10 most difficult areas of Level I of the

CFA® Program

The Level I CFA Program exam presents a considerable challenge for many candidates due
to the vast range of topics that you are expected to master.
The key to achieving the mastery of the concepts, is to study SS4: Economics 1, R14 Aggregate Output, Prices and
efficiently, focusing on the exam-based learning outcome Economic Growth
statements (LOS). Certain topics do present a significant problem
For anyone who hasn’t studied economics to before, the macro-
for the majority of candidates. To assist you, we have compiled a list
economic topics will be the hardest to master. The concepts take
of the ten most difficult areas for the Level I CFA Program exam. This
time to understand and cannot be crammed in a short space of time
is based on our delegate feedback at Fitch Learning, over 20 years
(unlike the microeconomic section)! Try to focus on the factors that
of training. The study sessions (SS) and readings (R) are listed to
shift aggregate demand, and long run aggregate supply. Make sure
enable you to reference the topic easily.
you can calculate the GDP deflator, and use it to derive the annual
inflation rate. Take care with the IS-LM model, it is a highly conceptual
SS1: Ethics and Professional Standards, R3 Guidance model and can be difficult to understand; so for most candidates it
for Standards I-VII can take a disproportionate amount of time to master. Unless you
SS1 presents the joint heaviest weighted topic of the exam (15%), have studied this model before, you are probably better off not trying
and most candidates find the material overly lengthy. However, it to fully understand it. This model will lend very little to your exam
forms the cornerstone of the exam, and is used to determine the performance but may take forever to master! Remember, grab the
pass/fail outcome of candidates with borderline scores. The key low hanging fruit, and pick your battles.
is to focus on R3, from where the majority of the questions will
come. You must read all of the CFA Institute volume 1 book (approx. SS5: Economics 2, R18 Currency Exchange Rates
150 pages) for reading 3. Each Standard section is presented with For those without a background in economics, this reading provides
full explanations, recommendations for compliance, and most a lot of concepts that can be mastered with careful practice. What
importantly, the application of the standard in business scenarios. candidates can find tricky, are some of the conventions used by CFA
CFA Institute assumes you have read through these scenarios when Institute. The stating of currency pairs using the price currency/
writing your final exam, hence its importance cannot be overstated. base currency convention can confuse those who use currency
You cannot cram this material, so read it through fully at least three pairs in their daily job. In addition, use of terms such as direct versus
times before the final revision period. You should complete the end indirect quotes, and nominal versus real exchange rates can cause
of reading questions to consolidate your understanding. confusion without careful study. However, once mastered, this
reading can provide a strong base for many exam questions.

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SS8: Financial Reporting and Analysis (FRA), R26 SS14: Fixed-Income, R44 Introduction to Fixed-
Long-Lived Assets Income Valuation
FRA is the joint heaviest weighted topic (alongside ethics at 15%), Most candidates can price a bond easily enough using the TVM
and certain sections of the topic are challenging, especially for those buttons on the financial calculator. However, related topics such as
learning the fundamentals from scratch. One such area regards the deriving forward rates from spot rates cause more problems. You must
impairment of PPE and intangibles and the impact on ratios. The understand that forward rates are simply breakeven future short-term
approach taken by the IASB (IFRS) is significantly different to that spot rates, and although you should use compound spot factors to
taken by the FASB (US GAAP). Candidates must be fully aware of the derive forward rates, you can generally get an accurate approximation
accounting differences. To make learning easier, remember that US by using simple maths (e.g. 2 years of the 2-year spot rate should equal
GAAP will generally prohibit any method which results in earnings the 1-year spot rate plus the 1-year forward rate in 1 year). In addition,
volatility (no reversals), and IFRS place importance on fair balance you must focus on the relationship between the two-term structure
sheet carrying values (allow reversals and revaluations). Once you spreads (the Z-spread versus the OAS). You can expect this topic to
have mastered the topic you can apply your knowledge to confirm be tested, as it also forms a key Level II topic. No calculation of either
the impact on key profitability and leverage ratios. spread is required but expect questions regarding which spread is
larger for callable or putable bonds, and the reasons why.
SS8: Financial Reporting and Analysis, R27 Income Taxes
Few candidates will enjoy studying any part of tax reading in FRA. SS15: Fixed-Income, R46 Fixed-Income Risk and Return
However, the key to unlocking the entire reading is to focus on tax The number of duration and convexity formulas in this reading can lead
expense. If you can appreciate that this expense, like any other, is candidates to believe the focus should be on calculation. However, the
based on the matching/accrual concept of showing the profit earned CFA Program is not designed to advantage candidates with a numerical
in the period, with the tax due on that profit, regardless of when it is background. Hence, you can be assured that no calculus is required for
paid. From this you will understand that tax expense will contain tax any calculation. Instead, you should focus on the approximate Modified
due now (tax payable) and tax due in future periods (deferred tax). duration and convexity formulas and be able to calculate the price
Deferred tax is a topic that many accountants take years to master, move based on the duration and convexity effect. In terms of Macaulay
so do not be too harsh on yourself if you do not understand it fully duration, a calculation is unlikely to come up, instead be able to
throughout your studies. The key is to be able to calculate the correct compute the duration gap, and state whether the investor is exposed
amount given the accounting and tax office figures. to price or reinvestment risk. In addition, know why the Effective
duration and convexity is used for bonds with embedded options.
SS13: Equity Investments, R41 Equity Valuation:
Concepts and Basic Tools SS16 Derivatives, R49: Basics of Derivative Pricing and
At Level I, equity valuation focuses on dividend discount models, Valuation
leaving the other techniques for Level II. Generally, candidates A tricky topic for almost all candidates, because the material is very
find this topic easier than the related fixed-income valuation area. conceptual, it takes time to understand, and topic weight is only 7%.
However, candidates can find the two-stage dividend discount The end of reading questions illustrate the exam questions will be
model quite challenging. Only a two-stage model (high growth easier than the material suggests. Focus on the forward pricing and
and constant growth) is tested at Level I. Remember, to apply the valuation formulas, this will also strengthen your swaps knowledge
Gordon Growth Model only once constant dividend growth has sufficiently. The options material is significantly harder than the rest,
started, and that the terminal value computed is one time period but apart from Put-Call Parity theory, don’t get caught up in any
before the dividend used (e.g. a dividend in year 4 will derive the formulas, as only an understanding of the models is required.
terminal value in year 3), don’t forget to discount the terminal value
back to the present. The high growth dividends must be discounted SS19 Portfolio Management, R56: Technical Analysis
separately and will be added to the discounted terminal value. For such a conceptual area, it is best to focus on the key
assumptions of technical analysis and be able to group the
Good luck with your studies during this uncertain time, stay safe. strategies into their respective groups (e.g. price-based indicators
Author: Peter A Menzies, CFA versus sentiment indicators). In addition, focus on the tenets of
CFA Program instructor, Fitch Learning Elliot Wave Theory. Calculations are highly unlikely to appear.

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