The Chartered Financial Analyst (CFA) Level 1 exam is the first of three exams offered by the CFA Institute, which sets standards for the investment management and financial analysis professions. The CFA Level 1 exam is a globally recognized qualification that provides a foundation in investment knowledge and ethical and professional standards for individuals who aspire to become financial analysts and investment managers. The Chartered Financial Analyst (CFA) Level 1 exam covers the following 10 topic areas:
I. Ethics and Professional Standards.
The Ethics and Professional Standards topic in the CFA Level 1 exam focuses on the ethical and professional standards that are relevant to investment management and analysis. It covers the following key areas:
- Ethical and Professional Conduct: The CFA Code of Ethics and Standards of Professional Conduct, and how these standards apply to the investment management and analysis profession.
- Conflicts of Interest: The types of conflicts of interest that can arise in investment management and analysis, and how to manage and disclose these conflicts.
- Independence and Objectivity: The importance of maintaining independence and objectivity in investment management and analysis, and how to avoid potential biases and other influences.
- Responsibilities to Clients and Employers: The responsibilities of investment professionals to clients and employers, including the duty of loyalty, confidentiality, and fair dealing.
- Professionalism: The importance of professional competence, due care, and maintaining a high level of professional reputation.
The Ethics and Professional Standards topic is designed to test a candidate’s understanding of the ethical and professional standards that govern the investment management and analysis profession, and their ability to apply these standards in practical, real-world situations.
The Quantitative Methods topic in the CFA Level 1 exam focuses on mathematical concepts and techniques that are relevant to investment management and analysis. It covers the following key areas:
- Time Value of Money: The concept of time value of money and how it can be used to make financial decisions, such as determining the present value of future cash flows.
- Interest Rates: The types of interest rates, including nominal and effective interest rates, and how they can be used to make investment decisions.
- Bond Valuation: The calculation of bond prices and yields, including the relationship between bond prices, yields, and interest rates.
- Equity Valuation: The calculation of equity values, including the use of dividends, earnings, and other financial metrics to estimate stock prices.
- Statistics: The use of descriptive and inferential statistics in investment management and analysis, including measures of central tendency, variability, and correlation.
- Probability: The basic principles of probability and how they can be applied to investment management and analysis, including the calculation of expected returns and risks.
- Sampling and Estimation: The use of sampling techniques and estimation methods in investment management and analysis, including the calculation of confidence intervals and hypothesis testing.
The Quantitative Methods topic is designed to test a candidate’s understanding of the mathematical concepts and techniques that are used in investment management and analysis, and their ability to apply these techniques in practical, real-world situations.
III. Economics
The Economics topic in the CFA Level 1 exam focuses on the economic concepts and principles that are relevant to investment management and analysis. It covers the following key areas:
- Macroeconomics: The study of the economy as a whole, including the determination of output, employment, and prices, and the role of monetary and fiscal policy.
- Microeconomics: The study of individual economic units, including consumers, firms, and industries, and how they interact in markets.
- International Economics: The study of international trade, finance, and exchange rates, and how these factors affect the global economy and investment decisions.
- Economic Indicators: The use of key economic indicators, such as gross domestic product (GDP), inflation, and unemployment, in investment management and analysis.
- Business Cycle Analysis: The use of business cycle analysis to understand the phases of economic growth and contraction and how they impact investment decisions.
- Monetary Policy: The role of central banks and monetary policy in determining the supply of money and credit, and how these factors affect the economy and investment decisions.
- Fiscal Policy: The role of government in the economy, including tax and spending policies, and how these policies affect investment decisions.
The Economics topic is designed to test a candidate’s understanding of the economic concepts and principles that are relevant to investment management and analysis, and their ability to apply these concepts in practical, real-world situations.
IV. Financial Reporting and Analysis
The Financial Reporting and Analysis (FRA) topic in the CFA Level 1 exam focuses on the interpretation and analysis of financial statements and other financial reporting documents. It covers the following key areas:
- Financial Statements: An understanding of the key financial statements, including the balance sheet, income statement, and cash flow statement, and how they are used to evaluate a company’s financial performance.
- Accounting Principles: An understanding of the basic accounting principles, including the accrual basis of accounting, the matching principle, and the principle of conservatism.
