CFA Program
Three-level professional credential for investment professionals.
Getting Started: Navigating the CFA Exam
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CFA Level I — key terms, tricks & tips
Everything from the course in one searchable place: 515 entries. Use it to review before a practice test or look up a word you forgot.
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Level I Exam
First exam, tests foundational investment knowledge and ethics.
Getting Started: Navigating the CFA Exam
Computer-Based Testing (CBT)
Exams administered on computers at designated test centers.
Getting Started: Navigating the CFA Exam
Multiple-Choice Questions (MCQ)
Questions with three answer options, only one is correct.
Getting Started: Navigating the CFA Exam
Item Set
A vignette followed by several multiple-choice questions (Level II/III).
Getting Started: Navigating the CFA Exam
CFA Charter
The professional designation earned upon program completion.
Getting Started: Navigating the CFA Exam
Prometric
Global network of test centers administering CFA exams.
Getting Started: Navigating the CFA Exam
CFA Program Structure & Exam Format
Levels 1-2-3: Tools, Valuation, Portfolio (TVP) – helps remember the focus of each CFA exam level.
Getting Started: Navigating the CFA Exam
CFA Program Structure & Exam Format
For Level I, remember the exact number: 180 multiple-choice questions, split into two 90-question sessions, each 2 hours and 15 minutes long. Spot keywords like 'foundational knowledge' or 'investment tools' for Level I content.
Getting Started: Navigating the CFA Exam
CFA Program Structure & Exam Format
Underestimating the total time commitment for all three levels.
Getting Started: Navigating the CFA Exam
CFA Program Structure & Exam Format
Not familiarizing oneself with the computer-based testing interface before exam day.
Getting Started: Navigating the CFA Exam
CFA Program Structure & Exam Format
Confusing the Level I standalone multiple-choice format with the item set format of Level II and III.
Getting Started: Navigating the CFA Exam
Learning Outcome Statements (LOS)
Specific knowledge and skills candidates must demonstrate.
Getting Started: Navigating the CFA Exam
Topic Weights
Percentage of exam questions allocated to each curriculum area.
Getting Started: Navigating the CFA Exam
Active Learning
Engaging with material through summarizing, questions, and notes.
Getting Started: Navigating the CFA Exam
Spaced Repetition
Reviewing material at increasing intervals for better retention.
Getting Started: Navigating the CFA Exam
Mock Exam
Full-length practice exam simulating actual test conditions.
Getting Started: Navigating the CFA Exam
Study Plan
Structured schedule outlining study activities and timelines.
Getting Started: Navigating the CFA Exam
Burnout
Physical or mental collapse caused by overwork or stress.
Getting Started: Navigating the CFA Exam
Study Strategies & Time Management for the CFA Exam
To remember key study strategies: 'PLAN, ACT, REVIEW, REPEAT!' (Plan your study, Actively learn, Review regularly, Repeat practice questions.)
Getting Started: Navigating the CFA Exam
Study Strategies & Time Management for the CFA Exam
The CFA Institute emphasizes that candidates should expect to dedicate a minimum of 300 hours of study per level. While this is a guideline, successful candidates often exceed this, especially if they are new to the material. Focus on understanding the 'why' behind concepts, not just memorizing formulas.
Getting Started: Navigating the CFA Exam
Study Strategies & Time Management for the CFA Exam
Underestimating the time commitment required for the exam.
Getting Started: Navigating the CFA Exam
Study Strategies & Time Management for the CFA Exam
Passive reading without active engagement or practice questions.
Getting Started: Navigating the CFA Exam
Study Strategies & Time Management for the CFA Exam
Neglecting weaker topics or failing to review regularly.
Getting Started: Navigating the CFA Exam
Study Strategies & Time Management for the CFA Exam
Failing to take timed mock exams before the actual test.
Getting Started: Navigating the CFA Exam
Code of Ethics
Six overarching principles for CFA members and candidates.
Ethical Foundations for Investment Professionals
Standard I(B)
Independence and Objectivity: Maintain unbiased professional judgment.
Ethical Foundations for Investment Professionals
Standard I(C)
Misrepresentation: Do not knowingly make false statements.
Ethical Foundations for Investment Professionals
Standard II(A)
Material Nonpublic Information: Do not trade on insider information.
Ethical Foundations for Investment Professionals
Standard III(A)
Loyalty, Prudence, and Care: Act in clients' best interests.
Ethical Foundations for Investment Professionals
Standard III(B)
Fair Dealing: Treat all clients equitably and objectively.
Ethical Foundations for Investment Professionals
Standard III(C)
Suitability: Recommend appropriate investments for clients.
Ethical Foundations for Investment Professionals
Code of Ethics & Standards of Professional Conduct I-III
For the Code of Ethics, remember 'I Can Do My Part Right.' (Integrity, Client interests, Diligence, Markets, Professionalism, Respect).
Ethical Foundations for Investment Professionals
Code of Ethics & Standards of Professional Conduct I-III
Memorize the six components of the Code of Ethics and the specific sub-standards for I, II, and III. Pay close attention to the nuances between 'knowledge of the law' and 'independence and objectivity,' and 'misrepresentation' versus 'market manipulation.' The exam often tests your ability to distinguish between these closely related concepts.
