Are There Any Easy Topics In CFA Level 1 Exam?
No one simple Yes or No answer can be given to the question posed in the headline.
However, we think there are 3 topics that could be nominated in the 'easiest topic' category. We give our nominations to:
Especially if special conditions apply!
But before we explain why, let’s begin by defining the topics as moderate instead of easy.
Moderate is something we could all agree on when looking at the table above (see also all 10 topics tabulated).
Every one of the 3 topics is moderate with respect to the number of readings to study, formulas to remember and pages to read, which is generally also reflected in the weights of the topics in the level 1 exam.
That’s where the issue of the condition comes into the spotlight.
If you meet it, then the moderate topics become – if not the easiest – then certainly easier for you.
On QM & PM Relationship
There’s a bond between Portfolio Management (PM) and Quantitative Methods (QM).
Rate of return or dispersion measures can serve as perfect illustrations of this inter-topic connection. The two concepts (and some more) are present in both Portfolio Management and Quantitative Methods. However, if you study QM first, PM gets so much easier.
Study QM before PM to pave the way for the quantitative PM readings. All else is pure theory.
The 6 readings comprising the PM topic can be labelled as either theoretical or quantitative (that’s right!):
Reading 38 /theoretical/
you will learn why portfolio diversification is so significant, who the market participants are and what steps make the portfolio management process.
As soon as you get familiar with all that, you will find out what portfolio managers must be able to do by studying:
With risk and return re-established in the context of portfolio, you’re off to some basics of portfolio planning and construction followed by risk management process and some fintech issues:
Reading 41 /theoretical/
you will get to know about the Investment Policy Statement (IPS) and its elements, how to construct a portfolio, that not every client willing to take the risk is able to take it or how strategic asset allocation differs from tactical asset allocation.
Reading 42 /theoretical/
you will become aware of the importance of the risk management process.
Reading 43 /theoretical/
it’s a newly added reading as of June 2019 exam which tells you about fintech and its applications to investment management (you’ll learn about artificial intelligence, machine learning, and distributed ledger technology).
We explain some of the major PM stuff in our free presentation The Power of Portfolio Diversification in 8 Diagrams:
Where Quantitative Skills Matter
There are 2 things every portfolio manager must be able to do:
1. Select 'the best' portfolios out of a larger set of investments, where 'the best' means with the best risk-return trade-off.
2. Choose from 'the best' portfolios those suitable for the client because compliant with the client’s investment profile.
Readings 39 & 40 are full of formulas and concepts that help you develop these analytical skills. You will learn:
1. how to calculate the portfolio’s risk and return,
2. that – on account of the risk-return trade-off – some portfolios are better than others and so we call them efficient portfolios (note: if we’d like to invest in risky portfolios only, we’d look for them on the efficient frontier),
3. that it’s better to invest in a portfolio consisting of an efficient portfolio and a risk-free asset rather than in the risky portfolios lying on the efficient frontier (to meet the risk-return trade-off),
4. how to use the utility theory to select the optimal investor portfolio,
5. how to make the analysis of risks and returns for different portfolios much easier thanks to the CAPM model.
So, to be able to grasp the real meaning of portfolio management (not only as a topic but also as a skill), you will surely need to understand what the expected rate of return, standard deviation, and correlation coefficient are and how they work. Without these QM concepts, there’s no portfolio management.
How Borrowing Can Make Life Easier
Let’s say you need a specific amount of money asap but you just don’t have it. Which solution is the easier one: borrow the money or make the money? Definitely, it’s a loan that helps you satisfy your need here and now. Especially if it’s a friend that you’re borrowing from.
It seems that the whole CF topic builds on this ‘friendly borrowing’ rule.
It borrows a lot:
from Quantitative Methods (QM) TVM + NPV + IRR + money market yields,
from Portfolio Management (PM) beta & CAPM model,
from Financial Reporting and Analysis (FRA) financial ratios.
Get friendly with the 'lending' topics first and you can get done with Corporate Finance quickly.
