The Complete Study Guide and Outline to the CFA Level 1 Exam
The CFA Level 1 exam is about the ability to quickly grasp the outlines of the curriculum and then answer a barrage of multiple questions that ask you to apply formulas and intuit concepts across a vast array of financial topics. In fact, as you progress through the Candidate Body of Knowledge (CBOK) you'll need to cover material spanning quantitative methods, economics (macro, micro, and international), financial reporting and analysis, corporate finance, equities and equity valuation, fixed income securities and valuation, portfolio management, derivatives, alternative investments, and ethics.
The sheer amount of material you will need to study in order to pass Level 1 can be daunting, and this volume is the first challenge you must overcome.
One common mistake you MUST avoid is getting bogged down in your first pass through the readings. This is especially challenging when Candidates with little background in the material first try to get through Quantitative methods and Economics, which account for a greater volume of the material than they do percentage weighting on the exam itself. CFA study guides like ours can help cut through the noise. You can also read more about general study principles, specific study tactics and cram strategies to see what has worked for other Candidates.
But what it boils down to for covering the CFA material the first time around is pretty straightforward.
Simply remember that perfect understanding is not the end goal. Your end goal is to apply concepts to correctly answer 240 multiple choice questions, each with three possible answers. That's it. So as you go through the material for the first time, keep moving.
How is the CFA L1 Exam structured?
The exam questions on Level 1 are all standalone questions, i.e. they do not depend on one another. You will have 90 seconds per questions with no penalty for incorrect guesses. The math behind being able to correctly eliminate even one option is quite powerful when you realize that a 70% is all you need pass (we wrote about this extensively in our post about how to find and improve your CFA weaknesses).
While many Candidates view Level 1 as a “plug and play” style exam, you shouldn’t be resorting exclusively to memorization.
Understanding the outline of the course and how material ties together is vital to building a framework to pass this test, and later CFA Level 1 and 2 as well. One of the things GoStudy has become known for is our ability to call attention to how material is linked to other areas of the Curriculum. This lets you better "chunk" the material by putting together the pieces more quickly.
Finally, know that a broader understanding of the Level 1 exam is important because many questions hide as “calculation” questions, when in fact you can identify the correct answer without resorting to your calculator if you simply understand the concept. Seeing these will help you save a lot of time during the exam itself.
CFA Level 1 Exam Topic Area Weights
The CFA Level 1 exam covers 10 topics over 18 study sessions and 60 readings. Each subject is weighted differently. You will want want to spend more time in the most tested areas. You should also make sure you have covered Ethics thoroughly, as if you are on the border of pass and fail, how you do in Ethics will determine your final status.
Creating a CFA Level One Study Schedule
When it comes to a schedule for covering the L1 material there's a lot of factors to consider including how much time until the test (Level 1 is offered in both December and June), how many hours you can dedicate each week, your level of experience with areas of the material and so on. The general guideline is that an average successful Candidate spends around 300 hours preparing for each level of the exam. Depending on your background you may need way more than this (and keep in mind that the average pass rate last year was just 42%.
In order to get started the first two things you need to do are:
- Decide when you will start to study (so you can work backwards from the L1 test date to map deadlines)
- Pick your study provider (or confirm your decision to only use the CFA-I material)
These aren't trivial decisions.
First, successfully studying for the CFA material is as much about planning your life and maintaining dicipline as anything else (see our post on how to macro-manage the CFA Exam for more on that). We've written a 3 month study plan for Candidates, but highly recommend an additional 2-3 month buffer which will allow you more time to cover the material, re-hash practice problems, and review and take mock exams over the last few weeks. Second, there are tradeoffs to using the Institute material vs. those of study providers, and no matter what choice you make, you should have a conscious understanding of what decision you are making.
Once you have that decision made, it's time to jump in. Don't procrastinate starting. In fact, this step is almost always the hardest part for Candidates (its so hard we wrote an entire blog post on how to overcome this hurdle). If you can get an early jump on the material, you are setting yourself up for success.
What to Expect on Each CFA Level 1 Study Sesssion
Ethics is a major section of the CFA curriculum covering the code of ethics, professional standards, and global investment performance standards (GIPS). It usually accounts for around 15% of the total points. Furthermore, if your overall test score is close to the pass rate, it is your performance on Ethics that will be the deciding factor. Be warned: while the overall material in the Ethics section appears fairly straightforward, the way it is tested is not. Many L1 Candidates make the mistake of treating this section lightly. Do not be one of them. You should practice Ethics problems a lot and read/re-read the CFA's official ethics handbook close to the exam date.
Resources for Ethics:
- 1 page ethics tear sheet
- GoStudy's 10 page Ethics outline (free)
- 5 key principles for answering ethics questions
- Basic GIPS overview
Quantitative methods is unique to Level 1, and the mathematical concepts introduced here are cornerstones of finance. Compound interest/time value of money and discounted cash flows show up both as stand-alone problems and as crucial parts of other problems throughout the curriculum. Mastering the basics will be key. Probability will also be directly tested but becomes even more important conceptually when thinking about risk and return. Expect between 25-30 questions to come from this section.
Some Candidates hit the quantitative section and get bogged down as they start to struggle with certain concepts or get lost with the minutiae of the section. Don’t be one of those Candidates. Keep your momentum going even if you sacrifice complete understanding of everything the first time around. As you start seeing the concepts embedded in other parts of the CFA curriculum you can revisit the section or relevant practice problems.
Resources for Quantitative Methods
- One Giant List of Quantitative Method's Testable Concepts
- Truly understanding time value of money
- Solving Time Value of Money Problems
- Nailing Discounted Cash Flow Problems
- Video and post on using your financial calculator
- Understanding the normal distribution
- How the CFA Tests Technical Analysis (a complete mini-series of 5 posts)
- Technical vs. Fundamental Analysis
This section contains a broad overview of some crucial components of economic theory covering macroeconomics, microeconomics, and international trade concepts. Some of the discussion will carry through the entire curriculum while other areas are more narrowly confined to Economics. There is a healthy mix of conceptual and calculation based topics here, all of which are fair game for the exam. If you have a strong academic foundation in Economics this material will be largely familiar. If you do not, you will need to spend considerable time here. Either way, do not underestimate the difficulty (and specificity) of the exam questions in this study session.
Resources for Economics
- Supply and Demand 101 for the CFA
- Understanding Perfect Competition, its long-run equilibrum, and its comparison to monopolistic competition
- Business cycle basics
- Microeconomics overview
- Aggregate Demand and Supply Recap
- Monetary Policy 101 and a dive on the money multiplier effect
- Benefits of International Trade and its pros vs. cons
- IS-LM Model
Financial Reporting and Analysis
On the CFA Level 1 exam, financial statement analysis (FSA) and its related questions is the most weighted study session, accounting for almost 20% of exam questions. There is just no getting around it: if you want to pass Level 1 you will need to spend considerable time learning the ins and outs of financial statements—what they consist of, how to calculate various line items, how each statement links to the others, and how they are used in evaluating a business.
You'll be tested on your understanding of the balance sheet, income statement, and cash flow statement and be expected to know the financial ratios derived from each. The depth of knowledge will include requiring you to understand how things like revenue recognition, depreciation assumptions, taxes, and treatment of long-lived assets (depreciation/amortization) can affect a firm's financial statements and thus make cross-company comparisons more difficult. Finally, the CFA Institute lovesto ask questions comparing U.S. GAAP and IFRS accounting standards.
Resources for Financial Reporting and Analysis
This section is so vital we've made almost 80 pages of our full level 1 notes available for free:
- 25 Page Introduction to Financial Statement Analysis
- 20 page guide to income statements
- 17 page guide to balance sheets
- The most commonly tested financial ratios and how to ace ratio problems on the L1 exam
- Depreciation 101
- Financial reporting quality 101
- FSA Basics (overview)
This is a short section (a relief after financial statements) and the testable concepts are fairly clear. You will be asked to calculate all the key metrics around evaluating a capital project and interpret the decision rules for each about whether a firm should undertake a given project. Calculations aside you need to be able to interpret an NPV profile as well as to discuss how IRR and NPV give the same accept/reject answer for a single project but can give different rankings when a project is mutually exclusive.
Resources for Corporate Finance
The CFA L1 portfolio management section is a basic introduction to modern portfolio theory (diversification = good) as well as the capital asset pricing model (CAPM). Expect around 14-18 questions for this material centering on the capital asset allocation line (CAL vs. SML vs. SML), and the distinction between systematic and unsystematic risk and the major risk-adjusted return measures like the Sharpe ratio. You'll also need a good unerstanding of Beta and how to calculate it + standard deviation of a two asset portfolio It might be worth mentioning that Level 3 is all about the portfolio management perspective and L2 has more depth on this material as well, so it will continue to be important.
This section is divided into two parts. The first (Study Session 13) provides an overview/groundwork set of readings that introduce asset classes, tyes of market structures, and things like trade execution, indexing, as well as an articulation of the entire assumption of an efficient market (vs. behavioral modifications to this efficient market hypothesis). It then goes deeper into what equities are, including share structure, private vs. public markets, and evaluating a company's strategic prospects using Porter's 5 forces and other frameworks. The second secttion is about equity valuation. It covers the different methods for calculating what a share is worth and comparing what it should be worth based on intrinsic value to what it is trading for in the market.
Fixed-income is a vital part of the CFA Level 1 exam and is weighted heavily at around 10%. You should be familiar with all the basic determinants of a bond's price as well as all calculations related to this. Expect duration and convexity to be tested as well. This is one section where really knowing your way around the financial calculator is incredibly important. The readings also cover more specialized instruments like mortgage-backed securities, collateraized mortgage obligations, and other asset backed securities.
Much like portfolio management, the Derivatives study session is fairly short and has a low weight on the exam (around 5%, 12 questions). You'll need to know the basics of futures and forwards as well as interest rate/currency swaps, and options (puts and calls). The idea of hedging using derivatives is an important one. Expect to be tested on the difference between OTC and exchange-traded markets (often in the context of comparing forward and future contracts) and potentially on the difference between a swap and a futures contract. Finally you should be able to understand the positions traders take within each financial position and how those positions correspond to movements in the underlying assets.
L1 provides a very high-level introduction to altnerative assets and usually accounts for <10 exam questions. Know the common characteristics of alternatives and their associated risks. For the test expect the fee structure of alternative funds to be tested, the distinction between VC and PE to come up, and questions around the due diligence process to be featured. Real estate is also a popular test subject. Be able to interpret the differences between direct and indirect investment as well as the valuation methods for real estate. Finally contango and backwardation are favorite test subjects as are the sources of return for a commodities contract.
Summary Overview of Study Prep for L1
Ultimately passing the CFA Level 1 exam requires you to combine knowledge of the subject areas with the ability to perform on the exam. Our notes and flashcards will help you drill down on the knowledge side, while our blog and newsletter are there for immediate feedback and guidance on your study system. But make no mistake, you need to develop your own habits and system to cover the material in a timely manner. There is no substitute for discipline and practice. We look forward to helping you on this journey.