How NOT to be Surprised by the CFA Exams!

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


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


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


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


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


Level I CFA Program Exam: Information Overload


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


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


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


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


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


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


Level II CFA Program Exam: A Quantitative Monster


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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