Fitch Learning - CFA level I Exam Companion: The Fitch Learning/Wiley Study guide to getting the most out of the CFA Institute Curriculum

This edition first published 2014 by John Wiley & Sons Ltd

2014 Fitch Learning

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Disclaimer: This Fitch Learning/Wiley CFA Level I Exam Companion should be used in conjunction with the original readings as set forth by CFA Institute in their 2014 CFA Level I Study Guide. The information contained in this Exam Companion covers topics contained in the readings referenced by CFA Institute and is believed to be accurate. However, their accuracy cannot be guaranteed nor is any warranty conveyed as to your ultimate exam success. The authors of the referenced readings have not endorsed or sponsored this Exam Companion.

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Foreword

The CFA Level I exam is the broadest curriculum in the CFA Program, covering accounting, economics, statistics, corporate finance, and investments. The breadth of the material is often what defeats candidates; therefore you need to familiarize yourself with the readings in all 18 study sessions.

The Ethics topic covers three main areas: the Code of Ethics, the Standards of Professional Conduct, and Global Investment Performance Standards (GIPS), which focus on the ethics of reporting investment results. It is necessary to understand both the why and the how of reporting results compliant with GIPS. The majority of your study time in this area will be spent reviewing the Standards of Professional Conduct. It is important to be able to know why something is a violation of the Standards, not just that it is a violation.

The Quantitative Methods topic covers financial mathematics, probability, and statistics. Many candidates are surprised by the number of qualitative questions in this topic. It is not just all about the calculations and formulae, it is also important to understand the theory behind the numbers. Many of the techniques covered in Quantitative Methods will be used again in other areas such as equity and bond valuation.

The coverage of macro- and micro-economics is at an introductory level, but remember that the focus is on how the analyst will use this knowledge in the analysis of an industry or a company. Therefore, as you read this material, think about the implications for financial analysis. As with all the topics, you also need to think globally, and in the context of Economics this means understanding the benefits of international trade as well as knowing the basics of exchange rates.

The biggest topic in terms of the weight is Financial Reporting and Analysis. You need to be familiar with financial statements how they are constructed, how they are linked to one another, and specific accounting treatments. However your focus should be on using this knowledge in an analytical context to compare companies.

The Corporate Finance topic is broad, although it only has a weighting of 8%. Some of this material overlaps material elsewhere in the curriculum (e.g. financial ratios). Remember that the focus is on financial analysis, and think about how investment and financing decision-making by a company affects its value. Many of these topics are studied in more detail at Level II.

Portfolio Management is a topic whose importance grows as you progress through the three levels of exams. At Level I, this topic spans the basics of portfolio theory and asset pricing. But don't forget the wealth planning component, and be sure to consider clients' needs with respect to investment objectives, constraints, and risk tolerance. Be sure to consider how this topic relates to the ethics coverage.

The Equity topic includes descriptive information on markets, as well as the theory and evidence regarding market efficiency. The topic also covers fundamental analysis, which begins with the economy, and extends to the industry, and then finally the company. Keep in mind that some of this material links back to financial reporting and analysis.

The Fixed Income topic is broad, but the emphasis is on the characteristics, valuation, and risks of bonds. Be prepared to describe the different risks associated with bonds, and to perform calculations specific to interest rate risk and the valuation of a bond.

The Derivatives topic covers the basic definitions and description of forwards, futures, options, and swaps. Key to mastery of this topic is understanding the factors that affect the value of derivatives. Calculations comprise relatively few learning outcomes in this topic, and the focus of these calculations is on the payoffs from forward rate agreements, the boundaries for the value of puts and calls, the profits from option strategies, and the cash flows associated with plain vanilla swaps. It is important to establish a solid foundation in derivatives at this level because you will be seeing derivatives at Level II and Level III in the context of portfolio management and risk management.