Ethical Foundations for Investment Professionals
Code of Ethics & Standards of Professional Conduct I-III
Confusing the Code of Ethics (broad principles) with the Standards of Professional Conduct (specific rules).
Ethical Foundations for Investment Professionals
Code of Ethics & Standards of Professional Conduct I-III
Failing to apply the 'stricter standard' rule when laws and the Code/Standards conflict.
Ethical Foundations for Investment Professionals
Code of Ethics & Standards of Professional Conduct I-III
Underestimating the importance of documenting actions and decisions, especially when potential conflicts arise.
Ethical Foundations for Investment Professionals
Loyalty to Employer
Act for the benefit of the employer; protect confidential information.
Ethical Foundations for Investment Professionals
Additional Compensation
Must disclose and get employer consent for outside work.
Ethical Foundations for Investment Professionals
Diligence and Reasonable Basis
Investment analysis must be thorough and well-supported.
Ethical Foundations for Investment Professionals
Fair Dealing
Treat all clients fairly in recommendations and actions.
Ethical Foundations for Investment Professionals
Conflicts of Interest
Disclose any situation that might impair objectivity.
Ethical Foundations for Investment Professionals
Priority of Transactions
Client and employer trades come before personal trades.
Ethical Foundations for Investment Professionals
Referral Fees
Must disclose any compensation for client referrals.
Ethical Foundations for Investment Professionals
Proper Use of Designation
Adhere to rules for using CFA designation and candidacy.
Ethical Foundations for Investment Professionals
Standards of Professional Conduct IV-VII
To remember the key duties: 'E-A-C-D' – Employers, Analysis, Conflicts, Designation. Each letter reminds you of a major standard.
Ethical Foundations for Investment Professionals
Standards of Professional Conduct IV-VII
For Standard IV(A) Loyalty, remember that client records are the property of the firm. Taking client lists or proprietary information when leaving a firm is a violation. For Standard VI(B) Priority of Transactions, 'personal transactions' include those for family members or accounts where the member has beneficial ownership.
Ethical Foundations for Investment Professionals
Standards of Professional Conduct IV-VII
Failing to disclose all forms of compensation, including referral fees, to clients and employers.
Ethical Foundations for Investment Professionals
Standards of Professional Conduct IV-VII
Placing personal trades before client trades, even if the intent was not malicious.
Ethical Foundations for Investment Professionals
Standards of Professional Conduct IV-VII
Misrepresenting CFA candidacy or membership status, or using the designation improperly.
Ethical Foundations for Investment Professionals
Standards of Professional Conduct IV-VII
Taking client lists or proprietary firm information when changing jobs without explicit permission.
Ethical Foundations for Investment Professionals
Guidance for Standards
Interpretations and explanations for applying CFA Standards.
Ethical Foundations for Investment Professionals
Recommended Procedures
Specific actions to ensure compliance with a Standard.
Ethical Foundations for Investment Professionals
Application of the Standard
Illustrative examples showing how a Standard applies.
Ethical Foundations for Investment Professionals
Stricter Rule
Adhering to the more stringent of laws/regulations or CFA Standards.
Ethical Foundations for Investment Professionals
Ethical Dilemma
A situation requiring a choice between conflicting ethical principles.
Ethical Foundations for Investment Professionals
Principles-based
Ethical rules based on broad principles, not exhaustive lists.
Ethical Foundations for Investment Professionals
Applying the Standards: Practical Guidance
To remember the components of a Standard, think 'SP-GAR': Standard, Purpose, Guidance, Application, Recommended Procedures.
Ethical Foundations for Investment Professionals
Applying the Standards: Practical Guidance
Exam Tip: The exam often tests your ability to apply the Standards in specific scenarios. Look for keywords like 'should,' 'must,' 'may,' and 'not permitted' in the Guidance. Pay close attention to the 'Recommended Procedures' as they often form the basis of correct actions in multiple-choice questions.
Ethical Foundations for Investment Professionals
Applying the Standards: Practical Guidance
Ignoring the 'Guidance' sections and only reading the main Standards, leading to misinterpretations.
Ethical Foundations for Investment Professionals
Applying the Standards: Practical Guidance
Assuming legal compliance automatically means ethical compliance; the CFA Standards can be stricter.
Ethical Foundations for Investment Professionals
Applying the Standards: Practical Guidance
Failing to document ethical decision-making processes, which can be crucial for justification.
Ethical Foundations for Investment Professionals
GIPS
Global Investment Performance Standards for ethical performance reporting.
Ethical Foundations for Investment Professionals
Composite
An aggregation of portfolios with similar investment strategies.
Ethical Foundations for Investment Professionals
Discretionary Portfolio
A portfolio where the manager makes investment decisions.
Ethical Foundations for Investment Professionals
Verification
Independent third-party review of a firm's GIPS compliance.
Ethical Foundations for Investment Professionals
Fair Representation
Presenting performance without misleading or cherry-picking data.
Ethical Foundations for Investment Professionals
Full Disclosure
Providing all relevant information about performance and methods.
Ethical Foundations for Investment Professionals
Firm
A distinct business entity holding itself out as an investment manager.
Ethical Foundations for Investment Professionals
Global Investment Performance Standards (GIPS)
GIPS: Global Integrity, Performance Standards. Think of 'Integrity' as the core purpose – preventing misrepresentation and ensuring trust.
