CFA Results and How to Deal with a Fail

The time between taking the exam and the release of CFA exam results can be excruciating. The CFA Institute has released the date of June exam results August 14, 2018. Emails will start going out at 9am eastern standard but it may take several hours to receive your email.

How to Pass the CFA Exams | A Basic Strategy

We have covered strategies and suggestions for level-specific studying in prior posts. Each level has its ‘core’ topics and should be approached in a way to maximize points.

With around 50% of candidates failing any given level each year, you can’t afford to let easy points go by not studying as efficiently and effectively as possible.

An Overlooked Benefit of the CFA

I am proctoring a mock exam as I write this and see one of the often overlooked and underappreciated aspects of the CFA. These exams are truly the great equalizer!

Some of the candidates pulled up in BMWs and Lexus, pulling off their designer sunglasses before entering the building.

Others pulled into the parking lot in things that may once have been considered cars, but are now a loose compilation of spare parts.

Whatever your economic situation in life, you can’t BUY the charter.

While it doesn’t hurt to have a fair amount of brains, I’ve seen the brightest and most adept students fail the exam.

Mock Exam Madness

Mock exam scores (the ones I have seen for various providers) are starting to come in and it looks like candidates are about as prepared as they have been in prior years. Difficulty varies on these, but it looks like candidates are coming in at around 60% overall.

What does this tell you? Not much actually. I have been a big proponent of taking mock exams as part of a guidance tool for your own studying. After taking a few exams, you can get a better sense for the topics in which you need more work. Consistently taking exams as part of your study routine can help to make sure you are not neglecting a topic or as a way to fine-tune your time. Comparing your score against the average scores for all candidates, just does not provide much new information.

We already know that no candidate with a score of 70% or above has ever failed the exam. Other than that, the Institute is pretty quiet on the issue. We also know the pass rates and trend for each of the exams, around 40% for the last five years or so. Knowing that candidates are averaging around 60% on mock exams really only tells us that the actual passing score will probably be somewhere between 61-69%, which we could have assumed anyway.

The mock exams are a great tool to test yourself in the testing environment. Unfortunately, many candidates choose to only complete one mock and then dwell on their score. If you do not understand how a sample size of one is not a good idea, you need to go back and check your quantitative methods. Scoring extremely well or poorly on one mock exam says little about your level of preparedness. Don’t neglect to study for the next month if you blew the mock away. Similarly, don’t get too discouraged if you did not do well. Take a few more mock exams and average out your scores by topic. This will show a better estimate of your understanding.

Mock exams are also a good idea because it forces candidates to do problems in multiple topics in one sitting. While doing topic specific practice problems after each reading is important, you need to do problems across different topics to better simulate the difficulty of the actual exam. The exam will require that you remember all topics in one sitting, so you should spend some of your study time practicing this.

You get one mock exam from the CFA Institute free as part of your registration. FinQuiz also has six full-length exams available. This, combined with the end-of-chapter and test bank questions should be enough to give you a good idea of where you stand come June 23rd.

Just 5 weeks left. Stop surfing the internet and get back to studying!
‘til next time, happy studyin’
Joseph Hogue, CFA


Will the CFA Charter Get Me a Job???

This is probably the question I see most often from candidates. The CFA exams can be extremely demanding and candidates want to know that their efforts will be rewarded.

There are two problems with the question though. First, it always seems to get asked most in the months leading up to the exam. It isn’t a legitimate question as much as it is fear of failure trying to give you a reason to give up, something I addressed in detail in a prior post. Ask yourself if you are dedicated enough for the exams before you begin level 1 (and at latest maybe before level 2 now that you know what you are up against), then stick to your decision.

Before I address the second problem with the question, we’ll cut to the answer. For those of you looking for a silver bullet in landing a job, the CFA designation alone will not get you a job. But then there are few things, when considered alone, that will get you that offer letter (short of marrying the boss’ daughter).  Even those with advanced degrees are looking at a 3.3% unemployment rate. You still need to use a comprehensive strategy to get that job (networking, education, experience). Will the CFA designation help to land an interview, yes! Will the designation help you stand out in a foot-deep stack of resumes, yes! Will it help you understand the industry/investment management so you can rock out on your interview, definitely!

Now that we know that it is a trick question, the second problem is that it really doesn’t matter. The designation isn’t about just getting a job. It is about making you the best (analyst, portfolio manager, advisor, etc) and being able to compete in an industry where people bite and claw for 50 basis points above the benchmark. If you are just looking for a ‘job’, there are easier ways than spending upwards of 1200 hours studying over 3+ years for just three little letters after your name.

If you are looking for a way to become a world-class professional in the field of asset management and analysis, then the Chartered Financial Analyst curriculum is second to none. *I was going to end that sentence with, “then stop asking stupid questions and get to studying,” but thought I would be nice for a change.

I could wrap this up with all kinds of clichés or analogies like, “the road less traveled,” but I’ll spare both of us. The golden gates will not open up on the day you get your charter nor will Bill Gross call and welcome you to the club, begging you to work for his fund. The charter is about placing a premium on your expertise and the value you can bring to your clients and employer, so in that respect…yeah maybe it will get you a job.

