CFA Tips (Level 1)

The 2010 Level I examinations will include 240 total multiple-choice questions, 120 on themorning session of the examination and 120 on the afternoon session. Each multiple-choicequestion is free-standing (not dependent on other questions) and has four possible answers: A, B,C, and D. All questions are equally weighted and there is no penalty for guessing. These are some ideas that may help you while you are taking the Level I multiple choice examination.

• Carefully manage your time. Don’t spend too much time on any one question or topic area. On average, you should allocate 1.5 minutes to each multiple choice question, including timeto record your answer on the answer sheet.

• Read the questions carefully. A careless “skimming” of the question may lead you to a completely different, and incorrect, answer.

• Read each item carefully and eliminate obviously incorrect answers. If you have to guess and you can eliminate one or two of the responses, your odds of answering the question correctly are much higher. There is no penalty for guessing.

• No individual has ever received a perfect score on any level of the CFA examination; there will be some questions on the examination that you will not be able to answer correctly. This is not by design. There is a great deal of material to master, and examination questions are challenging. A score of 70% is very good on the CFA examination. This means that on Level I, for instance, you can miss 72 (out of 240) questions and still earn 70% of the points.

• Examination writers use a standard set of formatting conventions on the selected response questions (multiple choice items on Level I and item set items on Levels II and III). Many sample exams produced by third parties do not follow these conventions, so you should review the CFA Institute format presented here:


Formatting Conventions Used for 2010 Level I Examinations

Item Construction:

Each item on the Level I multiple choice and Levels II and III item sets consists of a stem (question, statement, and/or table) and four distracters, A, B, C, and D. There are three basicformats used:

1. Stems using sentence completion with four unique distracters
2. Stems phrased as questions with four unique distracters
3. Stems using sentence completion or stems phrased as questions with pairs of distracters
arranged in two columns

The first two formats are routinely used for multiple choice items regardless of the nature of the
examination:

Example 1 (Stem using sentence completion)
An analyst suspects that a particular company’s U.S. GAAP financial statements may require adjustment because the company uses take-or-pay contracts. The most likely effect of the appropriate adjustments would be to increase that company’s
A. return on assets.
B. debt-to-equity ratio.
C. interest coverage ratio.
D. return on common equity.

Example 2 (Stem phrased as question)
An analyst suspects that a particular company’s U.S. GAAP financial statements may require adjustment because the company uses take-or-pay contracts. Which of the following is most likely to increase as a result of the appropriate adjustments being made to that company’s
financial statements?
A. Return on assets.
B. Debt-to-equity ratio.
C. Interest coverage ratio.
D. Return on common equity.

The third basic format is used extensively on the CFA examination and has several variations.
Alternative versions of the two-column distracter format are illustrated below:

Example 3(a)
An analyst suspects that a particular company’s U.S. GAAP financial statements may require adjustment because the company uses take-or-pay contracts. The most likely effect of the appropriate adjustments on the company’s return on assets (ROA) and debt-to-equity ratio, respectively, would be

ROA Debt-to-equity ratio
A. Increase Increase
B. Increase Decrease
C. Decrease Increase
D. Decrease Decrease

Example 3(b)
An analyst suspects that a particular company’s U.S. GAAP financial statements may require adjustment because the company uses take-or-pay contracts. What is the most likely effect of the appropriate adjustments on the company’s return on assets? debt-to-equity ratio?
A. Increase Increase
B. Increase Decrease
C. Decrease Increase
D. Decrease Decrease

Example 3(c)
An analyst suspects that a particular company’s U.S. GAAP financial statements may require adjustment because the company uses take-or-pay contracts. Will the appropriate adjustments most likely increase the company’s return on assets? debt-to-equity ratio?
A. No No
B. No Yes
C. Yes No
D. Yes Yes


Item Stems:

The Level I CFA examination does not use EXCEPT, TRUE, or FALSE in item stems and avoids the use of NOT in item stems whenever possible. When appropriate, stems will include one of the following qualifiers: most likely, least likely, best described, most appropriate, most accurate, least appropriate, least accurate. Each stem supports only one item on the examination.

Distracters:

The Level I CFA examination does not use any of the following distracters:
all of the above, none of the above, I and II only, II and III only, cannot determine,
cannot calculate, not enough information to determine.

Distracters consisting of words or sentences are typically ordered from shortest to longest; distracters that are quantitative are ordered from the smallest number to largest number. The distracters agree grammatically with the stem; language common to all distracters is placed in the stem.


Comments