- Financial Ratios: The calculation and interpretation of key financial ratios, such as liquidity ratios, profitability ratios, and debt ratios, and how they can be used to evaluate a company’s financial performance.
- Financial Statement Analysis: The analysis of financial statements to identify trends and patterns, and how this information can be used to make investment decisions.
- Earnings Quality: The evaluation of earnings quality, including the use of non-GAAP measures, and how this information can be used to make investment decisions.
- Corporate Governance: An understanding of corporate governance, including the role of the board of directors, management, and stakeholders, and how corporate governance affects investment decisions.
- Disclosures and Footnotes: The importance of disclosures and footnotes in financial statements, and how these disclosures can be used to make investment decisions.
The Financial Reporting and Analysis (FRA) topic is designed to test a candidate’s understanding of the financial reporting process, and their ability to analyze and interpret financial statements and other financial reporting documents in order to make informed investment decisions.
V. Corporate Finance
The Corporate Finance topic in the CFA Level 1 exam focuses on the financial management practices and techniques that are used by corporations. It covers the following key areas:
- Capital Budgeting: The process of evaluating and selecting long-term investments, including the calculation of net present value and internal rate of return.
- Capital Structure: The composition of a company’s financing, including the mix of debt and equity, and how capital structure affects a company’s risk and return.
- Cost of Capital: The calculation of a company’s cost of capital, including the weighted average cost of capital (WACC), and how this information is used in capital budgeting decisions.
- Dividend Policy: The decision-making process surrounding a company’s dividend policy, including the trade-off between retaining earnings and paying dividends.
- Risk Management: The identification and management of financial risk, including the use of derivative instruments such as options and futures.
- Working Capital Management: The management of a company’s short-term assets and liabilities, including the management of accounts receivable, accounts payable, and inventory.
- Mergers and Acquisitions: The process of combining two or more companies, including the analysis of synergies and the financing of the transaction.
The Corporate Finance topic is designed to test a candidate’s understanding of the financial management practices and techniques that are used by corporations, and their ability to apply these techniques in practical, real-world situations.
VI. Equity Investments
The Equity Investments topic in the CFA Level 1 exam focuses on the analysis and valuation of individual stocks and the stock market as a whole. It covers the following key areas:
- Stock Market Indexes: An understanding of the main stock market indexes, including the S&P 500 and the Dow Jones Industrial Average, and how they are used to track market performance.
- Stock Characteristics: The analysis of individual stocks, including their growth prospects, risk profile, dividend policy, and financial health.
- Industry and Company Analysis: The analysis of industries and individual companies, including the use of financial ratios and industry benchmarks to evaluate performance.
- Security Market Line: The concept of the security market line, and how it relates to the risk-return trade-off for individual stocks.
- Stock Valuation: The valuation of individual stocks, including the use of earnings-based and cash flow-based valuation methods.
- Portfolio Theory: The basic concepts of portfolio theory, including the efficient frontier, risk-return trade-off, and diversification.
- Behavioral Finance: The impact of behavioral biases, such as herding behavior and overconfidence, on the stock market and individual investment decisions.
The Equity Investments topic is designed to test a candidate’s understanding of the analysis and valuation of individual stocks and the stock market as a whole, and their ability to make informed investment decisions in the equity market
VII. Fixed Income
The Fixed Income topic in the CFA Level 1 exam focuses on the analysis and valuation of fixed income securities, such as bonds. It covers the following key areas:
- Bond Characteristics: An understanding of the key features of bonds, including coupon rate, maturity, and credit quality.
- Bond Prices and Yields: The relationship between bond prices and yields, including the calculation of yield to maturity (YTM) and yield to call (YTC).
- Interest Rate Risk: The impact of changes in interest rates on bond prices and yields, including the duration and convexity measures.
- Credit Risk: The analysis of credit risk, including the evaluation of credit ratings, and the impact of credit risk on bond prices and yields.
- Inflation-Linked Bonds: An understanding of inflation-linked bonds, including Treasury Inflation-Protected Securities (TIPS), and how they can be used to hedge against inflation.
- Bond Portfolios: The analysis and management of bond portfolios, including the use of laddering and sector rotation strategies.
- Municipal Bonds: An understanding of municipal bonds, including their tax-exempt status, and how they can be used in investment portfolios.
The Fixed Income topic is designed to test a candidate’s understanding of the analysis and valuation of fixed income securities, and their ability to make informed investment decisions in the fixed income market.
VIII. Derivatives
The Derivatives topic in the CFA Level 1 exam focuses on the use of derivative instruments, such as options and futures, in financial markets. It covers the following key areas:
- Options: An understanding of call options and put options, including their pricing, and the use of options in investment strategies.
- Futures: An understanding of futures contracts, including their pricing and use in hedging and speculative strategies.
- Swaps: An understanding of swap contracts, including interest rate swaps and currency swaps, and their use in managing financial risk.
- Risk Management: The use of derivatives in managing financial risk, including the management of interest rate, currency, and commodity price risk.
- Options Trading Strategies: The use of options in investment strategies, including covered call writing and protective put strategies.
- Futures Trading Strategies: The use of futures in investment strategies, including spread trading and futures-based portfolio strategies.
- Regulations and Ethical Considerations: An understanding of the regulatory framework for derivatives, including the role of the International Swaps and Derivatives Association (ISDA), and ethical considerations for the use of derivatives.
The Derivatives topic is designed to test a candidate’s understanding of the use of derivative instruments in financial markets, and their ability to make informed investment decisions involving derivatives.
IX. Alternative Investments
The Alternative Investments topic in the CFA Level 1 exam covers a range of investment strategies and assets that are considered alternative to traditional investments, such as stocks and bonds. It covers the following key areas:
- Real Estate: An understanding of real estate investment trusts (REITs) and direct real estate investments, including the analysis and valuation of real estate assets.
- Private Equity: An understanding of private equity investments, including venture capital, buyout, and growth equity, and the valuation of private equity assets.
- Hedge Funds: An understanding of hedge fund strategies, including long-short, market neutral, and event-driven strategies, and the evaluation of hedge fund performance.
- Commodities: An understanding of commodity markets, including precious metals, energy, and agricultural commodities, and the use of commodities in investment portfolios.
- Art and Collectibles: An understanding of art and collectible investments, including the analysis and valuation of individual assets, and the use of art and collectibles in investment portfolios.
- Infrastructure: An understanding of infrastructure investments, including public-private partnerships (PPPs) and infrastructure funds, and the analysis of infrastructure assets.
- Natural Resources: An understanding of natural resource investments, including timber, agriculture, and water resources, and the analysis and valuation of natural resource assets.
The Alternative Investments topic is designed to test a candidate’s understanding of a range of investment strategies and assets that are considered alternative to traditional investments, and their ability to make informed investment decisions in the alternative investments market.
The Portfolio Management and Wealth Planning topic in the CFA Level 1 exam focuses on the principles and practices of portfolio management, including the design and implementation of investment portfolios. It covers the following key areas:
- Portfolio Theory: An understanding of the key concepts of modern portfolio theory, including expected return, risk, and diversification.
- Asset Allocation: The design of investment portfolios, including the use of strategic and tactical asset allocation, and the analysis of asset class returns.
- Risk Management: The management of investment risk, including the use of portfolio insurance, and the evaluation of portfolio risk using measures such as Value-at-Risk (VaR).
- Performance Evaluation: The evaluation of investment performance, including the use of benchmarking, and the calculation of risk-adjusted performance measures such as the Sharpe ratio.
- Ethical and Professional Standards: An understanding of ethical and professional standards in portfolio management, including the fiduciary duty of portfolio managers, and the importance of transparency and disclosure.
- Tax Planning: An understanding of tax planning for investment portfolios, including the use of tax-efficient investment strategies, and the impact of taxes on investment returns.
- Wealth Planning: The design and implementation of wealth plans, including the integration of investment, tax, and estate planning, and the analysis of the trade-offs between risk and return.
The Portfolio Management and Wealth Planning topic is designed to test a candidate’s understanding of the principles and practices of portfolio management and wealth planning, and their ability to make informed investment decisions in the portfolio management and wealth planning market.
Each of these topics is designed to test a candidate’s knowledge of the concepts, techniques, and theories that are relevant to investment management and analysis. The Level 1 exam is designed to assess a candidate’s ability to apply this knowledge in practical, real-world situations.
