How to Pass the CFA Level 1
As an investment professional, being a Chartered Financial Analyst can open many new doors that will serve you well throughout your career. But the road to CFA charterholdership isn’t one for the uncommitted or the weak of will.
It’s a long process that will not only test you for what you know, but especially for what you’re willing to put in, your determination to succeed, and most importantly, how long you can last. Of course, this journey begins with passing the CFA Level I exam.
The first step to your success as a CFA Level I candidate is knowing what to expect during the exam. After all, this will probably be your first close encounter with the CFA Institute, which administers the exam. When you know what to expect, you can plan your review around those expectations and increase your chances of passing the test.
According to the Institute’s Head of Examination Development, Peter Mackey, the current program takes an all-encompassing approach to investment analysis, valuation and portfolio management, with a special focus on ethical and professional standards. The good news is, it is a program that can be mastered through distance self-education.
But how exactly does that translate to crucial specifics that can impact your performance as a potential CFA?
Let’s start with the most basic of all – exam structure. The CFA Level I exam will be around six hours long and split into two three-hour sessions. One will be in the morning and another in the afternoon. There will be a total of 240 multiple-choice questions. Each of these must be answered within a maximum of 90 seconds.
Take note that all of the questions are standalone, which means they are independent of one another, and there will be three possible answers for each.
Of course, the questions can be tricky, with each wrong choice reflecting calculation or logic errors that examinees are known to make. Nonetheless, be sure to answer all the questions as you won’t be penalized for answering incorrectly.
Even more important than knowing the structure of the CFA Level I exam is anticipating its content. After all, this is where it all comes down to. If you have the wrong content expectations, you will have little – if any – chance of passing, for then you would be studying the wrong topics. Then again, you don’t only have to know what topics to study, but also which ones to study more or less than the others.
Exam Weight Distribution
To help you with that, take note of the following weight distribution of CFA Level I exam questions according to topic:
Ethics and Professional Standards – 15%
This part is obviously about the CFA Code of Ethics and Professional Standards, and the Global Investment Performance Standards (GIPS). Keep in mind that the Institute is very, very serious about this section, which is composed of around 36 questions. So serious that even if you score low on the other topics, you may still pass the exam if you impress them enough in this section. Besides, if you master ethics by Level I, you will have one less subject to pore over when it’s time for Levels II and III.
Quantitative Methods (10%)
As you may tell, ethics is a highly situational subject that few candidates will have problems with (until they take it for granted). Quantitative methods, however, can be rather technical. Not that you need a Ph.D in mathematics to pass this section, but a good grasp of statistics will surely help.
This part is dedicated to basic micro and macroeconomic concepts, especially macroeconomics – think x and y curves reflecting market movements. A good background in economics will certainly give you an edge.
Financial Reporting and Analysis (15%)
This may well take the biggest chunk of the exam, with a good 15% of questions devoted to it. There are also about as many questions on this section in Level II, so you have to spend a lot of time studying this topic to build a strong foundation for your next two exams.
Here, you will be asked to interpret three financial statements (balance sheet, income statement and cash flow statement), determine the ratios, and apply other complex concepts like taxes and inventory analysis. But since the exam is international in scope, you won’t have to study local accounting practices. Instead, you will have to focus on globally recognized standards, such as the U.S. GAAP and IFRS.
Corporate Finance (10%)
This is a short one, taking no more than 7% of the total number of questions in the exam. Major topics in this section include agency issues arising from agency-principal relationship, leverage, capital budgeting, working capital management, and cost of capital.
Portfolio Management (6%)
This part of the test mainly covers the Modern Portfolio Theory and the Capital Asset Pricing Model, with about 17 questions essentially preparing you for the same section in Levels II and III.
Equity Investments (11%)
Equity markets and instruments are the focal points of this section, along with company valuation tools and techniques. Around 10% of the questions dwell on equities while 90% go to company analyses and valuations.
Fixed Income (11%)
In this section, you will be tested for your knowledge of different fixed income securities and methods for accurate pricing. Vital concepts like yield measures and duration are also covered, as well as structured products, like collateralized mortgage obligations and mortgage-backed securities.
About 14 questions will be found in this section, which tests your knowledge on the essentials of futures, swaps, and the like, as well as the hedging techniques that work with them.
Alternative Investments (6%)
Lastly, this part tackles alternative investments like real estate, venture capital, closely held companies, and commodities. About seven to eight questions are highly conceptual, with more attention given to commodity investments, so you have to be well-oriented with such concepts as contango and backwardation.
