LAST UPDATED: July 3, 2020
3 Most Important Level 1CFA® Exam Topics: FRA, Ethics, QM
The 3 most important level 1 CFA exam topics are:
Both FRA and Ethics are given the highest topic weight in the level 1 CFA exam, i.e. 15-20% and 13-17%, respectively. This means that you'll have to answer the most questions for these two topics. In your Dec 2020 exam, you may probably expect as many as 40 questions for Ethics and 36 for FRA. For the Feb 2021 exam, the number falls to around 28-26 questions per topic. The table below present even more data:
|Level 1 CFA Exam Topic||Short Description||Topic Weight||No. of Readings||No. of Formulas||No. of Questions in 2020 | 2021|
|Ethics||Moral spine vs investment environment||15-20%||5||None, which is an exception!||40|28|
|Financial Reporting and Analysis||Financial statements + Accounting methods + Reporting standards||13-17%||12||nearly 100||36|26|
|Quantitative Methods||Many quantitative concepts & tools||8-12%||6||nearly 100||24|18|
Quantitative Methods are given 8-12%. If you take a quick look at the table illustrating all the topics, you'll see that Equity and Fixed Income are given a bit higher weights than QM. However, no other topic – and surely neither EI nor FI – is referred to as often as QM when you study for your CFA exam. That's why we count Quantitative Methods among the 3 most important level 1 topics.
We elaborate more on our top trio, including Quantitative Methods, below. In this post, you'll also find free presentations summarizing Quantitative Methods and Ethics
That the topic of Financial Reporting and Analysis is important is the least to say. It’s super-important! As many as 36 out of 240 Dec 2020 level 1 exam questions are FRA questions (no other level 1 topic – except Ethics – is tested so scrupulously!).
That is why no effort spared on FRA is lost. The better you cope with the topic now, the bigger 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 Financial Reporting and Analysis is one of the topics given greater importance in the level 2 exam.
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 – you are required to be able to 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 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.
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 easily. You can know how to value companies using various methods. But if you can't interpret these companies’ financial reports, you won’t be able to apply all your other skills 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 Matters Much
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 15% of level 1 exam questions are devoted to Ethics.
Ethics questions usually 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. As a rule, 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, you should pay enough attention to Ethics cases and their descriptions!
You will need a lot of practice to become fluent in diagnosing possible violations. So, do all the cases meant as an illustration of separate standards in your CFA exam curriculum. Also, you can find many Ethics cases inside our CFA Exam Study Planner. They are exam-type questions that ask about viable ethical problems and then provide explanation. A thorough study of sample cases will 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 matters so much.
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 money. The nature of the financial industry makes it too vulnerable to be left just to national legislation. Only adherence to some shared rules and values 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 (or both ) depending on the strategy you’ll apply for Ethics.
CFA exam 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 your CFA exam preparation and then coming back to Ethics in between other topics. At the end of your prep, we also recommend Ethics revision. This is what you'll get when you set up your free CFA exam study plan.
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 by introducing the so-called ethics adjustment. This principle has been set by CFA Institute to discriminate between the borderline cases: who should be given a pass and who should be given a fail.
Quantitative Methods and QM-Related Topics
There are 4 major areas covered by the Quantitative Methods topic:
time value of money,
basics of probability,
statistical interference (with estimation and hypothesis testing).
You will find numerous quantitative tools there which are also used in other level 1 topics. Some of the tools that QM shares with other topics are:
time value of money Corporate Finance, Equity Investments, Fixed Income, FRA, Derivatives,
measures of interest rates, dispersion, and covariance Portfolio Management,
probability tree Derivative Investments.
That's exactly why Quantitative Methods are considered an important 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 Level 1 Quantitative Methods:
/1 : To CFA exam candidates, probability is usually either intuitive 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 Bayes' formula and so on. To learn about Bayes' theorem without formulas, see here.
It’s good to understand that not everyone can be perfect at everything. If you’re in the latter group and you 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 (read more).
Do not use excel or any other calculators. Focus on the right way of handling calculations from the very beginning of your CFA exam prep.
In our videos, 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.
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.
In our CFA exam study planner, we practice what we preach. If you follow our recommended topic sequence, you’ll get to study QM just after Ethics and shortly before PM or CF. To set up your free study schedule, click this button:
Before you go, see our free presentation about time value of money and basics of statistics: