10 Minute Review of CFA Ethics and Standards

Even with the change to topic area weights on the CFA exams this year, CFA Ethics and Professional Standards remain extremely important. It is a lot of material but fortunately doesn’t change much from year to year and you’ve got a real opportunity to carry over some points to each exam if you learn it early.

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CFA Level 1 Jobs – How to get the perfect job

It’s a jungle out there! I get emails every week from candidates that continue frustrated in their job search, even after passing one or more levels of the CFA exam.
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CFA Level 1 – Download Free Formula Sheet – PDF

Reading through the LinkedIn group lately, someone was asking about the difficulty of the CFA Level 1 exam and how it related to another professional exam. A couple of candidates commented how tough the material was and how much there was of it.

I just had to smile.
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CFA Curriculum Warning: Do Not Neglect

The actual length of the CFA curriculum varies a little each year but it’s generally between 2,500 and 3,200 pages. When you get the books in the mail, or receive the digital version, that may seem like a monstrous task. Over the three years of studying for the exams, I think my upper body strength grew just as much as my financial knowledge just from carrying the books around.

Study guides meant to substitute for the curriculum vary but generally range between 1,400 and 1,700 pages. At under two-thirds the length of the official curriculum, it seems like a no-brainer and I know many candidates who have only rarely even peaked inside their curriculum books.

And many of them are still candidates.

Do Not Neglect the Official CFA Curriculum!

Candidates that have tried to substitute the CFA curriculum with study guides have come to me afterwards with their horror stories. My reply is always the same, “I wish we had talked before because if you do the math then the answer is pretty obvious.” The minimum passing score for the exams is never released but I would guess it is around sixty-five percent. No candidate has failed with a score of 70% or better and I doubt if the Institute would want to charter someone that knows less than two-thirds of the subject matter.

Even the most gifted candidates are going to miss points. If about half the candidates fail the exam every year, I am guessing that most miss at least a tenth of the points and probably much more. We have no way of knowing but it’s obvious that you need every point you can get.

Now, I have seen pretty much all the study guides commercially available. There are some that do a pretty good job of condensing the material but none are able to get everything in a packet that is half the length of the curriculum. It’s impossible and information is going to get left out. Try to fit nearly 3,000 pages of information in less than 2,000 pages of notes and I would say you’re lucky if 20% of the information isn’t lost.

So if you neglect the official curriculum completely, you are already out something like 20% or more of the points. Now you need to remember at least 80% of the material just for a score of 64% on the exam.

Most of you have taken practice exams through test banks or the CFA Institute. How many have scored better than 80% on these? I know reading all those books is a daunting task but you just cannot afford to leave points on the table by neglecting the official curriculum.

CFA Study Guides

I don’t talk about the FinQuiz study notes much here on the blog other than to reference specific sections of the notes and the curriculum. I don’t want candidates to think I am being biased by pushing one particular study provider over another. But I can say, without any bias, that the FinQuiz notes have at least one big advantage over other study products, that they are meant to be used as a complement to the curriculum instead of a substitute.

The FinQuiz notes vary by length as well but are generally around 600 pages. It’s really the best of both worlds, you get 100% of the information from the curriculum and additional condensed explanations where you need them.

Free examples of the FinQuiz notes are available for download on the website. Take a look and compare them with the curriculum. FinQuiz regularly offers discounts on products and packages so you may want to contact the provider to get the best deal possible.

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

Last updated: August 10, 2016 at 4:30 am

CFA Level 2 – Read questions or vignette first?

The CFA Level 2 exam is considered by most to be the most difficult of the three exams. Whereas the first exam was largely conceptual and tested your basic understanding of a broad range of information, CFA Level 2 exam takes that same broad range but tests detailed concepts and data interpretation. On top of this, the exam is extremely formula intense. You will be responsible for calculating two and three-part formulas in almost every study session.

There are strategies that will get you through all three exams and those that you will need to change for each test. We will cover those strategies and advice specific to CFA Level 2 exam here and hold the broader suggestions for a future post. We will also look at two different schedules in the strategy post that could aid in planning.

CFA Level 2 Format and Basic Strategy:

CFA Level 2 exam consists of 20 item-set questions, each with six separate multiple choice questions that must be answered from information in an approximately one-page vignette. Each item set question will only cover one study session (i.e. ethics, quantitative methods, asset allocation, etc.) which makes it a little easier to concentrate on one topic at a time. As with all levels of the CFA, there are a total of 360 points possible, so each item set is worth five percent of your total points.

CFA Level 2 practice exams

While the CFA Institute does not publish what the passing score is for each year, they have said that no score of 70% or above has ever failed the exam. What does this mean? It means you should be completing practice exams and aiming for a score of at least 75%. Your practice exams may not mimic the actual exam exactly, but shooting for a higher average will give you some breathing room when it comes to test day.

CFA Level 2 Exam Item set question – Read questions or vignette first?

There are two schools of thought when tackling the individual item sets on the level II exam. Many candidates read through the six questions quickly to better understand the information for which they are looking. Other candidates start by reading the vignette, looking for information that may be important. After studying through the curriculum in preparation for the exam, you will begin to get a sense of what information is important for questions.

Remember, you are able to make notes in your exam booklet, so be sure to underline or highlight numerical information or other important points to find them more easily while answering the questions.

CFA Level 2 – Which item-set questions to answer first?

You may want to complete those item sets first in topics in which you are stronger. This will do two things. First, answering a good portion of the questions quickly and strongly will boost your confidence for the harder item sets. Secondly, answering those questions you are more likely to get right will save time and book the easy points before moving on to the less probable points. Just remember to effectively watch your bubble-sheet answer form to make sure you are filling in the correct numbers.

CFA Level 2 Topic Weight Differences on the Exam

Comparing the topic weights for the level II and the level I exam provided by the CFA Institute, there are a couple of things you should note.

  • Ethics is still a good portion of the exam, but not as much so as the level I exam. Your time spent here depends on part by how much you remember from the first exam and how well you did. If you got above 70% on the first exam and can score well on practice tests, then you will not have to study quite as much. Do not neglect the area because you will see it again on the level III exam.
  • CFA level II exam is much more heavily weighted towards asset classes than investment tools. The second exam is an analyst’s exam because you are going to spend a ton of time learning how to analyze the specific assets and investments within each. It is much more quantitatively intensive than the first exam.
  • Equity investments is the single biggest section and should be treated as such in your study schedule. Closely behind this is the Financial Reporting and Analysis section. Hopefully, you spent the time necessary to build a good base of knowledge in the three financial statements on the first exam. If not, you will need to review to be able to do well on FRA.

Ethical and Professional Standards, while not worth as many points as in the first exam is still very important. It is still a guaranteed 10% of your points, and you will see almost the same material at level III. I was able to reduce my time studying on the ethics portion of the level III to just looking over the new material because of my time spent studying for the other two exams.

Corporate Finance and Economics is again fairly conceptual though you will be responsible for some growth and emerging market formulas as well as dividend policy formulas. Summary sheets are often the best way to approach conceptual study sessions because you can outline the ideas and key points. This should get you the majority of points on the exam and free up study time for other areas.

Financial Reporting and Analysis is, with equity, your two ‘core’ topic areas for the level II exam. These two topics are worth between 35-55% of your total exam score. If you picked up a good base of understanding in the three financial statements at the first level, then the second exam is just detailing separate accounts and valuations. The readings here are extremely long and you will need to work through them. Do not expect to pick up the material with reading alone. The material is practice-based and you need to actively work through the examples in the books.

Quantitative Methods is slightly less important in the second exam and more so when you get to the third exam. The material here builds on some of the methods learned in the first exam. Do not neglect the section because you will get at least one item set, maybe two. You should be able to get the majority of the points by understanding the basic procedure in the formulas and any strengths, weaknesses, or biases.

Alternative Investments is slightly more important at the second and third level exams compared to the first, but still of secondary importance overall. The curriculum follows a finite set of ‘alternative’ assets (i.e. real estate, hedge funds, private equity, etc.) and each level builds in little more detail. While there are more calculations required in the second exam, it is still largely conceptual. Again, with conceptual topic areas, use a summary guide to learn the key points, strengths, weaknesses and biases.

Derivatives is also marginally more important on the second exam but extremely more quantitatively intense. You will confront some fairly lengthy pricing formulas here and will see between one and three item sets on the exam. For the formulas, first try to understand the logic behind the calculation to better memorize the formula. Often, working over practice problems is the only way to really convert the material to long-term memory.

Equity Investments is potentially the largest part of the exam with between four to six item sets. This and Financial Reporting & Analysis is where you really need to spend your time and learn the material. Working through practice exams, you should be aiming for at least 75% or higher going into the exam.

Fixed Income is also more quantitatively intense at the second level of the CFA exams. Many candidates are less familiar with debt instruments and do poorly on the topic. Begin with a basic understanding of the topic before you proceed to the detailed formulas. Do not neglect pricing and amortization of debt or some of the other formulas.

Portfolio Management  will set you up for the third exam where it is extremely important. Pay particular attention to the Investor Policy Statement (IPS) because it is pivotal to the third exam. Fortunately, much of the section is conceptually-based so you can get the majority of the points by understanding key points and ideas.

While you cannot afford to neglect any of the study areas in the level II curriculum, there are some on which you can spend more or less time. Ethics, FRA, Equity and Fixed-Income will account for upwards of two-thirds of the exam. If you concentrate your study time in these sections, aiming for a score of 75% or higher, you will have a very good chance of passing the exam.

You have a finite time before the exam so remember to use your study time efficiently. Take advantage of condensed study guides, summary sheets and flash cards to focus on the key concepts and formulas.

Read detailed tips on passing CFA Level 2 here.

Happy studying
Joseph Hogue, CFA

Last updated: October 7, 2016 at 3:34 am

When to start studying for CFA ?

Looking through forum posts and talking to a few candidates about timing and planning for the CFA exams provides some interesting stats and might help you assess how well your own preparation is going. The two core issues here are: when to start studying and exactly how much is enough studying.

When to Start studying for CFA Exam ?

It might be a little simplistic, but I see candidates starting their study plans in one of three categories: really early, about right, and what are you thinking! The actual dates started appear to follow a fairly normal distribution with the median around mid-February. I usually started with the ‘really early’ crowd between October and November, so I’m a little biased toward earlier rather than later.

While pre-January may be earlier than necessary, we see a lot of people waiting until March to begin studying. Biased I may be but 13 weeks to cram approximately 300 hours of studying seems a stretch. There will always be the intellectual giants out there (or at least those that think they are) that will have no problem learning all the material in three months. Then again, while actual pass-fail statistics are not available, I would put good money on the bet that the 50% of candidates in the fail band come disproportionately from these late starters.

Is it too late to begin studying for CFA Exam ?

Then there are always the (comical) posts in late April and through May asking for opinions whether it is too late to begin studying and still pass the exam. Most of the candidates I have met and talked to were fairly smart, but sometimes I’ve got to wonder.

Like I said, I am probably a little overcautious and biased to starting early. Most candidates have fairly relaxed schedules and can sacrifice a few extra hours for something that is undoubtedly going to change your career prospects and arguably your life (going out with that hot co-ed you met last week or keeping up with this season’s American Idol are not as important as you think). Nothing I could say would get most of you to start before January, but hopefully you will not wait until March.

How Much is Enough for CFA Exam ?

More important than when you start studying is (duh!) how much studying you do. Reading through forums and taking a few polls, I was surprised that the consensus is for reading through the material only once and then working through practice problems and a mock exam. At most, I found that candidates expect to read through study guides once then review a quarter to half of the material again. Most candidates planned on working through all the end-of-chapter questions and doing ‘some’ practice problems from a provider question bank.

Again, I might be a little conservative, but this seems entirely inadequate. Who are all these candidates with eidetic (photographic) memory that can pick everything up that easily? Practice exams taken through question banks will give you a good indication if you have picked up the material but most do not start taking these until late in the season. What happens when you take your first inclusive practice exam in May and find out you are not nearly as prepared as you thought?

The candidates that expressed a higher level of confidence with their preparation were mostly those that had read through all of the material at least twice and had started monitoring their progress through practice exams at least two months before the test date. This leaves time to focus on a few of the weaker topic areas as well as going through the material with a few other media (video, summary sheets, flash cards).

I guess it comes down to being realistic about your abilities and taking a rational look at the statistics. Surveys by CFA Institute show that candidates (both passing and otherwise) averaged around 300 hours of study time for each exam. We also know that approximately 50% of candidates fail the exam each year. This is one area where being ‘average’ is likely to not be enough.

I imagine that the absolute number of hours reported belies a fairly large distribution, but we’ll call it 200 hours minimum and maybe 400 maximum needed to pass the exams. Now think about your pre-CFA studying schedule. How many hours per week do you think you can realistically commit to studying? You need to plan conservatively if you are married, have children, or have a job with increasing workload around quarterly reporting. Life happens, don’t expect to be able to study as much as you would like every week.

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

Last updated: August 4, 2016 at 4:21 am