Ethical Foundations for Investment Professionals
Global Investment Performance Standards (GIPS)
Memorize that GIPS compliance is voluntary but, if claimed, must be firm-wide and complete. Partial compliance is not allowed. Also, remember the minimum 5-year (then 10-year) performance history requirement.
Ethical Foundations for Investment Professionals
Global Investment Performance Standards (GIPS)
Claiming partial GIPS compliance (e.g., 'GIPS compliant for our equity composite'). GIPS is all or nothing.
Ethical Foundations for Investment Professionals
Global Investment Performance Standards (GIPS)
Presenting only the best-performing portfolios in marketing materials without including them in a GIPS-compliant composite.
Ethical Foundations for Investment Professionals
Global Investment Performance Standards (GIPS)
Confusing GIPS compliance with legal or regulatory requirements; it's a voluntary ethical standard.
Ethical Foundations for Investment Professionals
Time Value of Money (TVM)
Money today is worth more than same amount in future.
Quantitative Tools for Financial Analysis
Future Value (FV)
Value of an asset at a future date.
Quantitative Tools for Financial Analysis
Present Value (PV)
Current value of a future sum of money.
Quantitative Tools for Financial Analysis
Compounding
Earning interest on interest.
Quantitative Tools for Financial Analysis
Discounting
Calculating present value of future cash flows.
Quantitative Tools for Financial Analysis
Annuity
Series of equal payments over specified periods.
Quantitative Tools for Financial Analysis
Perpetuity
Annuity that continues indefinitely.
Quantitative Tools for Financial Analysis
Effective Annual Rate (EAR)
Actual annual rate after accounting for compounding.
Quantitative Tools for Financial Analysis
Time Value of Money & Discounted Cash Flow
Remember 'I/Y' and 'N' on your financial calculator must match the compounding period. If it's monthly, divide the annual rate by 12 for I/Y and multiply years by 12 for N.
Quantitative Tools for Financial Analysis
Time Value of Money & Discounted Cash Flow
The exam frequently tests your ability to adjust interest rates and number of periods for different compounding frequencies. Always ensure 'r' and 'n' are consistent with the compounding period (e.g., if monthly compounding, use monthly rate and monthly periods).
Quantitative Tools for Financial Analysis
Time Value of Money & Discounted Cash Flow
Not adjusting the interest rate (r) and number of periods (n) to match the compounding frequency.
Quantitative Tools for Financial Analysis
Time Value of Money & Discounted Cash Flow
Confusing ordinary annuities with annuities due (payments at end vs. beginning of period).
Quantitative Tools for Financial Analysis
Time Value of Money & Discounted Cash Flow
Incorrectly using stated annual rate instead of EAR for comparisons with different compounding frequencies.
Quantitative Tools for Financial Analysis
Mean
The arithmetic average of a dataset.
Quantitative Tools for Financial Analysis
Median
The middle value in an ordered dataset.
Quantitative Tools for Financial Analysis
Mode
The most frequently occurring value in a dataset.
Quantitative Tools for Financial Analysis
Variance
Average squared deviation from the mean.
Quantitative Tools for Financial Analysis
Standard Deviation
Square root of variance; measure of dispersion.
Quantitative Tools for Financial Analysis
Probability Distribution
Describes all possible outcomes and their probabilities.
Quantitative Tools for Financial Analysis
Skewness
Measure of the asymmetry of a distribution.
Quantitative Tools for Financial Analysis
Kurtosis
Measure of the 'tailedness' of a distribution.
Quantitative Tools for Financial Analysis
Statistical Concepts & Probability Distributions
My Mom Smells Very Sweet Daily: Mean, Median, Mode, Skewness, Variance, Standard Deviation.
Quantitative Tools for Financial Analysis
Statistical Concepts & Probability Distributions
For the CFA exam, remember that standard deviation is the most common measure of total risk for an asset or portfolio. Understand how outliers affect the mean, median, and mode, and be able to interpret skewness and kurtosis in terms of risk.
Quantitative Tools for Financial Analysis
Statistical Concepts & Probability Distributions
Confusing variance with standard deviation; remember standard deviation is the square root of variance and is in the original units.
Quantitative Tools for Financial Analysis
Statistical Concepts & Probability Distributions
Incorrectly interpreting skewness: positive skew means a longer tail to the right (more high values), not necessarily more positive values overall.
Quantitative Tools for Financial Analysis
Statistical Concepts & Probability Distributions
Assuming all financial data is normally distributed; many financial series exhibit skewness and kurtosis, making normal distribution assumptions inappropriate.
Quantitative Tools for Financial Analysis
Population
The entire group of interest for a study.
Quantitative Tools for Financial Analysis
Sample
A subset of the population selected for analysis.
Quantitative Tools for Financial Analysis
Null Hypothesis (H₀)
A statement of no effect or no difference.
Quantitative Tools for Financial Analysis
Alternative Hypothesis (H₁)
The claim we are trying to find evidence for.
Quantitative Tools for Financial Analysis
P-value
Probability of observing data given the null hypothesis is true.
Quantitative Tools for Financial Analysis
Significance Level (α)
Threshold for rejecting the null hypothesis, e.g., 0.05.
Quantitative Tools for Financial Analysis
Confidence Interval
A range likely to contain the true population parameter.
