CFA Level 1 Exam Format

What is the Format of CFA Level 1 Exam Format and Questions?

Here are some information on the CFA Level 1 Exam format and question types. We will provide an overview of the way questions are asked on typical exams which is always useful to know in your CFA preparation.

We previously wrote a post about exam preparation and another one about exam-taking advices. This time, we delve into the actual CFA exam questions, how they are structured and the types of question asked.

Although it is true that there are no such thing as a typical exam or a typical CFA questions, there are types of questions or format that candidates can be sure to encounter on their exam. We tried to list here the main categories of recurring question types for multiple choice CFA exam questions. These apply for all three levels (except the essay part of the level 3 exam) but we will use level 1 examples to illustrate the question formats.

The following explains some of the most popular format of CFA multiple choices questions.

Cause and effect questions

These questions test your understanding of the implication of an event, they aim at assessing if a candidate knows the impact of a specific event or a series of events. These questions often requires the candidate to use reasoning to identify the proper implication. These question may come in the “complete the sentence” format or the “choose the most appropriate answer” format.

Long questions

Long question typically tell you a long story about Paul Smith, CFA who wakes up one day, eat a balanced breakfast and goes to work taking bus line number 146, then once arrived talks to his superior about mortgage-backed securities and during this long discussion several statements are made, only one of which is relevant for the question but you just spent 5 precious minutes reading about Paul’s day…

These are time consuming because candidates need to sift through a truck-load of irrelevant information before discovering the actual question. When you see such a questions (they are easy to spot since they include long paragraphs), just read the actual question and answer choices first. This allows you to scan for pertinent info when reading the long question.

The ethics section is populated entirely by long questions, which can also be found in the accounting and economics sections. Here is an example:

Florence Zuelekha, CFA, is an equity portfolio manager at Grid Equity Management (GEM), a firm specializing in commodities. Zuelekha, who previously focused on alternative energy, recently attends her first commodity conference, sponsored in large part by GEM. Independentindustry experts, argued commodities would increase in value and recommended investors hold at least 10% of their portfolio assets in commodities based on consistent increases in theirvalues over the previous two years. Without doing any additional research, Zuelekha recommends to all her clients an immediate allocation of 5% of their portfolio into commodities. Over the next few weeks, Zuelekha moves her own portfolio to a 10% commodity allocation.

Which of the CFA Standards did Zuelekha most likely violate?

A. Priority of Transactions.

B. Independence and Objectivity.

C. Diligence and a Reasonable Basis.

Two-Column Question

These are, in my opinion, the worst type of questions since they typically test two different concepts in only one question. This means that if you know one of the two concept, you can still get it wrong if you guess the other one wrong.

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“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” – Sun Tzu, The Art of War

The enemy is the CFA exam. The more you know about it, the better your chances of succeeding. This is why we tried to provide the question format you will encounter. On the other hand you also need to know your strengths and weaknesses so you spend your precious time wisely. The CFA Exam questions are generally not trying to “trick” you and rarely uses what can be referred as “cheap shots”. For example, the question wont hint you toward a wrong answer or try to deceive you by using confusing wording. However there are some common traps in which countless candidates have fallen over the years. Here are five popular CFA exam traps:

CFA Exam Traps

Unnecessary calculations

“What is essential in war is victory, not prolonged operations.” Sun Tzu, The Art of War

Yes, I know…second Sun Tzu quote in this article… It sometimes seem like the Art of War was written as a guide for the CFA candidate… Some questions on the exam will have candidates automatically reach for their calculators while the answer can be found without one. If you perform the proper calculations, you will get the correct answer but will waste more time. Here is an example of a question which demonstrates unnecessary calculation.

The following ten observations are a sample drawn from a normal population: 25, 20, 18, -5, 35, 21, -11, 8, 20, and 9. The fourth quintile {80th percentile) of the sample is closest to:

A. 8

B. 21.0

C. 24.2

 There are 10 values in this sample so the 80th percentile is simply the 8th value starting from the lowest (-11). No need for maths here…

A company’s $100 par value preferred stock with a dividend rate of 9.5% per year is currently priced at $103.26 per share. The company’s earnings are expected to grow at an annual rate of 5% for the foreseeable future. The cost of the company’s preferred stock is closest to:

A. 9.2%

B. 9.5%

C. 9.7%

In this question, we can see that if the dividend rate (which is a percentage of the par value) is 9.5%, and the price is higher than par, the yield has to be lower than 9.5%. We do not need to perform the calculation since only answer A is lower than the dividend rate.

Common calculation mistakes as answer choices

This one is probably the most typical multiple question trap. The wrong answers will likely be the results of common calculation mistake rather than random numbers. This is tricky since when we perform a long calculation and see our answer as part of the choices, we usually feel very confident about our answer and simply move-on to the next question.

The following information (in millions} on a company is available:

Cost of goods sold: $500
Increase in total assets: $250
Increase in total liabilities: $200
Change in inventory: ($30)
Change in accounts payable: ($25)

The amount of cash (in millions} that the company paid to its suppliers is closest to:

A. $445

B. $495

C. $505

We can see here that the correct answer is found by adding the change in inventory and subtracting the change in accounts payable to the cost of goods sold [500 + (-30) – (-25)] = $495

It is easy to confuse the confuse the sign of the two adjustment to cost of goods sold which would result in the incorrect answer C. $505.

Double negative (or simply negatives)

It is much more natural to select the answer that seems right than the wrong answer. Candidates should tame that instinct since the CFA Institute is fond of questions such as “select the least likely” or “which statement is less accurate”. Read questions carefully since negative formulation are almost as popular as positive statements.

According to the IFRS framework, which of the following is the least likely qualitative characteristic that makes financial  information useful?

A. Materiality.

B. Comparability.

C. Understandability

“Esoteric” wording

We mentioned previously that there are no “cheap shot” questions on the exam. While accurate, there are questions that put non-native English speakers at a disadvantage through the use of complex words. The understanding of non-financial complex words is sometimes essential to grasping the question. To be fair, CFA questions are usually very clearly formulated.

Partly true answers

Since CFA questions usually uses formulations such as “select the most accurate statement”, answer choices sometimes features partly accurate or accurate under some condition statements. These partly true choices are incorrect answers since the question requires the “most accurate” answer. With these questions, we also have to tame our instinct to pick the first answer that sounds correct since another answer could be even more correct.

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If you have not done so already, we invite you to check out our latest CFA Level 1 Study Hack. This guide is the ideal companion to your CFA Study Toolbox.