CFA Level-1 experience

I had been to Nepal recently to appear for CFA Level -1.

This post is a bit about CFA exams and the course in general, what I learnt while preparing, how to prepare etc. I would like to share my experience and hope its helpful to a few.

CFA stands for Chartered Financial Analyst. You can know a lot more about it here at their website. The exam is mainly for those who want to enter into a career in Asset Management/Portfolio Management. Mutual fund is an example of a portfolio. One can have a portfolio of stocks, bonds etc. But the exam also covers few other areas which would help one get some idea about Markets in general.

This is the syllabus one would cover if one clears all three levels. The syllabus is broken down into many parts for each level. Since the Finance profession per se does not have too many exams like those in software, CFA is considered by few as an entry ticket into the world of finance. Its considered to be a respected course and is supposedly prestigious.

Some basic facts about CFA exam:

1. There are 3 levels to complete in it. CFA Level 1, Level 2 and Level 3.

2. Unless one successfully completes all three levels one cant become a CFA charter holder. However one can definitely write in his resume CFA L 1 pass etc if he has cleared only L1 till date.

3. Level 1 is held twice in a year. June and December. Level 2 and Level 3 are held only once in a year in June.

4. So technically one can complete all 3 levels in 1.5 years. Appear for Dec'09 L1, June'10 L2 and June'11 L3.

5. Its paper and pencil test as of now and not a computer adaptive test and hence is conducted in a single day across the world (2 days actually, due to time differences).

6. The Level 1 and Level 2 papers are objective in nature with 4 options per question. Level 3 has 1 objective paper and 1 subjective paper with 10-12 case studies.

7. 30-40% of those who appear for L1 pass. Similar, but slightly higher number would pass L2. Around 2/3rd's pass L3. And totally 18% who appear for L1 finally end up as a charter holder.

8. The seemingly higher pass percentages must not make one complacent. The test is tough if you have not prepared well (pretty obvious huh? ;) )and does not depend just on intelligence. A lot of hard work needs to go behind it since there are innumerable concepts which have to remembered. Also, in western countries a number of MBA's, people who are into equity research, portfolio mgmt and other related financial industries appear for it and it can be assumed they skew the curve to create a higher pass percentage.

9. Level 1 has 120 questions in a morning 3 hour session 0900-1200 hrs and another 120 question afternoon session of 120 questions from 1400-1700 hrs. All question carry equal marks and there is no negative marking. So everyone will technically attempt all 240 questions since there is no downside. One need not pass in both the sessions. Totally out of the 240 marks, one has to cross the cut-off. Also, each session of 120 question is split into 10 parts (Actually into 6 parts since they club 2 parts into 1). But one need not pass in each part. So, all that matters for passing is what score you got out of 240. That is the "only number" considered.

Syllabi for Level -I along with weightage (in terms of no. of questions) when I gave the exam in June'08:

I. Ethical and Professional Standards - 15%

II. Quantitative Methods - 12%

III. Economics - 10%

IV. Financial Statement Analysis- 20%

V. Corporate Finance - 8%

VI. Equity Investments - 10%

VII. Fixed Income - 12%

VIII. Derivatives - 5%

IX. Alternative Investments - 3%

X. Portfolio Management - 5%

Preparation (specifically for Level-I) :

When we for the test by paying the 1000$ or whatever fees, we will get a set of 6-7 fat books from the CFAI institute. This can be used for preparation. The books are really conceptual and do a extremely good job of explaining the concepts etc. However one disadvantage with the book is its the typical "foreign author" book of engineering days. Like taking 6 full pages in size 7 font to prove Kirchoffs law. So, yes, one will definitely understand better if one reads from the CFAI books but will take hell lot of time. The other set of books is from Schweser. There are many more, but usually Schweser is good enough. Schweser does a wonderful job of cutting down the crap and reduces the size to almost 1/10th to 1/15th of the original CFAI books. This book, I would say, is not a typical "local author book" of engineering days, but one step above that. But still, the purpose is the same.

Usually the argument or discussion is whether to prepare from schweser or CFAI. My suggestion or study plan would be as follows.