Quantitative Tools for Financial Analysis
Stratified Random Sampling
Sampling by dividing population into subgroups and sampling from each.
Quantitative Tools for Financial Analysis
Hypothesis Testing & Sampling Fundamentals
P-value is 'P'robability of 'P'roving 'P'ure 'P'ure (H₀) wrong. If P is low, H₀ must go!
Quantitative Tools for Financial Analysis
Hypothesis Testing & Sampling Fundamentals
For the exam, precisely understand that rejecting the null hypothesis means there is *sufficient statistical evidence* to support the alternative hypothesis, not that the alternative hypothesis is proven true. Failing to reject the null means there is *insufficient evidence* to support the alternative, not that the null is proven true. Pay close attention to the wording of conclusions.
Quantitative Tools for Financial Analysis
Hypothesis Testing & Sampling Fundamentals
Confusing failing to reject the null hypothesis with accepting the null hypothesis. Lack of evidence against H₀ is not evidence for H₀.
Quantitative Tools for Financial Analysis
Hypothesis Testing & Sampling Fundamentals
Interpreting a p-value as the probability that the null hypothesis is true. It's the probability of the data, given H₀ is true.
Quantitative Tools for Financial Analysis
Hypothesis Testing & Sampling Fundamentals
Using inappropriate sampling methods, leading to biased results and invalid conclusions about the population.
Quantitative Tools for Financial Analysis
Correlation Coefficient (r)
Measures strength and direction of linear relationship.
Quantitative Tools for Financial Analysis
Coefficient of Determination (R²)
Proportion of dependent variable variance explained by independent variable(s).
Quantitative Tools for Financial Analysis
Simple Linear Regression
Models linear relationship between one dependent and one independent variable.
Quantitative Tools for Financial Analysis
Dependent Variable (Y)
Variable being explained or predicted.
Quantitative Tools for Financial Analysis
Independent Variable (X)
Variable used to explain or predict the dependent variable.
Quantitative Tools for Financial Analysis
Y-intercept (b₀)
Expected value of Y when X is zero.
Quantitative Tools for Financial Analysis
Slope Coefficient (b₁)
Expected change in Y for a one-unit change in X.
Quantitative Tools for Financial Analysis
Error Term (ε)
Portion of Y not explained by the independent variable.
Quantitative Tools for Financial Analysis
Correlation & Introduction to Regression
R-squared is 'R'eliability 'S'quare: it tells you how 'R'eliable your model is at 'S'quaring up the variance.
Quantitative Tools for Financial Analysis
Correlation & Introduction to Regression
For the exam, remember that correlation measures LINEAR relationships only. A zero correlation does not mean no relationship, just no linear relationship. Also, correlation does not imply causation.
Quantitative Tools for Financial Analysis
Correlation & Introduction to Regression
Confusing correlation with causation. Just because two variables move together doesn't mean one causes the other.
Quantitative Tools for Financial Analysis
Correlation & Introduction to Regression
Interpreting R-squared as a percentage of accuracy. It's a percentage of variance explained, not predictive accuracy.
Quantitative Tools for Financial Analysis
Correlation & Introduction to Regression
Extrapolating regression results far beyond the range of the observed data, which can lead to inaccurate predictions.
Quantitative Tools for Financial Analysis
Demand
Quantity consumers are willing and able to buy at various prices.
Understanding Economic Principles
Supply
Quantity producers are willing and able to sell at various prices.
Understanding Economic Principles
Equilibrium
Price where quantity demanded equals quantity supplied.
Understanding Economic Principles
Surplus
Quantity supplied exceeds quantity demanded; price above equilibrium.
Understanding Economic Principles
Shortage
Quantity demanded exceeds quantity supplied; price below equilibrium.
Understanding Economic Principles
Substitute Goods
Goods used in place of another; price of one affects demand for other.
Understanding Economic Principles
Complement Goods
Goods consumed together; price of one affects demand for other.
Understanding Economic Principles
Market Structure
Characteristics influencing firm behavior (e.g., competition, number of sellers).
Understanding Economic Principles
Demand, Supply, & Market Structures
P.I.N.T.E.S. for Demand Shifters: Population, Income, Tastes, Expectations, Substitutes, Complements.
Understanding Economic Principles
Demand, Supply, & Market Structures
The exam often tests your ability to identify whether a given event causes a 'movement along' a curve (change in quantity) or a 'shift' of the entire curve (change in demand/supply). Pay close attention to the wording: 'change in price' vs. 'change in income/technology'.
Understanding Economic Principles
Demand, Supply, & Market Structures
Confusing a change in quantity demanded/supplied (movement along the curve) with a change in demand/supply (shift of the entire curve).
Understanding Economic Principles
Demand, Supply, & Market Structures
Incorrectly identifying whether a factor shifts the curve left or right.
Understanding Economic Principles
Demand, Supply, & Market Structures
Assuming that a shift in one curve automatically implies a shift in the other, rather than a movement along it.
Understanding Economic Principles
GDP
Market value of all final goods/services produced within a country.
Understanding Economic Principles
GNI
GDP plus net primary income from abroad.
Understanding Economic Principles
Business Cycle
Fluctuations in economic activity over time.
Understanding Economic Principles
Inflation
Sustained increase in general price level.