By studying all the 3 topics before you start reading Corporate Finance, you can facilitate the understanding of this topic excessively.
Study QM, PM & FRA before Corporate Finance to speed up its intake. Apart from a couple of more complex bits, CF theory is quite intuitive & easy to handle.
Corporate Finance: No Troubles?
Owing to the borrowed concepts, quite intuitive CF issues and relatively easy formulas, Corporate Finance may actually prove to be the easiest CFA level 1 topic.
Our categorization of the 5 CF readings and the analysis of their contents look as follows:
3 easy readings:
introduction to corporate governance & ESG (environment, society, governance) you will get to know more about it when studying for your level 2 exam.
NPV & IRR already explained in Quantitative Methods,
investment decision criteria such as profitability index, payback period, discounted payback period,
capital budgeting steps,
types of investment projects (conventional vs unconventional).
different types of risks from the perspective of a company (business risk, sales risk, operating risk, financial risk),
how the company measures its risks using measures of leverage (DOL/DFL/DTL = degree of operating/financial/total leverage).
2 moderate readings:
WACC and its components:
you will learn how to calculate the cost of capital for various sources of financing,
beta & CAPM already explained in Portfolio Management,
cost of equity and pure-play method for beta estimation may prove a bit more complicated (shouldn’t be too problematic, though).
working capital management in a company,
ratios but you don’t need to worry about that ‘cos you already know how to interpret them having done your FRA first!
Can CFA Level 1 Topic Get Any Simpler?
Many CFA candidates invest in stocks. If you’re an investor yourself and follow companies listed on the stock exchange, you will find the Equity Investments topic quite basic in many aspects (though equity is not only stocks).
Interest in stocks & listed companies gives you a head start. Besides, Equity Investments is mainly theory and it learns smoothly.
The topic is mostly theoretical, which means you need to hire your memory skills to get the job done.
And the job is about studying all 6 CFA level 1 readings on Equity Investments (even if you never made any investments, no big deal you can still ace the topic if your memory’s good):
Reading 44 – introduction to markets
Real basics, including types of assets and contracts, financial intermediaries, orders on the stock exchange, and the distinction between the primary and secondary security markets.
Reading 45 – indices
Probably the most complicated of all Equity readings. You get to know different types of indices, how they are created, as well as what the advantages and disadvantages of the indices are. Also examples from many markets throughout the world are given.
Reading 46 – market efficiency
3 forms of market efficiency are explained: weak, semi-strong, and strong. To complement the picture, types of market pricing anomalies (e.g. January effect) and behavioral mechanisms behind investors’ decisions are described.
Reading 47 – types of equity securities
Reading 48 – industry and company analysis
Reading 49 – basics of equity valuation
The last two readings include issues elaborated on in greater detail in the CFA level 2 curriculum. Don’t get misguided by the fact that Equity can be defined as quite plain and simple among all CFA level 1 topics. In the level 2 exam, this topic gets the greatest weight (along with 3 different topics) and becomes more complex with its different valuation methods and scary formulas.
On Market Efficiency (& Not Only)
There are 3 forms of market efficiency: weak, semi-strong, and strong. Each next form includes the previous one as shown below:
Weak form efficient market when all past information about prices and volumes are included in the price of an asset.
Semi-strong form efficient market when all past information about prices and volumes as well as all publicly available information are included in the price of an asset.
Strong form efficient market when all past information about prices and volumes as well as all publicly available and confidential information are included in the price of an asset.
What follows is that:
for weak form efficient market technical analysis should yield no abnormal returns,
for semi-strong form efficient market both technical and fundamental analysis should yield no abnormal returns.
Not only markets can be efficient. Also topics can be analyzed with respect to their efficiency. On the efficiency of topics, we will write in the summary post of our CFA Level 1 Topics Series. It’s coming soon.
Before you go, also take a minute to think about how efficient is your exam prep. If you wish it was more productive, use our CFA study planner that puts you in charge, motivates you to work, holds you accountable and makes you study: