CFA Level 1 – Exam Preparation Guide
If you are a CFA Level 1 exam candidate, this guide will provide you all the information you need to prepare and pass the exam.
The Chartered Financial Analyst (CFA®) is one of the most desired designations for investment professionals and financial analysts. The CFA designation has wide acceptance in the industry and can significantly boost your professional career.
The CFA Program Structure
To become a CFA charter holder an individual is required to pass three exams, which are popularly referred to as CFA Level I, CFA Level II, and CFA Level III. Apart from passing the exam, you are also required to have four years of relevant professional work experience to earn your charter. Only when you have passed all the three levels of the exam and CFA Institute has verified your work experience, you qualify as a regular member and get the right to use the CFA designation.
Note that it’s not necessary to have the work experience before you start the CFA program. You can gain the work experience even while preparing for and writing the exams. You also need to fulfil certain educational requirements.
In this guide we will focus on CFA Level 1 exam and how to prepare for it.
The CFA Level 1 exam is conducted in June and December every year. The exam day will generally be the first Saturday of the month. The exam registration opens at least 11 months before the exam so you have enough time to make up your mind about the exam; however, it is advised that you register early. CFA institute’s website has a detailed CFA Program Calendar. Early registration also provides you a discount on the fees.
CFA Level 1 Exam Format
The CFA Level 1 exam is a multiple choice exam. It’s a 6 hour exam conducted in two sessions of 3 hour each. You will need to answer total 240 multiple choice questions, 120 in the morning session and 120 in the afternoon session. All the exam questions are independent of each other. The questions are designed by experts and are sometimes very tricky. However, as long as you know the subject you can answer them confidently.
CFA Level 1 Exam Syllabus
The CFA Level I exam tests your knowledge and understanding of various investment tools. The syllabus covers 10 topic areas, namely, Ethical and Professional Standards, Corporate Finance, Economics, Financial Reporting and Analysis, Quantitative Methods, Alternative Investments, Derivatives, Equity Investments, Fixed Income, and Portfolio Management.
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The weightages of questions from each of these topics are provided below:
Topic Areas for Level I
|Ethical and Professional Standards (total)||15|
|Investment Tools (total)||50|
|Financial Reporting and Analysis||20|
|Asset Classes (total)||30|
|Portfolio Management and Wealth Planning (total)||5|
Let’s now take a look at each of these 10 topics:
Ethical and Professional Standards
CFA Institute gives high importance to the Ethical and Professional Standards and expects all members and candidates to abide by the CFA Institute Standards of Professional Conduct. This section also covers Global Investment Professional Standards (GIPS). On the test candidates can expect 36 multiple choice questions from Ethics and Professional Standards – 18 questions in the morning and 18 questions in the afternoon. The questions will revolve around situations involving firms, government/regulatory bodies, and people – charter holders, candidates, investors, beneficiaries, and so on.
Correct answers will centre on your ability to apply: seven professional standards of conduct, and the GIPS. To do well in this section, you will have to depend on both your memory and intuition. The main focus of questions is to interpret the code and standards in the context of specific situations. In many cases, you will be asked to identify violations of the Code and Standards.
Knowledge of quantitative methods is essential to financial analysis and investment management. This section tests your knowledge on various quant topics including time value of money, discounted cash flow applications, probability, hypothesis testing, statistics, and correlation among others. These concepts have their application in the field of investments, project valuation, and financial risk management. With a weightage of 12%, you can expect 28 or 29 questions on quantitative methods. If you have a maths background or have an MBA degree, then this section is essentially a review of concepts you’ve already studied. However, for non-math candidates, it can be a tough section. In the exam, you are allowed to carry a CFA-approved financial calculator. Buy this calculator immediately after enrolling for the exam, and make sure that you are able to solve quants problems using the calculator. This could be a real time saver.
The next section is economics that tests your understanding of both macro and microeconomics concepts. Economics has 10% weightage in the exam and you can expect about 24 questions from this section. The problem with this section is that it has a huge amount of content and may take a long time to study. You need to plan your time carefully while studying for economics. It’s mostly concept oriented and if you have studied economics in college then you can expect familiarity with most of the concepts. In microeconomics focus on elasticity, efficiency and surplus, firm level economics, cost curves, the impact of government action on firms, and market structures. In macroeconomics focus on the business cycle, aggregate supply-aggregate demand, banking systems, monetary policy, and fiscal policy. You should also be familiar with international trade and currency exchange rates.
Financial Reporting and Analysis
Financial reporting and analysis is the largest (after ethics) and the most important section in CFA Level 1 exam. It has a 20% weightage so you can expect 48 questions from here. The material in Exam 1 is also the foundation for what you will come across in Level 2 and Level 3. You need to know how to read the three financial statements, namely, balance sheet, income statement, and the statement of cash flows. Once you know these statements, proceed with financial reporting standards, inventories, long-lived assets, income taxes, and non-current liabilities. You should get very comfortable with financial ratios and how to interpret them.
Corporate finance is a small and easy section with just 8% weightage in the exam. This includes capital budgeting, cost of capital, working capital management, leverage, dividends, and issues in corporate governance. You should know various capital budgeting methods and the calculations involved.
This section revolves are equity and equity markets and you can expect about 24 questions on equities in the exam. The syllabus is divided into two parts: The first part focuses general market dynamics including market structure, stock indices, and market efficiency. The second part focuses on equity analysis and valuation. This material is quite straightforward and you should aim at scoring high here.
Just like equities, fixed income is also a sweet section and you can expect about 28-30 questions from fixed income concepts. There is however a lot of material. You will be learning about various debt securities, risks involved, yield measures, valuation of debt securities, measurement of interest rate risk, and credit analysis.
Derivatives, Portfolio Management, and Alternative Investments
These three sections put together form 13 % of the exam with about 32 questions coming from here. In derivatives, the focus is on the basic derivative instruments such as futures and forwards, options, and swaps. You should be familiar with these derivative instruments, and how they are used to manage risk. The portfolio management section covers the basic principles of portfolio management. Some of the important concepts are CAPM, portfolio risk and return theory, and investor policy statement. The section on alternative investment covers the various types of alternative investment classes such as real estate, private equity, venture capital, hedge funds, closely held companies, distressed securities and commodities. The content is conceptual in nature and you need to know only the basics of these asset classes.
The CFA Institute suggests that you spend about 300 hours to prepare for the exam. However depending on your educational background and work experience, you may need to spend more or less. The ideal time to start preparing for the exam is at least 3-4 months before the exam date and to follow a daily study routine. You should start with reading the study material and then gradually move towards solving practice questions. Just before the exam, it is advised to attempt a few mock exams to get familiar with the exam structure and build speed.
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