Understanding Economic Principles
Deflation
Sustained decrease in general price level.
Understanding Economic Principles
CPI
Measures consumer price changes for a basket of goods.
Understanding Economic Principles
Unemployment Rate
Unemployed divided by total labor force.
Understanding Economic Principles
Frictional Unemployment
Temporary unemployment due to job search.
Understanding Economic Principles
Aggregate Output, Business Cycles, & Inflation
To remember the GDP expenditure components, think 'Cows In Green Pastures' (Consumption, Investment, Government spending, Net exports).
Understanding Economic Principles
Aggregate Output, Business Cycles, & Inflation
When calculating GDP using the expenditure approach, remember that 'Investment' (I) includes business fixed investment, residential investment, and changes in inventories. It does NOT include financial investments like stocks or bonds.
Understanding Economic Principles
Aggregate Output, Business Cycles, & Inflation
Confusing nominal GDP with real GDP (nominal uses current prices, real uses constant base-year prices to adjust for inflation).
Understanding Economic Principles
Aggregate Output, Business Cycles, & Inflation
Misinterpreting a rise in the unemployment rate without understanding its underlying causes (e.g., distinguishing cyclical from frictional unemployment).
Understanding Economic Principles
Aggregate Output, Business Cycles, & Inflation
Forgetting that GNI includes net primary income from abroad, while GDP focuses purely on domestic production.
Understanding Economic Principles
Monetary Policy
Central bank actions to influence money and credit.
Understanding Economic Principles
Fiscal Policy
Government use of spending and taxation.
Understanding Economic Principles
Policy Rate
Interest rate set by central bank for lending.
Understanding Economic Principles
Quantitative Easing
Central bank buys assets to increase money supply.
Understanding Economic Principles
Money Multiplier
Ratio of change in money supply to monetary base.
Understanding Economic Principles
Reserve Requirement
Fraction of deposits banks must hold.
Understanding Economic Principles
Crowding Out
Increased government borrowing reduces private investment.
Understanding Economic Principles
Monetary & Fiscal Policy
Think 'M' for Monetary = Money supply & Central Bank. Think 'F' for Fiscal = Funding (government spending) & Taxes.
Understanding Economic Principles
Monetary & Fiscal Policy
The exam often asks you to differentiate between the tools and objectives of monetary vs. fiscal policy. Remember that central banks handle monetary policy (e.g., interest rates, reserve requirements), while governments handle fiscal policy (e.g., taxes, government spending). Keywords like 'central bank' or 'government budget' are crucial clues.
Understanding Economic Principles
Monetary & Fiscal Policy
Confusing the roles of the central bank (monetary policy) and the government (fiscal policy).
Understanding Economic Principles
Monetary & Fiscal Policy
Incorrectly identifying the impact of expansionary vs. contractionary policies.
Understanding Economic Principles
Monetary & Fiscal Policy
Forgetting that the money multiplier is 1 divided by the reserve requirement, not just the reserve requirement itself.
Understanding Economic Principles
Comparative Advantage
Ability to produce a good at a lower opportunity cost.
Understanding Economic Principles
Exchange Rate
Price of one currency in terms of another.
Understanding Economic Principles
Appreciation
A currency's value increases relative to another currency.
Understanding Economic Principles
Depreciation
A currency's value decreases relative to another currency.
Understanding Economic Principles
Tariff
A tax imposed on imported goods or services.
Understanding Economic Principles
Quota
A quantitative limit on the amount of a good imported.
Understanding Economic Principles
Direct Quote
Price of foreign currency in domestic currency.
Understanding Economic Principles
Indirect Quote
Price of domestic currency in foreign currency.
Understanding Economic Principles
International Trade & Exchange Rates
T.I.G.E.R.S. for Exchange Rate Determinants: Trade Balance, Interest Rates, Government Intervention, Economic Growth, Relative Inflation, Speculation.
Understanding Economic Principles
International Trade & Exchange Rates
The exam often tests your ability to interpret direct vs. indirect quotes from different perspectives (e.g., 'for a US resident'). Pay close attention to the base and quoted currencies.
Understanding Economic Principles
International Trade & Exchange Rates
Confusing direct and indirect exchange rate quotes, especially when the perspective (e.g., 'for a US investor') changes.
Understanding Economic Principles
International Trade & Exchange Rates
Incorrectly calculating percentage changes in exchange rates, forgetting to use the base currency as the denominator.
Understanding Economic Principles
International Trade & Exchange Rates
Assuming that a trade surplus always leads to currency appreciation without considering other factors like capital flows.
Understanding Economic Principles
Income Statement
Reports financial performance over a period.
Analyzing Financial Statements
Balance Sheet
Presents financial position at a specific point in time.
Analyzing Financial Statements
Net Income
Revenues minus all expenses; the 'bottom line'.
Analyzing Financial Statements
Assets
What a company owns, expected to provide future benefit.
Analyzing Financial Statements
Liabilities
What a company owes to external parties.
Analyzing Financial Statements
Equity
Owners' residual claim on assets after liabilities.
Analyzing Financial Statements
Retained Earnings
Cumulative net income less dividends, part of equity.
Analyzing Financial Statements
Income Statement & Balance Sheet Fundamentals
IBS: Income Statement (period), Balance Sheet (snapshot). Remember 'I' for 'Interval' and 'B' for 'Beginning/End' (a point).
