CFA Level 1 My Thoughts And Tips 16 April, 2010

Filed under: CFA,General Rahul Mulchandani @ 8:51 pm

Tags: CFA
This post is long overdue, 9 months after my L-1 exam and deep into the L-2 preparation. In this
long post, I outline what I did to clear L-1, what you should take ahead from L-1 and how to
tackle this exam that forms the foundation to achieve the prestigious Three Letter Designation.
I believe in tackling things by breaking them into pieces. I first outline each of the 10 subjects,
the important stuff and what to do. Later, I give the view by combining the subjects, what to
expect on the exam and my understanding of the paper.
Ethics This subject forms 15% of the weightage & seems a very boring subject but its critical
subject for the following reasons.
1. The heavy weightage (More on that later).
2. It judges candidates who have borderline scores in the other subjects.
3. Its recurrence in L-2 and L-3 and the importance given to the Conduct of Students &
Charterholders.
Its good to practise a lot of problems in this section. Only then you understand the problems
where the answers are closely related. GIPS are another important area, but Ethics is what I saw
more than GIPS in the Exam. This section is always a grey area, so its good to Begin Early.
Quant This section weighs 12% of the paper & introduces you to the concepts of Time Value of
Money, Probability, Probability Distribution, Sampling and Hypothesis testing.
TVM & DCF are critical, its almost everywhere in Finance. TVM turns up thrice in L-1. NPV & IRR
will be tested many times in the entire paper. TVM is at a basic level in L-1; its various forms turn
up in L-2. Its good not only for CFA exam but also as a potential analyst to think in terms of
TVM.
Measures of Central Tendency is an easy chapter. Skewness & Kurtosis are an important part
and expect a few questions on them for sure. Sampling & Technical Analysis is easy.
Probability & distributions can get a bit complicated, especially for those without a Maths
background. An understanding of the formulas will help nail these chapters, because the sums
are generally straightforward.
Hypothesis testing is the most important part of Quant. It turns up in L-2 again, so know it well.
This was my grey area and I think not knowing this Chapter got me the 50-70% range on the
exam. I regret not knowing this well for my L-2 preparation.
Economics This section is potentially scoring and is easy.
From SS5, know the graphs of each type of market well and their features. I needed a lot of
readings to memorize the stuff in the graphs, so give it time. If I could understand and memorize
the graphs, anyone else can. Also, elasticity of demand is important.
SS6 is relatively easier. Watch out because this section has data that might conflict with what you
read in the papers. Always remember, CFAI is correct. If in doubt, always follow what the CFAI
Book says.
FRA This is a heavyweight with 20% weightage. Performing poorly in this section drastically
reduces your chances of passing the exam.
SS7 forms the basics of this section and shouldnt be too difficult to master. IFRS vs. GAAP is a
repeated area of testing. Role of different bodies like IASB, SEC, IOSCO are another tested area.
SS8 introduces you to Income Statement, Balance Sheet, Cash Flows and ratios. EPS calculations
(diluted v/s basic), Asset depreciation, revenue and cost recognition (Acceleration & Delaying) are
important areas. Understanding how the CFS works, differences in IFRS & GAAP in the formation
of the 3 statements will be tested.
Ratios are very important. Enough Said. DuPont Analysis (3 & 5 term) appeared atleast twice on
my exam.
SS9 is the most important part of the FRA syllabus. 4 big and extensive chapters appear heavily
on the exam. Poor knowledge of this section leads to your downfall, because almost everything in
this SS will be tested.
FIFO v/s LIFO This is tested heavily. Questions on Which method saves tax under
inflationary/deflationary environment or increasing/decreasing inventory, LIFO reserve & which
method is better for the IS or BS will surely be there on the exam.
Long Lived Assets This is an important area because of its relation to the previous BS chapter in
SS8. Almost everything on this chapter will be tested.
Income Taxes This chapter is daunting due to the heavy terminology. I could never master this
section, but I got a lot of questions on this right in the exam because I got the big picture view
correct to eliminate atleast one answer. I suggest you focus on the big picture When is a
DTA/DTL created, effect of Inventory & Depreciation on Taxation (Notice the links to the previous
chapters).
Long Term liabilities This chapter is not difficult, but needs a couple of readings to nail the
concepts. The leasing section is really important different types of leases & their effect on
Ratios, Types of Debt (Hybrid & Convertible).
SS10 is relatively easier to SS9. The fraud triangle, window dressing of statements & convergence
is important stuff. Convergence is important stuff, dont ignore that. Its easy.
Corporate Finance You can hit a jackpot on this section. If the CFA marksheet displayed a 90-
100% range, over half of the students who passed would be in this section. I highlight
the relatively tougher & important stuff.
