Level I of the CFA® Exam – Topics and Weights

A Word from the Author

This article is meant for individuals who have decided to pursue the CFA® charter. It is also meant for individuals who are still indecisive on whether to pursue CFA® exams or not. I will start by congratulating all CFA program level 1 candidates on taking this first step towards achieving the CFA® charter. At AnalystPrep, our goal is to help candidates pass the CFA® exams more efficiently. We provide question banks, summarized study notes, video lessons, mock exams, and much more.

Should you Pursue the CFA Designation?

For those people who are still not sure about pursuing the CFA exams, this is to assure you that CFA charterholders, apart from being recognized globally, are the most coveted employees in the financial and investment industries. Employers crave and fight for individuals who have been awarded CFA charters. The money factor ($700 to $1450 per exam), however expensive, cannot compare to the benefits that come with being a CFA charterholder. Registering as soon as possible lowers the fees for each exam and allows a candidate at least 300 hours study period that is recommended by the Institute. You can learn more about the exam fees here: https://analystprep.com/blog/all-you-need-to-know-about-the-2020-cfa-exams/

Level I of the CFA® Exam Format

The CFA exam equips its candidates with unrivaled financial and investment skills and capabilities. Level 1 CFA exam is tailored to help candidates attain basic knowledge and understanding of the concepts that are applied in the finance and investment industries. The level 1 CFA exam comprises 240 independent multiple-choice questions that are divided into two sets of 120 questions. One set of questions is taken during the three-hour morning session and the other set taken during the 3-hour afternoon session, with a lunch break in between. It is important to note that all these questions carry the same weight.

The CFA exam is considered a difficult exam because the incorrect choices among the multiple choices have been tailored to reflect the common mistakes that a candidate can make in both calculation and logic. It is, however, advisable to answer all questions because unlike college board exams, CFA exams do not penalize on wrong answers.

The Main Test Areas

1. Ethical and Professional Standards: This test area covers one subject area, Ethical and Professional Standards and makes 15% of the level I CFA exam.
2. Investment tools: The area encompasses 4 test areas: Financial Reporting and Analysis, Corporate Finance, Quantitative methods, and Economics. This test area carries 49% of the exam.
3. Asset Classes: The maximum a candidate can attain in this area is 29% of the exam. The area is made up of four subject areas: Equity Investments, Fixed Income, Derivatives, and Alternative Investments.
4. Portfolio Management and Wealth Planning: Has only one subject area – Portfolio Management – which 7 makes up for 7% of the possible 100%.

Subject Areas

As shown above, level 1 CFA exam has 10 subject areas:

1. Ethics and Professional Standards
2. Financial Reporting and Analysis
3. Corporate Finance
4. Quantitative methods
5. Economics
6. Portfolio Management
7. Equity Investments
8. Fixed Income
9. Derivatives
10. Alternative Investments

Below is a detailed summary of the level 1 CFA exam subject areas:

Ethics and Professional Standards

The mission of the CFA Institute is to lead the Investment and finance profession globally by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society. This mission statement depicts how much the CFA Institute values ethics and ethical behavior, making this subject area one of the most important subject areas. Ethics is examined throughout all the levels; thus, it is best to completely understand ethics during level 1, as the concepts in level 2 and 3 build up from those learned in level 1.

Ethics and Professional Standards equips a candidate with knowledge in code of ethics and ethical behavior, challenges to ethical behavior, how ethical behavior relates/ differs with law, professional standards and Global Investment Performance Standards (GIBS).

Quantitative methods

This subject area applies a more mathematical and analytical approach. It addresses more complex financial concepts. Students with a background in Statistics tend to have an upper hand in this subject area. Quantitative methods equip the learner with skills on hypothesis testing, time value of money, performance testing, basics of probability and statistics, regression analysis and sampling methods.

Economics

This test area favors students with a background in economics, and those with mastery in drawing and analyzing graphs as most of the macroeconomics concepts are better explained graphically. It tests basic concepts applied in both micro and macroeconomics.

Financial Reporting and Analysis

A larger percentage of questions in the level 1 exam are tested from this subject area. It is important to completely understand Financial Reporting and Analysis in order to secure a good foundation, as level 2 Financial Reporting and Analysis builds up from the concepts learned in level 1. This subject area equips a candidate with knowledge and skills in financial statements, taxes, inventory analysis, revenue recognition, and long-term assets. Due to its global nature, the exam does not test on locally acceptable accounting principles, it focuses on internationally acceptable principles and laws, for example, the International Financial Reporting Standards (IFRS).

Corporate Finance

This subject area carries a small percentage in the exam weighting. Apart from testing on agents and principal-agent relationships, it tests on matters related to cost of capital, net present value (NPV), internal rate of return (IRR), and working capital management.

Equity Investments

The subject area instills into a learner the skills to value and analyze a company by teaching candidates how to use tools such as performance-based financing (PBF). It also covers equity markets and instruments.

Fixed Income

This subject area equips a candidate with knowledge in fixed income markets and the instruments of fixed income markets. Candidates learn how to price various fixed income securities. It teaches concepts in yield measures, duration, credit analysis, and complex fixed-income securities such as asset-backed securities (ABS).

Derivatives

Level 1 introduces the basic concepts of derivatives to a candidate, concepts that will then be applied at large in levels 2 and 3. Level 1 tests on the basics of futures, swaps, forwards, options and how to hedge using these derivatives.

Alternative Investments

A good investment manager should be able to outline to his/her clients the various investment options available. This area, therefore, teaches a candidate the various alternative investments including real estate, private equity, venture capital, distressed commodities, and hedge fund.

Portfolio Management

As compared to levels 1 and 2, Portfolio Management has a lower weighting in level 1. The subject area equips the candidate with basic concepts that will be applied in levels 2 and 3. It introduces a candidate to modern portfolio theory (MPT) and the capital asset pricing model (CAPM).

Making the most out of the minimum 300-hour study period

To ensure that a candidate understands most of the level 1 CFA exam syllabus concepts, good time management, and good planning is necessary. Level 1CFA exam syllabus encompasses 10 subjects that are divided into 57 readings which require at least 18 reading sessions. Assuming a candidate starts preparing for the exam in January, the candidate will be having a 5-month preparation period. To make the most out of the 5 months, the candidate should allocate the first four months towards reading the curriculum or study notes and solving many practice questions from the different subjects in isolation, and the last month towards attempting mock examinations and polishing on his/her weak study areas. Four months translate to roughly 16 weeks, this means that a candidate should aim for at least 18 hours of study time every week. These 18 hours of study every week means that a candidate should aim to study for at least 3 hours every day with an exception of Saturday and Sunday. Here is a study plan written by a candidate who passed all three levels of the CFA exams on the first attempt: https://analystprep.com/blog/cfa-level-1-6-month-study-plan/

The CFA Institute offers a personalized study plan that allows candidates to allocate more study time to the more difficult topics. It is also prudent for candidates to allocate more time to the topics that carry more weight, without totally neglecting the ones that carry less weight.

A student is advised to create a study tool and map his/her progress to ensure that the student gains a lot from his/her study while still within the study period.

FRM Part I & Part II Complete Course

Conclusion

Passing level I CFA exam is easily feasible. It simply requires discipline, good time management skills, smart work, and extra help that can be obtained from third-party providers. Even though CFA examfavors candidates with a background in business courses, anyone in their final year of bachelor’s degree is eligible to sit the examinations and has encountered at least three subject areas in their campus education.

We at Analyst Prep will ensure that we walk with you every step of the way to help you realize good CFA exam results. Learn more about how to efficiently pas the CFA exams here: https://analystprep.com/cfa-level-1/