STUDY HINTS FOR THE LEVEL I CFA EXAM
The Level I CFA exam is a multiple choice test consisting of 240 multiple choicequestions, half of which will be given in the morning session and half of which will be in
the afternoon session. Expect that all topics will be covered in both the morning andafternoon, similar to the question format found in the three practice examinations that arein the Stalla Seminars Practice Exams.
Read the exam rules on page 10-11 of the CFA Level I Study Guide provided byAIMR. Specifically, note that only two brands of calculators are permitted for the exam:
the HP 12 C and the TI BAII Plus. Answers will be recorded by darkening the ovals on
the answer sheets provided at the exam. No. 2 or HB pencils with attached erasers
must be used to record the answers. Erasers not attached to the pencils will not be
permitted on the exam. It is suggested that you bring several approved pencils to theexam since none will be provided at the examination centers.
The Level I exam is expected to cover most of the general principles that comprise thereading assignments. As a guide for last minute preparation, we suggest that you review
the following material:Ethics (15% of exam):
Review the basic requirements of each of the Standards of Professional Conduct,
focusing on the required conduct and compliance procedures for each standard. Pay lessattention to minute details such as the material on L1:19-28. Do expect a few questions
on the rules of procedure, especially the sections written in bold italics on pages L1:45-46
and L1-49, as well as the requirements of the GIPS in bold italics (L1:45-61). TheHomework questions in Stalla Review for the CFA Exam (including the three PracticeExams) should provide enough practice in the type of questions that will appear on theexam.
Quantitative Methods (12% of exam):
The Quantitative Methods portions of the exam will include Time Value of, Descriptive
Statistics, Probability, Statistical Analyses such as Hypothesis Testing, Regression andCorrelation. Know how to do all of the various types of problems covered in Time Valueof Money Money (L1: 63-103). Working problems is your best form of study
preparation in this area. Some problems might be complicated involving one or moretime sequences.
Descriptive Statistics (L1: 104-134) is likely to be covered completely on the exam.
However, do not worry about complex equations like skewness and kurtosis. Most of thematerial in this section will be very basic.

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The hardest material in probability is Bayesian analysis. Fortunately, there is only likely
to be one question on it. If you find the material difficult, guess and move on. Do notwaste valuable time trying to perform calculations that you find incomprehensible. If theprinciples of counting is covered, it is likely to be limited to combinations andpermutations.
The uniform and binomial distributions are not likely to be worth many points on theexam. However, the normal curve will be emphasized. Study pages L2: 33-45
thoroughly. Also, sampling, confidence intervals and hypothesis testing will likely becovered by several questions (L2: 50-68 and L3: 1-33). Detailed mathematics may not benecessary, but know the meaning and interpretation of terms such as level of significance,
Type I and Type II error, p-value, and so forth. Do not worry about detailed formulas on
testing the difference between two means (pooled variances, etc.). No one can beexpected to remember extremely complex formulas.
Regression and correlation analysis (L3: 34-64) will be the source of several questions.
Again, the meaning and interpretation of terms such as regression coefficient, correlation
coefficient, coefficient of determination, dependent and independent variable, standard
error of estimate, confidence interval, prediction interval and significance testing areimportant. Do not worry too much about long, complicated equations. Stick to theequations that are boxed, short, and important, and you should be all right.
Economics (10% of the exam):
The Economics section of the exam will consist of approximately 24 questions. They
will divide up into approximately 6 questions in each of the following categories:
macroeconomics (L4: 1-51), Money and Banking and Expectations (L4: 52-83)
microeconomics (Lesson 5), International Trade and Foreign Currency and Balance ofPayments (Lesson 6).
In macroeconomics, cause and effect relationships are important, not explaining theories
or drawing graphs. Know the simple expenditure multiplier, but otherwise ignore thedetails of Keynesian economics. Virtually all of the Money and Banking section isimportant. You are probably going to be required to perform calculations in this area.
Monetarist theory is important, including the equation of exchange and the quantity
theory of money. Understand the effects of monetary policy in the short run, and the longrun both when it is anticipated and unanticipated.. The adaptive expectations and rational
expectations models are important.
All of International Trade Theory is important (L6: 1-11). Expect some questions on
those pages. Foreign Currency (L6: 12-44) topics are likely to be emphasized on theexam: Currency quotations and conversions, cross exchange rate calculations, forward
discount and premium calculations, triangular arbitrage, purchasing power parity, balanceof payments relationships, and covered interest arbitrage are likely to be heavily
emphasized.

