Wall Street’s most gruelling exam is only 50 days away — here’s how to prepare for the CFA

source
Natalie Behring/Getty Images

  • The annual Chartered Financial Analyst exams are only 50 days away.
  • The CFA is considered to be one of the most difficult exams in finance, with a pass rate of around 40%.
  • Speaking to eFinancial Careers, a senior member of the CFA Institute said that taking full mock exams is one of the best ways to prepare.

In just over six weeks time, hundreds of thousands of aspiring financiers around the world will sit down to take the notoriously gruelling Chartered Financial Analyst (CFA) exam.

The test is a six-hour, 240 question behemoth, with a failure rate of almost 60%. In short, it is one of the most brutal test in the world of finance.

This year’s test is being held on Saturday June 23rd, and with exactly 50 days to go, preparations are intensifying for those taking it. But what’s the best way for candidates to prepare for the ordeal that is the CFA?

Stephen Horan, who is managing director of credentialing at the CFA Institute – the body that administers the test – recently spoke to careers website, eFinancial Careers to share some of his tips for prospective CFA holders. Business Insider has included some of his tips, alongside a handful of recent sample CFA questions, to illustrate the best preparations for the test.

“Generally that’s what it takes for candidates to be successful, so you have to start early, create a schedule and a study plan and stick to them,” Horan told eFinancial Careers. The CFA Institute generally advises candidates to spend a cumulative 300 hours studying for the test. That equates to around seven and a half weeks of a full-time 40-hour per week job.

“When we’re about a month or two away, you want to be able to start wrapping up your first curriculum run-through and revisions, because you want to leave time for practice exams,” Horan added.

CFA questions range from relatively simple ones like: “A portfolio of securities representing a given security market, market segment, or asset class is best described as a …” (answer: Security market index) – all the way to immensely complex financial calculations.

The key to success in such areas, Horan told eFinancial Careers, is to take full mock tests, rather than just practicing specific areas.

“A mock exam is going to surface the areas where you’re relatively weak, whereas if you just pick out some practice questions, you risk going to the areas that you’re comfortable with rather than the ones you really need to work on,” he said.

“It simulates the natural test-taking experience – it is intended to replicate the actual exam as much as possible, right down to the two three-hour sessions.”

After doing mocks, candidates should then focus on the areas where they score lowest, allowing them to focus in on areas of weakness, rather than just practising what they’re good at.

For example, a prospective CFA holder might struggle to answer the following question:

A corporation issues five-year fixed-rate bonds. Its treasurer expects interest rates to decline for all maturities for at least the next year. She enters into a one-year agreement with a bank to receive quarterly fixed-rate payments and to make payments based on floating rates benchmarked on three-month Libor. This agreement is best described as a: a) futures contract; b) forward contract; c) swap.

Answer: C

The CFA also has an ethics section, which grills candidates on what they should and shouldn’t do in certain professional situations.

“Ethics is important to becoming an investment professional – we take this seriously,” Horan told eFinancial Careers.

“The ethics section is not based on the candidate’s intuitive sense of right and wrong – rather, questions are based on what the CFA institute’s code and standards say and how they might be applied to behavior in various situations.”

An example of an ethics based question is as follows:

Colin Gifford, CFA, is finalizing a monthly newsletter to his clients, who are primarily individual investors. Many of the clients’ accounts hold the common stock of Capricorn Technologies. In the newsletter, Gifford writes, “Based on the next six months’ earnings of $1.50 per share and a 10% increase in the dividend, the price of Capricorn’s stock will be $22 per share by the end of the year.” Regarding his stock analysis, the least appropriate action Gifford should take to avoid violating any CFA Institute Standards of Professional Conduct would be to:

a) Separate fact from opinion

b) Include earnings estimates

c) Identify limitations of the analysis

Answer: B (to see why click here)

Finally, all the usual tips about taking exams are relevant. Get a good night’s sleep, have a decent breakfast, drink lots of water (not too much so that you need the toilet all the time), and try to stay calm.