I would not recommend studying entirely from CFAI mainly because

1. Will take 4-5 times more hours of study time than from Schweser.

2. One usually needs to revise the syllabi 3-4 times before the main exam. Revising from CFAI books is too painful

3. Too much of information. One needs to exactly know which line is important or which concept is important in an explanation or derivation running for 4 pages. i.e. The gist is not presented clearly

The way I went about it is as follows:

1. If you have an idea about where you want to end up in (say Fixed Income, Derivatives or M&A etc), based on that select a few topics which you want to read from the CFAI books for better clarity. I studied Fixed Income and derivatives from CFAI since they are usually tested during the summer placements.

2. Some areas which are not very conceptual (Set A):

a. Ethics
b. Quants
c. FSA (Financial Statement analysis)
d. Derivatives
e. Alternative Investments

Some areas which are moderately conceptual or very conceptual are (Set B):

a. Corp Finance
b. Equities
c. Portfolio Management
d. Fixed Income (pretty conceptual)
e. Economics (pretty conceptual)

If all areas are equal to you, reading from CFAI books for Set-A does not make much sense. Reading d. and e. from SET-B makes some sense. However reading economics from Set B will take lots of time.

I, most of the time, used to go through 3-4 initial chapters from CFAI to get a hang of the subject and then shift to Schweser.

Finally, all said and done, if you are planning to pass the exam with good/decent grasp of fundas, Schweser is more than enough. Reading only from CFAI, that too just once, wont ensure a pass. You would know some concepts, but cant answer the questions!

I am planning to head to Schweser only for Level II and wont touch the CFAI books unless I am stuck up somewhere. I am planning to use CFAI books only for reference. And yeah, 98% of questions in CFAI main exams can be answered by studying Schweser thoroughly (I mean there was no need to know stuff from CFAI).

Solving questions is a must. That is the best practice ground. I would suggest working hard on the 3300 questions schweser q bank. I did only 10% of the questions from that, that too in the last 2 weeks. But would suggest one to finish reading a topic and take a test in Q Bank on tat topic and keep doing the q bank now and then to strengthen the concepts. Start with Basic and Moderate level and then slowly shift to advanced levels. Would suggest one to complete all 3300 questions before L1. You would definitely be in a very good position.

Time required:

It depends on your background. Putting some 250 hours would be ideal. I would suggest targeting to complete the entire syllabi once some 6 weeks before exam. I completed just 2 weeks before and it made me jittery and I felt under prepared. Then, after that it has to be 120Q tests from Q Banks + revision of syllabi. Then, slowly start getting used to 240Q tests in a day.

Passing marks:

Target 80%+ in Schweser Q Bank tests (85% if you need to feel happy about yourself) and 65-70%+ in Book 6/7 of Schweser and 75%+ in 100$ CFAI mocks.

Target 70%+ in main exam for a pass. 65-70% range is a bit dicey and may fall in the "just pass" category of school exams. 60-65%: Pray to God

Unfortunately most of what I have written above are things which I did not do and learnt it the hard way. Hope I do a good job when appearing for Level II or god forbid, reappearing for L I.

Also, what I mentioned above as a schedule/advice etc is not to "just pass" the exam or "scrape through" it, but to get a good grasp of the subjects and also to feel very confident before the actual exam. There is a difference between being uncomfortable and passing the exam and being comfortable and passing the exam. I was definitely very uncomfortable before the exam.

Why Nepal:

There are certain issues with CFA in India. I am talking of the CFA from US. Till recently we could not give the exam in India due to some court case etc. I did not follow it much. But I knew we could not give it in India. A week before the test, they allowed the exam to be conducted in Mumbai and CFA did a wonderful job I heard by conducting it at a short period of time. However, I was from Delhi and canceling ticks to Nepal and booking again to Mumbai did not make much sense since I had to anyway spend a lot re-booking. And also giving in Mumbai this year had some risks. There were enough disclaimers from CFAI which made me a bit uncomfortable. One of the disclaimers were like "If the court rules against it the exam conducted in mumbai becomes null and void" and to that level. I was like WTF. So did not take any risks. From this December, I expect the exams to be allowed in India and no more Nepal, Bangkok, Sri Lanka trips for Indians.

Update:

*I passed CFA L-1 with 70%+ in all areas! :)

*Visited my blog after almost 6-8 months. 1st year at A was the culprit. Sorry for delay.

* http://www.analystforum.com/ is a good website for discussions on CFA. The forum junta would keep you on toes.