managing your time than just planning for your ten minute breaks. Make sure you avoid the biggest risks in your hourly breaks and plan activities that will help you succeed.

Avoid these Study Break Nightmares

There are two problems that come up when CFA candidates try to take a break from studying

  • Too many breaks go into overtime. You plan on stopping for just 10 minutes but then find yourself an hour later still not back on your study schedule.
  • Some activities affect your studying well after you’ve returned to the curriculum. It might seem like it’s only taken 10 minutes but the after-effects last for hours.

Avoid these bad study break ideas:

  • Don’t turn on the television thinking you are going to watch just ten minutes of TV. You’ll end up watching an entire movie and wasting the whole day.
  • Anything online is going to be a recipe for disaster. This includes checking email, news, the stock market and just about anything else on the World Wide Web. There are two problems with getting online for your study breaks. First, there is just too much temptation to go over your break time. You’ll also carry the distraction back with you to your studying. You’ll find yourself thinking about where the market is going or an important email instead of thinking about the CFA curriculum.
  • Don’t check in on CFA-related websites or study groups during your break. That’s not really a break from studying for the CFA exam. You need something that is unrelated and that will take your mind off the curriculum for a moment to relax.
  • Don’t start any conversations during your study break. You might not be able to wrap it up within the allotted time and any messages you leave might be returned when you’re trying to study.

Ideally, you want to take short breaks every hour or two that can take your mind off studying but that won’t keep you from getting off track.

Avoid foods as a CFA study distraction. Catching a snack every hour or two could mean some serious kilograms put on over the last week before the exam. Besides the extra weight, it’s too easy to be tempted to cook a bigger meal than you planned. You’ll spend valuable study time cooking and a big meal could make you drowsy when you finally get back to studying.

Instead, schedule regular meals around the day. Avoid foods high in fat that will sit in your stomach, making you feel sluggish, and don’t overeat.

Stretching or light exercise is a great way to use your study breaks. Do some quick calisthenics in the study room or stretch for about 10 minutes. It will improve circulation and wake you up. The idea isn’t to exercise vigorously but just to get a quick pickup. You’ll love the energy but won’t generally be tempted to extend the break for more than scheduled.

While you generally don’t want to do too much snacking or cooking during your study breaks, having a cup of tea can be a great alternative. It won’t take more than a few minutes to prepare your tea and another five or six minutes to drink. A cup of green tea will refocus your brain and improve your memory without hopping you up on too much caffeine.

If your study area is a disaster area, take a few minutes to organize your things and tidy up a little. Putting everything in its place can help you stay focused and can lead to less distractions while you’re studying. We’re not talking about taking an hour to deep clean the house, just a few minutes to pick up some stuff and make your study area more professional.

Whatever you decide to do for your regular study breaks, don’t do it every time you break. You’ll take upwards of ten breaks a day. Try exercising during every break and you’re going to start getting extremely tired. Doing the same thing each break will also get boring and won’t be much of a break at all.

Plan out your study schedule with effective breaks and use this last week for all that its worth.

‘til next time, good luck!
Joseph Hogue, CFA

A Last Week CFA Schedule and Checklist for Success

There’s just two weeks before the December CFA exam and there’s finally some light at the end of the tunnel. For a lot of CFA Level 1 candidates, the intensity of studying for the CFA exams is something entirely different.

You’ve come a very long way but resist the temptation to glide easily to the test. Using your last week wisely can mean the difference between passing on to the second exam or having to repeat your efforts in June.

Your Last Week CFA Study Plan

Long-time readers of the blog will know I’m a big believer in an intensive study schedule the final week before the exam. Not only can making the CFA exam your job that last week score you a lot of points it can actually be a lot of fun as well.

Think I’m exaggerating that your last week studying for the CFA exam can be fun?

Take next week off from work and commit to an intense study schedule around the CFA curriculum. I always stayed home during the week but I know a lot of candidates that have traveled somewhere for the week as well. Staying in another city not only makes the week more enjoyable but it also gets you away from all the distractions you’ll face at home.

Plan on studying between 10 and 12 hours a day from Sunday through Thursday. This can still leave you plenty of time to relax and take in a few sites around town. I wouldn’t plan on traveling too far from home and your test site, only as far as you can drive in a few hours. That way, you can spend Friday getting back home and relaxing before Saturday’s exam.

If you do stay home for the last week before the CFA exam, try studying in a private location. Reserve a study room at the library and turn off your cellphone. You might want to disable internet browsing if you are studying the CFA curriculum or notes on a tablet, just so you aren’t tempted to waste time.

Set a strict schedule for each day’s studying. Try reviewing at least two study sessions and working as many practice problems as possible. Do at least one full-length practice exam at the beginning of the week to find your problem topics and where you might need to focus.

Make sure you formally limit non-CFA study activities in your schedule. It may seem like only a few minutes but those constant bathroom breaks, walks to stretch out, snack breaks and checking your email can really add up.

Your Last Week CFA Materials Checklist

I usually leave this last-minute CFA checklist for a separate post. I wanted to include it here to give you more time to work on this administration and logistics-type problems this week so you can focus only on studying next week.

Put together your exam-day preparation kit now so you won’t be scrambling to find things just before the Saturday exam. Get a clear plastic bag to hold everything and store it in a safe place where you will be able to find it.

  • Passport identification
  • Your printed admission ticket – I usually printed two just to be safe
  • An approved calculator
  • An extra calculator battery and a small screwdriver – if you want to avoid having to change out your calculator battery, just take an extra calculator instead
  • At least three pencils
  • An eraser and a pencil sharpener
  • Ear plugs
  • Wristwatch

The CFA Institute Program Policy page has all the resource links you need to confirm what you can take to the exam. You will need to visit the page to print out your admission ticket.

You should know where your exam center is located but check out the CFA Institute December Test Center Locations for any updates. If you do not live nearby, it is a good idea to talk to someone that lives near the exam site to ask if there is any road construction or other potential travel problems. If you live more than a few hours from the exam site, you may want to consider staying in a nearby hotel the night before to avoid any problems and get a good night’s rest.

The Institute has published a brief schedule of the CFA Exam Day with recommendations on when to arrive and what to expect. The policy on leaving the exam room after completing one of the sessions has been changed. You are no longer allowed to leave the room after you finish. Everyone will wait to be dismissed together. You are still allowed to leave briefly to go to the restroom but must return to the exam room.

Making sure you get to the exam center and have the right materials isn’t really complicated but there is always one or two candidates that forget something or arrive too late. Prepare your materials and CFA exam day schedule well in advance to take the stress out of these little things. Arriving at the testing location rested and ready will go a long way in giving you the confidence you need to pass the exam.

‘til next time, happy studyin’
Joseph Hogue, CFA

Freelance Analyst Jobs for CFA Candidates

I got a lot of comments and emails about last week’s idea of freelancing as a way to find your passion and succeed as an analyst. I have been freelancing for more than five years and have done it full-time since 2013. Besides making extra money, it can be a great way to build your skill set before you land that dream job.

I thought I would share my story of how I got started as well as some tips for CFA candidates looking into the possibility of freelancing as an investment analyst.

Freelancing Opportunities for CFA Candidates

Freelancing is nothing more than working for yourself, finding small projects where you can and not being held to any single employer. There are two great benefits to freelancing for CFA candidates.

  • The obvious benefit is extra money. You can charge by the project or by the hour with hourly rates ranging from $25 to several thousand dollars an hour for highly qualified CFA charterholders or candidates.
  • You can use freelancing to gain practical experience while you are studying for the CFA exams. Employers want to see that you can apply what the CFA curriculum teaches you before they take a chance to extend a full-time position. I have gotten full-time job offers from people for whom I did freelance work.

There are risks and headaches to freelancing as well. You won’t make much to start and will have to do a lot of work just to get your first clients. You may even have to do some free analysis just to show people what you can do. One of my first projects was a report on the affect of market integration in Latin America. It wasn’t a paid project but something I wanted to do to show my ability as an analyst. It took several weeks to complete but ended up getting me an invite to speak as a panel expert at a Bloomberg conference in New York.

Occasionally you may also run into clients that refuse to pay or have to be reminded several times. This is extremely frustrating, especially if you’ve already delivered the work. Contracts outlining the payment terms help but are not really enforceable unless you want to spend a lot of money on legal fees. It’s rare that this happens but can turn you off freelancing when it does.

Despite the risks and occasional frustration, freelancing is a great option for CFA candidates. It can be fairly easy to get started but you’ll need to make sure you hit the important points.

How to Start Freelancing as an Investment Analyst

Freelancing as an investment analyst is pretty much the same as any freelancing strategy but it’s the job that appeals most to CFA candidates. The truth is that your freelancing business will probably grow to offering other services like white paper reports, content writing and consulting. Of course, the first thing to do if you are already employed is to get written permission to freelance from your employer.

You first need some practical skills. The CFA curriculum is great for understanding how the markets work and some of the tools you’ll use as an analyst but there isn’t much practical exercise in the curriculum. I started with a few financial statement modeling courses and small writing jobs to hone my skills. If you are not a proficient writer, you will need to put in some practice. Even if you are doing almost all your work in an Excel model, you still need to be able to explain the model and potential outcomes in a report. Holding the CFA charter or candidacy will help get your foot in the door, being able to write well will get you the job.

You will also need a basic website to present yourself as well as highlight some of your previous work. The site does not have to be expensive but should be professional-looking. You can launch a website for as little as $5 a month for hosting and just use basic WordPress themes.

Your freelancing business should be doing something you enjoy. You are probably not going to make much money at first so it helps to enjoy the work and be able to see future benefits.

Getting your first jobs will be difficult unless you already have some work experience to present. Make sure it is permissible to present your previous work from employers before posting it on your website. A few websites like Seeking Alpha will allow you to post short analysis and may even pay you to do it. Take some time to read through other articles to see how to put something together and publish. You may also want to reach out to other freelancers and offer to help with their projects. You’ll learn a lot in just a few short months and will have a portfolio of projects to present.

You might try posting for projects on the freelancer websites like Upwork and Freelancer but I have never seen much from these. In more than five years, I have only gotten four projects from these types of sites. Your best bet is reaching out to contacts to let them know you are freelancing and asking if they will refer your name to anyone in need of help.

