What to Expect on the CFA Level I Exam

The Chartered Financial Analyst (CFA) designation is one of the most sought-after credentials for investment professionals. However, becoming a CFA charter holder is not for the fainthearted 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. The CFA exams are also difficult to pass; in February 2023, the passing rate for the Level I exam was just 38%, compared with an average Level I pass rate of 41% for the 1963-to-February 2023 period.

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 computer-based exam split between two 135-minute sessions. The exam consists of 180 multiple-choice questions: 90 questions in the first session and 90 questions in the second session. Candidates should allow approximately 90 seconds per question, depending on their 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 topic areas that cover key subjects including ethical and professional standards, investment tools, asset classes, and portfolio management and wealth planning.

The following table provides the approximate weights of these topic areas for the 2023 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 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.

Quantitative Methods

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.

Economics

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.

Corporate Issuers

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.

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 between 9 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.

Equity Investments

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.

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% to 12% 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. Similar to portfolio management, this section only has a 5%-to-8% weight in the Level I exam, which equates to between 9 and 15 questions.

Alternative Investments

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 9 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.

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.