waiting for CFA books

I registered for the CFA Level 1 exam on Tuesday, and I’m just now waiting for the study books to arrive. UPS tracking says that all 20lbs worth of books are making their way up from South Carolina, and should hopefully be arriving on my doorstep in New York shortly. In the meantime, I thought I would try to wrap my mind around exactly what to expect regarding the CFA curriculum, as well as the history behind the designation and why I thought it worthwhile to devote the rest of my summer to pursuing it.

The current CFA Institute traces its lineage back to the founding of the Financial Analysts Federation (FAF) in 1947. Before then, a few local societies existed for investment professionals, most notably the New York Society of Security Analysts (NYSSA), which predates the FAF by 10 years. NYSSA was founded by a group of professionals that included Benjamin Graham, the “father of securities analysis” (fundamental analysis), and acknowledged mentor of billionaire Warren Buffet.

The first actual CFA charters were not awarded until 1963, which ironically followed on the heels of great advancements in economic research out of the University of Chicago regarding financial markets, particularly with the development of the “efficient market theory (EMT).” Threatening to negate the utility of fundamental (and technical) analysis, EMT held that it was nearly impossible to beat market index returns through careful analysis of individual stocks, because all knowable information regarding the stock was instantaneously priced into them causing stocks to follow a “random walk” trading pattern. However, the success of value investors (Berkshire Hathaway) and technical investors (Renaissance Technologies hedgefund) largely refute the rigid orthodoxy of the “semi-strong” and “strong” forms of EMT.

Now that I have reassured myself that I didn’t just squander $1,100 on a designation that would be of no practical value to me, I turn to the actual content of the course. First, what does it take to become a CFA:

“In order to become a "CFA Charterholder" candidates must pass all three six-hour exams, possess a bachelor's degree (or equivalent, as assessed by the CFA institute) and have 48 months of work experience in an investment decision-making position. CFA charterholders are also obligated to adhere to a strict Code of Ethics and Standards governing their professional conduct”

Second, what are the most recent pass-rates for each level of the exam:
June 2008:    Level I: 35%     Level II: 46%     Level III: 53%

When we follow the success rate of candidates who pass through each of the 3-successive levels, then we can see that less than 9% of those who started the CFA process ultimately earn the designation. Okay now that we have established that the CFA is extremely hard, what exactly do we hope to learn, and how can this help prepare me for my Oxford MBA core-courses?

When deciding on what material will be included on the CFA exam, the CFA Institute solicits the advice of industry professionals on what the most relevant financial topics that a professional should know. The resulting “Candidate Body of Knowledge (CBOK)” is then parceled into 10 different “Topic Areas,” which are further divided into 18 “Study Sessions.” The topics are:

1. Ethics & Professional Standards 

2. Quantitative Methods 

3. Economics 

4. Financial Reporting & Analysis 

5. Corporate Finance 

6. Portfolio Management 

7. Equity Investments 

8. Fixed Income 

9. Derivatives 

10. Alternative Investments.

At first blush this might not seem too intimidating until you drill-down into "Quantitative Methods,” and realize that without the aid of a formula sheet, you will need to memorize: time value of money, probability, probability distributions and descriptive statistics, sampling and estimation, hypothesis testing, correlation analysis and regression, time series analysis, simulation analysis, and technical analysis. Whew-when I finish this my Finance I course should be a breeze!