CFA Level 1 Notes and Summary: A Guide to Mastering the 10 Key Topics
Welcome, ambitious CFA candidates! You’ve taken the first step towards becoming a CFA charterholder, and we’re here to guide you through the CFA Level 1 exam. Our detailed CFA Level 1 notes and summary will help you understand and dominate each topic.
Before we jump in, watch this video that offers our guidance on the optimal sequence of study and exam strategy:
1. Quantitative Methods (6-9% of the exam)
Let’s dig deep into the captivating world of Quantitative Methods, exploring a range of topics from the Time Value of Money to Linear Regression. These subjects cover essential concepts in finance and data analysis, providing you with a comprehensive understanding of how to interpret and utilise financial data effectively.
- Rates and Returns (TVM)
Gain a thorough understanding of Time Value of Money, including the intricacies of interest rates, future value and present value of cash flows, annuities, and the importance of compounding scenarios.
- The Time Value of Money in Finance
Dive into the world of finance with a clear understanding of how the time value of money (TVM) influences investments in fixed income and equity instruments.
- Statistical Measures of Asset Returns
Delve into the essentials of data analysis, mastering the art of data organisation, visualisation, and interpretation. This section includes essential tools such as measures of central tendency, dispersion, skewness, and correlation.
- Probability Trees and Conditional Expectations
Embark on an exciting journey through the world of probability, covering important topics like definitions, rules, expected values, variance, portfolio return and variance, Bayes’ formula, and counting principles.
- Portfolio Mathematics
Step into the intriguing world of common probability distributions.
- Simulation Methods
Unlock the mysteries of simulation methods in finance, where you’ll get hands-on with lognormal distributions to understand asset price movements and dive into Monte Carlo simulations to forecast stock option prices.
- Estimation and Inference
Immerse yourself in the fascinating world of sampling and estimation. You’ll learn about sampling methods, central limit theorem, point and interval estimates, resampling methods, and biases in sampling.
- Hypothesis Testing
Learn about hypothesis testing, a critical component of statistical decision-making. This section covers the hypothesis testing procedure, hypothesis tests concerning the mean, variance, correlation, and tests of independence using contingency tables.
- Parametric and Non-Parametric Tests of Independence
- Continuing with Hypothesis Testing, we have a deep dive into tests of correlation, and tests of independence using contingency tables.
- Simple Linear Regression
Dive into the exciting field of linear regression, understanding dependent and independent variables, regression model analysis, hypothesis tests for slope coefficients, and various functional forms for simple linear regression.
- Introduction to Big Data
Step into the world of Fintech where finance meets cutting-edge technology
2. Economics (6-9% of the exam)
The world of Economics is an engaging and vital area of study, covering topics such as demand and supply analysis, firm and market structures, aggregate output, prices, economic growth, and more. It also touches on the understanding of business cycles, monetary and fiscal policies, geopolitics, international trade and capital flows, and currency exchange rates.
- Topics in Demand and Supply Analysis
Delve into the world of demand and supply analysis, understanding price elasticity, income and substitution effects, marginal returns, breakeven and shutdown conditions, and economies of scale.
- The Firm and Market Structures
Gain a deep understanding of the diverse market structures and their unique characteristics, along with their impacts on pricing strategies and market concentration.
- [Prerequisite] Aggregate Output, Prices, and Economic Growth
Learn about GDP, its components, aggregate demand and supply, macroeconomic equilibrium, and the fundamentals of economic growth.
- Understanding Business Cycles
Understand business cycles, their phases, theories, and connection with credit cycles, unemployment, inflation, and economic indicators.
- Fiscal Policy
Learn about the shaping of the economy through fiscal policies, the process of money creation, demand and supply of money, inflation.
- Monetary Policy
Learn about the shaping of the economy through monetary policies, and the roles of central banks.
- Introduction to Geopolitics
Uncover the intriguing world of geopolitics, its impact on the global economy and financial markets, and its relationship with globalization.
- International Trade
Discover the compelling world of international trade and capital flows, including the dynamics of imports, exports, trade and capital restrictions, and agreements.
- Capital Flows and FX Market, Exchange Rate Calculations
Understand the backbone of international financial transactions – exchange rates, and learn about foreign and forward exchange rates, various regimes, and their influence on international trade and capital flows.
3. Financial Statement Analysis (11-14% of the exam)
Dive into the realm of Financial Statement Analysis, navigating the intricacies of financial reports, exploring various reporting standards, and mastering the art of interpreting income statements, balance sheets, and cash flow statements. Further, you’ll learn powerful financial analysis techniques, understand the vital role of inventories, and the intricacies of long-lived assets. You will also uncover the secrets of income taxes, non-current liabilities, and financial reporting quality, and apply these skills to real-world financial statement analysis scenarios.
