CFA Level 1 Topics Given The Greatest Importance
The most important CFA level 1 topics are:
Unlike with the hardest topics, this top trio is something we can be certain of.
It’s a verifiable fact because it stems from the weights the topics are given in the CFA level 1 exam.
No individual preferences count here.
Financial Reporting and Analysis is at the very top with its 20%. Ethics come second and are given 15%. The topic weight for Quantitative Methods is 12%. If you took a quick look at the whole table illustrating all the topics, you would see that the next weight is 10% and it applies to 3 different topics.
While it’s easy to say – at a single glance – which topics are the most important, it’s not clear right away why they’ve been given the greatest weights.
That’s the question we’ll try to answer in the following paragraphs.
That FRA is important is the least to say. It’s super-important because it’s given the greatest weight in the CFA level 1 exam. As many as 1/5 of all CFA level 1 exam questions are FRA questions.
That is why no effort spared on FRA is lost. The better you cope with the topic now, the greater the chances of success in your level 1 exam. Plus, it will surely pay off when the challenges of the level 2 exam get real because FRA is second in the level 2 topic weight hierarchy.
The focus of the level 1 exam is on knowledge and comprehension, while for level 2 – it’s application and analysis. You can really experience that when studying FRA.
At level 1, you’re asked to acquire lots of terms and to understand what FRA is all about, and – at level 2 – it’s required of you that you can analyze and evaluate what you see.
And that’s it.
There’s nothing more at level 3.
Perhaps that’s the reason why FRA is given such an emphasis both at the level 1 and level 2 of the CFA exam. You have to develop all the competencies necessary for the analysis and reporting of financial statements already when studying for the first two exams.
And these competencies are crucial not only in the context of the CFA exam but also when you think about your future.
There are many different kinds of jobs that require the ability to read and analyze financial statements. You can be very skillful with excel spreadsheets. You can handle the time-value-of-money problems without any problem whatsoever. You can know how to value companies using various methods. But if you feel uneasy when interpreting these companies’ financial reports, you won’t be able to apply the skills you have where they really matter – in practice. They will be just theoretical.
And you don’t want that as a CFA charterholder-to-be.
After all, the CFA designation is a credential certifying that you possess professional expertise, including analytical proficiency.
Why Ethics Is Judged So Meaningful
The professional expertise you’ll gain as a CFA charterholder will also relate to ethical conduct.
There’s a strong emphasis put on Ethics, which you probably already know. So, it comes as no surprise that as many as 36 out of the total of 240 exam questions are about Ethics.
Ethics questions take the form of cases related in one way or another to the Code of Ethics and 7 Standards of Professional Conduct. In that sense, they stand out from other exam questions. Usually, Ethics cases describe various situations likely to happen in an investment environment and make you react to the situation by asking to provide the correct answer.
When studying Ethics, do not neglect to read and analyze the cases meant as an illustration for separate standards in your CFA curriculum. They aim at describing viable problems and explain the right way to go. Going through those sample cases can make you alert to possible violations and able to respond to them in a strictly determined manner compliant with the Code and Standards – not only in the exam but also in life.
This brings us to why Ethics is judged so meaningful.
A universal approach based on some commonly accepted moral standards is simply a must in an industry that operates on both local and global scale and which is all about finance. The nature of the industry makes it too vulnerable to be just left to national legislation. Only adherence to some shared rules can guarantee proper conduct towards economies, companies and individual investors worldwide.
That is why Ethical and Professional Standards are very important at all levels of the CFA exam. The essence stays the same and it’s the Code and Standards as shown in the free presentation below:
This presentation makes a great intro to Ethics but it can also serve as a comprehensive recap depending on the strategy you’ll apply for Ethics.
CFA candidates usually study Ethics by:
reading it once:: just before the exam, or
reading it twice:: at the beginning of the exam prep + revision just before the exam.
Regardless of the strategy, the goal is always the same to remember things better in the exam!
However, the result can be just the opposite, particularly for the read-once-only strategy. It’s too close to cramming to give you the desired outcome.
In this sense, the second technique is much better because you give yourself a chance to understand what you previously read about.
Still, owing to the weight Ethics carry both in the exam and in the profession, neither of these two popular techniques is sufficient.
We suggest you adopt our read-and-reread strategy instead. It’s about reading Ethical and Professional Standards at the very start of you CFA exam preparation and then coming back to Ethics after every topic.
Our strategy enables you to thoroughly understand Ethics and develop ethical thinking. Moreover, your exam prep gets more diversified. Being different from all other topics, Ethics can be a nice change from – say – QM formulas or FRA concepts.
The strategy’s definitely worth it because of how important Ethics is to CFA Institute. It’s the only topic given special treatment through introducing the so-called ethics adjustment. This principle has been set by CFA Institute to discriminate between the borderline cases: which should be given a pass and which should be given a fail.
QM and QM-Related Topics
There are 4 major areas covered by the Quantitative Methods topic:
time value of money,
basics of probability,
descriptive statistics + statistical interference (with estimation and hypothesis testing),
technical analysis (well enough could’ve been part of Equity or Portfolio Management).
You will find numerous quantitative tools there which are also used in other CFA level 1 topics. Some of the tools shared by QM with other topics are:
time value of money Corporate Finance, Equity Investments, Fixed Income,
measures of interest rates and dispersion Portfolio Management,
NPV and IRR Corporate Finance,
money market yields Corporate Finance, Fixed Income,
probability tree Derivative Investments.
No wonder Quantitative Methods are considered an important CFA level 1 topic.
The more proficient you are in QM, the better you’ll get at other related topics. (Note that becoming proficient in QM also includes getting skillful with your calculator and flexible with using formulas).
3 Remarks on CFA Level 1 Quantitative Methods:
/1 : To CFA candidates probability is usually either intuitional or a real nuisance.
While the former group has no real problems with probability questions, the latter usually cannot cope with basic issues – they find it hard to differentiate between joint and conditional probability or do not know how to use the Bayes formula and so on. To learn about the Bayes formula without formulas, see here.
It’s sometimes good to understand that not everyone is perfect at everything. If you’re in the latter group and struggle with probability without any reasonable success, it might be better to concentrate on statistics instead, which is key in the long run.
/2 : QM is one of the hardest topics in the level 2 exam.
It’s mainly devoted to statistics (hypothesis testing, regression, trend analysis), which makes it obvious how important this part of the QM topic should be for you also in the level 1 exam.
/3 : When getting trained with calculations, opt for the calculator approved by CFA Institute.
Do not use excel or any other calculators. Focus on the right way of handling calculations from the very beginning of you CFA exam prep.
In our video, you can see how to use different calculator worksheets. Apart from the commonly applied TVM and CF+NPV+IRR, we also show DATA+STAT worksheets useful in dealing with descriptive statistics problems.
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Recommended course of action:
Owing to the many quantitative tools that overlap with different topics, we suggest that you study Quantitative Methods just after reading Ethics, making it the first mathematical topic you learn. That should make the absorption of other topics so much easier and ensure a thorough understanding of QM concepts. How is that? Because while studying other topics, you get to recall various QM concepts.
See our free presentation about time value of money and basics of statistics now: