The June 2017 sitting of the CFA Institute's exams is fast approaching. If you're studying for them, good luck. You know you'll need it: the CFA exams are notoriously hard and for Levels One and Two at least, most people fail. Last year's miserable pass rates are show in the table below.
Level One has the lowest rate of success. Of the huge 59,627 people who sat the first rung of the CFA exams last year, 33,820 people failed. That's a lot of disappointment. Given that the CFA Institute advises 300 hours of study per exam, that's also 10m hours of study time wasted (assuming the candidates who failed actually put the hours in, which isn't always the case).
To maximize your chances of passing CFA Level One, you need to do some mock tests. At this stage, successful candidates say you need to be doing a lot of mock tests under timed conditions. But when you score yourself afterwards, how will you know whether you've done well enough to pass the real thing?
This is the problem: you won't.
The CFA Institute, which masterminds the entire process, is notoriously coy when it comes to explaining what constitutes a pass and what doesn't.
To pass, candidates need to meet a minimum 'net passing score.' What is that minimum net passing score ? No one knows. It's never given and it varies year-on-year according to how hard the paper was and how well everyone does in the exams.
When it's working out the minimum passing score, the CFA Institute uses something known as the 'Angoff Standard Setting Method' (explained here) to determine the pass rate. This has something to do with a set of CFA Charterholders sitting down and working out how difficult the questions really are and how easy it ought to be to pass.
To confuse matters further, because the marks allocated to different topics vary (click here to see the allocation for June 2016), strong performance in one topic won't necessarily compensate for weak performance in another.
If you fail the coming exams, you might therefore, wonder why.
So, what's the minimum score you need to pass?
Based on results posted in various online forums, we've identified the candidates who've passed recent Level 1 exams with the weakest scores. This is, seemingly, the minimum you'll need to get through:
1. You can pass with less than 50% in four subjects (Derivatives, Economics, Portfolio Management, and Quantitative Methods), with 51% to 70% in Alternative Investments, and with more than 70% in Corporate Finance, Equity Instruments, Ethical and Professional Standards, Financial Reporting and Analysis, and Fixed Income.
2. You can pass with Financial Reporting and Analysis under 50%, Economics and Portfolio Management over 70%, and everything else (seven other subjects) between 51% and 70%.
3. You can pass with less than 50% in Derivatives and more than 70% in Corporate Finance and Equity Investments, and between 51% and 70% in the other seven subjects.
4. You can pass with less than 50% in Quantitative Methods, Derivatives, Financial Reporting and Analysis, as long as you have more than 70% in Economics, Quantitative Methods, and Equity Instruments, and 51% to 70% in Corporate Finance, Ethical and Professional Standards, Fixed Income, and Portfolio Management.
5. You can pass with less than 50% in Alternative Investments, Derivatives and Quantitative Methods, so long as you have 50% to 70% in Economics, Equity Instruments, Financial Reporting and Analysis and Portfolio Management, AND more than 70% in Ethical and Professional Standards, Fixed Income and Corporate Finance.
So this, roughly, is the minimum passing score...
In other words, you don't have to get more than 70% in everything to pass. You don't even need to get more than 51% in everything to pass. It looks a lot like you can get less than 50% in three (or maybe four) topics, but you will probably need to counterbalance this with more than 70% in at least three subjects and with 51% to 70% in the rest.
The ethics adjustment
Lastly, if you're going to try super-hard for any of the subject areas, you might want to try very hard in ethics. For the past 11 years, the CFA Institute has implemented a so-called "ethics adjustment" when scoring exams, described on its website as follows:
'What is the "ethics adjustment"?
The Board of Governors instituted a policy to place particular emphasis on ethics. Starting with the 1996 exams, the performance on the ethics section became a factor in the pass/fail decision for candidates whose total scores bordered the minimum passing score. The ethics adjustment can have a positive or negative impact on these candidates' final results.
CFA Institute has a policy of not releasing either the minimum passing score or individual candidate scores. Consequently, CFA Institute does not release specific information about the ethics adjustment or the candidates who were affected. The adjustment has had a net positive effect on candidate scores (and thus pass rates) in most exam sessions. The published pass rates always take into account the ethics adjustment for borderline candidates.'