After a while, people will start coming to you from your website and referrals. Make sure you only promise work that you can complete and deadlines that you can meet. The first job for a client is nice but you will only succeed if you can keep clients coming back for more work. Do well enough and you may find that you continue freelancing even after you pass the CFA exams.

‘til next time, happy freelancing!
Joseph Hogue, CFA

How to Find your Hustle and be a Success

I know a lot of you are just starting your careers and getting your first jobs. I thought I would share an experience that changed my life and that might save you from the misery that plagues so many people.

I get a lot of questions about how to be successful. Some readers are looking to do well at work while others just want to achieve financial independence and retire early. I can relate because I asked the same questions for many years.

The response isn’t what most people are expecting. Instead of hearing how to work less and achieve more, the real secret may actually be in working more.

How the Hustle Changed my Life

Like so many people, I started my professional career in my 20s and hated every minute of it. I had three jobs before I was 32 and felt like I was trapped in the rat race. They were good jobs, all professional positions in finance, but I spent half the time thinking of what I was going to do on the weekend.

I understood that I needed something different. I couldn’t spend the next 30 years of my life hating my job.

Earning the CFA charter in 2011 was a start. It opened up my opportunities but I still didn’t know how to find the job I wanted and how to be successful.

My wife and I knew we wanted to move back to Colombia from the United States and decided to make a plan shortly after I passed the CFA exams. I started freelancing, writing investment analysis for financial advisors and institutional investors. It was tough balancing a side job with my 9-to-5 job but I knew that once we moved, we would have to depend on my freelancing income.

I worked an extra 20 or 30 hours a week on my side job to build it as quickly as possible. By the time we moved back to Colombia in 2013, I was ready with regular clients and a steady income.

But in freelancing and working for yourself, if you’re not hustling then you’re not making any money. I determined to work even harder.

That was just over two years ago. Recently, a blogger friend posted a question on Facebook asking why I hustled. I didn’t have an immediate answer.

While I started hustling out of necessity, working around the clock to support my family and get ready for our move, it wasn’t about the money anymore. I have more than enough clients and we don’t worry about money.

After thinking about it, I realized that I still hustle because I love the challenge. The hustle is a part of my life and I have never been happier. I realized that the secret to being successful and happy with your job is not working less but finding something that you love and working more.

How to find your Hustle

Are you hustling? If you aren’t working everyday like your job and your financial security depends on it, you’re missing out on a huge opportunity. You will never be as successful or as happy as you can be.

I found my hustle by breaking into freelancing but you can find yours at your traditional 9-to-5 job. It can be harder because people are not always rewarded for their hard work in a traditional job. You might have to deal with senior workers that benefit from your work simply because they have been around longer. Work hard enough though and your reward will come.

If you don’t feel like your hustle is at your current job, you first need to decide where your passion is in work. Having a hustle has to start with a passion or you’ll just burn out from the stress. Finding what you enjoy doing and making it a career will help you get through the tough days without giving up.

If you haven’t considered freelancing, check out how to freelance and some websites that connect freelancers with clients. Starting a freelance side job, you’ll work harder than you ever have but you will develop a real expertise. You’ll love the sense of pride from being great at your job and you’ll start to enjoy the challenge of working harder.

‘til next time, happy hustlin’
Joseph Hogue, CFA

The Best Part of the CFA Charter and You Don’t Even Need to Pass the Exams

As a CFA charterholder of more than four years, I can tell you about the benefits of having those three little letters after your name. I’ve gotten my foot in the door to jobs that wouldn’t have been available and have found that I can charge more for my freelance services.

But it turns out, there’s another benefit to the CFA program and you don’t even need to pass the exams to take advantage. This benefit will help you open doors as well. It will connect you with all the right people and will help you shape your career.

I’m talking about connecting with the CFA community through the resources on the CFA Institute website.

We’ve covered some of the great resources on the CFA Institute’s website before. Earlier this year, we ran a five-part series on landing your dream job from networking to interviews. I’ve talked about how to fill the void after studying for the CFA exams by becoming more active in your local CFA society.

But there’s still some great resources and benefits I wanted to highlight, especially for the new readers that might not have seen the older posts. Check out the CFA resources below to network, keep informed on the industry and even make a name for yourself.

Again, best of all, your CFA candidate login gets you access to all of them. You don’t need to pass the exams to start benefitting.

CFA Institute Blogs

The CFA Institute Blogs are a relatively new resource on the website with posts dating back a few years. There are nine linked blogs though a few have been discontinued.

The most active blogs are the Enterprising Investor and Inside Investing. New posts are published on a daily basis and anyone can submit an article for publication. Not only are the blogs a great resource for staying up-to-date on market issues but could turn out to be an excellent way to distinguish yourself.

Check out the posts on one of the blogs to get a feel for the kind of issues discussed and how your expertise might fit in on the blog. Depending on your experience, you might need to research a particular topic to build enough expert knowledge to add something but it is easily doable.

Consider approaching a local CFA charterholder to team up for an article. They can provide the direction and you can do the research. Getting published on one of the CFA Institute blogs and building your expertise in a subject area is sure to get noticed by employers.

CFA Local Societies

I am a big supporter of the local CFA societies and sat on the board of directors to the Iowa society when I lived in the States. Besides the obvious benefits of networking with the people that direct the financial community, going to society events is just plain fun!

Check out a few of your local society’s events. Don’t worry about ‘networking’ at first, just talk to people and have fun. Going into the events without a motive other than just to talk to people and enjoying yourself will help lessen the stress of an unfamiliar room.

Remember, you aren’t restricted to only participating with your local society. Use the societies strategically to guide your career where you want it to go. If you want to end up in a particular city or at a particular firm, try contacting people in that city or with that firm.

CFA Institute Insights & Learning

The CFA Insights & Learning site is the main page for some great continuing education material.

My favorite section is Research & Financial Tools with topic-specific calculators, spreadsheet models, questionnaires and data sets for just about any need. The section is a great resource for data sets that has saved me a lot of time.

The Institute provides some excellent content for your clients in the For Investors section. This is material you can share with clients and other investors to help them understand the financial markets and basic investing principles.

The area also hosts the CFA Institute’s initiative on the Future of Finance, a long-term global effort to shape a trustworthy, forward-thinking financial industry that serves society. This project is on the forefront of the industry and will be a huge issue for years to come. It could be one area where you can make a name for yourself.

CFA Career Resources

Probably the most popular resource with candidates is the CFA Career Resources section with its resource library of presentations and the JobLine platform. The resource library hosts webinars, articles and presentations on everything from skills development to networking for that dream job. There are currently 2,623 jobs listed across five regions and by 175 employers on the CFA Institute’s JobLine.

It’s easy to let time slip away between study seasons for the CFA exams. You finish up the June exam and don’t even want to think about the curriculum or anything with CFA in its name. Pretty soon, it’s January and you have to start studying for the next exam. You’ve let a great opportunity pass by without taking advantage.

You’ve still got two months before you need to start thinking about your next CFA exam. Use those months to take advantage of all the CFA Institute has to offer and some of the resources available. If you haven’t attended a local CFA society event, make it a goal to attend at least one before the end of the year. If you’ve attended some of the events, make it a goal to start getting involved by volunteering. You won’t regret it and you will open up doors you didn’t even know where there.

‘til next time, happy studyin’
Joseph Hogue, CFA

How NOT to be Surprised by the CFA Exams!

Less than half the candidates taking the CFA exams each year pass. It’s a statistic most of you know but never ceases to amaze me. How can an exam be so difficult that less than half pass each year?

You could blame the CFA Institute for making it so difficult and adjusting the minimum passing score but the fact that no one with an average of 70% has ever failed takes some of the blame off the Institute’s shoulders. Having to answer about two-thirds of the questions correctly doesn’t seem like too much to ask for a professional exam.

What if it’s something else? What if candidates just aren’t prepared for the exams? Spending upwards of 300 hours doesn’t seem like a lack of preparation to me so maybe candidates just aren’t preparing correctly for the CFA exams.

Each exam can be surprising for its own reason. This specific challenge in each exam catches candidates off guard and leads to a ridiculously-high rate of failure.

Learn what to expect on each CFA exam and how to study for it, and you’ll be better prepared than half the candidates already.

CFA Level 1 Exam: Information Overload

The first thing that surprises candidates on the CFA level 1 exam is the sheer amount of information they are expected to remember. Through undergraduate studies, most of you have been responsible for textbooks of information but you haven’t had to master all the material for one mammoth-size exam.

The CFA Institute doesn’t feed you the information in manageable chunks and then ask you focused questions every couple of weeks. The Institute turns on the firehose and drowns you in knowledge of which you’re supposed to drink every last drop.

Maybe the firehose analogy is a little extreme but it seems that way at times.

The trick to passing the CFA level 1 exam is that you don’t need to know every excruciating detail within the curriculum. Much more important is the basic ideas and concepts around each study session. Understanding the qualitative ideas in the curriculum is much more important than being an expert in one topic. This means reviewing every study session and getting a basic understanding across the entire curriculum.

Understanding the main ideas will help you immediately eliminate at least one potential answer for each question and should help you pick out the most appropriate answer.

It also helps to use multiple resources when studying for the CFA level 1 exam. Getting the curriculum from several different perspectives, i.e. official text, study notes, videos, flash cards and practice problems, helps to build repetition and memory.

CFA Level 2 Exam: A Quantitative Monster

After figuring out that the first exam is all about basics and qualitative information, the CFA Institute throws you a curve ball with the CFA level 2 exam.

The second CFA exam is all about formulas and quantitative detail!

While the CFA level 2 exam includes the same topic areas as the first exam, the topic weights clearly show a focus on three subjects. Financial Reporting & Analysis, Equity Investments and Fixed Income will account for up to 65% of your exam score and a large chunk of that is in quantitative calculations.

Top it off with the fact that you have a different format in the vignette questions, having to read through a story and then answer a set of questions.

Avoid being surprised by the quantitative material on the second exam through understanding the conceptual reasoning in the formulas and repetition.

Try memorizing every formula on the CFA level 2 exam and you could end up in an asylum for the criminally-insane. There are just too many letters, abbreviations and craziness. If WACC = (Vd/(Vd +Vce))rd (1-t) + (Vce/(Vd+Vce))rce) doesn’t make you go cross-eyed you are a stronger person than I am. Think about it intuitively and it makes sense.

