Sunday, March 20, 2011

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Passing the Level 1 CFA Exam


A Guide for Undergraduate Business Students

On June 5, 2010, over 139,000 people worldwide sat to write the Chartered Financial Analyst examinations. The CFA program requires candidates to complete three levels of examinations, one each year, and obtain 48 months of work experience in an investment related role. On July 25, the results of this year’s Level 1 exam were released: 42% of candidates had passed this year’s Level 1 CFA exam, and thankfully I was one of them.

The CFA exam has become a gold standard for professionals looking to enter many diverse finance careers; specifically, many "buy-side" jobs such as portfolio management and investment analysis. It is also a great option for analysts working on the "sell-side," in areas such as investment banking analysts, in case they want to make the switch to the "buy-side." In January of 2010, after hearing all of the horror stories of the long study hours and the miserably low pass rate, I signed up to write the Level 1 CFA exam. There were many reasons why I signed up. Obviously an interest in finance first got me curious to find out more about the CFA program. Many professionals I have talked to in asset management have promoted the benefits of the CFA, going so far as to say it is a better alternative to an MBA for young professionals interested in finance. Secondly, if you look at the careers section on your school’s website, many entry level and mid-level finance job descriptions state that the CFA designation is a strong asset for candidates, and in some cases it is a requirement. Finally, I am beginning work in September at the accounting firm Ernst _ Young to complete my Chartered Accountant designation. I work in the Financial Services industry, providing audit services to mutual funds and hedge funds. The knowledge that I will gain through completing the CFA program will help me to serve my clients better.


CFA Cheat Sheet: How to Pass Level 1

The CFA institute recommends students study 300 hours for the Level 1 exam. To put that in perspective, it is 7.5 standard 40 hour work weeks, on top of a summer job or school. The good news is that 300 hours is not needed for a student coming from a business undergrad. The CFA level 1 exam is essentially a test on all of the quantitative material learned within a four-year undergraduate business program, plus a couple hundred pages of new material on subjects such as alternative investments and ethics. The test is broken down into 10 sections of various weightings: Alternative Investments (3%), Corporate Finance (8%), Derivatives (5%), Economics (10%), Equity Investments (10%), Ethical _ Professional Standards (15%), Financial Reporting _ Analysis (20%), Fixed Income Investments (12%), Portfolio Management (5%), and Quantitative Methods (12%).


Recommended Courses

If you are considering pursuing the CFA designation, you can save yourself a lot of time and headache by taking both the advanced accounting and investment analysis courses offered at your university. At Queen’s University, these are Investments and Portfolio Management (Comm 324), and Advanced Accounting (Comm 311 and Comm 313). Any course on Investments and Portfolio Management will cover the basics of fixed income investments, derivatives, portfolio theory, and equity investments. These sections make up a large portion of the Level 1 exam. I will admit bond valuation, yield curves, and many other fixed income concepts are not my strength; but having taken a course on portfolio management, I found many of the CFA exam concepts similar to those that I had already learned in my course work. As for the advanced accounting courses, with 25% of the exam marks based on Financial Statement Analysis, it is essential to master this area. It is much easier to learn some of the more advanced accounting concepts over an entire semester of classes than to cram them into one month of studying for the CFA exams. This is why I would recommend candidates take at least one advanced accounting course in their final year of school.

Study Materials

The CFA Institute forces you to purchase their textbooks when registering for the exam, an excellent business model for them. The books cover every topic necessary for the exam and then some; in total the CFA books are 2600 pages long and can read very slowly. YOU DO NOT NEED THEM!

There are a number of alternative sources for students to use; I used the Kaplan-Schweser guides, which are half the length of the CFA Institute books and provide a much clearer explanation of the concepts. The Kaplam-Schweser guides also include multiple choice questions at the end of each chapter and full length mock exams covering all required material. These extra questions and mock exams are perfect to study from, as they are very similar to the questions asked on the real exam. The Kaplan-Schweser guide costs about $500, a steep price for any student, but it is much cheaper than the $1,000 fee to re-write the Level 1 exam if you fail on the first attempt. If you are serious about passing the Level 1 exam, make the investment, and purchase the Kaplan-Schweser guide.


Study Plan

Start studying early; I cannot stress this enough. This does not mean starting to study on your Christmas holidays, but definitely start before final exam period in April. I signed up for the Level 1 exam in January, and began studying in March. March is a busy time for many students, as final projects are due and preparations for final exams are just around the corner. I am not a big organizer, but a strategy I used to keep on task was to purchase a wall calendar where I recorded the number of hours I studied for CFA exams, completed school homework, or headed out with friends each day. While I never set a concrete schedule, I tried to study for the Level 1 exam for 10 hours each week in March, or an hour and a half each day. Some days I didn’t study at all for CFA exams - I had school work, or wanted to head out partying with my friends - but my calendar reminded me of my obligations. By the end of March, I had reached my 40 hour goal and was already 20% through the study material.

For the month of April, I did not touch CFA material; I had 5 exams at the end of the year and was very busy.  Once May 1 came, the intensity shifted up, and almost every hour I was awake I was either studying or feeling bad that I was not studying. May was one of the longest months of my life; it was like a never ending exam period. It was a gruelling time, and I barely went out with friends, but you get into a routine and can tolerate it.

The Final Week Before the Exam

During the final week before the exam, you should by now have covered all the material and be starting the mock exams. The real CFA exam is 240 multiple choice questions that must be completed in six hours, split into a morning and afternoon session with a two hour lunch break. When completing your mock exams, try to simulate the experience of exam day as much as possible. That means complete the entire morning half of the exam (120 questions) in three hours, take a break for lunch, then do the afternoon in three hours as well. Do not look at the correct answers until after you have completed the exam. On exam day you will have to second guess yourself and go into the afternoon session knowing you got some of the morning questions wrong, but you have to overcome this feeling. Once you have completed a mock exam, score it and see how you did. The CFA institute never releases what the minimum passing score needed for the examinations is, but no candidate has ever failed if they scored above 70% on the examination. The mock exams are a little bit easier than what the real exam is like on exam day, so shoot to get above 75% on the mock exams. Once you complete and mark your mock exams, take a step back and identify areas where you need to focus on studying going forward.

Exam Day

The night before the exam, stop studying at midnight at the latest. There is no point in cramming further; the CFA exam is a 6 hour marathon, and an extra hour of sleep will do much more than a couple more hours of cramming. I wrote the exam in Toronto at the Direct Energy Centre, in a room the size of an airplane hangar. You are writing with 4,000 other students, some are nervous, some claim to have not studied at all. Forget about what others say and just focus on the exam in front of you!

Final Thought

Having studied and successfully completed the CFA Level 1 exam, I can honestly say it was one of the most time-consuming and mentally draining tasks I have ever attempted. I am relieved to have passed the Level 1 examination, and truly believe that if any business student follows the tips I have outlined in this guide, they too can pass on their first attempt. I am looking towards next June when I will write the Level 2 examination with a mix of nervousness and excitement: I know it will be a daunting task, but I know with a great deal of hard-work, I will be writing the guide “How to pass the CFA Level 2 exam” this time next year!


Good Luck.

Additional Links

CFA Institute

Analyst Forum (Forum for CFA Writers)


John Veitch is a Queen's BCOMM 2010; he will be starting at Ernst _ Young in the fall.

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