CFA Level 1 Topics: What is The Hardest Topic?

The road to becoming a CFA charter holder is long, and it requires not just subject knowledge but also patience, effort, and will.

There are three levels to the CFA curriculum: Level 1, Level 2, and Level 3. Candidates for the CFA certification must pass each of these tests and complete the CFA Institute’s work requirements.

Each of these three levels’ curriculum is designed to assess a wide range of skills that are most important to investment professionals. The CFA Level I topics test will be the topic of this article.

Passing the CFA Level 1 examinations is also challenging. Indeed, the passing percentage for the Level I test in November 2022 was just 27%, compared to an average Level I pass rate of 45% from 1963 to 2022.

In order to pass CFA Level 1, grasping thoroughly the topics is essential. In this article, we will discuss CFA Level 1 topics and determine which one is the hardest.+

What Is CFA Level 1 Exam Structure?

How long is CFA level 1? How many question in CFA level 1 exam? These are the frequently asked questions when it comes to the CFA level 1 exam structure. 

The exam is broken into two 135-minute sessions and is computer-based. The test has 180 multiple-choice questions, 90 in the first session and 90 in the second. Candidates should allow 90 seconds for each question, depending on their understanding of the concepts.

The multiple-choice questions are all free-standing and not dependent on each other. There are three different answers to each question. The questions are cleverly constructed such that the wrong answers represent typical math or logic errors. Because there is no penalty for wrong responses, candidates should try to answer all questions.

It is also necessary to become familiar with calculator functions, as these will be required to answer some of the problems.

How Many CFA Subjects Are There?

The exam focuses on basic knowledge and understanding of investment valuation and portfolio management tools and concepts. The curriculum is divided into ten sections that include important topics such as ethical and professional standards, portfolio management, asset classes, investment instruments, and wealth planning.

For the Level I exam, the following table shows the approximate CFA level 1 topic weights of these topic areas.

Topic	Exam Weight
Ethical and Professional Standards	15-20%
Quantitative Methods	8-12%
Economics	8-12%
Financial Reporting and Analysis	13-17%
Corporate Finance	8-12%
Portfolio Management	5-8%
Equity Investments	10-12%
Fixed Income	10-12%
Derivatives	5-8%
Alternative Investments	5-8%

Ethics and professional standards

Ethics is one of the most essential topics in CFA Level 1, accounting for 15%. The code of ethics, professional standards, and the Global Investment Performance Standards (GIPS) are all covered in this section. This section has around 27 to 36 questions, and the Institute itself takes this area very seriously.

If a candidate’s scores on all other topics are low or close to the minimal passing score, this section’s score may influence whether or not they pass. One advantage of studying ethics thoroughly is that it aids in the preparation for Level 2 and Level 3 exams.

Quantitative methods

While the ethical part is more scenario-oriented and straightforward, some students may find the quantitative techniques section frightening. Quantitative methods make up 12% of the CFA Level 1 exam content. It presents quantitative methods such as the time value of money, descriptive statistics, and probability. 

It is not required to have a Ph.D. in mathematics to succeed in quantitative approaches, although having a foundation in statistics will be beneficial.

Candidates might expect between 15 and 22 questions on quantitative techniques if the weighting is between 8% and 12%. The subjects presented are intended to provide an understanding of analytical tools and processes that are necessary for financial analysis and investment decision-making.

The time value of money and discounted cash flow analysis, which are the foundations for security and asset valuation; descriptive statistics, which convey important data attributes and characteristics of return distributions; and probability theory and its application to quantifying risk in investment decision making are among the key topics covered.

Time value of money

Basic techniques for supporting corporate finance decisions and estimating the fair value of fixed income, equity, and other securities or investments include the time value of money estimates.

Candidates should be able to do various calculations such as finding the future value and present value, DCF, NPV, and IRR using interest rates and discount rates in the context of the time value of money.

Descriptive statistics

Basic statistical concepts such as establishing a parameter and a frequency distribution, calculating percentiles, coefficient and sharpe ratio, and understanding standard deviations and skewness are covered in this part. Application areas include sampling, estimation, and hypothesis testing.

Probability

Candidates will be asked to describe a random variable or outcome, distinguish between different types of probabilities and rules, compute the joint probability, explain the tree diagram, and understand covariance and correlation. 

Economics

The economics section evaluates your knowledge of basic micro and macroeconomic concepts. Among the subjects covered are supply and demand analysis, oligopoly and monopoly market structures, aggregate output, prices, economic growth, and business cycles and their impact on economic activity. Economics accounts for 8% to 12% of the Level 1 examination.

Microeconomic analysis

Microeconomics is the study of consumer and company market behavior based on the demand and supply premise.