The overall cost of a firm’s funding capital is the cost and proportion of equity and debt. The percentage of each funding type relative to the total is multiplied by its cost. Debt is tax advantaged, so you need the after-tax cost.

Understanding the conceptual reasoning behind each formula will help you recall it on the exam and you won’t drown in a sea of math.

The second trick really is no trick at all. You just have to work those practice problems over and over again. Use flash cards to write out the especially-difficult problems so you can review them several times a day until you’ve got it down. Work the end-of-chapter questions for each study session and use a question bank of problems if you’ve got one available.

CFA Level 3 Exam: Essays are a Physical, Emotional and Intellectual Challenge

Most CFA candidates understand that the essay section will be difficult but few realize how difficult it’s going to be until they’re half way through the morning session and sweating through their shirt.

The three-hour morning section of the CFA level 3 exam is a physical, emotional and intellectual challenge for which few really prepare well. It isn’t about just understanding the material, it’s about being able to construct your own answer and being physically able to write for three-hours straight.

There is really no better resource than the old exams provided by the CFA Institute. The Institute releases the last three years’ worth of morning essay questions on its website along with guideline answers.

  • Don’t just review these past morning sections, actively work them as if you were sitting for the exam. If you haven’t prepared the muscles in your hand to write for three hours when you arrive at the exam, you are going to regret it.
  • Learn how to bullet-point your responses to include all the relevant information. This will save you a ton of time on the exam. See how it’s done in the guideline responses.
  • When you’re writing out your answers on old exams, practice writing out your thought pattern. The CFA Institute awards partial credit for the essay portion but you have to demonstrate a certain point within the answer. Writing out your reasoning makes it more likely that you’ll hit on a few of those points and get the highest score possible.

Passing the CFA exams means being prepared for each exam and not being caught off guard by differences on each. Ask other candidates what surprised them most and understand how to study for each exam.

‘til next time, happy studyin’
Joseph Hogue, CFA

Will I Pass the CFA Exam: A CFA Studying Checklist

As much as we cover strategies and studying here on the Finquiz blog, one of the most difficult questions a candidate faces is, “How do I know if I’m ready to pass the CFA exam?” You can practically quarantine yourself away for months, studying every formula and note in the curriculum, and still the question will nag you.

Go into the exam shaken and worried that you’ll end up in one of the fail bands and you’ll have a harder time remembering the material. Without being able to know if you’ll pass the CFA exam, it’s difficult to find the confidence to not be worried.

It’s an ironic dilemma.

To that end, I’ve put together a checklist for passing the CFA Exam. Plan your CFA studies out to check off each point on the list and you can go into the exam with the confidence of your success.

Checklist for Passing the CFA Exam

First off, this isn’t a scientifically-developed checklist. The CFA Institute hasn’t provided any data or guarantees to prove the points. It’s just my experience of what makes a candidate successful after three years of taking the exams myself and another 3+ years of writing exam prep.

I’ve spent more years studying the curriculum than most. I’ve talked to more candidates than I can count about their experience. I can confidently say, if you have done the points below, you have a great chance of passing the CFA exam and you can be confident of your success.

I have read the official CFA curriculum at least once all the way through

There’s really no substitute for the official curriculum. On an exam where more than half the candidates fail and just a few points could make the difference, do you really want to put all your faith in condensed study notes?

The curriculum is extremely long and can get boring at times but you need every detail. I would recommend you read through it at least once and then review once more just to be sure.

I have read through the official CFA curriculum once again or through condensed notes once or twice

Part of the ‘secret’ to passing the CFA exams is just plain repetition. There’s an immense amount of material that you need to remember over the six-hour test. Studies show that you need to see something about seven times in order to commit it to memory. It might not be possible to read through the official curriculum that many times in your limited time but you can easily cover the material a few more times through condensed study guides.

Besides reading through the curriculum and reviewing it through notes a few times, you’ll want to build repetition through practice problems and other resources.

I have worked at least 120 practice problems for each study session

The CFA level 1 exam consists of 240 questions, split between morning and afternoon sessions. Working 120 practice problems for each of the 18 study sessions means over 2,000 problems and a full three-hour session practiced in each.

You won’t be able to get all the practice problems from the end-of-chapter sections of the curriculum. This is where question banks and study guides come in handy. You can refer to questions in older versions of the curriculum, usually available at the library or through members of the local CFA society, but you have to make sure they aren’t outdated.

I created flash cards with the most difficult problems – most of which I now know

This one serves a couple of purposes. It measures your use of different resources for mastering the CFA curriculum. Using different resources beyond just reading helps to keep your studying from becoming boring and gives you another way to look at the content. It’s one more repetition closer to the seven or so you’ll need to remember the material.

Being able to easily work problems you once found difficult is also a sign of progression and learning. Constantly progressing through your mastery of the CFA curriculum is more important than you might think. Besides understanding more of the material, you’ll become more confident from the regular reinforcement in the fact that you are learning more.

I have kept close to my original study schedule or if I lost some time, I made it up within the next week

This one is more a test of your commitment. Too many CFA candidates allow themselves to deviate from their schedule, promising to make up the time but never getting around to it. It becomes easier to skip studying all-together.

I have taken at least three mock exams and measured my results in each

How can you have any idea of how well you’ll do on the CFA exam if you don’t replicate the experience with a mock exam? Not only will it test your knowledge of the material but will also test your endurance to sit through the two 3-hour sessions.

Make sure you track your results for each mock exam, overall and for each topic area. Besides studying the material, it will help uncover any weak spots you may need to hit again.

Being able to say you’ve done everything on the list doesn’t guarantee you a passing score on the CFA exam but it does demonstrate your commitment to the process and a good review of the content. Remember, the idea isn’t just to check off that you’ve completed one of the points but to have the confidence that you’ve done what it takes. It’s not the end of the world if you’ve stumbled in a few of the points and can’t quite check them off, just try to get as much study time in from here to exam day.

‘til next time, happy studyin’
Joseph Hogue, CFA

Top 9 Formulas for the CFA Level 1 Exam

Peeling back the cover on your CFA Level 1 books can be a shock at first. Thousands of pages and hundreds of formulas sit in front of you and can seem overwhelming.

Before you freak out, it’s not really so bad. While formulas become crucial on the CFA level 2 exam and its quantitative focus, the formulas on the first exam are much more about learning relationships and the process. Learn the ‘why’ of the formula and you’ll remember how to work it on the exam easily.

I thought I would cover some of the most important formulas in the CFA level 1 exam and how to approach the mountain of equations. Practice problems and flash cards are going to be your best friends. There’s really no substitute for working formulas over and over again for remembering them on the exam. Write out practice problems of the most difficult and most important formulas and then practice them daily until you can do them easily.

Equation #1: Future Value of a Single Cash Flow

The future value of cash flows is not a difficult formula and one that you’ll do on your financial calculator but it’s really a building block to a lot of the more difficult formulas for time value of money. Make sure you understand this basic formula and what the different notations mean.


i.e. if your savings account earns interest at a 5% rate and you have $100 deposited, how much will it be worth in 20 years?


Equation #2: NPV and IRR

Both NPV and IRR are also found easily with the calculator but they pop up many times in conceptual questions so you really need to understand the idea behind each. Remember that a key assumption of IRR is that cash flows are reinvested at that rate, which may not be realistic. Also, if there are multiple cash outflows, there will be multiple IRRs or none at all. There may be a conflict between NPV and IRR when projects are mutually exclusive or when there are multiple cash outflows. In this case, NPV is preferred.

Using the calculator is relatively easy,

The initial project cost or investment is a negative (outflow) as CF0
CO1 through x are the stream of cash flows and entered as a positive (inflow)
If cash flows are an equal amount, you can enter them as F (frequency)

Press the NPV button and enter the interest rate
Down arrow
For IRR, just press the IRR button and CPT

Equation #3: Sharpe Ratio

The Sharpe Ratio is a measure for adjusting risk across investments and measuring return on the same scale. While bonds may offer a much lower rate, are they a better or worse investment than stocks given their lower volatility? It’s a pretty easy calculation and you’ll see it come up in all three exams so make sure you can remember it quickly.

Sharpe ratio = (Asset Return – Risk Free Rate) / Asset Standard Deviation

Equation #4: Capital Asset Pricing Model

There are a lot of flaws in the CAPM and it’s used more in academics but it is still a very useful formula and will appear throughout the CFA exams. Beyond the formula, you should pay attention to drawbacks of using the CAPM.

Ra = rf + Ba (rm-rf)

The required return (Ra) is the amount of return required given a specific asset’s additional risk relative to the market and the risk free rate. You multiple an asset’s beta (Ba) by the difference between the expected return on the market (rm) and the risk free rate (rf). You then add back in the risk free rate.

The difference between the market’s expected return and the risk free rate is called the market premium, the additional return required for taking on market risk.

Equation #5: DuPont Analysis of ROE

DuPont analysis breaks down the return on equity (ROE) into three components, profit margin – asset turnover – equity multiplier.

ROE = (Net Income/Sales)*(Sales/Assets)*(Assets/Equity)

Which becomes (Net Income/Equity) in its simplest form.

The formula provides another layer of analysis on which to compare company profitability. It’s not enough to be able to say that one company has a high return on its shareholder equity but you need to know the source of the return.

Equation #6: Dividend Discount Models

The Gordon Growth Model (GGM) is arguably one of the most used formulas in the curriculum. It is a single-stage model, assuming that dividends will grow at a constant rate into perpetuity. The general formula is:

Price = Div0 (1+growth) / (Rce – growth)

An important note is that the required return must be higher than the growth rate in dividends to use the formula. This is not usually a problem in single-stage models because the long-term growth rate will probably be fairly low. Be ready to calculate some of the data points on the exam (like finding the discount rate through CAPM or the growth rate through ROE and the payout ratio).

The GGM is not appropriate when the company is experiencing super-normal growth for a period before it slows to perpetual growth. For this scenario, you need one of the multi-stage models.

Equation #7: Weighted Average Cost of Capital

Understanding and calculating the WACC is another foundational concept that you will need to master. The concept is pretty intuitive, a firm’s cost of capital (spending) is a weighted average of the cost from each source (debt or equity). Debt is normally less expensive and tax shielded but can be risky at high amounts.