Beta of project/asset
Treatment of floatation costs
Working Capital Management Ratios & Concepts
Portfolio Management This weighs 5% but is tested again in L-2 and L-3. In L-2, the first
Chapter in PM is whole syllabus of L-1 PM, so its a bonus to know this well.
This section seems difficult due to the new terminology, but isnt very difficult. Understand the
CAL/SML, Efficient Frontier, Risk (Unsystematic v/s Systematic), Portfolio diversification, Standard
Deviation and Assumptions of Prof. Markowitz. Know the formulae well.
Equity An easy section, but needs a little time to understand it. At 8% of weightage, this section
has a lot of easy questions on Types of Markets, Indices and Arbitrage. EMH is a favourite topic
and expect something on Margin calls while going long and Short. A couple of readings will help
you master this.
In SS14, DDM & Relative Valuation will be tested and is easy. Know the advantages and
disadvantages of each ratio well.
Fixed Income This is one of the most interesting topics in the L-1 syllabus. This section is easy
initially and deepens as you progress.
Duration and Convexity are a bit complicated and you need to apply some effort to understand.
Spot rates, Implied Forward Rate, Z-Spread & Option Adjusted Spread will have some questions.
Bond Equivalent Yield is important stuff, expect some questions on that. Know Duration,
Convexity and their advantages & disadvantages. Convexity of bonds with Options, Duration &
PVBP would be tested.
Dont get the basics in this section wrong. My PM paper was tougher, but I remember that FI
questions took up a lot of time compared to the AM. This section can get complicated and time
consuming.
Derivatives This is an easy & scoring section. This section had an even mix of number crunching
and conceptual stuff. Margin calls and Payoffs are an important part. Put Call Parity is important,
should have 2-3 questions based on it. Swap payoffs can get complicated, so be ready. Risk
Management strategies are easy and will be tested.
Alternative Investments This section seemed complicated to study, but I think the questions
were mostly formula based and straightforward. Valuation of Real Estate is the relatively
toughest part of AI. ETFs and its properties, VC investments, Commodity Investments are easy.
Contango and Backwardation should be tested.
My three essentials for studying
Start Early Nothing better than to start early. It allows you to read the syllabus a couple of
times. I finished my learning of the syllabus by May 20th. The next few days were dedicated
to practise papers. The last 4 days of my exam were spent relaxing, reading only Secret Sauce
and light revision of grey areas. In my opinion, theres no point in trying to cram in stuff at the
last moment, it confuses ( atleast me) further.
Practise & Hard work As they say, Practise makes a man Perfect. Keep practising from
Schweser books, Q.Bank, CFAI material and the Mock papers (that was my order of practise).
Try to recreated the feel of an exam by writing exams with specified time limits.
Positive attitude Theres no substitute for it. Its good to visualise the happiness that you
and your loved ones will feel on your passing the exam. Thats what I did 2 months prior to
the exam. Once you visualise your goal and the outcome of passing the CFA exam, you will do
wonders.
Having said a lot, this is the final section of this long post contains a lot of random stuff of the
most important things for the CFA exam. This part gives the big picture view of the paper.
If I classify the easy scoring, medium and the tough sections, I would do as follow
Easy Economics, Equity, Corporate Finance, Alternative Investments
Medium PM, FI, Derivatives, Quant (only due HT, otherwise an easy section)
Tough Ethics, FRA (due to SS9, otherwise in Medium)
The classification can differ based on your educational qualifications, but take the above as a
generalist view.
Focus on the big picture. You may decide not do a chapter because it dodges your
understanding, but I suggest you to concentrate on the larger view i.e. know the bare basics
that will help you eliminate 1 of 3 choices.
Do not mess up heavyweights, especially Financial Reporting and Analysis. FRA + Ethics =
35%. Ethics is a potentially grey area and throws up a surprise to almost every CFA candidate.
Better not get these heavyweights wrong. You mess up FRA, Ethics and another one or two
sections and you are doomed for the next 6 months and $710.
You can probably skip a chapter or two, but as I mentioned earlier; focus on getting the big
picture right. Know enough of the skipped chapters so that you can strike down atleast one
choice as incorrect.
The exam is more conceptual than numerical. I think I used my calculator for about 20
minutes out of 360. SO get the concepts and basic right
Either of the Paper will be tougher than the other. So expect surprises and dont mess up due
to your own hubris.
Schweser Test papers are tougher and more quantitative than the actual paper. The CFAI mock
paper (Not the sample paper) is very close to what you the actual paper feels like.
Thank you for reading this and I hope this helps you. Post any doubts in the comments section