Level 1 of the CFA® Exam – A Three Month Study Plan

If you are just now starting to study for the Level 1 CFA exam, this guide can help you successfully prepare for the exam in three months. Passing the exam with three months of prep is a daunting task; the attack plan mapped out below seeks to help you slay the dragon.

This study plan is based on notes taken from my journey through the Level 1 CFA exam. There may be some curriculum differences in the next test (CFA Institutelikes to make adjustments from year to year), so be sure to compare this guidance with the official CFA Institute books for your exam.

At this point, you will probably need at least 20-25 hours of study per week, and more as the test date approaches.

Purchase two (2) 100 page notebooks. One is for notes; the other for practice problems and tests. As you read each section, make notes of the concepts you believe are most likely to be tested.

Make flash cards for key formulas and lists. I made about 250. They are easy to carry around and allow you to study while waiting in lines, riding the bus, etc.

The Level I exam will contain 240 questions. Many students struggle with the time pressure. The only way to prep for this is through practicing and practicing under a time constraint. Check Level I Authority for CFA Exam, our Study Notes, Practice Questions, and Mock exam, that helps you prepare for the exam in a focused way.

Practice tests need to be worked into the schedule below. I recommend taking at least three to five under exam-like conditions. On weeks in which you do not take a practice exam, prepare to do about 100 practice questions (and more, if possible).

Checkout our Level I Authority for CFA Exam - Study Notes, Practice Questions, and Mock Exam..

The dates below assume that you are writing the exam in December.

September 6-25 – Ethics, Quant, and Econ

Ethics will cover the code and standards, plus GIPS® . Expect this to be 10 – 15% of your questions. These are critical questions. If you have a borderline score Ethics could be the deciding factor. Use flash cards so you can easily review this material as you work through later sections.

Quant is very intimidating for many L1 candidates. Those of you with stats backgrounds will find a mix of review and new material. Expect Quant to be 10 – 15% of your questions. You gotta know the time value of money, return/yield calculations, measures of central tendency (ex. mean) and dispersion (ex. standard deviation), confidence intervals, and general hypothesis testing. You will also see the Sharpe ratio, correlation, covariance, and return variance of a two asset portfolio. These latter concepts appear in multiple sections, across all three levels. Do yourself a favor and learn them now. Everything mentioned above is flash card worthy. Also, some of these problems can be time consuming, so you must practice and know how to do it before test day. Lastly, you will see some more obscure formulas. Do not beat yourself up over them. You may miss a question or two, but mastery of the core material will get you the pass.

Econ should be a review of some general micro and macro principles from your college days. Expect this to be ~10% of the test. Look for a micro focus on elasticity, efficiency and surplus, firm level economics, cost curves, the impact of government action on firms, and market structures. On the macro side, look for the business cycle, aggregate supply-aggregate demand, banking systems, monetary policy, and fiscal policy. You will see formulas in Econ, but not as complex as quant. I would say the micro side is more formulaic and macro is more conceptual.

September 26-October 16 – Financial Statements and Corporate Finance

The combination of FSA and Corporate Finance could be the largest test section, covering 25-30% of the questions. This material also represents building blocks for the L2 exam; give this section massive respect.

You must know how to read and interpret the three major financial statements (income statement, balance sheet, and statement of cash flows). Once you get comfortable with the statements themselves, more advanced issues will be introduced: revenue recognition, calculating diluted shares outstanding, calculating cash flow from operations, free cash flow methods, inventory analysis, analysis of long term assets and depreciation, and taxes. You will also see discussions contrasting US GAAP and IFRS.

I want to give special mention to the analysis of financing liabilities (i.e., bonds), leases, and off-balance sheet financing. This stuff stinks and unfortunately, CFAI loves it. You gotta get yourself amped up and attack this material. Unless CFAI has bumped it to L2, I would fully expect questions on these items.

In case you did not get enough of FSA, you now need to learn the ratios. This is classic flash card fodder. The calculations are simple, but there are a lot of them, so the cards will help.

After all this, Corporate Finance still remains. This will include capital budgeting, the cost of capital, working capital management and issues in corporate governance. Like core-FSA, this builds to L2, so get it down. Pay particular attention to the different capital budgeting methodologies, their calculations, and their strengths/weaknesses.

October 17-October 27 – Equity

Finally, stocks and the stock market! Look for Equity to be 10-15% of your questions. Expect to see a split between the generalities of markets (organization of exchanges, indexes, margin trading, and market efficiency/EMH) and actual valuation (basic models, determining the required return on common equity, and industry analysis).

October 28-November 3 – Fixed Income

Naturally bonds follow stocks (despite being a significantly larger segment of the global capital markets). Fixed Income could be 10-15% of the exam. You will need to understand basic feature of fixed income securities and how to measure their risk. Gain familiarity with US Treasuries and that market, as well as corporate credit analysis. More exotic fixed income securities, such as CDOs and ABSs will be discussed. I want to make special mention of duration; understanding duration (and convexity) is a must.

Getting into the more sophisticated fixed income material, you will see spread analysis, valuation, spot and forward rates (which I hated), and analysis of interest rate risk.

November 4-November 14 – Derivatives, Portfolio Management, and Alternative Investments

The Derivatives section of L1 is really more of a teaser of things to come; L2 and L3 will get more intense so enjoy L1. Derivatives will be in the ballpark of 5% of the test. You will learn a little about forwards, futures, options, swaps, and some basic risk management applications. Put-call parity, option payoff charts, and swap diagrams are good things to know.

Like Derivatives, Portfolio Management is another foreshadowing section and should also be in the ballpark of 5%. You will see some of the same formulas from Quant, such as return variance of a two asset portfolio (which CFAI loves). You should learn the key points of MPT and CAPM. There are some different charts (ex. capital market line) which could appear on the test.

We close with Alternative Investments, which is another ~5% segment. This segment is more conceptual in nature and you will want to know the basics of the different types of investments. Any calculations would likely focus on real estate valuation.

November 15-December 3 – Review

If you followed this plan then you have about three weeks left for review. This is the time where your pass or fail is decided. You will want to do a ton of practice problems and ideally two practice tests. Set aside separate time in the days before the exam to review Ethics. I strongly believe that a high Ethics score may have been the difference between a pass and fail for me in Level 3 this year; the same applies to you any test taker, at any level.

Since time is of the essence you will want to be ultra focused. I recommend over-laying your strengths and weaknesses against the following rankings and allocating your time accordingly. The list below starts with the most important and works down.

  1. Financial Statements
  2. Ethics and Standards
  3. Quant
  4. Fixed Income
  5. Equity
  6. Econ
  7. Corporate Finance
  8. Derivatives
  9. Portfolio Management
  10. Alternative Investments

On Test Day – December 4/5

First, know how to get to your test center. Exam day is not the day to learn your travel route. Also, make sure you have an approved calculator.

Regarding the test, as you work through the questions, answer the easy questions and short questions first. Note the harder questions and the more time consuming questions and keep doing pass throughs. I did four or five pass throughs before completing the exam. The key is to not spend 20 minutes answering one question, when you could be knocking out 12 others. Note the tricky ones and move forward. Ultimately, you will probably need to make a few guesses; this is normal so do not get stressed out. Time management and a cool head are the two intangibles that will help you get the pass.

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