10 most difficult areas of Level I of the
CFA® Program
The Level I CFA Program exam presents a considerable challenge for many candidates due
to the vast range of topics that you are expected to master.
The key to achieving the mastery of the concepts, is to study
efficiently, focusing on the exam-based learning outcome
statements (LOS). Certain topics do present a significant problem
for the majority of candidates. To assist you, we have compiled a list
of the ten most difficult areas for the Level I CFA Program exam. This
is based on our delegate feedback at Fitch Learning, over 20 years
of training. The study sessions (SS) and readings (R) are listed to
enable you to reference the topic easily.
SS1: Ethics and Professional Standards, R3 Guidance
for Standards I-VII
SS1 presents the joint heaviest weighted topic of the exam (15%),
and most candidates find the material overly lengthy. However, it
forms the cornerstone of the exam, and is used to determine the
pass/fail outcome of candidates with borderline scores. The key
is to focus on R3, from where the majority of the questions will
come. You must read all of the CFA Institute volume 1 book (approx.
150 pages) for reading 3. Each Standard section is presented with
full explanations, recommendations for compliance, and most
importantly, the application of the standard in business scenarios.
CFA Institute assumes you have read through these scenarios when
writing your final exam, hence its importance cannot be overstated.
You cannot cram this material, so read it through fully at least three
times before the final revision period. You should complete the end
of reading questions to consolidate your understanding.
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SS4: Economics 1, R14 Aggregate Output, Prices and
Economic Growth
For anyone who hasn’t studied economics to before, the macro-
economic topics will be the hardest to master. The concepts take
time to understand and cannot be crammed in a short space of time
(unlike the microeconomic section)! Try to focus on the factors that
shift aggregate demand, and long run aggregate supply. Make sure
you can calculate the GDP deflator, and use it to derive the annual
inflation rate. Take care with the IS-LM model, it is a highly conceptual
model and can be difficult to understand; so for most candidates it
can take a disproportionate amount of time to master. Unless you
have studied this model before, you are probably better off not trying
to fully understand it. This model will lend very little to your exam
performance but may take forever to master! Remember, grab the
low hanging fruit, and pick your battles.
SS5: Economics 2, R18 Currency Exchange Rates
For those without a background in economics, this reading provides
a lot of concepts that can be mastered with careful practice. What
candidates can find tricky, are some of the conventions used by CFA
Institute. The stating of currency pairs using the price currency/
base currency convention can confuse those who use currency
pairs in their daily job. In addition, use of terms such as direct versus
indirect quotes, and nominal versus real exchange rates can cause
confusion without careful study. However, once mastered, this
reading can provide a strong base for many exam questions.
SS8: Financial Reporting and Analysis (FRA), R26
Long-Lived Assets
FRA is the joint heaviest weighted topic (alongside ethics at 15%),
and certain sections of the topic are challenging, especially for those
learning the fundamentals from scratch. One such area regards the
impairment of PPE and intangibles and the impact on ratios. The
approach taken by the IASB (IFRS) is significantly different to that
taken by the FASB (US GAAP). Candidates must be fully aware of the
accounting differences. To make learning easier, remember that US
GAAP will generally prohibit any method which results in earnings
volatility (no reversals), and IFRS place importance on fair balance
sheet carrying values (allow reversals and revaluations). Once you
have mastered the topic you can apply your knowledge to confirm
the impact on key profitability and leverage ratios.
SS8: Financial Reporting and Analysis, R27 Income Taxes
Few candidates will enjoy studying any part of tax reading in FRA.
However, the key to unlocking the entire reading is to focus on tax
expense. If you can appreciate that this expense, like any other, is
based on the matching/accrual concept of showing the profit earned
in the period, with the tax due on that profit, regardless of when it is
paid. From this you will understand that tax expense will contain tax
due now (tax payable) and tax due in future periods (deferred tax).
Deferred tax is a topic that many accountants take years to master,
so do not be too harsh on yourself if you do not understand it fully
throughout your studies. The key is to be able to calculate the correct
amount given the accounting and tax office figures.
SS13: Equity Investments, R41 Equity Valuation:
Concepts and Basic Tools
At Level I, equity valuation focuses on dividend discount models,
leaving the other techniques for Level II. Generally, candidates
find this topic easier than the related fixed-income valuation area.
However, candidates can find the two-stage dividend discount
model quite challenging. Only a two-stage model (high growth
and constant growth) is tested at Level I. Remember, to apply the
Gordon Growth Model only once constant dividend growth has
started, and that the terminal value computed is one time period
before the dividend used (e.g. a dividend in year 4 will derive the
terminal value in year 3), don’t forget to discount the terminal value
back to the present. The high growth dividends must be discounted
separately and will be added to the discounted terminal value.
Good luck with your studies during this uncertain time, stay safe.
Author: Peter A Menzies, CFA
CFA Program instructor, Fitch Learning
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SS14: Fixed-Income, R44 Introduction to Fixed-
Income Valuation
Most candidates can price a bond easily enough using the TVM
buttons on the financial calculator. However, related topics such as
deriving forward rates from spot rates cause more problems. You must
understand that forward rates are simply breakeven future short-term
spot rates, and although you should use compound spot factors to
derive forward rates, you can generally get an accurate approximation
by using simple maths (e.g. 2 years of the 2-year spot rate should equal
the 1-year spot rate plus the 1-year forward rate in 1 year). In addition,
you must focus on the relationship between the two-term structure
spreads (the Z-spread versus the OAS). You can expect this topic to
be tested, as it also forms a key Level II topic. No calculation of either
spread is required but expect questions regarding which spread is
larger for callable or putable bonds, and the reasons why.
SS15: Fixed-Income, R46 Fixed-Income Risk and Return
The number of duration and convexity formulas in this reading can lead
candidates to believe the focus should be on calculation. However, the
CFA Program is not designed to advantage candidates with a numerical
background. Hence, you can be assured that no calculus is required for
any calculation. Instead, you should focus on the approximate Modified
duration and convexity formulas and be able to calculate the price
move based on the duration and convexity effect. In terms of Macaulay
duration, a calculation is unlikely to come up, instead be able to
compute the duration gap, and state whether the investor is exposed
to price or reinvestment risk. In addition, know why the Effective
duration and convexity is used for bonds with embedded options.
SS16 Derivatives, R49: Basics of Derivative Pricing and
Valuation
A tricky topic for almost all candidates, because the material is very
conceptual, it takes time to understand, and topic weight is only 7%.
The end of reading questions illustrate the exam questions will be
easier than the material suggests. Focus on the forward pricing and
valuation formulas, this will also strengthen your swaps knowledge
sufficiently. The options material is significantly harder than the rest,
but apart from Put-Call Parity theory, don’t get caught up in any
formulas, as only an understanding of the models is required.
SS19 Portfolio Management, R56: Technical Analysis
For such a conceptual area, it is best to focus on the key
assumptions of technical analysis and be able to group the
strategies into their respective groups (e.g. price-based indicators
versus sentiment indicators). In addition, focus on the tenets of
Elliot Wave Theory. Calculations are highly unlikely to appear.
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