2Financial Statement Analysis (20% of the exam):
Historically, the Financial Statement Analysis section of the Level I exam has been themost difficult portion of the test. There will be approximately 48 questions in this area,
half in the morning and half in the afternoon. Most of the questions will likely beconcentrated in a relatively few blocks:
1. Financial ratios (which will likely include the DuPont model that is discussed onpages L12-48 of Stalla Review for the CFA Exam). There may be
several questions in this area. Most of the financial ratios are discussed on pages
L7: 17-38
2. Inventories (L8: 1-18)
3. Accounting for Fixed Assets (L8: 19-39)
4. Leases (L9: 1-8). Do not study the details on Leases from the point of view oflessors (L9: 9-15).
5. Accounting for Equity Capital (L10: 1-8)
6. Computing Earnings per Share (L10: 9-16).
7. Cash Flow (L10: 20-31).
The other topics in Financial Statement Analysis will all be covered with 1-2 questions
each, but the "fire power" will be concentrated in the above 7 areas.
Corporate Finance (10% of the exam):
The Corporate Finance questions may be difficult. Know how to determine the cost of
the various components of capital (L11: 5-8) and how to perform WACC calculations(L11: 14-17). In addition, the material on ranking capital projects will likely be covered,including linear interpolation to obtain payback and discounted payback periods (L11:18-25). You will likely have to perform a NPV calculation, but the IRR and MIIR
calculations are very unlikely. Understand how to calculate operating cash flow (L11:29-32) for a project and how to make a capital budgeting decision based on the NPV
approach (L11-33). Optimum capital structures including the MM model (L11: 44-55)
will likely be the source of several questions, as will signaling theory and the optimum
dividend policy (L11: 56-63).
Equity Investments (7% of the exam)
Make sure you know how to perform basic dividend discount model calculations,especially the constant growth dividend discount model (L12: 36). The formula forinternal growth rate (L12: 47) is also important, as is the DuPont model. Expect about
one or two questions on technical analysis (L12: 79-84). Most of the other questions(especially questions covering pages L12: 59-78) mostly will be of a "trivial pursuit"nature. If you read the Lesson 12 section and can do the examples, you should not findthis portion of the exam too difficult.

3Global Markets and Instruments (2% of the exam)Expect four or five global questions from the material covered on L12: 85-91 and L16:
32-34.
Derivatives (5% of the exam)
There will only be a few questions on Futures. Most will be the trivial pursuit variety,concerning definitions of terms (long/short, initial margin, variation margin, maintenancemargin, mark-to-market, the role of the clearinghouse, methods of settlement, and soforth). However, know how to calculate how much a contract price has to increase ordecrease before a margin call will occur (L15-10).
Most of the derivative questions will probably be related to Options. A few questions
might require knowledge of some definitions (call, put, in-the-money, out-of-the-money,and so forth). Most questions, however, should center around strategies that employ
options. Therefore, the material covered on pages L15: 20-31 is very important. If you
do the Homework problems covered in the Stalla Review for the CFA Exam and Practice
Exams, you should have little problem with the options questions on the exam itself.
There are only going to be a few questions on swaps. Most of them are expected to bedefinitions of terms (tenor, settlement, notional amount, and so forth). You may have todetermine one cash flow for an interest rate swap as in the example on page L15: 34-35.
Debt Investments (11% of the exam)
In Fixed Income, expect most of the questions to be on the material covered on pages
L13: 44-65 and L14: 1-46 with only a few "trivial pursuit" type questions being based onpages L13: 1-43. You should expect to have to calculate the value of a bond, certain
bond yields, the duration and convexity of a bond, spot rates and forward rates(particularly the latter). If you can do these calculations and have read the rest of thematerial once, the fixed income questions should not be too difficult.
Alternative Investments (3% of the exam):
Real Estate, Investment Companies, and Venture Capital should be a simple portion of
the exam. Expect one question on the material covered on L15: 44-46, probably on thedeterminants of real estate value and three questions on valuating real estate
Expect only one or two questions on Investment Companies (trivial pursuit) and one or
two definitions in Venture Capital.
Portfolio Management (5% of exam):
Portfolio management can be broken down into Conventional Portfolio Management(L16: 1-10) and Modern Portfolio Theory (L16: 11-30). The Global Portfolio

4Management material will be included in the Global Markets and Instruments section ofthe test.
The questions on conventional portfolio management topics should not be very difficult.
Know the two objectives and five constraints (L16: 2-5), the phases of an individual'sinvestment life cycle (L16: 8-10) and how the two objectives and five constraints should
be applied to various types of portfolios (summarized in the table on L16-10) and you
should be all right.
The modern portfolio theory questions may involve calculations. Specifically, know theformulas on L16: 11-12 and understand beta (L16: 18-21). Know the CAPM, the CML
model (L16-22) and the SML model (L16: 23-24). However, you do not need to know
the derivations of these models. The arbitrage pricing model might have one or twoquestions related to it, but they are likely to be on the material found on L16-31.
Psyche Yourself for the Exam
Before taking the exam, read the Hints on Taking the CFA Exam section (L16: 35-42).
This contains a lot of useful hints in answering multiple choice questions. It also
provides you with other useful ideas about preparations to be made just prior to the testday. Read these hints about 10 days before taking the exam itself and follow the advice
on exam day!
About a week before the exam, start getting yourself into a mental state in which passing
the exam is not such an all-encompassing goal as it seems today. This will relax you andreduce the tendency to panic on exam day. A calm and relaxed attitude is the best mental
approach to taking the exam itself. So, about two weeks before the exam, keep saying toyourself:•••

I am prepared.
I will do my best.
If my best is not good enough, so be it.

Good Luck!

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