Understanding the CFA Exam

By Indeed Editorial Team

Updated 15 June 2022 | Published 26 August 2020

Updated 15 June 2022

Published 26 August 2020

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

The Chartered Financial Analyst (CFA) Exam is a qualification that allows a financial advisor or investment professional to have the CFA designation of esteem. In the financial industry in India, it is one of the most prestigious levels a financial analyst can attain and requires much focus and attention to earn. If you choose to obtain the CFA designation, it can help advance your career and is evidence of your valued skills. In this article, we discuss what the exam entails and the methods to prepare for it.

What Is The CFA Exam?

The CFA exam measures a candidate's ability to manage finances, their knowledge of portfolio and investment management and the fundamental skills in the role of financial investment. It consists of core topics called Learning Outcome Statements (LOS). The LOS and other central concepts are derived from the Candidate Body of Knowledge developed by the CFA Institute. The three levels of the CFA exam focus on ten categories which are grouped into the following four sections:

  • Portfolio management and wealth planning

  • Investment tools

  • Asset classes

  • Professional and ethical standards

These four fundamental areas are then divided into more detailed sections and are weighted differently on the exam based on their importance in the business and economic realms. The divisions are fixed income, quantitative methods, equity investments, professional and ethical standards, corporate finance, alternative investments, economics, portfolio management, derivatives and financial reporting and analysis.

CFA Exam Structure In India

The CFA exam is administered in a series of three exams: Levels I, II and III. While each level is fundamental and crucial in showing mastery of the content and earning the CFA designation, they do also focus on individual aspects. Level I consists of fundamental knowledge and basic comprehension questions concerning investment tools. Level II necessitates on valuing assets and complex analysis. Level III is concerned with knowledge application and analytical strategies for investment portfolios, portfolio management and wealth planning.

The exams are offered annually in June with an extra opportunity for Level I in December of each year. Each level must be passed before moving on to the next. With each level, exam difficulty does increase, and it is suggested that each candidate dedicate a minimum of 300 hours of study-time per level.

Details About The CFA Exam

The range of topics covered within the three respective exams allows candidates to exhibit their range of knowledge and showcase their expertise in the content. Each of the three exams lasts for six hours, each split into two three-hour sessions. The first half is administered in the morning, and the second half is administered in the afternoon of the same day. With each session there are about 120 multiple choice questions, allowing for approximately 90 seconds per question. Questions are stand-alone and do not build upon one another, and you are not penalised for incorrect answers. Rather, you earn points for each correct response.

Topics In The CFA Exam

The CFA exam aims to be a comprehensive measure of your valued skills in a financial investment role. The guiding topics, which appear at each level in different degrees, are as follows:

  • Fixed income

  • Quantitative methods

  • Equity investments

  • Ethics and professional standards

  • Corporate finance

  • Alternative investments

  • Economics

  • Portfolio management

  • Derivatives

  • Financial reporting and analysis

Fixed income

Fixed income markets are crucial for investment professionals to understand. The fixed income section of the CFA exam will provide an opportunity for you to show how well you understand fixed income securities and their characteristics. Some of the key concepts covered in this portion include convexity and duration of yield measures. Additional topics include collateral mortgage obligations, mortgage-backed securities and other structured products. The fixed income section makes up 10% of the total exam.

Quantitative methods

For some financial professionals, the quantitative methods section is the most challenging. Because it is not as scenario-focused as the other sections, a background in statistics can be beneficial. The 28–30 questions in this section of the exam allow you to demonstrate your knowledge in analytical tools for managing portfolios and equities as well as calculating fixed incomes. Additional topics that are often covered include hypothesis testing and sampling, probability basics and statistics, linear regression and correlation analysis and the time value of money.

Equity investments

As a financial and investment professional, you need to demonstrate your knowledge in equity instruments and markets, along with the techniques and tools you use to value a company. The equity investments section of the exam includes questions about equities and makes up about 10% of the questions. To complete this section effectively you will typically be expected to analyse and value companies accurately, showing your ability to apply the necessary tools and techniques.

Ethics and professional standards

The ethics and professional standards section of the CFA exam includes the professional standards applied to investment professionals, such as the Global Investment Performance Standards (GIPS). Additionally, the questions focus on the financial code of ethics that professionals should apply when working with others' financial assets.

This 36-question section is vital to the overall score of the exam. A low score here could result in failing the exam. Studying the curriculum of the Ethics and Professional Standards section carefully can increase your odds of passing the Level I exam and help in preparing for Levels II and III.

Corporate finance

The corporate finance part of the CFA test is short and only worth 7% of the overall weight of the exam. The central topics of this section include working capital management, the cost of capital, the agency-principal relationship, leverage and capital budgeting.

Alternative investments

The alternative investments section of the exam includes venture capital, real estate, distressed securities, private equity, hedge funds, commodities and closely held companies. It includes seven or eight conceptual questions. When preparing for the exam, make sure to become more familiar with contango, backwardation and the other commodity investment concepts.

Economics

In this section of the exam, you will find questions that cover foundational macroeconomic and microeconomic topics. Macroeconomics includes the use of x and y curves and graphs to provide a visual representation of economic concepts. This portion makes up 10% of the overall exam.

Portfolio management

When you take the level one CFA examination, you will only need to cover the basics of portfolio management. The key topics include the Capital Asset Pricing Model and the Modern Portfolio Theory. Since it's a shorter section, it helps you prepare for the second and third levels of the exam. Those levels focus more heavily on applying your knowledge of portfolio management. The portfolio management section of the first-level exam has 17 questions. Conversely, the portfolio management section on Levels II and III are more comprehensive and allows you to exhibit your skills at a deeper level.

Derivatives

Derivatives are covered lightly in the first level of the CFA exam and carry a 5% overall weight. There are approximately 12 questions on Level I. The questions cover the basics of hedging techniques, options, futures, swaps and forwards through derivatives.

Financial reporting and analysis

The largest section of the finance test for CFA is the Financial Reporting and Analysis portion. It comprises approximately 20% of the total number of questions, which are weighted heavily and regarded as crucial on both the first and second-level exams. It is important to spend time preparing in this area so you can build a strong foundation. In this portion, you will be provided with and have to interpret three main financial statements: a cash flow statement, a balance sheet and an income statement.

Additionally, the questions require you to prove that you know the ratios and other advanced financial concepts, including long-term assets, revenue recognition, taxes and inventory analysis. When answering these questions, you will need to apply widely accepted account practices, such as the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP).

CFA study strategies

Studying for a challenging exam requires dedication, time and effort to be successful. Successfully completing the CFA exam can help to further your career and make you a more desirable employee by demonstrating your expertise within your field. To prepare for each of the three exams you will want to consider:

  • Dedicating at least 10-15 hours per week to study

  • Understanding your learning style and using strategies to help you retain information

  • Implementing the tools and resources available online

Creating a study routine will help minimise distractions and ensure that you feel prepared for each level.


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