Corporate finance in my opinion is one of the most scoring topics of the level one exam. You can expect between 5-10 percent of the questions being asked from this section. To start with corporate finance, you need to first understand time value of money from the quantitative section very well. If you haven't done that please go and finish that first and then come back to this section.
Once you start, the initial 15-20 percent of curriculum would be pretty self incubating; you will be following it up from the quant section. However, after that you learn the important concept of weighted average cost, capital structure and valuation which are more hardcore corporate finance concepts. The topics of leverage and dividend, these were a part of level two curriculum earlier but since the last 2 exams these are now a part of level 1 corporate finance. Understand them well, questions are relatively straight forward. They are analytical as well as quantitative in nature. So if you know your concepts and methodology well it is very difficult to get them wrong.
Economics contradictory to the popular myth, in my opinion is the most interesting and one of the toughest topics in the curriculum. The level one curriculum attempts to start from the basics and wants to make you an economist in some right by the time you are through reading all sections of the curriculum. The entire gamut of economics from demand supply, micro economics to the fiscal monetary policy and macro economics is covered in the level one curriculum. So my advice would be - try and read through all the concepts and think about all the concepts as you see being applied in the real world. No harm in taking a video from a good prep provider or through other source to understand the concepts. It's got about 10 percent weight age on the exam. However there is one whole book dedicated to economics so you really need to think deep to understand these concepts well to be able to answer them right in the exam.
Ethics is the weakest portion of the exam. Ethic is the only section of the CFA curriculum that remains constant throughout the 3 levels so you study the exact same things. Please don't have the misconceptions that you are a good person and you are an ethical person in life, so you will score well in the ethical section because you have to be ethical according to the ethical definitions of the CFA institute. Make sure that you don't take this section lightly. It's going to be very boring when you read it for the first time but reading and remembering the exact section is not going to help much. The only way to master the ethics section is to practice, practice and more practice. So in this case I am going to advice students to refer to a good question bank from a good prep provider and use it to the maximum.
Do Indian students particularly find ethics tricky?
A lot of problems given are real world situations and you are expected to say what is right or wrong. So for a student who does not have any experience in finance or is not from the investment industry, it is going to be difficult to imagine and decide what is right and what is wrong. So, it is not about Indian students and students abroad, its more about the students who have faced these kinds of conflicts in their real life situation than the students who have never faced this because they are not doing exactly fund management or portfolio management jobs. But I think that's true for the rest of the curriculum as well. I don't see a major difference which cannot be ironed out with enough of practice.
Equity investment is a scoring topic as everybody is interested in stock markets these days. It is an interesting topic as it tells you how to add value and how to decide which investment to go for and which one to avoid. For preparation, read your concepts first and practice as much as you can. It is a straight forward topic in my opinion and scoring as well. About a 10-15 percent of the questions come in the level one exam from this topic. So it can help you score if you understand this topic well.
Fixed Income securities:
Again level one has a more basics aspects of fixed income securities. So the basics of co valuation, duration and sensitivities are going to be covered. A lot of terminologies about the fixed income markets will be there. It can be a bit painful but you have to take it none the less. It builds a strong foundation for level 2 and level 3 where it becomes greatly evolved over level one. So a lot of basics and a lot of technical jargons that the students would have to remember but valuations concepts may not be very difficult.
Derivatives again it is an introductory topic. If you are new to finance then you may find this topic to be very confusing. So make sure that you understand the concept very well. Certain derivations in the derivatives may seem to be occult when you are reading it for the first time so again refer to the videos from a good prep provider for this regard. Derivative is a weak section for a lot of students especially for the students who do not have an experience in finance. Go right from the basics, understand it step to step and take your time on this section and no need to hurry up.
Financial reporting is very important in level one exam. It can make the difference between passing and failing. If you are not good with derivatives or alternative investments you may still get away with it. But if you are not good with financial reporting and analysis and not good with ethics because these two sections are like make or break sections. So there is no running away from it. It's about a lot of accounting and understanding of how accounting is done by the global standards in today's world. Its not very difficult, students have a phobia sometimes. However once you start studying for it in the beginning you will realize that it is a scoring topic and it is pretty prescriptive in nature. Not difficult to master. Don't be hesitant and scared. There is no running away from this topic. You devote as much time as you can on this as it will make a difference between passing and failing.
Which are the subjects that the student should have a strong foundation in to ensure that his level 2 is not that difficult?
