CFA Level I Quick Review Guide

Introduction

Preparing for the CFA Level I exam requires a solid grasp of core concepts in financial reporting, ethics, quantitative analysis, and investment tools. This quick review guide provides a streamlined overview of essential topics, formulas, ethics standards, and high-yield concepts that are most likely to appear on the CFA Level I exam. Use this guide as a supplement to your comprehensive study plan to reinforce critical points and quickly refresh your memory on key areas.

1. Ethics and Professional Standards

Key Ethics Standards

The Ethics and Professional Standards section is heavily weighted on the CFA Level I exam. The CFA Institute’s Code of Ethics and Standards of Professional Conduct outlines important principles for ethical behavior in finance.

Core Principles of the Code of Ethics:

• Place the integrity of the profession and client interests above personal gains.
• Act with integrity, competence, and respect.
• Uphold the CFA Institute Code and Standards.

Standards of Professional Conduct

1. Professionalism: Covers knowledge of the law, independence, objectivity, and integrity.
2. Integrity of Capital Markets: Avoids market manipulation and insider trading.
3. Duties to Clients: Focuses on loyalty, suitability, and fair dealing.
4. Duties to Employers: Concerns loyalty, client rights, and independence.
5. Investment Analysis and Recommendations: Stresses the importance of diligence and reasonable judgment.
6. Conflicts of Interest: Transparency and disclosure.
7. Responsibilities as a CFA Member or Candidate: Maintain integrity of the CFA designation and adhere to CFA Institute policies.

Quick Tip: Ethics questions often test your ability to apply these standards in real-world scenarios. Pay special attention to sections on confidentiality, loyalty, and independence.

2. Quantitative Methods

Key Formulas and Concepts

1. Time Value of Money (TVM)
   • Future Value (FV): FV=PV×(1+r)nFV = PV times (1 + r)^nFV=PV×(1+r)n
   • Present Value (PV): PV=FV(1+r)nPV = frac{FV}{(1 + r)^n}PV=(1+r)nFV​
   • Annuity Present Value: PV=PMT×[1−(1+r)−n]rPV = frac{PMT times [1 - (1 + r)^{-n}]}{r}PV=rPMT×[1−(1+r)−n]​
2. Discounted Cash Flow Analysis
   • Net Present Value (NPV): NPV=∑CFt(1+r)tNPV = sum frac{CF_t}{(1 + r)^t}NPV=∑(1+r)tCFt​​
   • Internal Rate of Return (IRR): IRR is the discount rate that makes NPV = 0.
3. Statistical Concepts
   • Mean (Average): xˉ=∑xnbar{x} = frac{sum x}{n}xˉ=n∑x​
   • Variance (Population): σ2=∑(x−μ)2Nsigma^2 = frac{sum (x - mu)^2}{N}σ2=N∑(x−μ)2​
   • Standard Deviation: σ=σ2sigma = sqrt{sigma^2}σ=σ2​
4. Probability Concepts
   • Expected Value (E): $E(X)=\sum [P(x)\times x]$
   • Bayes’ Theorem: P(A∣B)=P(B∣A)×P(A)P(B)P(A|B) = frac{P(B|A) times P(A)}{P(B)}P(A∣B)=P(B)P(B∣A)×P(A)​

Quick Tip: Focus on TVM and probability, as they’re high-yield concepts for Level I.

3. Financial Reporting and Analysis (FRA)

Important Financial Ratios and Concepts

1. Profitability Ratios
   • Gross Profit Margin: $\text{Gross Profit}/\text{Sales}$
   • Net Profit Margin: $\text{Net Income}/\text{Sales}$
   • Return on Assets (ROA): $\text{Net Income}/\text{Total Assets}$
2. Liquidity Ratios
   • Current Ratio: $\text{Current Assets}/\text{Current Liabilities}$
   • Quick Ratio: Current Assets−InventoryCurrent Liabilitiesfrac{text{Current Assets} - text{Inventory}}{text{Current Liabilities}}Current LiabilitiesCurrent Assets−Inventory​
3. Leverage Ratios
   • Debt-to-Equity Ratio: $\text{Total Debt}/\text{Total Equity}$
   • Interest Coverage Ratio: $\text{EBIT}/\text{Interest Expense}$
4. Valuation Metrics
   • Price-to-Earnings (P/E) Ratio: $\text{Price per Share}/\text{Earnings per Share}$
   • Dividend Yield: $\text{Dividends per Share}/\text{Price per Share}$

Financial Statements

• Income Statement: Measures profitability over a period.
• Balance Sheet: Shows assets, liabilities, and equity at a point in time.
• Cash Flow Statement: Breaks down cash inflows and outflows from operations, investing, and financing.

