CFA Level 1 / Topics Introduction

The Smart Way To Go About CFA Topics


Do you have a clue how to deal with the topics that extend over a number of 3000 pages of your CFA Curriculum? Many questions will start popping into your head when you think about it...

Should I stick to the topic sequence as it is in the CFA Curriculum?

Should I treat all topics equally or are there any topics of special significance?

What are the things I should know about a topic when I start to study it?

Should I allow for some extra time to reread the topics?

On which topics do I need most practice?

How to study to study well?

With this and the next four posts comprising our CFA Level 1 Topics Series, we’ll try to explain what CFA topics are all about. Our aim is to leave you – when you finish reading this series – with only the questions necessary to let you find the smart way to deal with the issue.

CFA Level 1 Topics & Their Description

During your CFA level 1 exam, you will be tested on:

This is how the topics are sequenced in your curriculum. But if you know more about the topics, it’s likely you’ll want to make changes to this order.

Ethical and Professional Standards (Ethics)

Topic Level Learning Outcome:*

*All Topic Level Learning Outcomes are cited from the CFA Level 1 Curriculum.

"The candidate should be able to explain the needs for high ethical standards in the investment industry and the ethical responsibilities required by the CFA Institute Code of Ethics and Standards of Professional Conduct and to demonstrate the application of the Code and Standards. The candidate should also be able to demonstrate an understanding of the Global Investment Performance Standards."

Your goal: Being a moral person can help but is not enough! You need to learn to interpret investment situations and diagnose ethical challenges.

Key terms: integrity, responsibilities towards clients and the employer, diligence, loyalty, prudence, due care, mosaic theory, Investment Policy Statement

Quantitative Methods (QM)

Topic Level Learning Outcome:*

"The candidate should be able to explain and demonstrate the use of elementary statistics, data collection and analysis, probability theory, distributions theory, and the time value of money in financial decision-making."

Your goal: You want to make sure you understand quantitative concepts and tools and know how to use them. You’ll be needing them again soon – while studying PM and CF.

Key terms: time value of money, interest rate, measures of location & dispersion, random variable, normal distribution, Student’s t-distribution, sample, confidence interval, hypothesis testing

Economics (ECO)

Topic Level Learning Outcome:*

"The candidate should be able to demonstrate knowledge of microeconomic and macroeconomic principles."

Your goal: Learn how economies work, both on the micro and macro scale. Lots of definitions to be handled.

Key terms: equilibrium, consumer surplus, normal goods, perfect competition, profit maximization, GDP, Monetarism vs. Keynesianism, unemployment, inflation, IS-LM, fiscal policy, BOP, central bank, exchange rate

Financial and Reporting Analysis (FRA)

Topic Level Learning Outcome:*

"The candidate should be able to demonstrate a thorough knowledge of financial reporting procedures and the standards that govern financial reporting disclosure. Emphasis is on basic financial statements and how alternative accounting methods affect those statements and the analysis of them."

Your goal: Get to know different financial statements, accounting methods, and reporting standards.

Key terms: accrual basis, IFRS, U.S. GAAP, total comprehensive income, EPS, depreciation, goodwill, carrying amount, indirect method, FIFO, LIFO, income tax, bonds payable, operating & finance lease, DuPont analysis

Corporate Finance (CF)

Topic Level Learning Outcome:*

"The candidate should be able to evaluate a company’s corporate governance; to analyze a capital budgeting problem; to estimate a company’s cost of capital; to evaluate a company’s operating and financial leverage and its working capital management; and to describe the mechanics of dividends and share repurchases."

Your goal: Learn how and why decisions about investment projects, financial leverage, dividends, etc. are made by a company.

Key terms: NPV, IRR, WACC, pure-play method, DOL, DFL, DTL, breakeven point, inventory, ex-dividend date, accounts payable, accounts receivable, operating cycle, trade credit, board of directors

Portfolio Management (PM)

Topic Level Learning Outcome:*

"The candidate should be able to explain and demonstrate the use of fundamentals of portfolio and risk management, including return and risk measurement, and portfolio planning and construction."

Your goal: All about the portfolio, including its structure and diversification, risks and returns. Especially important if you plan to become a portfolio manager.

Key terms: risk & return trade-off, risk aversion, utility function, diversification, correlation coefficient, modern portfolio theory, efficient frontier, CAL, beta, CAPM, SML, CML, Investment Policy Statement

Equity Investments (EI)

Topic Level Learning Outcome:*

"The candidate should be able to describe characteristics of equity investments, security markets, and indices. The candidate should also be able to analyze industries, companies, and equity securities and to describe and demonstrate the use of basic equity valuation models."

Your goal: Learn about market organization, indices and efficiency and get to know the basics of industry & company analysis.

Key terms: common shares, leveraged positions, orders, price return index, index weighting, intrinsic value, forms of market efficiency, industry life-cycle stages, Porter’s five forces, growth rate, Gordon modelt

Fixed Income (FI)

Topic Level Learning Outcome:*

"The candidate should be able to describe fixed-income securities and their markets, yield measures, risk factors, and valuation measures and drivers. The candidate should also be able to calculate yields and values of fixed-income securities."

Your goal: The mechanisms behind fixed-income instruments to take in. Harder than you could have imagined.

Key terms: yield-to-maturity, basis point, accrued interest, callable bond, spot rates, forward rates, matrix pricing, interest rate risk, effective duration, modified duration, convexity, 4 Cs of credit analysis

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Derivative Investments (DI)

Topic Level Learning Outcome:*

"The candidate should be able to demonstrate a working knowledge of the analysis of derivatives, including forwards, futures, options, and swaps."

Your goal: Understand what derivatives are and how they work. If you are interested in trading in them, you’ll to make sure you know every bit about this topic.

Key terms: arbitrage, cash settlement, FRAs, payoff formula, margin call, marking-to-market, offsetting, call option, put option, American option, moneyness, option value, put-call parity, collar, protective put

Alternative Investments (AI)

Topic Level Learning Outcome:*

"The candidate should be able to demonstrate a working knowledge of alternative investments, including hedge funds, private equity, real estate, commodities, and infrastructure."

Your goal: Learn non-standard features of alternative investments that make them different from stocks, bonds or cash.

Key terms: LBO, MBO, low liquidity, downside risk measures, survivorship bias, backfill bias, management fee, incentive fee, hurdle rate, high water mark, exit strategies, REITs, diversification

Summing up

That’s a heck of copious information to process! But these are the things you surely want to know before you go through your CFA Curriculum. If duly analyzed, this set of info not only describes all the CFA level 1 topics but also tells you which of the topics are the most important, which are the most difficult, and which probably the easiest. It also tells you about how much there is to read and study.

No worries, though .

In the next posts of this CFA Level 1 Topics Series, we’ll elaborate on all the bits worth your time and attention.

Just keep coming back for more details and develop your own way about your CFA Curriculum.

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