Level 2 is essentially built of the same concept as level 1. The concepts become more advanced, application oriented and tougher. So fixed income, derivatives, financial reporting and equity valuations are all the broader topics are there in the level two as well. So I think rather than thinking about level2 you must concentrate on level 1 preparation. If he has done that I think that would suffice.
How much of time should the student devote to each of these 7 subjects in the next 5 months that he has?
I don't think you should have a fixed allocation of time topic wise. Don't hurry up on any topic; take as much time as you want to master it, five months is a lot of time. There will be topics where you will be faster and there will be topics where you will be slower depending on your background. For example an engineer would be fast with the Quantitative section than the financial accounting section. So it depends on their background they want to devote on each of the topic. As far as the importance is concerned from the exam perspective, definitely a lot of time has to be spent on financial reporting, quantitative analysis and corporate finance and then you can equal out time spent on derivatives, portfolio management, fixed income and alternative investments.
For students who are beginning their CFA studies right now, how much time should they devote every week and how should they plan their time in the next 6 months on studies?
If you are going through a coaching class then you are anyway spending about a 4 hours a week in the weekend classes or 4-8 hours a week. So over and above coaching to prescribe it would be any where between 40 minutes to 1 hour everyday i.e. practical questions and revising. In case if you have not joined any class and are going to do it entirely by yourself then you should be devoting at least 2 and half to 3 hours everyday.
Usually in the level 1 exam, what are the common mistakes that the students commit ?
The most common mistake that the students commit is that they start too late and they end up practicing much lesser than required. So the most important thing to do is start your preparation in time and regardless of whether you think that the topic is easy or difficult, practice enough questions on it. The biggest difference between a passing candidate and a non passing candidate is the amount of practice that he or she has done. I repeat this in many forums that these exams are not a test of intelligence; they are a test of hard work and sincerity. The curriculum is well defined, questions are not asked from outside the curriculum, the curriculum is huge and you have to vomit it out in 4-5 hours. So, if you have read it enough times and if you have practiced enough questions you will pass this exam whether you are an IIM graduate or IIPM student or an arts student. If you don't read and don't practice, it doesn't matter how smart you are you won't pass the exam.
Have there been any major changes in the 2012 portion from 2011?
Annually curriculum does change about 5-20 percent. So there have been changes this year as well. Students should refer to our website to get a better understanding. However if you are a level 1 student it does not really matter to you. It is only if you are a level three or level two candidate then it should be of your concern.
Would it be advisable for the students not to source the notes from 2011 and study from that?
Absolutely not, notes are easily available now days and even if you have given the exams last year, throw away your notes and purchase new ones.
Apart from notes, what are the other sources for CFA preparation?
I think the CFA curriculum notes are pretty exhaustive. There are notes available from many other publishers as well. The CFA exam has been in existing since 1967. All the publishers have pretty much refined their notes as per the requirement. The important part is, take a good question bank and practice. Notes will not be the reason why you fail the exam but lack of practice is. Please evaluate the question bank from different providers and have a good mock test series and a question bank programme with you.
Is joining a training institute advisable?
CFA, FRA and CIA exams are some of globally recognized of the golden standards of the industry; some of the toughest exams to clear across the world. These are not meant to be the stand alone exams. So you don't have to leave your job or your education or whatever it is that you are doing in main stream to do the CFA exam. If you don't read, practice and get the right guidance then you might end up wasting a lot of time. Not knowing what exactly to do and lose your focus. Getting a good coaching provider is very important from the aspect that you have very limited time with your other commitments and coaching providers who have the expertise in these exams can really help you minimize your training time and impart you with best conceptual knowledge that you may miss out on if you study on your own. The curriculum notes are good however they are certain part where these notes lack that's where the coaching provider would be able to fulfill very well and he will reduce your preparation programme significantly.
The author, Aditya Ahluwalia is a lead instructor at Finstructor, Mumbai. He has cleared all levels of the CFA and FRM exams with top sectional performance across levels. Aditya is a computer engineering graduate from Punjab Engineering College, Chandigarh. He has subsequently completed his MBA from the Faculty of Management Studies (FMS), University of Delhi. Aditya currently works in the Indian equity markets as a part of the portfolio management team of one of the largest domestic fund houses. He brings with him invaluable experience from the fields of fund management, equity valuation, portfolio management, risk management, quantitative analysis and behavioral finance. Aditya has over 2000 hours of teaching experience to his credit. He has been actively conducting training classes for the CFA and FRM programs for over 3 years.
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