Analyzing Financial Statements
Income Statement & Balance Sheet Fundamentals
The CFA exam often tests the interrelationship between the financial statements. Specifically, know that Net Income from the Income Statement, less any dividends, flows into Retained Earnings on the Balance Sheet. This is a critical link to memorize.
Analyzing Financial Statements
Income Statement & Balance Sheet Fundamentals
Confusing the time period: Income Statement is for a period (e.g., year), Balance Sheet is at a point in time (e.g., Dec 31).
Analyzing Financial Statements
Income Statement & Balance Sheet Fundamentals
Forgetting the accounting equation: Assets = Liabilities + Equity must always balance.
Analyzing Financial Statements
Income Statement & Balance Sheet Fundamentals
Not understanding the link: Net income impacts retained earnings, which is on the balance sheet.
Analyzing Financial Statements
Operating Activities
Cash flows from primary revenue-generating activities.
Analyzing Financial Statements
Investing Activities
Cash flows from buying/selling long-term assets and investments.
Analyzing Financial Statements
Financing Activities
Cash flows from debt and equity transactions with owners/creditors.
Analyzing Financial Statements
Direct Method
Presents gross cash receipts and payments for operations.
Analyzing Financial Statements
Indirect Method
Adjusts net income for non-cash items and working capital.
Analyzing Financial Statements
Inventory Increase
Represents a cash outflow; subtracted from net income.
Analyzing Financial Statements
Inventory Decrease
Represents a cash inflow; added to net income.
Analyzing Financial Statements
Cash Flow Statement & Inventories
O-I-F: Operating, Investing, Financing. Remember the order of the sections on the cash flow statement by thinking 'Operators Invest in Finance'.
Analyzing Financial Statements
Cash Flow Statement & Inventories
The exam frequently tests your ability to distinguish between the direct and indirect methods for operating cash flows, and how changes in working capital accounts (like inventory, accounts receivable, and accounts payable) affect cash flow from operations under the indirect method. Remember that an increase in an asset account (like inventory) is a cash outflow, and an increase in a liability account (like accounts payable) is a cash inflow.
Analyzing Financial Statements
Cash Flow Statement & Inventories
Confusing non-cash expenses (like depreciation) with actual cash outflows.
Analyzing Financial Statements
Cash Flow Statement & Inventories
Incorrectly applying the impact of changes in current assets and liabilities (e.g., adding an increase in inventory instead of subtracting it).
Analyzing Financial Statements
Cash Flow Statement & Inventories
Mixing up investing and financing activities, especially when dealing with debt or equity transactions.
Analyzing Financial Statements
Long-Lived Assets
Assets used for more than one year.
Analyzing Financial Statements
Amortization
Allocating intangible asset cost over its useful life.
Analyzing Financial Statements
Depletion
Allocating natural resource cost over its extraction.
Analyzing Financial Statements
Right-of-Use (ROU) Asset
Lessee's right to use an asset for a lease term.
Analyzing Financial Statements
Lease Liability
Lessee's obligation to make lease payments.
Analyzing Financial Statements
Finance Lease (IFRS)
Most leases under IFRS 16, on balance sheet.
Analyzing Financial Statements
Operating Lease (ASC 842)
Lease not transferring ownership risks, on balance sheet.
Analyzing Financial Statements
Long-Lived Assets & Leases
To remember the three 'D's of asset cost allocation: **D**epreciation for tangibles, **D**epletion for natural resources, **D**on't forget Amortization for intangibles!
Analyzing Financial Statements
Long-Lived Assets & Leases
For the exam, be precise about the differences between IFRS 16 and ASC 842 for lessees. Remember that IFRS 16 effectively eliminates operating leases for lessees (except for short-term/low-value exemptions), while ASC 842 retains both finance and operating lease classifications, though both are now on-balance-sheet.
Analyzing Financial Statements
Long-Lived Assets & Leases
Confusing depreciation with amortization or depletion. Each applies to a specific type of long-lived asset.
Analyzing Financial Statements
Long-Lived Assets & Leases
Forgetting that land is not depreciated because it's considered to have an indefinite useful life.
Analyzing Financial Statements
Long-Lived Assets & Leases
Not understanding the balance sheet and income statement impacts of the new lease accounting standards (IFRS 16/ASC 842), especially the recognition of ROU assets and lease liabilities.
Analyzing Financial Statements
Current Ratio
Measures short-term liquidity: Current Assets / Current Liabilities.
Analyzing Financial Statements
Debt-to-Equity Ratio
Measures financial leverage: Total Debt / Shareholder's Equity.
Analyzing Financial Statements
Net Profit Margin
Measures profitability: Net Income / Revenue.
Analyzing Financial Statements
Inventory Turnover
Measures efficiency: Cost of Goods Sold / Average Inventory.
Analyzing Financial Statements
Return on Equity (ROE)
Measures shareholder return: Net Income / Average Shareholder's Equity.
Analyzing Financial Statements
Liquidity Ratios
Assess ability to meet short-term obligations.
Analyzing Financial Statements
Solvency Ratios
Assess ability to meet long-term obligations.