Macroeconomics analysis

Macroeconomic analysis considers the large picture, including aggregate output and income measurement, economic growth determinants, business cycles, and how monetary and fiscal policies are utilized to offset economic variations.

Financial reporting and analysis

With a 13% to 17% weight, this is the second-largest section on the Level I exam. Financial reporting and analysis are only somewhat less weighted in the Level II course, therefore it’s critical to devote adequate time to studying this subject to lay a good basis for future exams.

Candidates will be expected to evaluate and comprehend primary financial statements (balance sheet, income statement, and cash flow statement), as well as understand ratios and a variety of advanced topics such as inventory analysis, revenue recognition, long-term assets, and taxes.

Because this is a global exam, it does not cover local accounting practices. The focus is on well-known accounting standards such as US GAAP and IFRS.

Corporate finance

The subject of corporate finance, which has an 8% to 12% weight in the Level I test, comes after financial reporting and analysis. It gives an overview of corporate governance, as well as investment and financing options. This topic also emphasizes the rising importance of environmental and social factors in investment. Cost of capital, capital planning, working capital management, and leverage are all important concerns.

Portfolio management

Despite the fact that portfolio management isn’t significantly weighted in Level 1 (7%), it’s an important section that sets the framework for the rest of the chapters In Levels 2 and 3, it also lays a solid foundation for portfolio management.

The Level 1 test covers simply the fundamentals of portfolio management. Two major elements are Modern Portfolio Theory and the Capital Asset Pricing Model. This portion has nine to fifteen questions and serves as a warm-up for Levels II and III, where the emphasis is on applying the information to portfolio management.

Equity investments

This session delves into the markets for stocks, bonds, derivatives, and alternative investments. It explains the different types of assets and their players, as well as how various investments are built and handled. It also goes into market efficiency briefly.

The other session focuses on equity securities’ characteristics, analysis, and value. The study materials address the characteristics of equities securities, the role of investment management, how to conduct industry and business evaluations, and how to assess a firm’s competitive position.

On the Level 1 test, equities make up about 10% to 12% of the questions, with the majority of the questions focusing on valuing and analyzing companies. This part is critical for candidates to understand since it builds the groundwork for Levels 2 and 3.

Fixed income

Following equities, the exam moves on to fixed-income markets and instruments. Candidates must be familiar with the characteristics and pricing of various fixed-income securities. The yield measurements, convexity, and duration are all significant concepts.

Structured products, such as mortgage-backed securities and collateralized mortgage obligations, are also discussed in this section. Fixed income questions account for 10 to 12 percent of the exam.

Derivatives

Derivatives, like portfolio management, are only introduced in Level 1. The principles of futures, forwards, swaps, options, and hedging approaches employing these derivatives will be tested. In the Level I test, this section carries a 5 percent to 8% weight, which amounts to nine to fifteen questions, similar to portfolio management.

Alternative investments

Alternative investments, such as real estate, hedge funds, private equity, infrastructure, and commodities, are covered in this section. The Level 1 alternative investments curriculum is introductory in nature, with a test weight of 5% to 8%, so expect between nine and fifteen questions.

Candidates should take this area carefully, given its increasing relevance in recent years and the fact that it has a somewhat larger weight in Levels II and III.

Which Are The Hardest CFA Level 1 Topics?

 

The most challenging sections of the CFA test for level 1 applicants are typically FI, Derivatives, and FRA. We couldn’t be more in agreement. So, it appears that the three most difficult level 1 CFA exam topics are:

1. Fixed Income (FI),
2. Derivative Investments (DI),
3. Financial Reporting and Analysis (FRA).

True, the three themes range significantly in terms of exam weight and the number of readings required in your level 1 program.

Level 1 CFA Exam Topic	Short Description	Topic Weight	No. of Readings	No. of Formulas	Predicted No. of Questions
Financial Reporting and Analysis*	Financial statements + Accounting methods + Reporting standards	13-17%	12	nearly 100	ca. 26
Fixed Income	Bond features, yields & markets	10-12%	6	around 40	ca. 20
Derivatives	Forwards vs futures vs options vs swaps	5-8%	2	around 40	ca. 10

Okay, Financial Reporting and Analysis appears to be quite hazardous: 12 readings (almost 700 pages in your CFA Program curriculum! ), approximately 100 formulas, and all of the information was assessed in 26 of 180 level 1 exam questions (or even more).

But Fixed Income, with its exam weight of 10 to12 %, and Derivatives, appear to be far less frightening.  The weight of the topic is only 5 to 8%. Only two readings! (and about 120 pages long – or short in this case)

The first tough thing to comprehend about level 1 CFA test subjects is that difficulty is determined by the length and weight of the exam. It’s all about the content, the curriculum, what’s written about the subject, and how it’s written!

