LAST UPDATED: July 3, 2020

CFA Exam: Level 1 / Topics Introduction


Introducing Level 1 CFA® Exam Topics




Do you have a clue how to deal with the topics that extend over 3000 pages of your level 1 CFA exam 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 curriculum?

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

What should I 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 three posts comprising our Level 1 Topics Series, we try to explain what level 1 CFA exam topics are all about. You’ll learn about level 1 topic weights and the number of readings to study or formulas to remember. Also, the number of exam questions is going to change with the level 1 exam moving to computers as of 2021. We estimate the number of exam questions for every topic, both for Dec 2020 and Feb 2021 level 1 exams.


All 10 Level 1 CFA Exam Topics

During your level 1 CFA 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. At the end of this post, we present what we believe to be the optimal level 1 topic sequence. Moreover, all the key info about the 10 topics is given in a table to enable easy analysis.



Describing Level 1 CFA Exam Topics

1.
ETHICAL AND PROFESSIONAL STANDARDS

ETH

LEVEL 1 TOPICS: Ethics
  • Topic Weight: 15-20%
  • Number of Readings: 5
  • Number of Formulas: None, which is an exception!
  • Number of Questions (Dec 2020): 36
  • Number of Questions (Feb 2021): 27
  • Topic Weight: 15-20%
  • Number of Readings: 5
  • Number of Formulas: None, which is an exception!
  • Number of Questions (Dec 2020): 36
  • Number of Questions (Feb 2021): 27

Topic Level Learning Outcome:*

*All Topic Level Learning Outcomes are cited from the Level 1 CFA® Program 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, Global Investment Performance Standards (GIPSes)

2.
QUANTITATIVE METHODS

QM

LEVEL 1 TOPICS: Quantitative Methods
  • Topic Weight: 8-12%
  • Number of Readings: 6
  • Number of Formulas: nearly 100
  • Number of Questions (Dec 2020): 24
  • Number of Questions (Feb 2021): 18
  • Topic Weight: 8-12%
  • Number of Readings: 6
  • Number of Formulas: nearly 100
  • Number of Questions (Dec 2020): 24
  • Number of Questions (Feb 2021): 18

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


3.
Economics

ECO

LEVEL 1 TOPICS: Economics
  • Topic Weight: 8-12%
  • Number of Readings: 7
  • Number of Formulas: around 60
  • Number of Questions (Dec 2020): 24
  • Number of Questions (Feb 2021): 18
  • Topic Weight: 8-12%
  • Number of Readings: 7
  • Number of Formulas: around 60
  • Number of Questions (Dec 2020): 24
  • Number of Questions (Feb 2021): 18

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

4.
Financial and Reporting Analysis

FRA

LEVEL 1 TOPICS: Financial and Reporting Analysis
  • Topic Weight: 13-17%
  • Number of Readings: 12
  • Number of Formulas: nearly 100
  • Number of Questions (Dec 2020): 36
  • Number of Questions (Feb 2021): 27
  • Topic Weight: 13-17%
  • Number of Readings: 12
  • Number of Formulas: nearly 100
  • Number of Questions (Dec 2020): 36
  • Number of Questions (Feb 2021): 27

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

5.
Corporate Finance

CF

LEVEL 1 TOPICS: Corporate Finance
  • Topic Weight: 8-12%
  • Number of Readings: 5
  • Number of Formulas: around 40
  • Number of Questions (Dec 2020): 24
  • Number of Questions (Feb 2021): 18
  • Topic Weight: 8-12%
  • Number of Readings: 5
  • Number of Formulas: around 40
  • Number of Questions (Dec 2020): 24
  • Number of Questions (Feb 2021): 18

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."

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

6.
Equity Investments

EI

LEVEL 1 TOPICS: Equity Investments
  • Topic Weight: 10-12%
  • Number of Readings: 6
  • Number of Formulas: around 50
  • Number of Questions (Dec 2020): 26
  • Number of Questions (Feb 2021): 20
  • Topic Weight: 10-12%
  • Number of Readings: 6
  • Number of Formulas: around 50
  • Number of Questions (Dec 2020): 26
  • Number of Questions (Feb 2021): 20

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 model


7.
Fixed Income

FI

LEVEL 1 TOPICS: Fixed Income
  • Topic Weight: 10-12%
  • Number of Readings: 6
  • Number of Formulas: around 40
  • Number of Questions (Dec 2020): 26
  • Number of Questions (Feb 2021): 20
  • Topic Weight: 10-12%
  • Number of Readings: 6
  • Number of Formulas: around 40
  • Number of Questions (Dec 2020): 26
  • Number of Questions (Feb 2021): 20