Analyzing Financial Statements
Financial Ratios & Analysis Techniques
Remember 'P-L-S-E-V' for the main ratio categories: Profitability, Liquidity, Solvency, Efficiency, Valuation. Picture a 'PLuS EV' (electric vehicle) driving financial insights!
Analyzing Financial Statements
Financial Ratios & Analysis Techniques
The exam often tests your ability to identify the correct numerator and denominator for a given ratio, and to interpret the implications of a ratio's value. Pay close attention to whether a ratio uses average balances (e.g., for assets or equity) or end-of-period balances.
Analyzing Financial Statements
Financial Ratios & Analysis Techniques
Comparing ratios of companies in different industries without adjusting for industry norms.
Analyzing Financial Statements
Financial Ratios & Analysis Techniques
Using a single ratio in isolation to make a definitive judgment about a company's health.
Analyzing Financial Statements
Financial Ratios & Analysis Techniques
Failing to understand the impact of different accounting methods on ratio comparability.
Analyzing Financial Statements
Corporate Governance
System of rules, practices, and processes for company direction.
Corporate Finance & Governance
Stakeholders
All parties affected by a company's actions.
Corporate Finance & Governance
ESG
Environmental, Social, and Governance factors in analysis.
Corporate Finance & Governance
Board of Directors
Group overseeing management and setting strategy.
Corporate Finance & Governance
Independent Director
Board member with no material relationship to company.
Corporate Finance & Governance
Shareholder Primacy
Focus on maximizing shareholder wealth.
Corporate Finance & Governance
Stakeholder Theory
Company creates value for all affected parties.
Corporate Finance & Governance
Proxy Voting
Shareholders vote without attending meetings.
Corporate Finance & Governance
Corporate Governance & ESG Essentials
To remember ESG: Every Shareholder Gains when Environmental, Social, and Governance factors are considered.
Corporate Finance & Governance
Corporate Governance & ESG Essentials
The CFA exam often tests your ability to identify corporate governance best practices versus weaknesses. Keywords like 'independent directors,' 'separation of CEO and Chairman roles,' and 'transparent reporting' indicate strong governance. Conversely, 'insider-dominated board,' 'lack of audit committee,' or 'related-party transactions' suggest weaknesses.
Corporate Finance & Governance
Corporate Governance & ESG Essentials
Confusing corporate governance with day-to-day management. Governance is oversight; management is execution.
Corporate Finance & Governance
Corporate Governance & ESG Essentials
Underestimating the financial impact of poor ESG practices. Reputational damage, fines, and operational disruptions can be very costly.
Corporate Finance & Governance
Corporate Governance & ESG Essentials
Assuming all stakeholders have identical interests. Governance often involves balancing competing interests.
Corporate Finance & Governance
Capital Structure
Mix of debt and equity financing.
Corporate Finance & Governance
Leverage
Use of fixed costs to magnify returns.
Corporate Finance & Governance
Operating Leverage
Fixed operating costs magnifying EBIT changes.
Corporate Finance & Governance
Financial Leverage
Fixed financing costs magnifying EPS changes.
Corporate Finance & Governance
Degree of Operating Leverage (DOL)
Sensitivity of EBIT to sales changes.
Corporate Finance & Governance
Degree of Financial Leverage (DFL)
Sensitivity of EPS to EBIT changes.
Corporate Finance & Governance
Degree of Total Leverage (DTL)
Sensitivity of EPS to sales changes.
Corporate Finance & Governance
Trade-Off Theory
Balances debt benefits vs. costs.
Corporate Finance & Governance
Pecking Order Theory
Prefers internal funds, then debt, then equity.
Corporate Finance & Governance
Capital Structure & Leverage
DOL-FIN-TOT: Operating, Financial, Total. Remember the order: Sales -> EBIT (Operating) -> EPS (Financial). Total is the product of the first two.
Corporate Finance & Governance
Capital Structure & Leverage
Memorize the formulas for DOL, DFL, and DTL. The exam often tests your ability to calculate these given financial statement data and interpret their meaning. Pay attention to whether the question asks for percentage changes or the direct formula.
Corporate Finance & Governance
Capital Structure & Leverage
Confusing operating leverage with financial leverage; remember operating affects EBIT, financial affects EPS.
Corporate Finance & Governance
Capital Structure & Leverage
Forgetting that leverage magnifies both positive and negative outcomes, increasing risk.
Corporate Finance & Governance
Capital Structure & Leverage
Not understanding that the 'optimal' capital structure is a balance, not just maximum debt.
Corporate Finance & Governance
Working Capital
Current assets minus current liabilities.
Corporate Finance & Governance
Quick Ratio
Current assets minus inventory, divided by current liabilities.
Corporate Finance & Governance
Cash Conversion Cycle (CCC)
Time to convert inventory and receivables into cash, less payables.
Corporate Finance & Governance
Days of Inventory Outstanding (DIO)
Average number of days inventory is held.
Corporate Finance & Governance
Days of Sales Outstanding (DSO)
Average number of days to collect receivables.
Corporate Finance & Governance
Days of Payables Outstanding (DPO)
Average number of days to pay suppliers.
Corporate Finance & Governance
Managing Working Capital
CCC: 'Cash Comes Quickly' when you manage your 'Currents' (assets and liabilities) well!