WACC = E/V * Re + D/V * Rd * (1-Tc)

The WACC is equal to the percentage of financing from equity (E/V) times the cost of equity (Re) plus the percentage of financing from debt (Rd) times the cost of debt, adjusted for the tax shield.

Use the market value of debt or equity when available. Remember, the company’s capital structure may change over time so it is preferable to use target weights instead of current market value weights.

Equation #8: Free Cash Flows

FCF models acknowledge that investors have a right to all cash flows from a company and not just those paid out as dividends. Free cash flows are the cash generated from operations after that needed for continued operations is deducted.

The advantage is that FCF compared to dividend models is that FCF can be calculated regardless if the company pays a dividend. FCF models are also appropriate for investors that may be able to exercise a control premium on the company. The major disadvantage is in valuing those companies with high capital expenditures, making free cash flow negative at times.

Free cash flow is shown two different ways, Free Cash Flow to Equity and Free Cash Flow to the Firm, each appropriate to two different ownership perspectives. FCFF is the cash flow from operations after capital expenditures that is available to both levels of ownership (debt and equity). FCFE is that left over after paying debt holders, since they have a prior claim.

Free Cash Flow to the Firm (FCFF) is the cash flow available to all capital providers (debt and equity) and equals:

Net income + Net noncash Charges (depreciation and amortization) – Investment in working capital – Investment in Fixed capital + after tax interest expense

Free Cash Flow to Equity (FCFE) is the cash flow available to common shareholders and equals:

Net income + Net noncash Charges (depreciation and amortization) – Investment in working capital – Investment in Fixed +/- net borrowing

  • Notice that FCFE is FCFF except without adding back interest expense and taking net borrowing into account.
  • Understand how to arrive at FCFE or FCFF with CFO
  • FCFF = CFO + INT (1-t) – invest fixed capital
  • FCFE= CFO – invest fixed capital +/- net borrowing

Equation #9: Turnover Ratios

The last formula is actually a series of ratios but all relatively easy to remember. These are the turnover ratios: accounts receivable, inventory turnover, number of days receivables, number of days payable and number of days inventory. You’ll use these to calculate the net operating cycle and all individual ratios are fair game on the exam.

The most important thing here is to remember that when you are combining income statement data and balance sheet data, you need to use an average of the balance sheet data. For example, the inventory turnover ratio is the cost of goods sold (income statement) divided by the average inventory from the current and previous period balance sheet.

Most of these formulas are not difficult and are pretty intuitive if you just think through them for a moment. You’ll need that deep understanding of what is going on in the formula more than you’ll need the formula itself. Make sure you have this conceptual mastery and you’ll have no trouble on the CFA level 1 exam.

‘til next time, happy studyin’
Joseph Hogue, CFA

What do you need to pass the CFA Level 1 Exam?

By far the most common question we get at Finquiz is, “What does it take to pass the CFA level 1 exam?” It’s a valid question considering only 42% of CFA level 1 candidates passed the June 2015 exam.

How can more than half of the candidates taking an exam fail to achieve a passing score? What does the CFA Institute expect you to know before moving on to the second exam?

Of course, the Institute doesn’t make things any easier by not releasing their minimum passing score. We know that no candidate has failed any of the exams with a score of 70% or higher but we’re never given the minimum score for any testing year.

But there are ways to approach the exam to determine what you need to do to be confident of passing. Looking at the topic weights and understanding how the CFA level 1 curriculum is tested can give you the edge you need to push you above the mysterious passing score.

CFA Level 1 Most Important Topics

Every study plan should start off by looking at what is being tested and how important it is to the overall exam. The CFA Institute releases the topic weights for the three exams each year with changes occurring only rarely.

2016 CFA Exam Topic Weights

2016 CFA Exam Topic Weights

The CFA exam topic weights factor heavily into our study strategy to pass the CFA level 1 exam. Topic weights have changed only slightly since I studied for the level 1 exam in 2009 and the key topics haven’t changed. Ethics and Financial Reporting & Analysis continue to be the most tested topics. You should also notice that Equity Investments and Fixed Income, while only worth 10% of your level 1 exam are worth a much bigger percentage in the other two exams. Focusing on these other two topics as well will help you save time when you do pass the first exam.

It may be a little disappointing but there really is no secret to passing the CFA level 1 exam. The exam covers a huge range of topics and can seem overwhelming for many candidates. Fortunately, the test doesn’t get very far into the details of the subject matter. The curriculum is tested on a basic understanding, a mastery of the big picture and the relationships between different concepts.

This means that you shouldn’t spend too much time on any particular topic or reading. Make sure you master the four core topic areas in terms of weighting but read through the entire curriculum multiple times to get a strong overview of everything.

The CFA Institute regularly releases its candidate study survey that nearly always shows an average of 300 hours studying by successful candidates. While candidates in the level 2 exam might spend a majority of time on FRA and level 3 candidates probably spend more time on the essay section, level 1 candidates should spread their time out more evenly.

Trying to spend 300 hours reading through the same curriculum is only going to lead to burn out. You need to mix up your study resources so studying stays fresh enough that you don’t get bored. This means reading the curriculum, reviewing notes, working practice problems, studying flash cards and even reviewing difficult concepts on YouTube when available.

CFA Level 1 Study Plan: Tortoise or the Hare

If you are reading this for the 2015 December level 1 exam, just two months out from now, you may need to kick your study plan into overdrive depending on how far along you are in the curriculum. You will want to start taking mock exams and practice exams by November to gauge your progress. Aim for a target of 75% or better in each topic area to give yourself some room for error on the actual exam.

Multiple resources are the key for covering the material from different perspectives and reviewing the curriculum multiple times. With thousands of pages in the official curriculum, you may not have time to read through it again and still do the necessary practice problems and mock exams. Try shifting more time to review notes and flash cards to cover the material more quickly.

If you are studying for the 2016 CFA level 1 exam next June, then you’ve got more time to prepare. Start reading through the curriculum in December or January at the latest. Once you’ve worked through the official curriculum once, you can start reviewing using other resources to reinforce the material.

Given the low pass rates on the CFA exams, you’re best bet is to over-study for the test. Plan an aggressive study strategy and go into the exam super-confident that you know the material. It’s far better to over-study than to have to spend another year reviewing the material because you didn’t study enough.

‘til next time, happy studyin’
Joseph Hogue, CFA

What to do after Failing the CFA Exam

So you got the bad news that you failed the CFA exam last June and you’re feeling pretty low. Even though you’ve got plenty of company with between 47% and 58% of candidates failing one of the CFA exam levels, it still feels like a personal defeat.

First of all, don’t stress out over a CFA exam fail. Over a 20- or 30-year career, one year doesn’t make much difference at all. Having to repeat the material may even make you a better professional by really cementing the curriculum in your mind.

The most important thing is that you learn something from the experience and understand how you can avoid it in the future. I talked with five candidates that failed the CFA exam in June, three that failed the CFA level 2 exam and two that failed the third exam. Each candidate had something different to share and a different strategy for passing the CFA 2016 exam.

Check out their story and relate it to your own and your chances of passing your next CFA exam will improve significantly.

Why did you fail the CFA Exam?

Take a moment and evaluate your CFA study plan. What band did you appear in for the exam results? The ten bands are approximately equal score so each is likely between 3% and 5%, meaning the band 9 and 10 candidates missed passing by only a few questions.

For many candidates, it is just a matter of time spent studying. The average passing candidate spends around 300 hours studying for the exam. That’s just over ten hours a week on a six-month schedule, but try to cram it into three or four months and your commitment increases to 20 hours a week or more. A lot of candidates plan on putting in 15 or more hours a week studying and decide to wait until February to start but then have something come up that takes their time away.

That’s what happened to James from Portland. He started studying in late February and thought he would have plenty of time. He got a job offer in March and was working more hours than he expected through June. Besides James’ story, I hear the problem from a lot of candidates. Between heavy workflow around the end of the quarter and other life events, you never really know how much time you’ll have to study. That’s why you need to start as early as possible, even in December, to give yourself plenty of time.

The CFA level 3 essay section catches some candidates by surprise. Arnav of Mumbai told me that he was extremely confident of his knowledge of the material but just couldn’t write fast enough on the essay section. His hand started hurting after a couple of hours and he ran out of time before he could finish.

You absolutely must practice the essay section for the level 3 exam. Besides learning how to write down your thoughts quickly, you need to train your mind and muscles to be able to do it for three hours. It can be really tiring for candidates that don’t practice. The CFA Institute makes this as easy as possible by publishing the actual morning section exams along with guideline answers. You can sit down and take the essay questions just as if you were sitting for the exam.

We’ve covered a lot of the old CFA essay exam questions on the blog. Click through to this post on How to Pass the CFA Level 3 Essay Section for strategy and links to individual essay questions.

What could you have done differently to pass the CFA Exam?

I know a lot of CFA candidates that neglect doing practice problems, something that tripped up Jennifer of Miami. She told me that she meant to work the problems but it was just so much easier to read the material and not do the work.

Working practice problems can be a pain sometimes but they are absolutely critical. Not only is it an active learning technique, proven to help you retain information, but it also keeps you from zoning out as you read the material.

Paul from New York fell into the trap of having too many distractions during his study routine. I am guilty of this one as well. When I was studying for the first CFA exam, I would often study in front of the TV. I would be distracted often and would spend much of my study time just focusing back in on where I was in the book. Beyond the TV distraction, a lot of other things in the home are going to distract you from really focusing on the material. That’s why it’s always better to find a quiet place outside the home, maybe at the library, to do your studying.

Koki of Tokyo thought he would pass the exam by just reading through the curriculum once and working the practice problems. Many candidates believe that because they did well in school, always remembering things for the test, then they will do equally well remembering the CFA material for the exam. The CFA curriculum is an incredible amount of material and you have to remember it all in one six-hour sitting. It’s entirely different than having to remember a few weeks worth of lectures for a college exam.

Studies show that you need to review something between five and seven times to commit it to memory. Besides reading through the curriculum and working practice problems, you should consider other ways to review such as flash cards, study guides and talking your way through it. Finquiz Notes are designed to be used with the official curriculum so you can review and highlight important information while you are studying. The more times you can cover the material, the more likely you’ll be to remember it on the exam.