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

8.
Derivative Investments

DI

LEVEL 1 TOPICS: Derivatives
  • Topic Weight: 5-8%
  • Number of Readings: 2
  • Number of Formulas: around 40
  • Number of Questions (Dec 2020): 14
  • Number of Questions (Feb 2021): 11
  • Topic Weight: 5-8%
  • Number of Readings: 2
  • Number of Formulas: around 40
  • Number of Questions (Dec 2020): 14
  • Number of Questions (Feb 2021): 11

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 need 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

9.
Alternative Investments

AI

LEVEL 1 TOPICS: Alternatives
  • Topic Weight: 5-8%
  • Number of Readings: 1
  • Number of Formulas: around 10
  • Number of Questions (Dec 2020): 14
  • Number of Questions (Feb 2021): 10
  • Topic Weight: 5-8%
  • Number of Readings: 1
  • Number of Formulas: around 10
  • Number of Questions (Dec 2020): 14
  • Number of Questions (Feb 2021): 10

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

10.
Portfolio Management

PM

LEVEL 1 TOPICS: Portfolio Management
  • Topic Weight: 5-8%
  • Number of Readings: 7
  • Number of Formulas: around 50
  • Number of Questions (Dec 2020): 16
  • Number of Questions (Feb 2021): 11
  • Topic Weight: 5-8%
  • Number of Readings: 7
  • Number of Formulas: around 50
  • Number of Questions (Dec 2020): 16
  • Number of Questions (Feb 2021): 11

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, fintech


Optimal Level 1 Topic Sequence

The topic sequence presented above (ETH, QM, ECO, FRA, CF, EI, FI, DI, AI, PM) is your CFA Program curriculum topic sequence. However, at Soleadea, we don't think it's the best order of topics. That is why we made some tweaks and came up with our own sequence which we believe to be optimal. The sequence is based on topics length and difficulty and it factors in thematic relations between the topics. Have a look:

In our opinion, the optimal level 1 topic sequence is as follows:

ETH - QM - PM - FRA - CF - FI - EI - DI - AI - ECO - ETH


WHY THE SEQUENCE IS OPTIMAL

  • Where possible, topics are coupled based on the comparability of concepts, e.g. QM+PM (rate of return, standard deviation, covariance, etc.), FRA+CF (financing ratios).
  • More challenging topics are coupled with more easy ones allowing you to take a sort of a break meanwhile, so PM after complicated QM, CF after long and detailed FRA, or quite intuitive EI after more theoretical FI.
  • The most important topics – i.e. Ethics, FRA, and QM – are scheduled upfront to ensure they are thoroughly studied. Moreover, it's not a mistake that Ethics is stated twice. We advocate that Ethics be studied at the very beginning and then thoroughly revised before the exam (partially because of the ethics adjustment, and partially because you'll be tested on Ethics at each level of your CFA exam so you need to know it well!).
  • The shortest topics – i.e. Derivatives and Alternatives – are scheduled more into the end. You can study them over a week if need be. Plus, DI should be easier to take in after you get familiar with the concept of options in FI.
  • Economics is scheduled the last because if you're really needy for time that's the topic you can skim through (especially if you have some previous educational background in this area).

We know things may get tight at the end of your exam prep that's why we wouldn't leave PM to be the last. We'd also like to encourage you to start your exam prep early enough not to be forced to compromise any of the topics. The majority of level 1 candidates begin their preparation 5 or even 4 months before their exam. Still, the level 1 pass rate is just around 43%. To prepare yourself well for your exam, you need to get enough study time + you need to revise all the topics regularly (with our Study Planner – you get both study & revision sessions scheduled).

Of course, everyone can have their own optimal topic sequence. This is the one we recommend if you're not sure what kind of topics will be difficult or easy for you. But if you know your preferences, you can set your own topic sequence using our free CFA Exam Study Planner (there's drag&drop in the All Weeks view of your study schedule).



Summing Up Level 1 CFA Exam Topics

The table below summarizes the most important bits of information about the 10 level 1 CFA exam topics:


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
Quantitative Methods Many quantitative concepts & tools 8-12% 6 nearly 100 24|18
Economics Micro vs macro scale 8-12% 7 around 60 24|18
Financial Reporting and Analysis Financial statements + Accounting methods + Reporting standards 13-17% 12 nearly 100 36|26
Corporate Finance Corporate governance
& decision-making
8-12% 5 around 40 20|16
Equity Market, industry & company analysis 10-12% 6 around 50 26|20
Fixed Income Bond features, yields & markets 10-12% 6 around 40 26|20
Derivatives Forwards vs futures
vs options vs swaps
5-8% 2 around 40 14|10
Alternative Investments Alternatives to stocks, bonds & cash 5-8% 1 around 10 12|10
Portfolio Management Portfolio: structure, risks & returns 5-8% 7 around 50 18|14


That’s a lot of information to process! But these are the things you surely want to know before you go through your CFA Program curriculum. If duly analyzed, this set of info not only describes all 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.

No worries, though .

In the next posts of this Level 1 Topics Series, we explain level 1 topics in more detail.

ALSO IN THIS SERIES: