What To Expect on the CFA Level I Exam
|CFA Level I Exam Topics and Weights|
|Ethical and Professional Standards||15-20%|
|Financial Reporting and Analysis||13-17%|
Source: CFA Institute.
Ethics and professional standards
This section covers the code of ethics, professional standards, and the Global Investment Performance Standards (GIPS). There are approximately 27 to 36 questions on the subject, and the Institute itself takes this section very seriously. If scores are low or close to the minimum passing score on all other topics, then the score on this section could determine whether a candidate passes or fails. One advantage of studying ethics well is that it also helps with Level II and Level III exam preparation.
While ethics is more scenario-oriented and easy to follow, the quantitative methods section could be intimidating for some students. A Ph.D. in mathematics is not necessary to do well in quantitative methods, but having a background in statistics will certainly be helpful. An 8%-to-12% weight means that candidates should expect anywhere from 15 to 22 questions on quantitative methods. The topics covered are geared toward providing knowledge of analytical tools and techniques that are essential for financial analysis and investment decision-making.
The key topics covered are the time value of money and discounted cash flow analysis, which form the basis for security and asset valuation; descriptive statistics that convey important data attributes, and characteristics of return distributions; and probability theory and its application to quantifying risk in investment decision making.
The economics section tests knowledge of basic micro and macroeconomic concepts. These include supply and demand analysis; various market structures such as oligopoly and monopoly; aggregate output, prices, and economic growth; and business cycles and their effect on economic activity. Economics comprises between 8% to 12% of the Level I exam.
Financial reporting and analysis
This is the second-largest section on the Level I exam, with a 13%-to-17% weight. Financial reporting and analysis have only a slightly lower weight for the Level II course, so it’s important to spend enough time studying this area to build a solid foundation for subsequent exams.
Candidates will be asked to analyze and interpret primary financial statements (balance sheet, income statement, and cash flow statement), know the ratios, and many other advanced concepts such as revenue recognition, inventory analysis, long-term assets, and taxes.
Since the exam is a global exam, it does not cover local accounting practices. The focus is more on widely accepted standards, such as U.S. GAAP and IFRS.
After financial reporting and analysis is the section on corporate finance, which has an 8%-to-12% weight in the Level I exam. It provides an introduction to corporate governance, as well as investing and financing decisions. This subject area also highlights the growing impact of environmental and social considerations in investing. Key topics include capital budgeting, cost of capital, leverage, and working capital management.
The Level I exam only introduces the basics of portfolio management. The important concepts are the Modern Portfolio Theory and the Capital Asset Pricing Model. There are between nine and 15 questions in this section, which acts as preparation for Levels II and III, where the focus is more on the application of knowledge on portfolio management.
The section on equities covers equity markets and instruments, as well as tools and techniques for valuing companies. Candidates should pay close attention to this section because it lays the foundation for further study in Levels II and III. Approximately 10% to 12% of the questions on the Level I exam are on equities, and the majority of the questions are focused on valuing and analyzing companies.
After equities, the exam next deals with fixed-income markets and their instruments. Candidates are required to understand the characteristics of various fixed-income securities and how to price them. Some important concepts are the yield measures and duration and convexity. This section also discusses structured products, such as mortgage-backed securities and collateralized mortgage obligations, among others. Questions on fixed income comprise 10% to 12% of the exam.
Similar to portfolio management, derivatives are only introduced in Level I. Candidates will be tested on the basics of futures, forwards, swaps, options, and hedging techniques using these derivatives. Similar to portfolio management, this section only has a 5%-to-8% weight in the Level I exam, which equates to between nine and 15 questions.
This section focuses on alternative investments including real estate, private equity, hedge funds, infrastructure, and commodities. The Level I curriculum for alternative investments is of an introductory nature, with a 5%-to-8% exam weight, so expect between nine and 15 questions. Given the growing importance of this asset class in recent periods, and the fact that it has a slightly higher weight in Levels II and III, candidates should treat this section seriously.
Test-Taking Tips on Exam Day
All CFA exams are now administered through computer-based testing at proctored exam centers in over 400 locations globally. The exam centers have tight security measures in place, and each center closely monitors candidates to detect any form of cheating. The CFA Institute offers the following test-taking tips for CFA Level I Exam Day:
- Be comfortable with your calculator’s features, and ensure you know how to use them to address the learning outcome statements. Permitted calculators are either the Texas Instruments BA II Plus or the Hewlett Packard 12C.
- Exam questions referring to financial reporting and analysis are based on IFRS unless otherwise specified. If U.S. GAAP is used, this will be stated in the question.
- Answer all questions, since there is no penalty for incorrect answers.
- While there is no dress code for the exams, dress in layered clothing for comfort and preferably wear quiet shoes.
Is there a break between Session 1 and Session 2 of the CFA Level 1 exam?
There is an optional break of 30 minutes between Session 1 and Session 2.
How much study time do I need for the Level I exam?
According to CFA Institute, the average successful candidate reported spending 303 hours studying for the Level I exam offered in June 2019.
If I do not pass the CFA Level I Exam, how long do I have to wait before I can retake it?
Beginning in 2021, every candidate who does not pass their exam will have to wait for a minimum of six months to retake it.
The Bottom Line
Overall, the CFA Level I exam is well balanced, with a wide spectrum of topics. Some topics may require proportionally more time to study than others; however, what’s important is to create a study plan and stay with it.