‘til next time. Happy studyin’
Joseph Hogue, CFA

CFA Level II Market-Based Valuation

The material here is fairly straight forward and easy points if you focus on the concepts and a few key formulas. The section is large enough and within an important topic area (Equity) that you can count on getting a few questions on the exam.

Be sure you know the advantages and disadvantages of each market multiple method as well as the general concepts behind the measures. We’ll cover these in today’s post. You must understand the Gordon Growth Model and be able to move things around to find different variables. Finally, Free-cash-flow-to-equity (FCFE) and Enterprise Value are fairly important formulas, of which we’ll cover on Friday.

Advantages and Disadvantages of Market Multiples

  • Relative value is relevant when picking stocks despite general market mood – despite the general trend in the market, there will still be over- and under-valued assets which can be found using relative valuation measures.
  • Easy to compute and understand – These measures (P/E, P/B, E/P) are some of the most widely used metrics. The math is easy to compute and the concept is intuitive. There is a risk that these measures are overly simplistic though.
  • May be difficult to compare companies across multiples without significant adjustments – Companies in different sectors and industries may vary greatly in their fundamentals, i.e. debt burden, payout ratio, growth and margin characteristics. This makes it inappropriate to compare many companies directly without some kind of adjustment.
  • Biggest disadvantage is multiples build in systematic errors- Even if one stock is extremely under-valued compared to another, if the general market or the sector is in an over-valued state then the asset may not truly be a good investment.

Comparables versus Forecasted Fundamentals

The material covers two forms of market-based valuation, comparables and forecasted fundamentals.

  • Comparables are relative value measures where a benchmark value is created through analysis or averaging usually the sector or industry average. This is then used to compare equities within that sector to determine relative over- or under-valuation.
  • Comparables provide an objective guide for valuation but provide no information on
  • Forecasted fundamentals use financial statement data (payout ratio, ROE, earnings, etc.) to find either a present value or future forecast of the asset price, most often cited in the curriculum is discounted cash flows (DCF). This tries to explain the ‘why’ in valuation.

Price to Earnings (P/E)

Price-Earnings is most often quoted on ‘trailing’ earnings or those over the last 12 months but can also be quoted on ‘leading’ earnings, those over the next 12 months, or a combination. Trailing earnings are more widely used and not subjective to forecasting errors but leading earnings should be used if the analyst expects a regime change in earnings.

With the P/E ratio, we can see the relationship between required return, growth, and the retention rate.  You need to be able to understand the relationships in this formula and be able to change things around to solve for different variables.

Advantages/Disadvantages of P/E

  • Simple and widely understood
  • Intuitive since investment value is derived from corporate earnings
  • Negative earnings will cause an error
  • Earnings can be volatile or transitory, making the measurement inconsistent
  • The biggest disadvantage is management’s incentive to manipulate earnings

Analysts may want to ‘normalize’ earnings by taking the average over an entire business cycle. This helps to reduce the short-term effects of business cycle changes on different industries. The curriculum discusses two ways to do this, the historical method and ROE method. Historical, is just the simple average of earnings over the cycle. The ROE method involves averaging the firm’s ROE over the cycle then multiplying by the current book value per share.

One important piece of vocabulary that often confuses candidates is the ‘justified’ P/E. This is simply the P/E based on forecasted fundamentals as follows:

Notice, it is the P/E that should result given the forecasted earnings and the company’s payout ratio.

Earnings Yield

The earnings yield is just the inverse of the P/E (Earnings divided by Price, E/P). The measurement will yield the same meaning as P/E but is useful when earnings are negative.

Price to Book Value (P/B)

Analysts are generally skeptical of income statement metrics because of the ease and incentive for manipulating earnings. Price to Book uses the Gordon Growth Model and incorporates book value in the following formula:

Remember, book value is total assets minus total liabilities and preferred equity then divided by common shares to get book value per share. You may need to adjust some balance sheet accounts because of different practices across firms.

  • intangible assets- patents should be included but goodwill not
  • assets usually carried at historical and should be marked to fair value
  • adjustments for off balance sheet items
  • LIFO vs FIFO adjustments and depreciation


  • Book value is more stable than earnings
  • Book value more appropriate for highly liquid companies (insurance, banking)
  • May be inappropriate to compare book values across industries because of differences in fundamentals

Price to Sales (P/S)

The final relative price multiple is price-to-sales, using net sales divided by number of shares. The main advantage here is that sales, or revenue, is less easily manipulated than earnings and always positive though revenue recognition practices can still distort the outcome. The main disadvantage is that P/S is often used to justify valuation based on expectations of future earnings profitability even when current earnings are negative. This happened in the years leading up to the dot-com bust. Analysts used P/S and inflated sales projections to value equities that would never live up to the high expectations and eventually crumbled as investors saw that the companies would not eventually be profitable.

Remember, this is just a quick review of the core concepts and formulas for the material. You need to actively study the study guide and question bank software to make sure you get this stuff down. Again, fairly straight forward material but no less important because it has a good chance of showing up on the exam.

happy studyin’

Joseph Hogue, CFA


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