Although the difficulty is a subjective criterion, there is an objective reason why these three subjects are likely to be accurate for the majority of level 1 candidates: they are all purely conceptual and contain numerous things you’ve probably never heard of.

What this implies is that there is a lot to remember, and some of it may be difficult to comprehend!

Fixed Income

Have you ever made a stock investment? Even if you don’t, you’re probably familiar with a number of publicly traded corporations. As a result, equity investments appear to be very tangible and intuitive. However, debt securities are not something that most people are familiar with (especially if they live in a country where the bond market is not as well developed as in the US). Fixed-income securities are thus more abstract to analyze.

You’ll have a better start with derivatives if you understand fixed-income assets. Bonds can influence derivative instruments, and there are additional alternatives – initially stated in the Fixed Income section and then further analyzed in the Derivative Investments section.

Derivatives

Is it conceivable that the most difficult aspect of the level 1 curriculum has been tucked away in one of the smallest topics? It is undeniably the case for many.

Stocks, stock indices, bonds, interest rates, exchange rates, commodities, and other derivative instruments are some of the assets that can be used as underlying assets for derivatives. The value of the derivative instrument is affected by changes in the underlying asset’s value.

Financial Reporting & Analysis

FRA will give you a hard time if you’ve got little or no experience with financial statements. It’s a lot of theory for the level 1 exam, covering a wide spectrum of accounting concepts.

The first two readings cover various financial reporting and analysis frameworks, reporting standards, and authorities.

The income statement, balance sheet, and cash flow statement, or the major three financial statements, are discussed in the next three readings.

Then there’s a reading on various accounting approaches, followed by a series of readings on various financial statement items, such as inventories.

Quality and applications are the topics of the last two readings.

The most challenging aspect of the subject of financial reporting and analysis is likely not the substance itself, but the volume of data.

To begin with, there are several contrasts and similarities to learn. Make an inventory. Depending on whether they are reported under IFRS or US GAAP, they are regarded differently.

To handle such issues, you must first comprehend what a specific change entails and whether it has any significant implications. If you answered yes, you must understand what the change affects and how it affects it.

So, is Financial Reporting and Analysis the most difficult topic on the CFA level 1 exam? It may be. However, it might just well be Fixed Income with its debt securities, Derivative Investments with its options, or any other topic. It’s a personal choice.

If it turns out to be FRA for you, don’t give up; instead, figure out how to conquer the challenge. It’ll be well worth your time because it’ll be one of the most significant topics on your level 1 exam. Consider this: all work put on FRA is wasted. The more you understand the material today, the more likely you are to pass your level 1 exam. It will also pay off as the level 2 exam’s obstacles become more genuine.

How To Ace CFA Level 1 On Test Date?

All CFA tests are currently delivered via computer-based testing at over 400 proctored exam centers around the world.

Exam facilities have strict security measures in place, and each one thoroughly monitors candidates for any signs of cheating. For CFA Level I Exam Day, the CFA Institute gives the following test-taking advice:

• Make sure you’re familiar with your calculator’s features and how to apply them to the learning outcome statements. The Texas Instruments BA II Plus or the Hewlett Packard 12C are both acceptable calculators.
• Unless otherwise noted, exam questions on financial reporting and analysis are based on IFRS. This will be noted in the question of whether US GAAP is used.
• There is no penalty for wrong answers, so answer all of them.
• While there is no dress code for the tests, it is recommended that you dress in layers for comfort and wear quiet shoes.

FAQ – CFA Level 1 Topics

Is there a break in the CFA Level 1 test between Session 1 and Session 2?

Between Session 1 and Session 2, there is an optional 30-minute break.

How much time should I devote to studying for the Level I exam?

The average successful applicant spent 303 hours preparing for the Level I test held in June 2019, according to CFA Institute.

How long must I wait after failing the CFA Level I Exam before I may retake it?

Every applicant who fails their exam will have to wait at least six months to retake it starting in 2022.

The Bottom Line

The CFA Level 1 test is well-balanced, covering a wide range of CFA level 1 topics. Some topics may demand more study time than others; nonetheless, the most important thing is to make a study plan and stick to it.

You’ll be able to determine the difficulty of topics when you create your CFA exam study schedule. You’ll have additional study time for the topics you mark as challenging. And you’ll have less time for the issues you think are simple.

We hope this post will help you prepare for your CFA Level 1 exam. Don’t forget to take our free CFA Level 1 Mock Exam to get familiarized with the format as well as the questions of the actual exam to strengthen your knowledge and skills, as a result, enhancing your chance to pass the CFA exam with a high score on your first attempt. Good luck to you!