Corporate Finance & Governance
Managing Working Capital
For the exam, remember that a shorter Cash Conversion Cycle (CCC) generally indicates better working capital management and improved liquidity. Be prepared to calculate CCC and its components.
Corporate Finance & Governance
Managing Working Capital
Ignoring the impact of working capital on profitability and long-term growth.
Corporate Finance & Governance
Managing Working Capital
Focusing only on current assets or current liabilities in isolation, rather than their relationship.
Corporate Finance & Governance
Managing Working Capital
Failing to consider industry benchmarks when evaluating working capital ratios.
Corporate Finance & Governance
WACC
Weighted Average Cost of Capital; average cost of financing assets.
Corporate Finance & Governance
Cost of Equity
Return required by equity investors; often estimated by CAPM.
Corporate Finance & Governance
Cost of Debt
After-tax interest rate a company pays on its debt.
Corporate Finance & Governance
Capital Budgeting
Process of evaluating and selecting long-term investments.
Corporate Finance & Governance
Net Present Value (NPV)
Present value of cash inflows minus initial investment.
Corporate Finance & Governance
Internal Rate of Return (IRR)
Discount rate that makes the NPV of a project zero.
Corporate Finance & Governance
Tax Shield
Reduction in taxable income due to tax-deductible expenses.
Corporate Finance & Governance
Cost of Capital & Investment Decisions
WACC: 'W'e 'A'lways 'C'onsider 'C'apital. Think of it as the 'ticket price' for a company to get money.
Corporate Finance & Governance
Cost of Capital & Investment Decisions
When calculating WACC, always remember to use the after-tax cost of debt. The exam often provides a pre-tax cost of debt and a tax rate, requiring you to apply the (1-t) factor.
Corporate Finance & Governance
Cost of Capital & Investment Decisions
Forgetting to use the AFTER-TAX cost of debt in WACC calculations.
Corporate Finance & Governance
Cost of Capital & Investment Decisions
Incorrectly applying the discount rate (WACC) in NPV calculations.
Corporate Finance & Governance
Cost of Capital & Investment Decisions
Confusing project acceptance rules for NPV (positive) vs. IRR (greater than WACC).
Corporate Finance & Governance
Primary Market
Where new securities are issued for the first time.
Equity Market & Valuation
Secondary Market
Where existing securities are traded among investors.
Equity Market & Valuation
Broker
Executes trades for clients, earning commissions.
Equity Market & Valuation
Dealer
Trades for own account, providing market liquidity.
Equity Market & Valuation
Price-Weighted Index
Weights components by their share price.
Equity Market & Valuation
Value-Weighted Index
Weights components by their market capitalization.
Equity Market & Valuation
Equally-Weighted Index
Each component has the same percentage weight.
Equity Market & Valuation
Equity Market Organization & Indexes
P-V-E: Prices are for 'Price-weighted', Values for 'Value-weighted', and Every stock is 'Equally-weighted'.
Equity Market & Valuation
Equity Market Organization & Indexes
Memorize the key characteristics and calculation methods for price-weighted, value-weighted, and equally-weighted indexes. Pay close attention to how stock splits and dividends affect each type, especially the divisor adjustment for price-weighted indexes.
Equity Market & Valuation
Equity Market Organization & Indexes
Confusing the roles of brokers (agents) and dealers (principals).
Equity Market & Valuation
Equity Market Organization & Indexes
Forgetting to adjust the divisor for stock splits in a price-weighted index.
Equity Market & Valuation
Equity Market Organization & Indexes
Assuming all indexes are calculated the same way; ignoring weighting methodologies.
Equity Market & Valuation
Efficient Market Hypothesis
Asset prices fully reflect all available information.
Equity Market & Valuation
Weak-Form Efficiency
Prices reflect all past market data.
Equity Market & Valuation
Semi-Strong Form Efficiency
Prices reflect all public information.
Equity Market & Valuation
Strong-Form Efficiency
Prices reflect all public and private information.
Equity Market & Valuation
Market Anomalies
Empirical findings contradicting EMH, suggesting predictable returns.
Equity Market & Valuation
Behavioral Finance
Psychology and economics explaining irrational financial decisions.
Equity Market & Valuation
Overconfidence Bias
Overestimating one's abilities or information precision.
Equity Market & Valuation
Loss Aversion
Preferring to avoid losses over acquiring equivalent gains.
Equity Market & Valuation
Market Efficiency & Behavioral Finance
W-S-S: Weak-form only defeats past (Technical); Semi-strong defeats past AND public (Fundamental); Strong-form defeats ALL (Insider).
Equity Market & Valuation
Market Efficiency & Behavioral Finance
For the exam, precisely remember the information types for each EMH form: Weak (past prices/volume), Semi-Strong (all public info), Strong (all public and private info). Also, know which analysis types (technical, fundamental, insider) are defeated by each form.
Equity Market & Valuation
Market Efficiency & Behavioral Finance
Confusing the information types for each form of market efficiency (e.g., thinking semi-strong includes private information).
Equity Market & Valuation
Market Efficiency & Behavioral Finance
Assuming that market anomalies prove markets are completely inefficient; anomalies are often temporary or difficult to exploit.
Equity Market & Valuation
Market Efficiency & Behavioral Finance
Believing that behavioral biases only affect 'other' investors, not oneself, leading to poor decision-making.
Equity Market & Valuation