Top Tips for Passing the CFA Level I Exam
Setting the right expectations is only the beginning of effective CFA Level I exam preparation. Once you know what lies ahead, you can start taking concrete steps to ensure that you will indeed be ready for the challenge come exam day. Here are some handy tips to remember as you go along:
1. Focus on the Curriculum
Every item that appears on the CFA Level 1 exam comes right out of the curriculum provided by the CFA Institute. Therefore, focus your review on that instead of confusing yourself with too many sources. When the Institute says the test questions are based on the assigned curriculum, that means they won’t be asking you anything beyond that.
However, as the CFA exam is known to keep evolving, you have to stay up to date with any changes. In 2009, for example, the number of options for the exam’s multiple-choice items was reduced from four two three. In short, visit the Institute’s website regularly to remain in the loop.
2. Begin Early
Passing a CFA exam requires proficiency in a large, multifaceted body of knowledge. Hence, you have to give yourself enough time for each topic. Generally speaking, you should allot around six months of review before exam day, so if you’re planning to take the test in June, you should be getting started by January or at least February.
But don’t jump in full-blast yet or you could burn yourself out long before the day of the exam. Instead, go bit by bit and gradually gather your momentum. Remember, you’ll be studying for about 300 hours total, which is around 11.5 hours weekly within a 6-month period. This is based on the results of a candidate survey conducted by the Institute itself. While the topics are not that difficult, the sheer volume of material to be covered requires a significant investment of time.
Of course, all these are mere suggestions, and there are no hard and fast rules on how long you should study for the exam. That’s because many things can come into play, such as your finance background, which is still the biggest factor to be considered.
3. Prepare Yourself Mentally and Socially
Yes, reviewing for the CFA exam requires mental preparation, and we’re not just talking about soaking up all the knowledge you need to pass the test. You also have to work on your attitude, starting with the realization that it will be a time-consuming process that can possibly get in the way of your daily routine. Know that it will be difficult to balance your attention between your review and the rest of your life and that you may feel all stressed out and peevish, especially as the exam draws near.
At least, try to communicate this to your family or anyone important to you – best friend, coworkers, etc. Patiently explain to them that you’re preparing for a taxing exam, which means you will have to focus on studying and beg off from your usual activities with them. By telling them beforehand, you can spare yourself the distractions later on, as when they start acting up because you rarely take their calls anymore.
4. Study Your Exam Calculator
There’s no doubt about it: you are beholden to your calculator as a CFA candidate, no matter your level. And the best way to maximize your benefits from this device is to use the same one during your review and the actual exam. You don’t want any delays when answering questions, and especially not from using a calculator that’s being difficult. Very importantly, be sure to bring two identical calculators to the exam. You’ll never know.
5. Take as Many Practice Exams as You Can
First-timers usually focus on reading and studying notes when preparing for the CFA exam. Big mistake! Study notes will give you base knowledge, but practice exams are key when it comes to drilling this knowledge deep into your brain.
Plan your review such that you finish with your notes early and begin with practice tests 4 to 6 weeks prior to the exam. And make it a point to time yourself so you can better assess your current performance and work on improving it if necessary.
6. Shoot for a 70% Minimum Score
The general perception is that the lowest passing score the Institute will set for the exam is 70%. There has never been an official word on this, but based on historical data, 70%-100% does appear to be the highest score range a candidate can get for any section. It would be very odd to find a candidate scoring 70%-100% in everything and fail the test. Hence, when taking your practice exams, always target a score of 70% or higher.
If you get a lower score on your first practice exam, don’t worry. Most people do at first, but you can always improve this by going back to your notes, making changes if necessary, or by simply getting used to answering more and more practice exams.
7. Get Your Logistics Straight
In the middle of all the reading and calculating, it’s good to stop a while and run through your logistics on this day. If possible, visit the venue and take a good look around; if not, figure out how to there using tools like Google Maps. You should also visit the CFA Institute’s website and scan their checklist of things to bring to the exam. Preparing all these details beforehand will help ensure that you only have the exam to think about when the big day arrives.
8. Be Wise with Your Time
The CFA Level I exam has 40 questions per hour, which is why, as we mentioned, you have around 90 seconds max to answer each. Because of the volume of questions in this exam, there’s always the possibility that you will not complete the paper. If this seems likely in your case, just blindly guess the remaining items before the proctor signals the end of the exam. And again, because you won't be penalized for giving wrong answers, getting a few correct ones by accident is always better than wasting an opportunity to increase your score.
9. Take Time to Enjoy
If you’re like most candidates, you’ll probably be tempted to squeeze in as much final study time as you can. That might be okay but not at the expense of time you would otherwise spend on exercise, eating healthy food or getting a full night’s sleep, especially as the exam approaches. You want to ace this test like everyone else, but remember, no amount of review will work if your mind and body are unprepared.
This may sound like a no-brainer, but the Institute can be wildly meticulous when it comes to exam procedures and behavior. If you give them a reason to cite you for breach of the rules, that could mean the end of the hundreds of hours you’ve put into your review.
You definitely don’t want to pique your proctor or anyone for that matter. Just be quiet and wait for your paper to be collected. Don’t make a fuss if that takes a while. After the exam, don’t dare discuss the questions anywhere public, like social media. If they catch you, you will no longer be allowed to take future exams, and the one you just took will be automatically canceled.
Common Reasons People Fail the CFA Level I Exam
It doesn’t matter if you’re taking the CFA exam for the first time or you’re retaking it. Aside from knowing what works for prepping, you should also be aware of what doesn’t. In other words, know the reasons behind some people’s unsuccessful attempts at charterholdership so you can learn from their mistakes and avoid making the same. Here are some of the most common:
Lack of Preparation
There’s a good chance you’ll end up dealing with exactly the same thing the other candidates did on exam day – nerves! But the only time nerves can really get in your way is when you haven’t prepared enough for the exam. The more you work to get ready for the challenge, the fewer impact nerves will have on your performance.
Lack of Strategy
Sometimes, candidates fail the exam simply because they don’t have the right strategy, if, at all, any. For example, if you think you will have a problem finishing the exam, plan to answer 10 questions at a time and take a short break before proceeding to the next set. Another thing you can do is grab the easy scores from the simpler questions first before lingering on the more difficult ones. Otherwise, you will lose time – and score.
If you’re getting 70% on your practice tests, keep the same approach when you finally take the exam. Don’t overanalyze just because you’re holding the actual paper from the Institute. In most cases, your first answer will be the correct one. Remember, it’s when you overthink and start changing your answers that you could get them wrong. Unless you’re completely sure that you’ve made a mistake, leave your answer as is.
In the Institute’s Learning Outcome Statements (LOS), you will find everything that you’re supposed to know about each topic. Incorporate these into your study plan because they will lead you to the areas that you need to focus on. In short, you learn how to study not necessarily harder but smarter, which is what actually works when you have so much knowledge to absorb.
Taking Ethics for Granted
We’ve touched on this earlier, but yes, your Ethics score will have a huge impact on whether you pass the exam or not. Even if you score high in the other areas, a low Ethics score can still lead you to fail. Similarly, a good score in Ethics can be the deciding factor that lets you pass the exam, even if you don’t score so well on the rest of the topics. Thus, never take Ethics for granted. Make it a point to answer as many practice Ethics questions as you can.
People who have an MS or MBA in finance can be overconfident about passing the CFA Level I exam – until they find themselves guessing a ton during the test. Truth is, it doesn’t matter how much finance background you have or even how smart you are. The questions in a CFA exam are so detailed that you will never be able to answer them correctly without studying enough. Even if you’ve covered all the exam topics while earning your advanced finance degree, you’ll still probably need a refresher.
The Bottom Line
At the end of the day, the secret to passing the CFA Level I exam is to study systematically for a total of 300 hours. This is the only way of preparing for the exam with any real chance of success. Don’t bother with shortcuts as there are no such things in the world of finance.
Also remember, while studying is never easy, you can make it easier. It’s all about softening up your mind so it begins to absorb more and more information. In the beginning, you may find it hard to focus for longer than 10 minutes. But that’s probably because you haven’t studied in 10 years. If you keep a consistent schedule for learning the topics, your mind will be primed to take on more tasks as you continue to review.
Of course, it helps to study with a CFA Level I exam review course, which you’ll find plenty of through online learning platforms like Udemy and Coursera. There’s a whole variety of exam prep courses out there, but keep in mind that they’re not all created equal. You still need to do your homework to find the best one that fits your needs and learning style. In any case, as long as you stick to a system and keep going, you should be well on your way to charterholdership.
1. What is the passing score for CFA Level 1?
You can pass with Financial Reporting and Analysis with under 50%, Economics and Portfolio Management with over 70%. The rest subjects are between 50-70%.
2. How long does it take to prepare for CFA Level 1?
Successful candidates report spending about 300 hours preparing for the exam.
3. What are the requirements to pass the CFA Level 1?
The highest score bracket for the Level 1 exam is 70-100%.
4. Is passing CFA Level 1 hard?
CFA exams are not easy. Commonly cited as being one of the most difficult exams in the world, the CFA qualification has a reputation for being challenging. However, if you put in the required effort, it is achievable.
5. Is 7 months enough for CFA Level 1?
It is possible. Exam preparation lasting for 7 months is just enough time if you are willing to put in the required effort.