What to Expect on the CFA Level I Exam

The chartered financial analyst (CFA) is one of the more frequently sought after designations for investment professionals. However, becoming a CFA charter holder is not for the faint-hearted nor the uninterested. The journey to becoming a CFA charter holder is long, and it tests not only knowledge of the subject but also endurance, diligence, and will. 

According to the CFA Institute, the current program is best described as a self-study, distance-learning program that takes a generalist approach to investment analysis, valuation, and portfolio management, and emphasizes the highest ethical and professional standards. 

The CFA program consists of three exams: the CFA Level I, Level II, and Level III. CFA candidates are required to pass each of these exams and must meet certain work requirements as set out by the CFA Institute. In December 2019, the passing rate for the Level I exam was 42%.

The curriculum for each of these three levels is designed to test a broad array of skills considered to be most relevant for investment professions. In this article, we will focus on the CFA Level I exam.

CFA Level 1 Exam Structure

The exam is a six-hour exam, broken into a morning and afternoon session, each three hours long. The exam consists of 240 multiple-choice questions: 120 questions in the morning session and 120 questions in the afternoon session. Candidates should allow approximately 90 seconds per question, depending on the knowledge of the topics.

All of the multiple-choice questions are free-standing (i.e., they are not dependent on each other). For each question, three possible choices are provided. The questions are crafted intelligently, such that the incorrect choices reflect common mistakes in calculation or logic. Candidates should aim to answer all questions, as there is no penalty for incorrect answers.

Additionally, it is essential to become comfortable with calculator functions, as these features will be needed to complete some of the questions.

Exam Curriculum

The exam focuses on basic knowledge and comprehension of tools and concepts of investment valuation and portfolio management. The curriculum consists of 10 topics that are grouped into four areas, specifically: ethical and professional standards, investment tools, asset classes, and portfolio management and wealth planning.

The following table provides the weights of these topics and broad areas for the Level I exam.

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 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.

Quantitative Methods

While ethics is more scenario-oriented and easy to follow, this 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. There are around 28 to 30 questions on quantitative methods. The topics covered are geared toward providing knowledge of analytical tools that are essential for material on fixed income, equities, and portfolio management.

The key topics covered are the time value of money, performance measurement, statistics and probability basics, sampling and hypothesis testing, and correlation and linear regression analysis. 

Economics

The economics section tests knowledge of basic micro and macroeconomic concepts. Without a background in economics, this material can be challenging, especially macroeconomics, which employs the use of graphs and x and y curves to illustrate concepts related to the economy. Economics comprises 10% of the exam.

Financial Reporting and Analysis

This is probably the largest section on the exam, with 20% of the questions focused on this topic. Reporting and analysis are also weighed about the same 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 interpret three 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.

Corporate Finance

After financial reporting and analysis is the section on corporate finance. This is a short section with only a 7% weight. The key topics include agency problems related to agency-principal relationship, capital budgeting, cost of capital, leverage, and working capital management.

Portfolio 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 about 17 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.

Equity Investments

The section on equities covers equity markets and instruments, and tools and techniques for valuing companies. About 10% of the questions are on equities, and the majority of the questions are focused on valuing and analyzing companies.

Fixed Income

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% of the exam.

Derivatives

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. This section only has a 5% weight, which is about 12 questions.

Alternative Investments

This section focuses on alternative investments including real estate, private equity, venture capital, hedge funds, closely-held companies, distressed securities, and commodities. There will be about seven to eight questions in this section that are more conceptual in nature.

There is special consideration to commodity investments, so it is necessary to become familiar with concepts such as backwardation and contango.

Personal Items You’re Allowed to Bring Into CFA Exam

The CFA Institute recommends that you leave your personal belongings at home or in your car, but they provide an exhaustive list of what is and isn’t allowed in their CFA Exam Personal Belongings Policy.

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.