- Financial Statement Analysis – An Introduction
Get well-versed with financial statement analysis fundamentals, learn to navigate through balance sheets and income statements, understand auditor’s reports, and immerse yourself in the financial statement analysis framework.
- Analysing Income Statements
Learn to breakdown income statements into components, master various expense recognition methods, and understand key concepts like basic and diluted earnings per share, and comprehensive income.
- Analysing Balance Sheets
Get acquainted with the components of a balance sheet, learn to analyze it through liquidity and solvency ratios, and understand the concept of owner’s equity.
- Analysing Cash Flow Statements
Master the principles and classifications of cash flows, learn methods of presenting cash flows, and develop skills to analyze these statements.
- Analysis of Inventories
Learn about inventory accounting, unlock various inventory valuation methods, and understand the specifics of the LIFO method.
- Analysis of Long-Term Assets
Understand the fundamentals of capitalisation, depreciation, and amortisation, and learn about impairments, revaluation, and derecognition of long-lived assets.
- Topics in Long-Term Liabilities and Equity
Learn about bonds, leases, and pension plans, and understand how solvency ratios help in assessing a company’s ability to meet long-term obligations.
- Analysis of Income Taxes
Dive into the world of deferred taxes, understand the disparities between financial accounting and tax reporting, and explore the effects of tax rate changes on financial statements.
- Financial Reporting Quality
Understand the concept of financial reporting quality, identify the motivations for low-quality reporting, and learn to spot signs of accounting bias and earnings manipulation.
- Financial Analysis Techniques
Discover various financial analysis techniques, understand key financial ratios, and learn equity and credit analysis.
- Introduction to Financial Statement Modeling
Venture into the captivating sphere of financial statement analysis applications. Kickstart your journey with the analysis of past performance and the forecasting of future outcomes using essential financial tools.
- Financial Statement Analysis – Applications
Apply your knowledge in analyzing past performance and forecasting future outcomes, assess credit quality, understand equity screening, and learn to adjust financial statements for comparability.
4. Fixed Income (11-14% of the exam)
Fixed income securities are a cornerstone of the investment world, covering a broad range of instruments, markets, and valuation techniques. This content takes you on a journey from defining the elements of fixed income securities to understanding the risks and returns associated with them. Also, you’ll learn about credit analysis and the intricacies of asset-backed securities.
- Fixed Income Securities: Defining Elements
Learn the fundamentals of bonds, the variety of coupon structures, the legal and regulatory framework surrounding them, and the concept of contingency provisions.
- Fixed-Income Markets: Issuance, Trading, and Funding
Uncover the mechanisms of global fixed income markets, including primary and secondary bond markets, types of bonds based on issuers, corporate debt, and short-term funding methods for banks.
- Introduction to Fixed-Income Valuation
Master bond pricing and yield measures, understand the time value of money, and delve into the components of yield spreads.
- Introduction to Asset-Backed Securities
Gain insights into the world of asset-backed securities, understanding securitisation, residential and commercial mortgage-backed securities, non-mortgage asset-backed securities, and collateralised debt obligations.
- Understanding Fixed-Income Risk and Return
Learn about sources of return in fixed-rate bonds, how to calculate duration, the factors influencing interest rate risks, and the concept of empirical duration.
- Fundamentals of Credit Analysis
Understand the components of credit risk, credit ratings, how to conduct corporate credit analysis, and the special considerations involved in high yield and sovereign credit analysis.
5. Derivatives (5-8% of the exam)
Get ready for a wild ride through the world of Derivatives! We’ll start from the basics, take you through different types of derivatives and their uses, and finally help you master pricing and valuation. At the end of this journey, you’ll see derivatives as a powerful financial tool rather than a complex mystery.
- Understanding Derivative Instruments and Market Features
Start your journey by learning the ABCs of derivatives, their functions, and why they’re used. Get a clear view of exchange-traded and over-the-counter derivatives and see how the 2008 financial crisis impacted derivatives trading.
- Features of Forward Commitment and Contingent Claim Instruments
Explore the key types of derivatives, focusing on forwards, futures, swaps, options, and credit derivatives. Discover the unique characteristics of forward commitment and contingent claim derivatives.
- Benefits, Risks, and Uses of Derivatives
Get to know the advantages of derivatives over cash markets, and the potential dangers they hold. Learn how issuers and investors use derivatives for hedging risks and speculating.