Taking an honest look at what happened on your CFA exam is the first step to passing the next exam. Check out these five stories from candidates and reevaluate your own study plans. With a little work, you’ll be well on your way to earning the charter.

‘til next time, happy studyin’
Joseph Hogue, CFA

Why I Sacrificed Three Years of My Life and am Glad I did!

The CFA exams are tough! No doubt about it. To pass the exams, you’re basically saying that you’re willing to work a part-time job for six months of each of the next three years…and you’re going to pay someone to do it.

I did it and about 165,000 candidates make the decision every year. After making the decision, many candidates constantly fight with the question of whether it’s all worth it. Only half the people pass their exam in any given year.

Despite all the time and sacrifice, I would do it all again and am glad I took the time for one of the most difficult professional challenges in finance.

The Best Textbooks You’ll Ever Read

Like all candidates, I sat through my undergraduate work and wondered if there was anything more boring than a college textbook. I studied for two degrees, Finance and Communications Studies, and even the analytical material in the finance texts usually seemed completely academic and impractical. Don’t just theorize about the capital markets, help me see how it actually works and fits together!

The CFA curriculum is some of the best textbooks you’ll read, written by actual market participants as well as a few academics. It won’t teach you everything you need to know about a specific job but the breadth of information will get you through just about any topic in asset management. No one really knows where their career will take them but the CFA curriculum gives you a good start in a lot of different fields.

As a CFA candidate, you’ll work harder than you ever did in any undergraduate course. I pretty much breezed through my undergraduate studies. I did the reading and went to class and was able to easily pass the exams without really trying too hard. The CFA exams are different. It’s an immense amount of material and you need to remember it all for the six-hour marathon exam. This kind of challenge forces you to be a professional and to really put the effort into the curriculum.

Surround Yourself with Success

Not only are the CFA exams worth it in themselves, for the challenge and information, but having the charter has opened a lot of doors for me. I have been able to open my own freelance consultancy and have had many clients hire me on the basis of having the charter. I don’t guarantee any special insight or performance as a matter of holding the charter but it does command a high level of respect from a lot of people in the financial market.

Through society and CFA Institute events, I’m able to network and partner with some of the best minds in the business. The Institute keeps a great flow of materials for professional development on its website and I’ve seen several new ideas pop up there before they became commonly accepted rules within the larger financial community.

There are a lot of you, candidates, that will be reading this while questioning whether to start or to continue studying for the CFA exams. I certainly faced my own ups and downs over the three years of studying. It is a lot of time spent with your nose in the books when you could be spending it with friends and family. Some people may even tell you that it doesn’t matter and they did fine without the charter.

Earning the CFA charter isn’t a golden ticket and it doesn’t mean the work is over once you’ve gotten your charter. It does mean a lot of things though and I’m glad I pushed on through. I think you will be just as glad you made it. Stay strong and keep studying.

‘til next time, happy studyin’
Joseph Hogue, CFA

Boys enjoying beautiful yellow sun and green grass. Copyrights

Boys enjoying beautiful yellow sun and green grass. Copyrights

Study Groups for the December Level 1 CFA Exam

With the start of the study season for the December Level 1 Exam comes a rush of calls for study groups in CFA groups on the internet and locally. Studying for the CFA exams can be an extremely solitary and uncertain pursuit so candidates look for help and confidence in groups.

But should you join a study group for the CFA exam? If you do join a group, how much time should you commit and what are the advantages or disadvantages?

We’ve posted a few articles on the Finquiz CFA blog about participating in groups but I thought I would reinforce some of the most important ideas. We’ll look at some study group options, benefits and risks to watch out for before tackling the question of whether you should join a study group for the CFA exams.

What are your options for CFA Study Groups?

I remember studying for the CFA exams, from 2009 through 2011, and joining study groups. Since then, technology has brought new options to CFA study groups but candidates are still using the old methods as well.

First, you’ve got the old school method of in-person study groups. Maybe I haven’t grown up with the technology that enables the other study groups but I still like in-person groups above all others. They take a little longer, through travel time, and a little more coordination to set up but these study groups can be an indispensable networking tool. Through your study time together, you’ve got a chance to develop a real friendship with some of the people that will lead the profession in your city or region.

There are live study groups that meet over Skype or Google Hangouts. This is the next best thing to the in-person groups. You lose a little of the interpersonal nature because you can’t really talk one-on-one with anyone but it’s still face-to-faces so you can build some good connections. Virtual groups can save a lot of travel time and are easier to put together than in-person groups.

Next you’ve got web-enabled study groups on Facebook and in other website forums. These can range in formality from an open forum that allows posting to a closed-group that controls the study plan and questions. You lose a lot of the networking benefit unless you interact with members outside the group. The benefit is that they allow everyone to post and reply on their own schedule.

Lastly, you’ve got the newest type of CFA study groups in messaging software like WhatsApp. These are so popular that they are continuously the most commented discussions in the CFA Candidates LinkedIn group. I’ve gotten mixed reviews from candidates about these groups. They can be helpful because you can multi-task while participating, checking in occasionally on new messages, but you lose all of the networking benefit to groups. I sat in on one of the groups a few times and the flow of messages can get overwhelming.

What are the risks you want to avoid in a CFA study group?

The biggest risk to any study group is going off-topic and letting the group go unorganized. It’s fine to trade a few off-topic comments here and there, that’s all part of being sociable, but it helps to set a schedule and bring the group back on topic quickly.

  • Don’t make the same person act as schedule-keeper every meeting. Nobody wants to be the bad guy, constantly nagging the group to stay on topic. Rotate the role each time the group meets.
  • Everyone in the group has to make the same commitment to the process and the schedule. You’re not accountable to anyone for grades like in school groups but the group breaks down if one or a few people are always missing or forget to read their assignment.

In-person groups and internet-live groups should probably be limited to about six people or less. This helps make sure that everyone has a chance to participate and that you don’t get too many people talking at once. Forum and chat groups can include more people but it still helps if there are a limited number of ‘virtual’ seats. Having hundreds of people participate makes it difficult to differentiate between the real contributors and those just hanging out.

Don’t be afraid to question someone’s answer or rationale behind an answer. You will either learn where you were wrong, improving your own score on the exam, or you will avoid everyone learning the wrong material which will improve everyone’s score. On the same note, don’t take it personally when someone questions one of your answers. You are all there to learn.

Should you join a CFA study group?

Now that you know your options, some of the benefits and the risks to joining a CFA study group, you can make a better decision whether to join one or not. Study groups can be an inefficient way of learning the material, eating up your time and possibly even giving you misinformation from wrong answers. They can also be great motivators through the group support system and an excellent way to network.

I participated in study groups and I would recommend everyone try them out at least once. Maybe I’m old fashioned but I still prefer the in-person groups to any other method. Try putting together a weekly or bi-weekly group in your area, close enough that no one has to travel more than 20 minutes for the group. Limit the group to under two hours and stay on schedule. Going out socially after the group can help keep group-time focused.

I would caution against participating in more than two groups. Spending more than a few hours a week in group is seriously going to cut into your study time. Groups can be great for discussing problems and questions but they are not as efficient as reading the material yourself and working end-of-chapter questions.

If you can’t manage to coordinate an in-person study group or a live-internet group, you might try one of the forum or chat groups. You might have better luck than I did with these groups but remember to keep it organized and on-topic.

I’d love to hear how you are using CFA study groups to further your studying and prepare for the exam. Let me know if I missed any pointers or any of the risks you’ve seen in groups.

‘til next time, happy studyin’
Joseph Hogue, CFA

You need someone at steering wheel in any group. Copyrights FinQuiz

You need someone at steering wheel in any group. Copyrights FinQuiz

Countdown to the December CFA Exam – Here’s your Strategy

There’s just 13 weeks left to the December level 1 CFA exam and you should be starting your preparation if you haven’t started already. Two deadlines have passed for registration and only the final deadline remains to get your seat at the exam.

We just finished up our review of the Code & Standards topic area of the exam but I thought I would start us off again with a few words on getting ready for the December exam. Despite the roughly 50% of candidates that do not pass any given exam, preparing for the three exams can actually be relatively easy if you know the process.

That’s not to say that studying and passing the exam will be easy but that too many CFA candidates make it more stressful than it needs to be. Understand how the Level 1 CFA exam is tested and build yourself an outline for your study plan and you’ll find it much easier to make it through the exam.

How to Pass the December Level 1 CFA Exam

It’s been said that the Level 1 CFA exam is like a lake one-mile wide and an inch deep. It’s an appropriate analogy because the breadth of the material in the curriculum can seem endless, but you will not drown in the details.

In this first exam, the CFA Institute wants to introduce you to the world of asset management and analysis. They do not expect you to be a world-class analyst after reading the curriculum but to have a good base of understanding on the many topic areas and how they fit together.

Your job is to keep this in mind when studying for the December level 1 CFA exam. Make sure you have a good understanding of all the topics and can begin to see how many of the topics relate to each other. The sheer volume of material will seem overwhelming sometimes but the difficulty of the questions is ultimately not a problem.

How do you build this idea into your study plans for the December level 1 CFA exam? You need to make it through the curriculum multiple times. This will help commit it to memory and will make sure you get a broad understanding of everything. Do not spend so much time on details or any one topic area that you cannot make it through all the material.

Besides the official curriculum, a set of study notes makes this more easily achievable. FinQuiz Notes are designed to be used with the curriculum instead of substituting for it. This means they’re shorter than other study notes packages and can help you get the broader picture of the material more quickly. Read through a topic or study session one week then follow it up with a review of the study notes the next week for better absorption.

Check out our basic strategy on how to pass the CFA exams
Check out a more detailed strategy on how to pass the CFA level 1 exam

Getting to December: An Outline for Study Plans

  • Registration ends for the 2015 December CFA exam on September 16th, register here
  • Plan out your study schedule
    • You’ll want to read through the curriculum at least once with time enough to review over the last month
    • Plan on working at least the end-of-chapter questions for each reading and consider a question bank with additional item sets
    • Plan on at one or two days a week with no studying so you do not get burned out on the curriculum
    • Try scheduling the entire last week off from work and devoting it to a last-week review
  • Keep to your study schedule at all costs! It’s only a few months and the odds are high that you’ll have to retake if you do not take this seriously.
  • Check your passport right now! The information must match that provided on your CFA exam registration and the passport must not expire before the exam date. Still time to get it fixed if you check now.
  • Admission tickets will be available several weeks before the exam. Check the information on your ticket as soon as you receive it.
  • One week before the exam, gather all the materials that you’ll take to the exam in one spot. Better to have these ready than to be looking for them the night before the exam.
  • Several days before the exam, check the route to the testing location (if possible) for detours or road work. Ask a local candidate to check the route or if there are typically traffic problems on Saturday mornings.
  • Plan on arriving at the testing center several hours early. This will allow you any last-minute problems and still get you to the exam on time.

We’ll cover parts of the CFA exam prep outline over the next few months to make sure you stay on track for the exam. Try to work a little ahead of your study schedule just in case something comes up to set you back a little. Too many candidates work right at their schedule or a little behind and then get set way back on any minor hurdle. Stay ahead of schedule and go into the exam with the confidence that you WILL pass.

‘til next time, happy studyin’
Joseph Hogue, CFA



Ethics Practice Roundup for CFA Level 1 Exam

We’ve covered eight practice problems in the CFA Level 1 ethics material over two prior posts, available by clicking CFA Level 1 Ethics and CFA Level 1 Ethics Practice. This post will wrap up our practice problem review and look at a few key points to the Ethics and Standards topic area.

At the very least, you need to cover every end-of-chapter question in the Ethics study sessions at least once during your CFA exam prep. You may also want to consider a question bank of item sets as well to get a little more practice. The Ethical & Professional Standards topic area accounts for 15% of your CFA level 1 score.

Not only will you need to master the material for the exam, you’ll see it again in the CFA level 2 and level 3 exams where it’s worth as much as 15% of your score on each. The fact that you could see questions on all three exams covering roughly the same material makes for a great opportunity. Learn the material early in level 1 and you will save a lot of study time leading up to the other exams.

CFA Level 1 Ethics Practice Problem Review

We’ll work two more practice problems in this post. Be sure to check out the prior two posts for eight more ethics practice problems. When you’re working the problems, make sure you read through the given answer to get an understanding for how the CFA Institute is looking at the ethical dilemmas.

CFA Ethics Question #1

Tom Hart works for IAM Investment Management, a struggling firm that is likely to close soon under the weight of redemptions. Tom wants to start a small independent practice so he will have something to work on if the firm closes. Which of the following statements is correct under the Code and Standards?

A. CFA Institute members and candidates are prohibited from pursuing independent practice that might be in competition with their employer.

B. Tom needs to obtain written consent from his employer for the independent practice since it could result in compensation or other benefits in competition with the firm.

C. Since the firm is likely to close, Tom does not need permission from his employer and can start his independent practice. He must disclose his independent practice only when he starts making money.

CFA Ethics Question #2

Meg and June have been good friends since high school and are sitting down to a cup of coffee. Meg, the CFO of a large retail clothing chain, mentions that sales are booming and the quarterly results should look very good. June, an investment adviser, writes a research report to clients suggesting they buy shares of a retail exchange traded fund on the potential for high industry sales this quarter. June also buys shares of the fund, which includes shares of Meg’s company, for her personal account.

A. June violated the Code and Standards by buying shares of the fund but not by making the recommendation to clients.

B. June did not violate the Code and Standards by either action because she did not directly act on the information by buying shares of Meg’s company.

C. June violated the Code and Standards by both actions, buying shares of the fund and recommending that clients do so.

Question #1 Answer: B

Under Standard IV – loyalty, members and candidates may undertake independent practice as long as they get written permission from their employer. The requirement is not contingent on actual compensation or benefits but the potential. This is like the ‘perception of conflict’ standard held by the Institute. All necessary disclosures and requirements must be upheld if there is the potential or perception of conflict in a scenario.

Question #2 Answer: C

June violated Standard II – material non-public information because both her purchase and recommendation appears directly related to the information she received from Meg. The information would likely influence the share price of the fund¸ making it material, and it is non-public because it has not yet been released.

Wrap-up of CFA Level 1 Ethics Practice

Many of the ethics questions on the exams will offer one answer that the action was not a violation and then two questions that claim a violation but for different reasons. For this reason, you not only have to know if an action is a violation of the Code and Standards but also why it is a violation. Practicing ethics problems will help to practice matching violations to specific Standards.

Another favorite of the CFA Institute is the problem where someone makes two statements and the candidate must decide whether one, both or neither statement is a violation of the Code and Standards. One statement is usually clearly a violation or not but the other is often ambiguous. For these, you really need to study the Standards for claims that can be made and things you can say.

The ethics material on the CFA exams is actually not too difficult if you spend a little extra time studying before the first exam. I earned 70% + on the topic in the second and third exam without spending a lot of time refreshing just because I drilled on the material extensively while studying for the first exam. Do the same and you shouldn’t have any problems.

‘til next time, happy studyin’
Joseph Hogue, CFA


CFA Exam Changes 2016 – LOS and CFA Curriculum Changes

The CFA Institute revised a lot of the exam curriculum for 2016 and may emphasize these changes on the exams

The CFA Institute has released the 2016 CFA exam curriculum and the changes from last year’s material range from immaterial to must-read. Make sure you know which study sessions and learning outcome statements (LOS) were changed and how it could affect your studying.

New candidates to a specific level may not feel that curriculum changes are important. They didn’t read the previous year’s curriculum for that exam level so why should changes matter?

CFA curriculum changes are important because they highlight the thinking of the CFA Institute. The LOS and readings were changed for a reason and that reason may mean a higher likelihood of the material appearing as a question on the exam.

We published our update to the CFA curriculum changes for each level in separate posts last week. Make sure you click through and check out content changes for your exam level.

Click here for the CFA Level 1 2016 Changes
Click here for the CFA Level 2 2016 Changes
Click here for the CFA Level 3 2016 Changes

What the CFA Institute Changed on the CFA 2016 Exams

The 11th edition of the Standards of Practice Handbook was just released in 2014 and changes hit the exam last year. This means that the Ethical & Professional Standards topic area was largely unchanged in the 2016 CFA curriculum. Two readings are dropped and one added to the CFA level 3 curriculum but the LOS have remained largely the same.

The CFA level 1 curriculum saw the most changes this year with one new reading and a change to about half the LOS. There are 29 new LOS with 23 changed LOS and eight removed from the curriculum. Study session 7 and 9 (FRA) see the most LOS changes. The introduction to risk management (study session 12) has been moved from the level 2 exam and it looks like the Institute wants to start emphasizing the material earlier in the curriculum.

Level 2 CFA candidates will want to pay attention to the changes in the Portfolio Management topic area with three new readings out of four. Besides the new readings and new LOS, I would bet that these changes carry over to some fairly big changes to the topic area in the level 3 exam next year.

How to Study for CFA 2016 Curriculum Changes

The CFA Institute does not say whether it favors CFA exam curriculum changes for item sets on the exams but you should be ready for the new LOS and readings to appear. While a wording change in an LOS might not be significant, changing a reading is a big step.

Changing a reading in the CFA curriculum may mean that the Institute wants to emphasize a change in the market regarding that topic. In this case, it would be intuitive that they would want to test candidates on the material to make sure they are up-to-date with market forces.

Changing a reading in the curriculum may also mean that the Institute wants to clarify the topic or provide a more easily understood perspective. In this case, whether this year or next, you would think the Institute would want to test the changes in the content to compare against previous exam results.

Either way, you can bet that many of the LOS from new readings will make it on to the 2016 CFA exams.

Perhaps as important as some of the changes is the fact that the institute did not change the CFA exam topic weights. The CFA Institute changed many of the topic weights on the 2015 exam, balancing out the weights a little more evenly. Traditionally important topics saw their weight decrease while other topics picked up a few points. This meant that you could no longer focus your study time on just a few topic areas to get maximum points.

The table below shows the topic weights for the 2016 CFA exams. Financial Reporting and Analysis, Equity, Fixed Income and Ethics still carry the most weight across all three exams but other topics will contribute significantly to your total score.

2016 CFA Exam Topic Weights

2016 CFA Exam Topic Weights

After reading through the curriculum, working practice problems as you go, make sure you actively test your understanding in each topic area. You should be aiming for at least 70% in all topic areas and try for 80%+ in the core topic areas.

Don’t forget to check out the CFA 2016 curriculum changes for your test level linked at the beginning of the post. You can download a pdf copy of the CFA exam changes on the Institute’s website by clicking here and scrolling down to your exam level.

‘til next time, happy studyin’
Joseph Hogue, CFA

Soothing City - Copyrights

Soothing City – Copyrights

CFA Level 3 Changes 2016: CFA Curriculum Updates

Miss these CFA level 3 changes in the 2016 curriculum and risk missing out on those important few points that could get you a passing score

The CFA Institute has published its curriculum changes for the 2016 exams. The CFA level 3 changes for 2016 are very limited, really only posing new material over the same learning outcome statements (LOS).

You can download a pdf copy of the CFA level 2 changes for the 2016 curriculum by clicking through this link. The curriculum changes are available in a combined document or individually for each of the 18 study sessions.

A word of warning to any candidates comparing the 2015 LOS posted on the CFA Institute website. Many of the author names for readings on the document are incorrect. Comparing the pdf with the 2016 CFA Level 3 LOS will appear that authors have been changed on the readings but it’s not the case.

CFA Level 3 Changes in General

The CFA level 3 changes for 2016 are pretty minor compared to previous years. Two readings have been removed and one reading added to the Ethics material in study session two. The LOS have largely remained the same and the material is still based on the 11th edition of the Standards so not much has really changed here.

2016 CFA Exam Topic Weights

2016 CFA Exam Topic Weights

CFA Level 3 Changes by Study Session

Reading 3 (The Consultant) and Reading 4 (Pearl Investment Management) have been dropped from Study Session 2 the CFA level 3 curriculum.

A new reading (Application of the Code and Standards) has replaced the old Reading 3 in Study Session Two (Ethics). The two LOS from the old Reading 3 (The Consultant) have been held over to the new reading so there is really little that has changed in terms of material you must master.

A new LOS has been added to Reading 4 (Asset Manager Code), LOS 2a – explain the purpose of the AMC and the benefits that may accrue to a firm that adopts the Code.

There are almost no material changes to the CFA level 3 2016 curriculum. A few readings have been changed in the Ethics material but the study session still revolves around the 11th edition of the Code & Standards so the background material is the same. If you are a repeat candidate for the CFA level 3 exam next year, take a moment to compare the readings but you shouldn’t have any problems.

As with the prior two exams, passing the Ethics material is about working end-of-chapter questions to get a feel for how the CFA Institute wants you to think about the issues. My own experience with the Ethics portion on the Level 3 exam was that it seemed relatively easy. I’m not sure if it’s because I had already worked the topic in the two prior exams or if the Institute figures you must know the material by the time you reach the third exam.

As always, success on the CFA Level 3 exam revolves around your preparedness for the morning essay section of the exam. We covered the importance of practicing the essay questions released by the CFA Institute in a prior post along with working some of the exam questions. It looks like this is going to be the case for the 2016 CFA level 3 exam as well. We’ll cover more essay questions in the lead-up to the exam next year.

‘til next time, happy studyin’
Joseph Hogue, CFA

Read to rule the world - Copyrights FinQuiz

Read to rule the world – Copyrights FinQuiz


CFA Level 2 Changes 2016: CFA Curriculum Updates

Miss these CFA level 2 changes in the 2016 curriculum and risk missing out on those important few points that could get you a passing score

The CFA Institute has published its curriculum changes for the 2016 exams. The CFA level 2 changes for 2016 are fairly small except for two study sessions. There are no changes to the topic weights as there were last year. I have always suggested candidates get a jump on studying by reviewing prior year curriculum before their own books arrive but you have to be ready for the changes.

You can download a pdf copy of the CFA level 2 changes for the 2016 curriculum by clicking through this link. The curriculum changes are available in a combined document or individually for each of the 18 study sessions.

A word of warning to any candidates comparing the 2015 LOS posted on the CFA Institute website. Many of the author names for readings on the document are incorrect. Comparing the pdf with the 2016 CFA Level 2 LOS will appear that authors have been changed on the readings but it’s not the case.

CFA Level 2 Changes in General

Working through the new readings and LOS for the CFA level 2 changes for 2016, I was just about ready to comment on how little had changed…until I got to the final study session.

In fact, other than in SS18 Portfolio Management, very little has changed from the previous year’s curriculum. There were only two wording changes that I could find in the old LOS along with less than ten new LOS. There is also one new reading in a new subject.

2016 CFA Exam Topic Weights

2016 CFA Exam Topic Weights

And then you get to SS18 that is almost completely new with three new readings out of four. Make sure you master the new Reading 12 in SS3 but spend as much time as possible studying the new material in Portfolio Management.

CFA Level 2 Changes by Study Session

Study session 3 (Quantitative Methods) includes a new reading, reading 12 – Excerpt from “Probabilistic Approaches: Scenario Analysis, Decision Trees, and Simulations”. Within the new reading are seven new LOS so make sure you spend some time on the excerpt and understand the material.

Understand that from the inclusion of the new Reading 12 in SS3 to Reading 46, the numbers for readings do not match up in the new CFA level 2 curriculum (i.e. old Reading #40 corresponds to new Reading #41).

LOS 6i of Reading 20 (Multinational Operations) includes a wording change from, “…sales affect earnings sustainability.” to “…sales affect the sustainability of sales growth.”

LOS 14c of Reading 43 (Term Structure and Rate Dynamics) is new and requires you to describe how zero-coupon rates can be obtained by bootstrapping.

LOS 14g of Reading 43 includes a wording change to, “…swap spread for a given maturity,” from “…swap spread for a default-free bond.”

LOS 14m of (old) Reading 44 (Embedded Options) – “calculate the value of a capped or floored floating-rate bond” has been removed.

Reading 46 of Study Session 15 “Introduction to ABS” and its nine LOS have been moved to the CFA Level 1 Exam and are no longer in the CFA level 2 exam.

The Institute has almost completely revised the readings in SS18, Portfolio Management. Three readings have been replaced and only one remains the same from last year. Readings 53 – 55 are new and must be studied in-depth. The three new readings bring with them 26 new LOS.

Again, other than the new reading in SS3 and SS18, there are not many changes to the CFA level 2 2016 curriculum. Make sure you master the material in these new readings and be prepared to answer the LOS on the exam.

Until next time, happy studyin’
Joseph Hogue, CFA

Performers spreading joys among a diverse and random group of people - Copyrights

Performers spreading joys among a diverse and random group of people – Copyrights


CFA Level 1 Changes 2016: CFA Curriculum Updates

Miss these CFA level 1 changes in the 2016 curriculum and risk missing out on those important few points that could get you a passing score

The CFA Institute has published its curriculum changes for the 2016 exams. The CFA level 1 changes for 2016 are relatively light compared to last year but still extremely important. I have always suggested candidates get a jump on studying by reviewing prior year curriculum before their own books arrive but you have to be ready for the changes.

You can download a pdf copy of the CFA level 1 changes for the 2016 curriculum by clicking through this link. The curriculum changes are available in a combined document or individually for each of the 18 study sessions.

CFA Level 1 Changes 2016 in General

Only one reading has been added this year and about half of the learning outcome statements (LOS) in the CFA level 1 curriculum have been affected with changes. There are 29 new LOS with 23 changed LOS and eight removed from the curriculum.

Fortunately, the CFA level 1 changes do not affect topic weights in the exam as they did last year. Last year’s CFA curriculum changes to the topic weights in each exam caught a lot of candidates off guard. The table below shows the topic weights for each CFA exam.

2016 CFA Exam Topic Weights

2016 CFA Exam Topic Weights

There is no real proof to say that you need to study new or changed curriculum material more than older material. It seems intuitive that the CFA Institute would want to highlight changes in the curriculum by putting it on the exam but there is no way of knowing for sure since we can’t talk about exam questions. There aren’t many changes to the 2016 CFA level 1 curriculum so take a little time to make sure you master them.

CFA Level 1 Changes to Curriculum

The 11th edition of the Standards of Practice Handbook, effective July 2014, is still relatively new so its no surprise that the Institute has not changed much from last year’s level 1 exam. There are no changes to the Ethical and Professional Standards study session on the exam.

The changes to the CFA level 1 2016 curriculum do not affect study session two or three of Quantitative Methods.

The changes to the CFA level 1 2016 curriculum do not affect study session four through six of Economics.

Study session seven, the introduction to Financial Reporting and Analysis, is the first part of the CFA level 1 2016 curriculum where we see any changes.

  • LOS 7.2.1b and 7.2.2e have added or removed words but there is no change to the intent or the material you’ll need to study.
  • LOS 7.2.2a is new: Describe how business activities are classified for financial reporting purposes

Study session eight includes a new LOS (8.2.1d): Describe key aspects of the converged accounting standards issued by the International Accounting Standards Board and Financial Accounting Standards Board in May 2014.

Study session nine is where we see the most CFA level 1 changes to the LOS

  • 9.2.1c now asks you to “compare” the different inventory methods across perpetual and periodic inventory systems.
  • 9.2.1d through 9.2.1h have been removed and replaced
  • 9.2.1d through 9.2.1l are six new LOS

Make sure you spend some time on inventories section (Reading 29). There is a new focus on the material and it accounts for a big portion of the changes.

Reading 30 of study session nine on Long-Lived Assets has also been changed significantly

  • 9.2.2c and 9.2.2d have been removed
  • 9.2.2f now only asks you to describe the different amortization methods and calculate amortization expense
  • 9.2.2 (b,c,d,e,g,k,o,p) are all new LOS on the 2016 CFA level 1 exam. That’s a quarter of the new LOS in just one reading so you can bet the Institute will be looking at the section for the exam.

Reading 31 (Income Taxes) has one change, LOS 9.2.3h has been changed to be more specific. You now need to, “Explain recognition and measurement of current and deferred tax items.”

The changes to the CFA level 1 2016 curriculum do not affect study session ten of Financial Reporting and Analysis.

The changes to the CFA level 1 2016 curriculum do not affect study session eleven of Corporate Finance.

Reading 42 (Risk Management: An Introduction) in study session 12 is new. The seven LOS for 12.2.1 are new so make sure you master the reading. You will revisit risk management in more depth during the CFA level 2 and level 3 exams so make sure you get a really good base of understanding in the first exam.

Study session 13 (Equity) includes one LOS change. LOS 13.2.1g has been replaced. You no longer have to compare behavioral finance with traditional finance but must instead describe behavioral finance and its relevance to market anomalies.

LOS 14.2.1 of study session 14 (equity) includes some wording change to d, g, h and j. Most of the changes do not affect what you need to learn. Make sure you understand how barriers to entry affect price competition and how the macroeconomic picture influences industry growth and risk.

LOS 14.2.2 f and g include some wording changes. Neither of the changes is really material but more to better define what you need to understand.

LOS 15.2.1 of study session 15 (Fixed Income) changes the word ‘functions’ for ‘content’ in the 2016 curriculum. It seems this a more general approach to the section.

LOS 15.2.2e is new and places a little more emphasis on sovereign bonds.

LOS 15.2.2f and 15.2.2i include wording changes to take the emphasis off sovereign bonds and highlight risks of repurchase agreements.

LOS 15.2.3 of Reading 55 (Intro to ABS) includes a lot of changes so make sure your pay attention to the section. LOS 15.2.3 (b, e, g, h, i) include wording changes but do not change the intent very much.

LOS 15.2.3 (c and f) are new while 15.2.3e has been replaced.

LOS 16.2.1 (d and e) include wording changes but do not materially affect your studying. You no longer have to explain how embedded options affect interest rate risk.

LOS 16.2.2b is new, you must now describe default probability and loss severity as components of credit risk.

LOS 16.2.2f includes a wording change but only to better define that you need to know the four Cs of credit analysis.

LOS 16.2.2i has been removed.

The changes to the CFA level 1 2016 curriculum do not affect study session 17 of Derivatives.

LOS 18.2.1 of Reading 61 (Intro to Alternative Investments) include wording changes but do not affect the material or what you need to learn.

The majority of the CFA level 1 changes to the 2016 curriculum occur in study sessions 7 and 9 (Financial Reporting), study session 12 (Portfolio Management), and study sessions 15 and 16 (Fixed Income). Most of the wording changes do not amount to much but pay attention to the new reading (SS 12) as well as the new LOS. The easiest way to do this is just to highlight the sections that include the new LOS and make sure you understand the material when you get there.

‘til next time, happy studyin’
Joseph Hogue, CFA

Yes - there are people on the giant rock. Copyrights

Yes – there are people on the giant rock. Copyrights

Working More December Exam CFA Ethics Questions

Last week, we talked about the importance of the Ethics & Standards topic area across all three CFA exams. Its importance in the CFA level 1 exam is heightened by the fact that new candidates may not know what they are up against within the topic.

Reading through the Code & Standards can seem obvious and many CFA candidates believe their moral compass will guide them to the most obvious answer on the exam. When they get to the exam, they’re surprised by the level of ambiguity in the questions and cannot decide between two seemingly correct and ethical answers.

We started working through a few ethics questions last week but will continue this week with five more. It is extremely important that you study these questions and the ones in the curriculum to learn how the CFA Institute asks questions within the Ethics topic and how it expects you to answer.

CFA Ethics Question #1

Roberts is in charge of a group of analysts at BB&T, only some of which are CFA charterholders or candidates. For a large project, he is delegating some of his supervisory duties to one of the analysts to lead the group. What are his responsibilities under the Code and Standards if he delegates tasks to the group.

A. His responsibilities under the Code and Standards apply to conduct of those with CFA designations but not to those that are not subject to the code. For those employees, only legal obligations apply.
B. He is no longer responsible for the group’s conduct because he delegated supervisory duties. That person is now responsible.
C. He is still responsible for all the analysts’ conduct under the Code and Standards.

Answer: C

Under Standard IV, Responsibilities of Supervisors, someone bound by the Code and Standards may delegate supervisory responsibilities but is still accountable for all actions of subordinates. Further, a supervisor is responsible to the Code and Standards for all actions whether their subordinates are bound by the Standards or not.

CFA Ethics Question #2

Babbitt & Coolidge Investments (B&C) has been hired to manage a follow-on issuance of shares for Argon Tech. The brokerage unit of B&C has a sell recommendation on Argon Tech but some fundamentals have improved and a review of the analysis is due. The head of the investment banking division has asked the reviewing analyst to look at the new information and upgrade the shares to buy. According to the Standards, what may the brokerage unit do?

A. Increase the recommendation but only to a hold since it is still a conservative recommendation
B. Place the company on a restricted list and only offer factual information in the report
C. Assign a new analyst that is willing to take the new information into account and assign a buy rating

Answer: B

Under Standard I, Independence and Objectivity, the firm should discontinue issuing recommendations on the stock to avoid the appearance of a conflict. Analysts must refuse any requests to change recommendations even if the change is only to a slightly higher recommendation. Changing the analyst assigned to the stock does not eliminate the conflict of interest.

CFA Ethics Question #3

Tye is an analyst for Buckmaster & Walters and is about to make a new recommendation. According to the Standards, which actions will help ensure fair treatment of brokerage clients?

A. Inform everyone in advance that a recommendation is about to be made so everyone can be ready
B. Since institutional clients need more time to review for suitability under their plans, they should receive the information before individual accounts
C. Time between the decision and dissemination of the recommendation should be reduced

Answer: C

The question deals with Standard III, Fair Dealing. Answer A may allow the recommendation to be leaked out since more people know about the coming release. Firms should limit the number of people that know a new recommendation release is eminent. Answer B is a clear violation as it discriminates between clients by size and assets. Reducing the time between the decision and dissemination of the recommendation helps to avoid it being leaked ahead of the release.

CFA Ethics Question #4

Portfolio Manager Jacob has done very well and one of his clients wants to keep the manager motivated. The client promises to compensate Jacob, above what the firm is paying him, if he can continue to beat the index each year. Jacob is a CFA charterholder and should:

A. Turn down the extra compensation because it could create a conflict with performance on other accounts
B. Turn down the extra compensation because it could lead him to unethical behavior by incentivizing the outperformance
C. Get written permission from his employer prior to accepting the agreement for extra compensation

Answer: C

Standard IV, additional compensation arrangements, does not prohibit compensation beyond that made by an employee’s firm. The employee is still bound by the Code and Standards to not let the additional compensation interfere with fair dealing among accounts and other ethical behavior but may accept additional compensation if it is disclosed and approval is granted in writing by the firm.

CFA Ethics Question #5

Redbeard, an advisor and CFA charterholder, recommends his client invests in U.S. Treasury bonds. The client accepts the advice based on two statements made by Redbeard.

I) The default risk on U.S. Treasuries is effectively zero since the bonds are backed by the U.S. government
II) Based on the historical return to U.S. Treasuries over the last twenty years, you are guaranteed to earn at least 5% over the next several years.

Did Redbeard violate the CFA Code and Standards with either statement?

A. Neither statement is a violation
B. Only statement I is a violation of the Code and Standards
C. Only statement II is a violation of the Code and Standards

Answer: C

Standard I, misrepresentation, requires that all those bound by the Code and Standards separate fact from opinion. The first statement is a fact given the government’s backing of the bonds. The second statement is an opinion based on historical performance and what the advisor thinks will happen in the future. Guarantees of future returns must not be made unless they are contractual within the investment.

Did any of these Code and Standards questions stump you? For the ones you missed, make sure you go back through the question and really understand the CFA Institute’s way of thinking. Don’t forget to review those questions where you guessed correctly. Working as many ethics questions from the curriculum is critical to learning how to answer the questions on the exams. We’ll cover a few more next week before moving on to other topics for the December CFA exam.

‘til next time, happy studyin’
Joseph Hogue, CFA

Practicing Ethics for the December CFA Level 1 Exam

With just four months left to the December CFA Level 1 exam, it is time to start studying and there’s no better way to begin that talking about the ethics material. Readers of the blog will know that I am constantly reinforcing the importance of study session 1, the material on The Code & Standards.

The material is important for several reasons. First, the topic will be a considerable part of your exam score at all three levels. Ethical and Professional Standards is worth 15% of the CFA level 1 exam and between 10% and 15% of the other two exams. There are some additional readings to study for the level two and three exams but the core material will remain the same throughout. Learn the Code and Standards early and you’ll bank a ton of saved study time ahead of the other two exams.

A second reason for the topic’s importance is the fact that it catches so many CFA level 1 candidates off guard. Too many candidates go into the first exam thinking they can rely on a basic tenet of, “Don’t lie, cheat or steal,” to pick the most obvious answer to each question. They neglect to study the topic area and are horribly surprised when they see the exam questions.

The questions over ethics on the exam do not have obvious answers! Even the ethical person will need to study the example questions in the curriculum to understand how to answer the section.

Finally, the CFA Institute is explicit that the ethics section is used as a tie-breaker for any candidate score that is close to the pass-fail mark. Do well on this section and it might just pull you up from a band 10 fail.

Studying Ethics for the CFA Exam

With the importance of the ethics material, you want to give it plenty of time in your study schedule. We have studied the material in several posts, outlining the most important parts of the Professional Conduct Program (PCP), the Components of the Code and the seven standards.

We won’t go over the three segments of the material because I want to get to the most important part of your study for the ethics section, working problems. You will need to commit the components and the standards to memory, click through here to read our outline of the CFA ethics and standards, but working problems is extremely important.

It’s only through working problems from the end-of-chapter curriculum that you will get a feeling for the actual exam questions. Work enough of these and the correct answer will start to become clearer. Neglect these questions and every multiple choice may sound like a viable answer.

For copyright reasons, we won’t be able to reproduce the question from the end-of-chapter questions. We will instead change the content of the question but keep the intent and the methodology for the answer.

CFA ethics question #1

A research analyst decides to change his recommendation for Greenway Corporation from a buy to a sell. He emails his recommendation change to all the firm’s clients on Monday. The day after the email, a client calls with a buy order for Greenway. The research analyst should:

A. Accept the order
B. Advise the client on the change in recommendation before accepting
C. Not accept the order because it is against the firm’s recommendation

Correct answer: B

Standard III, fair dealing requires that clients be notified fairly of all changes recommendations. The client may not have seen the notification and must be informed. If he still wants to make the trade, he must be allowed to do so even if it is against the firm’s recommendation.

CFA ethics question #2

A research analyst for Broward Brokerage & Investment Banking is asked to write a research report on Brown Forman Corporation. Howard B&I has represented Brown Forman’s acquisitions for the past 20 years. Several senior officers of Howard B&I are also directors of companies with which Brown Forman has business relationships. What is the best course of action for the analyst?

A. Write the report but must refrain from expressing any opinions because of the special relationships between companies.
B. Should not write the report because the Howard B&I officers’ service as directors to Brown Forman subsidiaries.
C. May write the report if the special relationships are disclosed in the report.

Correct answer: C

Standard VI – Disclosure of Conflicts states that all conflicts of interest must be disclosed in research and recommendations. An analyst is not prevented from writing a report because of conflicts but must disclose them in the report. The fact that no opinions are expressed does not clear the analyst of the responsibility to disclose conflicts.

CFA ethics question #3

Jameson is an advisor to the board of trustees of a non-profit foundation. The trustees have given Jameson all the fund’s financial information including planned expenditures. A wealthy contributor to the foundation phones Jameson to say that he has found a potential contributor but needs to show him the foundation’s financial information by the end of the day. Jameson does not have time to contact the trustees, he should:

A. Send the alumni the information because disclosure would benefit the endowment fund
B. Not send the information because it is confidential
C. Send the alumni the information but promptly notify the trustees

Correct answer: B

Standard III establishes the preservation of confidential information to a client. Confidential information cannot be released without permission, regardless of whether the disclosure may benefit the fund. Information can only be released, without permission, if it concerns illegal activities or disclosure is required by law. Information may also be disclosed on an inquiry from the CFA Institute’s Professional Conduct Program.

We will work through more questions over the next couple of weeks to give you a better idea of what the CFA Institute is looking for from the material on the Code and Standards. I cannot stress enough the importance that candidates for the CFA level 1 exam study the actual ethics questions in your curriculum. These are going to be very much like what you see on the exam and the correct answer will not always be obvious.

‘til next time, happy studyin’
Joseph Hogue, CFA