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

Should you Ask for a CFA Exam Score Retabulation?

The results of the June CFA exams were released last week, marking the end to a long and difficult exam season. Less than half the level one candidates (42%) passed the exam with level two candidates doing a little better with 46% passing their CFA exam. These are both above the ten-year averages at 39% for the first CFA exam and 44% for the second exam.

Results for the level 3 CFA exam are due out on August 11th with an average pass rate of 53% over the last ten years.

Around this time, I get a lot of emails asking if candidates should request a retabulation of their CFA exam score. The CFA Institute offers the service, for a fee, but is it really worth it?

Understanding CFA Exam Results

CFA exam scores are given on a pass-no pass basis with a 10-level scoring system for those that did not pass. While the minimum passing score is never released, we know that no candidate has ever failed a CFA exam with a percentage score of 70% or higher.

The scoring band system of 10-levels for candidates that did not pass is an equal-band measure, meaning that each band is the same number of points. The number of points separating you from the next higher band are not known either but you can put together a rough estimate by thinking through it. If we assume anyone with a 70% passed and that even the candidate guessing on every question should have gotten a 20%, then we have about 50% within the ten bands or about 5% in each band.

There are a total of 360 points available on each CFA exam with individual questions worth three points each, not counting the essay portion of the level 3 CFA exam. That means, if there is a 5% difference from one band to the next, that you need to have answered as many as six more questions correctly (6*3 = 18 points) to make it to the next band.

This is a very rough estimate and we can’t know the actual numbers. I would say it is probably a maximum for the percent in each fail band. Even if each band is only 3% then you still have 10.8 points or at least three questions within each band.

What does this mean? For retabulation to change the score on your CFA exam to the next band, your original score will likely need to be wrong by at least three questions.

Should you Request a CFA Exam Score Retabulation?

A retabulation request for your CFA exam score is due by the 11th of September along with your payment of the $100 fee. The CFA exam retabulation form is available here and must either be mailed or faxed to the address on the form. It takes between one and three weeks to receive your retabulation results by email.

Retabulation will not change an incorrect answer to a correct one and will not get you extra points on missed questions. The process is done by hand but only checks to make sure the machine scored your answers correctly, noting which circles were marked.

For example – If you marked B, the correct answer, but the machine read your answer incorrectly as marking C then a retabulation would result in a higher score. Retabulation of your CFA exam does not change the answer you marked, nor will it make a judgement call and give you partial credit for an incorrect answer.

Retabulation of the level 3 essay questions will not change the score given for a segment, only that your scores were added up correctly.

If the retabulation changes your score, you are refunded the $100 fee. If your score remains the same, your fee is not refunded.

There is no data released on scores changed by retabulation but I have never heard of anyone that got a higher score, much less anyone that changed a no-pass to a pass. If you are in the final fail band 10, you might consider it but it is still unlikely to make a difference. The accuracy rate on optical mark recognition (bubble-sheet scanners) is above 99% which means only 1% of tests have any error, much less an error on multiple questions.

It is extremely painful to feel like you wasted the last six months of your time but a retabulation isn’t likely worth the fee. Thinking about the tests in a larger context will make it a little easier. Really, how much difference does it make whether you pass this year or next when considering a 30- or 40-year career. Your additional studying only means that you will have a stronger grasp on critical material and the opportunity to be a better professional.

Take your CFA exam fail as what it is, a learning experience. Commit to hitting the material early next year and mastering the curriculum.

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

How to Network on LinkedIn…the Right Way!

I get between three and five requests a day to connect on LinkedIn. Do you know where most of those requests end up? I am active in at least six professional groups on a daily basis and see countless posts by members. Do you know what I do to the majority of posts?

The answer to both questions is the same, Ignore!

LinkedIn has emerged as a huge resource for professional networking and promotion but most people do not use it effectively.

If you ever want to leverage your connections into the career of your dreams or if you really want to use LinkedIn to promote your business, you need to use it correctly…i.e. not how most people use it.

Professional Networking on LinkedIn

I am active in quite a few groups from alternative finance to CFA exam preparation and investing. I publish upwards of 30 pages of content across different websites each week so I get a lot of connection requests on LinkedIn.

I would say, of the 20 connection requests I get every week, I accept less than ten of them.

Why? Because I do not know the person and cannot see the value in a connection.

LinkedIn makes it entirely too easy to send out connection requests, so easy that it deceives people into thinking that they are actually networking. How many of your LinkedIn connections do you think would actually be able to remember anything about you, or even how they know you?

Sending out connection requests with no introduction and no follow-up will yield absolutely no benefit in the future. In fact, having so many connections makes it difficult to find the real connections you have and the people that can actually help you the next time you need it.

If you are going to send out a connection request on LinkedIn, follow these steps:

  1. First, think about how the connection can be mutually beneficial. Why should the other professional want to accept your request?
  2. Visit at least one other page about the other professional – whether it be a blog post, their profile on the corporate website or something they have submitted to LinkedIn Pulse. Spend five minutes to get to know them beyond a group post you saw on LinkedIn.
  3. Find their email or contact information if possible. What good is it having a connection if you cannot reach them? If you connect with many others on LinkedIn, you may have a difficult time finding their profile later so it’s best to have another way to contact them.
  4. Send an email to introduce yourself and why you would like to connect. Using the reason why a connection would be mutually beneficial almost guarantees you will get the connection on LinkedIn.
  5. Change the default LinkedIn request note. Your personal note is limited here but try to reference how you know them and why you want to connect.
  6. Follow up after the connection with a thank you and reinforce why the connection can be beneficial for both of you.

This simple process will take you no more than 15 minutes and will make real connections on LinkedIn. Try to check in with what your connections are doing from time to time, checking out any change in job title or anything they publish on LinkedIn. Letting a connection go stale without any messages for more than a year means you’re unlikely to get any help when you need it.

Promoting your Business on LinkedIn

I spend a lot of time promoting my content from various blogs on LinkedIn and other social networks. One of my biggest pet peeves one of the worst things you can do on a social network is to spam groups with irrelevant messages.

You’ve seen these posts. Posts about how to make money working from home in a CFA Candidates group or posts about stock market investing in a group about business networking.

The click-through rate on social media posts is less than 3% for posts relevant to the audience. For those spam posts, the click-through rate is even lower. Not only are you annoying group members by posting irrelevant content but it’s a waste of time because no one is going to click through to the article.

Probably the most important reason not to spam groups with irrelevant posts, it’s unprofessional! After working so diligently to earn the CFA designation, do you want your colleagues to see you as a spammer?

I get upwards of 10% of my visitors from LinkedIn and it can be a great resource for promoting your business, but you have to do it right.

Before posting an article or promoting your post to a LinkedIn group, follow these steps:

  1. Is the content relevant to the group? Even if members are in the same industry as the content, it still might not be relevant. For example: I see a lot of market analysis posts on the CFA Candidates group. Is that content really relevant to the group’s goal of helping people prepare for the exams? Ask yourself why members come to that group and what information is directly relevant to that purpose. If your content is not directly relevant, find another group to post it in.
  2. Add more to the post description that simply pasting the link to the article or content. Social media is about being…social! Copying your link to ten different groups is not social. Describe the content in a brief summary and ask related questions about it. Try to generate a conversation around the content and you’ll have much more success with getting it shared.
  3. Make sure you respond to questions and comments about the content. This is a part of being social and engaging with other professionals. Simply pasting your link and then ignoring any feedback is spamming rather than being a part of the community.

It’s easy to spam LinkedIn groups and to send out connection requests with a click of the mouse, but it’s not networking. Make sure you are using LinkedIn as the amazing professional tool it can be and not wasting your time with poor practices. Use it correctly with the processes above and you’ll build your professional brand quickly and will have no trouble getting the job you want or promoting your business.

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

Most Common Finance Job Interview Questions

We’ve talked a lot about getting a job in finance lately, or at least getting an interview. We looked at lack of experience and how to gain some practical experience even without a finance job last week. A few weeks back, we looked at how to break into finance from another industry and some of the challenges you might find.