- Arbitrage, Replication, and Cost of Carry in Derivative Pricing
Unravel the art of derivative pricing, focusing on arbitrage, replication, and risk-neutral pricing. Get a handle on the four factors shaping underlying asset pricing.
- Pricing and Valuation of Forward Contracts
Dive into the world of forward contracts, exploring the difference between price and value in derivatives, how these change over the contract’s lifespan, and the role of holding costs and benefits.
- Pricing and Valuation of Futures Contracts
Understand futures contracts and their comparison with forward contracts. Learn how futures prices are calculated, the importance of margin requirements, and the mark-to-market routine.
- Pricing and Valuation of Interest Rates and Other Swaps
Welcome to the world of swaps. Get an understanding of how swaps and forwards are similar, and how to price interest rate swaps with the principles of no-arbitrage.
- Pricing and Valuation of Options
Venture into the land of options, understanding basic option concepts, the idea of moneyness, and the components of an option’s value, including intrinsic and time value.
- Option Replication Using Put-Call Parity
Explore the principle of put-call parity and how it influences options pricing. Understand protective puts and fiduciary calls, and how put-call parity aids in uncovering arbitrage opportunities.
- Valuing a Derivative Using a One-Period Binomial Model
Unwrap the binomial model for valuing derivatives over time. Learn to build the model, use it to value options, and understand the hedge ratio and the concept of no-arbitrage value.
6. Alternative Investments (7-10% of the exam)
Embark on an exciting exploration of alternative investments, diving into their unique structures, investment methods, and diverse categories. Understand the dynamic world of hedge funds, demystify their benefits and fees, and delve into the realm of private equity and private debt. This journey continues through commodity investments, real estate, infrastructure, and concludes with the important aspect of performance appraisal.
- Alternative Investment Features, Methods, and Structures
Step into the world of alternative investments and learn how they offer a different flavor compared to traditional stocks and bonds.
- Hedge Funds
Step into the elite world of hedge funds, where you’ll learn the essentials of aggressive management strategies, the balance between high risks and rewards, and the intricacies of fee structures.
- Investments in Private Capital: Equity and Debt
Dive into the dynamics of investing in private capital, focusing on the nuances of equity and debt.
- Real Estate and Infrastructure
Unlock the potential of real estate and infrastructure investments as you navigate through their diverse landscapes.
- Natural Resources
Explore the unique investment avenues of natural resources, focusing on timberland, farmland, and commodities.
- Alternative Investment Performance and Returns
Unpack the critical issues in performance appraisal for alternative investments, from benchmark selection difficulties to the impact of illiquidity and unique fee arrangements.
- Introduction to Digital Assets
Embark on a journey through the burgeoning world of digital assets, where you’ll get the lowdown on the revolutionary digital ledger technology powering cryptocurrencies and dive into the investment landscape shaping the future of finance.
7. Equity Valuation (11-14% of the exam)
Equity Investments is a critical field that unravels the essentials of financial markets, security market indexes, market efficiency, equity securities, industry and company analysis, and equity valuation. It’s a journey through the building blocks of the financial system to the nitty-gritty of financial intermediaries, and from the fundamental concepts of market efficiency to the intriguing realm of behavioral finance. This comprehensive guide is a passport to the world of equity investments, helping you master the theories, principles, and techniques that rule the stock market jungle.
- Market Organisation and Structure
Dive into the components that shape financial markets, understanding the roles of the financial system and intermediaries, and the dynamics of primary and secondary markets. You’ll also explore the significance of market regulation in maintaining system efficiency.
- Security Market Indexes
Unmask the intricacies of security market indexes, learning about their definitions, computation methods, and various applications. You’ll also delve into the complexities of index construction and management and different types of equity and fixed income indexes.
- Market Efficiency
Understand the fundamental concept of market efficiency and its impact on investment practices. You’ll also explore the Efficient Market Hypothesis, market anomalies, and the intriguing interplay of human biases and market efficiency via behavioral finance.
- Overview of Equity Securities
Delve into the dynamic world of equity securities, learning about their types, the differences between private and public equity securities, and non-domestic equity securities. You’ll also understand the risk and return characteristics of equity securities and their relationship with a company’s value.
- Company Analysis: Past and Present
Unlock the secrets to evaluating a company’s historical performance and present condition through company and industry analysis.
- Industry and Competitive Analysis
Embark on a journey to understand industry and company analysis, learning about industry analysis techniques, classifications, Porter’s Five Forces, and the impact of external influences on industry growth, profitability, and risk.
- Company Analysis: Forecasting
Dive into the art of financial forecasting where you’ll learn to blend historical data with management insights to shape future financial narratives.
- Equity Valuation
Venture into the realm of equity valuation, learning about the difference between intrinsic value and market price, major categories of equity valuation models, and the role of dividends. You’ll also explore various valuation models, such as present value models, multiplier models, and asset-based valuation models.
8. Corporate Issuers (6-9% of the exam)
Deep dive into the fascinating domain of Corporate Issuers, where you’ll comprehend the nuances of corporate structures, governance, and risks, in addition to mastering the art of capital investments and understanding the dynamics of working capital and liquidity. You will further enhance your knowledge about the cost of capital, capital structure, and leverage, which are all pivotal to understanding the corporate world.
- Organisational Forms, Corporate Issuer Features, and Ownership
You’ll grasp the diversity in corporate structures, including sole proprietorships, partnerships, and corporations, along with their tax treatments, liability levels, and operational characteristics.
- Investors and Other Stakeholders
Navigate the complex world of corporate finance by understanding the varying claims of lenders versus shareholders and the intricate web of corporate governance.
- Corporate Governance
This topic provides insights into the key players of corporate governance, stakeholder management, the role of boards and committees, and factors influencing these relationships. Additionally, you’ll learn to analyze these elements and incorporate ESG factors in decision making.
- Working Capital and Liquidity
Learn about the different sources of funds, managing and measuring liquidity, and evaluating short-term financing choices.
- Capital Investments and Capital Allocation
Familiarize yourself with the capital allocation process, principles of capital allocation, and investment decision criteria. You’ll also explore common pitfalls in capital budgeting and the concept of real options.
- Capital Structure
Uncover the relationship between a company’s life cycle and its capital structure, theories affecting capital structure decisions, and how stakeholder interests shape these decisions.
- Business Models and Risks
Understand how companies plan to earn money through various business models, their associated risks, and the effect of leverage on risk exposure and growth potential.
9. Portfolio Management (8-12% of the exam)
Portfolio management is an exciting field that bridges finance theory and practical investment strategy. The journey commences with the fundamentals of the discipline and progresses towards advanced concepts like risk management and technical analysis. The exploration also covers the influence of behavioral biases on investment decisions and concludes with the groundbreaking impact of Fintech on investment management.
- Portfolio Risk and Return I
Embark on an exploration of portfolio risk and return, understanding measures of returns, portfolio diversification theory, and how to determine an investor’s optimal portfolio.
- Portfolio Risk and Return II
Delve deeper into portfolio risk and return, learning about capital market theory, systematic vs. unsystematic risk, return generating models, and performance measures.
- Portfolio Management Overview
Grasp the essentials of the portfolio management process, including the portfolio approach to investing, types of investors, and the workings of the asset management industry. Delve into pooled investments and their unique features.
- Basics of Portfolio Planning and Construction
Understand the processes involved in portfolio planning and construction, focusing on client analysis, execution stages, and the integration of ESG factors.
- The Behavioural Biases of Individuals
Navigate the realm of behavioural finance, learning how cognitive errors and emotional biases can impact financial decisions and influence market behaviour.
- Introduction to Risk Management
Learn about the comprehensive risk management process, including risk governance, identification and measurement of risks, and methods of risk modification.
10. Ethics (15-20% of the exam)
Get ready to navigate the complex yet vital terrain of ethics in the finance world. This journey will take us from the essence of ethics in the investment profession to the rigorous code of conduct formulated by the CFA Institute. We’ll further explore the seven Standards of Professional Conduct and conclude with an introduction to the Global Investment Performance Standards (GIPS).
- Ethics and Trust in the Investment Profession
In this section, you’ll learn about the crucial role of ethics in the investment profession and the challenges in maintaining ethical behavior.
- Code of Ethics and Standards of Professional Conduct
This part will guide you through the CFA Institute’s Code of Ethics and Standards of Professional Conduct, a vital framework for all investment professionals.
- Guidance for Standards I to VII
Here, we’ll explore the seven Standards of Professional Conduct, giving you a comprehensive understanding of the ethical guidelines in finance.
- Introduction to the Global Investment Performance Standards (GIPS)
Lastly, we’ll introduce the Global Investment Performance Standards (GIPS), a set of best practices designed to ensure fairness and transparency in investment performance presentation.
Final Thoughts: Tackling the CFA Level 1 Exam
And there you have it – a comprehensive overview of the 10 topics covered in the CFA Level 1 exam! With our expertly crafted CFA Level 1 notes and summary, you’ll be well on your way to acing the exam. Remember to stay focused, practice plenty of questions, and don’t forget to enjoy the learning process. After all, finance can be fun, right? Good luck, and may the CFA gods be with you!