The Chartered Financial Analyst (CFA) exams are this Saturday. Consisting of three levels, they are considered to be the most difficult exams taken by Wall Streeters with fewer than 20 per cent of candidates passing all three tests on the first try. The average test-taker spends a solid five to six months preparing.
We recently talked to a CFA charterholder, who spoke only on the condition of anonymity, about things he didn’t think he needed to know for the exams.
Disclaimer: We don’t claim to be an expert in offering exam advice.
Explainer: When it comes to the section on convertible bonds, there's a 'decent amount of jargon,' according to our anonymous CFA source. What's more is there are about 10 formulas that are 'extremely straight-forward and simple,' but a 'total pain in the arse' to remember,' the CFA said.
Takeaway: Basically, the CFA charterholder we spoke to said the convertible bonds section is 'an isolated topic' that has almost no connection to other parts of the exam. If it takes more than an hour to master, don't waste your time.
Explainer: The anonymous CFA told us when he encountered the section on swaps, it wasn't about knowing the whole thing, but knowing a few key concepts: the basic dynamics of swap structures and payout profiles. He added that the test-takers could be asked 'if interest rates move, who is in the money and who is out?'.
He explained that calculating how much a party is in the money or out is super complicated and just not worth the effort.
Takeaway: 'All I'm saying is to ignore the whole process of pricing how much is made or lost by one party,' the CFA told Business Insider.
Anonymous CFA: 'I didn't need to know anything about detecting violations of regression assumptions.'
Explainer: According to our anonymous CFA source, in the quantitative methods part of the exam there are all kinds of statistical tests in formulas that a test-taker must memorize and master.
'There's not way to get around that.'
The CFA said there are tests to measure statistical weaknesses of certain regression formulas.
'They have crazy names like Breusch-Pagan test, Durbin-Watson statistic, Hansen Method, etc, and it's not straight-forward how to use them,' the CFA said. 'It's not worth the time.'
Takeaway: You pretty much guaranteed to get a question about this on Level, our source said. Don't be fazed if you're forced to guess.
Explainer: The formula for calculating the variance of a three asset portfolio is 'a freakin' joke,' according to the CFA we spoke to.
'You'll be like 'Ok just forget it.''
Takeaway: 'It's a thing that might show up on the exam and haunt you.' So you could be screwed if you don't learn it.
Explainer: According to our CFA source, the Treynor-Black Model once appeared on a 6-question section and 'everyone freaked out during the break.' The model is a way to analyse performance in an actively managed portfolio.
'It's just a lot of complicated topics, straight-forward, but complicated,' he said.
Takeaway: 'I'm pretty sure not knowing this caused me to fail the first time I took Level 2. But it wasn't on the exam the second time I took it. And I passed.'
Explainer: First off, the valuing of real property (real estate) is more for the Level 2 and 3 CFA test-takers.
'It's kind of like the convertible bond section, there's a lot of jargon and a lot of formulas that are very much isolated,' the anonymous CFA said.
Takeaway: 'There was one question about it when I took the Level 3 exam. I guessed.'