This week, it seemed only natural to tackle the next challenge in your finance job hunt, the interview! We’ve covered how to get a finance job from networking to interviews in a five-part series last year but have never looked at actual interview questions. This week, we are going to look at the top 10 most common finance job interview questions and things to think about in your response.

Of course, these aren’t the only questions you might see but each has a pretty good chance at being asked regardless of which position you’re applying. Besides preparing for these specific questions, thinking through your answers will help prepare for other related questions.

The 10 Most Common Interview Questions for Finance Jobs

1) Why should we hire you? What do you bring to the table that others do not?

You do not need to know the other candidates for this one, just yourself. Prepare at least two selling points before you go into the interview, something that you’ve accomplished or that set you apart. Do you have stronger experience or any particular project to which you can point? What have you done that others have not?

2) What challenges have overcome?

This shows perseverance and dedication, two characteristics you will need in a challenging industry like finance. Your example can be personal or professional. While you may have overcome a physical challenge, focus on the mental traits that helped you overcome it. Your future employer wants to know that when hours get long or the team needs to play damage control, you will have what it takes to step up.

3) What would your previous supervisor and coworkers say about you?

This is just as much personal as it is professional. You are going to spend about half of your waking hours with the people in the room and on the team, your personality needs to fit well with theirs. As with all answers, its best to answer the question directly and then reinforce it with a specific example. Don’t just say your coworkers would say you are hard-working and fun, give examples of instances that prove you have those traits.

4) Walk me through the Income Statement or Statement of Cash Flows

Even if you have no experience in finance, you can expect a few technical questions. The most likely of these are questions related to basic financial statement accounting and analysis. The employer wants to know that you have at least a basic understanding of these topics so they’re not starting from scratch in training. Be brief with these answers, just hitting on the most general line items.

5) What is your greatest strength and weakness?

This is about the lamest question I’ve ever heard and I don’t know why employers still ask it, but they do. For your strength, hit on one of the selling points you prepared for why you are the best candidate.

For your weakness, don’t take the feeble way out and say you work too hard or something like that. Provide a genuine short-coming but how you are trying to fix it. Your employer wants to know that you can honestly look at yourself and seek improvement. Remember, you need to reinforce your answers with specific examples for proof.

6) What is working capital and how does it apply to cash flow modeling?

Another technical question but fairly easy if you have spent a little time preparing your practical knowledge of the financial statements and modeling. When you’re answering these statement or modeling questions, be sure to touch on how the statements are connected through different accounts. This shows a broader understanding of how everything works together instead of just that you’ve memorized one process.

7) Where do you see yourself in five years?

Your career path needs to be aligned with the position and opportunities at the firm. No employer wants to invest money in someone through years of training only to find out that the employee’s ambition is outside the company. Know the career path from the job for which you are applying to an intermediate and senior position in the firm.

8) Talk me through what happens on the three financial statements after a capital investment

Again, it’s important that you know how changes on one financial statement affect another and how the process works itself out. For a capital investment, there is no income statement impact at first but cash decreases on the balance sheet while PP&E increases. The investment is also a cash outflow on the Statement of Cash Flows. As depreciation accumulates on the balance sheet, decreasing cumulative PP&E, net income is reduced from the expense while depreciation is added back to operational cash flow.

You probably do not need to go as detailed as ratios and other ideas, just the general process to show you have a working knowledge.

9) What sports or other competitive activities do you enjoy?

Finance is a competitive industry and you need that drive to be successful. By showing that you participate in sports, and enjoy the competition, you are showing that you will go a little further to help the firm succeed. Besides giving an example, it’s best to be able to point to an accomplishment. Anyone can go out jogging a few days a week, your employer wants to know that you pushed yourself to win.

10) What stock would you pick right now and why?

This is more about your presentation skills and ability to sell than it is about analysis. There are going to be reasons to buy or sell any investment. Your employer wants to know that you can rationally and intelligently pitch one side of the argument and convince clients, the portfolio manager or others on the team.

Remember, it isn’t only about what you say but also about how you say it in an interview. Have confidence in your answers and try not to stammer for the perfect thing to say. As an analyst or asset manager, people will look to you as an expert and trusted source. Employers are looking for someone that can speak clearly and confidently to convey that trust to clients.

Try to keep your answers to less than two minutes to avoid rambling. Employers don’t expect you to detail everything in a short interview, just make sure you hit on the general ideas and key points. Silence is ok and don’t stretch to keep adding to an answer just because they haven’t stopped you.

Finally, it’s ok to say that you do not know something. It is much better to say you do not know than to stammer through a guess. It will come across as lacking confidence at best or like you don’t know what you’re talking about at worst.

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

Why you still don’t have a job after the CFA

The journey to the CFA designation is extremely long and difficult. It’s understandable that candidates believe the charter will virtually guarantee them a job and just as understandable the disappointment they feel when they still don’t have a job after earning the designation.

While the CFA curriculum is one of the best sources of professional education in the world, it is still just education. A lot of candidates are still shut out of their dream job because they just don’t have the experience or practical knowledge required.

What more do employers want?

Of course qualifications vary according to specific jobs but many of the employers I talk to say the same thing when asked about their perfect job candidate. They say that the CFA designation or progress to it is a great start, ensuring them that the candidate has a strong base of core knowledge, but they also need someone with practical experience.

While the CFA curriculum may help you understand the ‘what’ and ‘why’ of asset valuation, it doesn’t do such a great job of explaining the ‘how’ of analysis. The material on financial statement analysis is detailed but it is not integrated well enough that candidates can use it practically.

Employers are willing to train new hires but they don’t want to start from scratch. They don’t necessarily want 20-year analyst veterans but they want candidates that already know the basics of cash flow modelling and working in Microsoft Excel.

How to get experience without getting a job

So we’re left with the chicken and the egg problem facing candidates. They can’t get a job because they’ve got no experience but can’t get experience without a job.

There’s actually a pretty easy solution.

There are several credible websites that offer self-study courses on financial modelling and other practical valuation courses. Before I talk about a couple I should note that FinQuiz is in no way endorsing any particular site or study course. Those below are only the ones I have used and have found to be detailed and informative.

Your first stop should be a basic financial modeling course, something to show you how to construct your own financial statement model in Excel. An integrated financial statement model is the backbone of an analyst’s work, integrating all the previous information from the company’s regulatory statements and working through a proforma of your own assumptions. Wall Street Prep offers a basic course and a premium course that includes the basic model, discounted cash flow modeling, M&A modeling and a leveraged buyout model. When I was putting together my team for a sell-side research department a few years ago, it drove me crazy how many candidates did not know the basics of constructing a model and how to integrate credible assumptions into the valuation estimation process.

I have also taken the Real Estate and REIT modeling course at Breaking into Wall Street. I already had some development and commercial RE experience before the course but was surprised at the amount of detail. I would generally recommend that you focus on basic modeling courses and not do too much training in a specific industry until you get a job and find out in which industry you’ll be focusing. Some employers may want their analysts to start as generalists first. The course is very good though and might help you get in the door to a RE development or REIT analysis firm.

Simon Benninga has published a very respected book on financial modeling through the MIT Press. It may be harder to follow than the videos that come with a self-study course but a new copy of the book will come with a data disk of models.

The two websites above are well respected for their course material. If you choose another provider, check around with other candidates to get feedback on the material. As a sneaky way of getting your foot in the door, you might try asking around the local CFA society about modeling courses. Asking a few charterholders their input on modeling courses lets them know that you’re willing to do what it takes improve your skills and get a job. You might just have one waiting for you after you finish the course.

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

What do CFA Candidates do when They’re not Candidates?

A recent post on the CFA Candidates LinkedIn group caught my eye, actually it’s one of the most popular posts on the forum. One candidate questioned the odd sensation of having too much time after the CFA exam, the odd feeling of boredom he is experiencing.

And he’s not alone. The post has more than 51 likes and 32 comments just over a few days.

It is an odd feeling, something like an educational Stockholm syndrome. At first you dread the exams and the amount of study time required. After a while, you begin to rely on the exams for something to do and pretty soon you need the constant challenge.

But with the next study season still at least four or five months away, what is a candidate to do when there’s no CFA exam to study?

What to do when you are not studying for the CFA exams

I’ve talked a few times about the idea that your development as a professional analyst go well beyond just the CFA exam. Just last month we posted four things candidates should be doing over the next few months before they begin studying again. Besides networking at local CFA events, there is a library of books waiting for you on the CFA Institute website and through the CFA Research Foundation.

I thought it would be interesting to look at some of those 32 comments to see what other candidates are doing with their “free” time.

Of course, some are rightly enjoying the extra time with their friends and family. As a professional, you’re always going to have busy times and you need to fit social time in when you can. I never wanted to be the best analyst in the world if it meant also being the most isolated person in the world.

Quite a few candidates are filling their time with industry reading on market risk analysis, economics and the like. Besides the strictly educational books, you might try some of the more entertaining books related to finance. One of my favorite authors is Niall Ferguson, author of The Ascent of Money: A Financial History of the World. It’s not exactly Harry Potter but those of us in the industry will be just as captivated.

Other candidates are using the break to work on other professional licenses like the Series 7 or to study for the FRM or CIMA. I know several charterholders with the FRM designation and there is some overlap so you shouldn’t have much of a problem with the curriculum. I would still recommend some practical courses as well like a cash flow modeling course or something to get you practicing actual financial analysis.

One candidate said he was mowing the lawn, which must be a huge lawn to take up that much free time!

My favorite response was the candidate attending Toastmasters and taking a writing class. As analysts, we get more than enough practice with quantitative concepts and financial statement analysis. The problem is that most emerge with their designation but not able to intelligently put two sentences together. If you ever want to be successful on the buy-side or the sell-side, you have to be able to write a report and pitch your analysis. Toastmasters is a public speaking organization and a great opportunity to practice your presentation skills. Top it off with a writing class and you’ve got the recipe for an analyst that can drive his ideas home.

You won’t spend the next four to six months doing just one thing so mix in a few ideas from the list. Enjoy your new free time with the family and do some reading. Network with your new CFA candidate friends and learn to speak in front of a group.

And go mow your lawn.

‘til next time, enjoy your free time!
Joseph Hogue, CFA

When should I Start Studying for the December CFA Exam

While the June CFA exams are just behind us, I’m already getting emails from CFA Level 1 candidates asking when they should start studying for the December CFA exam. It’s a common question, whether ahead of the December or June exam, and really depends on your own schedule and study style.

The easiest (and probably best) answer I can give you is…start studying right now! I have been a big advocate on the blog of making your CFA study schedule a part of continuous and life-long professional development. As a professional, you don’t get summer break or extended vacations. You need to constantly be learning and building your skills as an analyst, or face the chopping block the next time job cuts hit the office. The CFA curriculum is the best in the industry and it doesn’t hurt to start early and really master the material.

But if you’ve already got other projects on your schedule then it’s a relevant question to ask when you need to start studying for the December CFA exam.

How much time do you need to study for the December CFA exam

The average of 300 hours spent by most successful candidates to pass a CFA exam is a pretty good metric from which to start. Your own experience of how quickly you learn new material might guide you higher or lower but I would caution candidates against thinking they need less than 200 hours of study time. This will be your first CFA exam and most are surprised at the level of difficulty. Looking at the 10-year average pass rate of just 39% for the level one exam should give you an indication of how many are caught off-guard by its difficulty.

Most candidates for the June CFA exam start mid-February which leaves about three and a half months to study. That still means about 20 hours of studying each week over 15 weeks to reach 300 hours, a pace that most probably would have trouble keeping. For the December CFA exam, I have heard a lot of candidates wait until sometime in August to start their study schedule.

Realistically though, can you really fit more than 10 to 15 hours of studying into your weekly schedule? Even full-time students have to contend with their university exam schedule. Adult CFA candidates have to balance family-life, work and everything else with studying for the CFA. Budgeting 15 hours a week for studying means you’ll need to start in a few weeks to get 20 weeks of studying in before the exam.

You might be able to make up some lost time with a few days or even a week of intense studying. Taking off work the last week before the exam can net you upwards of 50 hours or more for studying. A lot of candidates plan on studying large blocks of time over the weekends but who wants to work all week and then study all weekend?

I would say plan on starting your December CFA study schedule by the second or third week of July, at the latest. That will give you 20 weeks before the exam. You may not need all the time but it’s far better to overstudy than to not study enough.

As for How to Pass the CFA Level 1 Exam, check out some of the posts here on the blog. The first exam is extremely broad-based but you do not need much detail in each topic area. Make sure you read the curriculum and supplement it with a quick reference guide like the FinQuiz Notes. This strikes a balance between getting the detail you need and the ability to cover the material multiple times through notes.

We’ll start covering topics specific to the CFA Level 1 exam in the coming weeks. Let me know if you have any questions on how to prepare for the exam or what to study.

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

How to Break into Finance from another Industry

Breaking into a role in investment analysis or asset management is tough and can be even tougher for candidates from other industries. Focus on your strengths to land your first finance job.

Last week’s post about getting a job in finance brought up another question we receive often here at Finquiz. The CFA exams attract candidates from a wide range of sectors and one of the most common questions is, “Can the CFA designation help me get a job in finance if I’ve only got experience outside of finance?”

The short answer here is yes…it can help, but it will not immediately land you offers from large asset management firms. As we saw last week, landing your dream job as an analyst is difficult enough for those with strong experience in the field. Your lack of experience in finance will be a roadblock on your resume but you may be able to turn knowledge of your prior industry into an advantage if you can get your foot in the door.

You’re in a Social Field Now

Depending on the industry you’ve worked in previously, networking and making contacts may be a new challenge for you. Those coming from engineering or other technical fields may not have needed to network at social events or build a name for themselves around the industry other than through their work.

Asset management is a social industry. While those in corporate finance may not need to network as much, investment managers and others in the sector depend on their connections to bring them leads on accounts and deals. This makes it difficult for outsiders to get a foot in the door because they don’t have the connections with people filling positions on their team.

It makes networking through your local CFA society and other connections so much more important if you’re trying to break into a finance position. Other CFA candidates will have built their file of connections through four years of undergraduate as well as at their current position. You need to put in the extra effort to meet people and make up for lost time.

  • Attend CFA Society networking events and consider volunteering for the society
  • Look for other industry events or conferences in your area
  • Try finding a mentor within the industry from any of your existing contacts

Turn your Disadvantages into Advantages

Your disadvantage of not having asset management or finance experience may be able to be used in your favor. You will still need to get your resume noticed through networking but once you’ve got an interview, you may be able to use your previous experience to get a leg up on other job candidates.

Many analysts come directly from the sector or industry they cover. Sell-side firms are always looking for people to give them deep technical knowledge of an industry, especially in fields like pharmaceuticals, technology and energy. Not only does your experience in the industry give you a deeper knowledge of the business but it lends you more credibility as an analyst.

Before you make the leap into asset management, spend some time to really understand the business model within your industry. It’s not enough to know the technical specifications of a product, you need to know how the product is manufactured, how it is marketed and what the industry looks like on a competitive basis. You need to show potential employers that you are an expert on the industry and that goes well beyond just having experience in one particular role.

Progress to the CFA designation is a strong plus for people coming from other industries, even more than for those already in finance. The CFA curriculum is broadly based and many universities use it as a model for a graduate program. Having passed the three CFA exams or progress to the designation shows you have the basic knowledge of finance and how the industry works.

That said, I would still recommend you take a basic cash flow modeling course online as well. The CFA curriculum covers some detail in financial statement analysis but really doesn’t go into practical application. Working through a modeling course will help show you how the financial statements are integrated and how to work through to a proforma valuation. Look through several reports on companies within your prior industry. Are there areas where you can use your previous experience to improve on the analysis?

Whatever you do, do not present yourself as a “well-rounded” candidate with knowledge across different fields. Employers do not want someone that knows a little about a lot. Employers want an asset that can bring detailed experience about a particular field and apply it to outperform other analysts.

Getting a job in finance is certainly not impossible though it may feel that way for candidates without any industry experience or connections. Make the connections you need through networking and highlight your experience in another field. Stick with it and don’t get discouraged.

‘til next time, happy job hunting!
Joseph Hogue, CFA