Quick Tip: Understand the structure and components of each financial statement, and be able to analyze key financial ratios.

4. Economics

Essential Economic Concepts and Models

1. Supply and Demand
   • Law of Demand: Price increase → Quantity demanded decreases.
   • Law of Supply: Price increase → Quantity supplied increases.
   • Equilibrium: Intersection of demand and supply curves.
2. Elasticity
   • Price Elasticity of Demand (PED): Measures responsiveness of quantity demanded to price change.
     • Formula: PED=% Change in Quantity Demanded% Change in PricePED = frac{% text{ Change in Quantity Demanded}}{% text{ Change in Price}}PED=% Change in Price% Change in Quantity Demanded​
3. Market Structures
   • Perfect Competition: Many sellers, identical products, and no barriers to entry.
   • Monopoly: Single seller, unique product, and high barriers to entry.
   • Oligopoly: Few sellers, either similar or identical products, and significant barriers to entry.
4. Fiscal and Monetary Policy
   • Fiscal Policy: Government spending and taxation to influence the economy.
   • Monetary Policy: Central bank actions, like interest rate adjustments, to control inflation and stabilize currency.

Quick Tip: Focus on basic supply and demand graphs and their applications in real-world scenarios.

5. Corporate Finance

Core Corporate Finance Concepts

1. Capital Budgeting
   • Payback Period: Time it takes to recover the initial investment.
   • NPV and IRR: Used for evaluating long-term investment projects.
2. Cost of Capital
   • Weighted Average Cost of Capital (WACC): Average rate a company is expected to pay to finance its assets.
     • Formula: WACC=(EV×Re)+(DV×Rd×(1−T))WACC = left( frac{E}{V} times Re right) + left( frac{D}{V} times Rd times (1 - T) right)WACC=(VE​×Re)+(VD​×Rd×(1−T))
3. Leverage
   • Operating Leverage: The extent to which fixed costs are used in operations.
   • Financial Leverage: The extent to which debt is used in capital structure.
4. Dividend Policy
   • Payout Ratio: Portion of earnings paid to shareholders as dividends.
   • Retention Ratio: Portion of earnings retained by the company for reinvestment.

Quick Tip: Know how to calculate and interpret WACC, as it’s fundamental to evaluating project feasibility and profitability.

6. Equity Investments

Key Concepts and Valuation Methods

1. Equity Valuation
   • Dividend Discount Model (DDM): Calculates the present value of expected future dividends.
     • Formula: P0=D1r−gP_0 = frac{D_1}{r - g}P0​=r−gD1​​
   • Free Cash Flow Model: Valuates based on discounted free cash flow.
2. Market Efficiency
   • Efficient Market Hypothesis (EMH): Suggests that stock prices fully reflect all available information.
   • Forms of EMH: Weak, semi-strong, and strong forms, each varying in levels of market information reflected in prices.

Quick Tip: Understand when to apply different valuation models, especially DDM and free cash flow models, depending on available data.

Conclusion

The CFA Level I exam covers a vast array of topics, but with a strong foundation in ethics, quantitative methods, financial reporting, economics, corporate finance, and equity investments, you’re well-prepared for success. This guide is a starting point to help you focus on high-yield topics and streamline your study sessions.

Summary

This CFA Level I Quick Review Guide condenses key concepts, ethics standards, formulas, and strategies essential for exam success. Use it to quickly refresh and reinforce your understanding of major topics, ensuring that you’re ready to tackle the exam with confidence.

Key Takeaways

• Essential ethics standards and the CFA Institute Code of Ethics.
• Core quantitative formulas like NPV, IRR, and TVM for financial analysis.
• Important financial ratios in profitability, liquidity, and valuation.
• Basic economic principles, including market structures and fiscal policy.
• Key corporate finance concepts, including WACC, capital budgeting, and leverage.

Your CFA Level I Quick Reference Guide to Simplify and Strengthen Your Study Sessions!