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Six ways the CFA exams are about to change

CFA, CFA Institute, CFA exams, CFA Level I, CFA Program, CFA Level II, CFA Level III, test taking

The CFA is a sought-after credential, especially for buy-side professionals.

The CFA exams are changing for 2018, and it’s not just an increasing focus on financial technology. In fact, there are nuanced adjustments to the questions related to asset allocation, fixed income, alternative investments, financial reporting, risk management and economics that the CFA Institute will include in the exams.

Stephen Horan, managing director of credentialing at the CFA Institute who formerly worked in the financial services industry and as a professor of finance, leads the development of the institute’s education programs, including the CFA Program. Here’s what changes he says should be on your radar as you prepare to take any of the three levels of the CFA exam.

Asset allocation: goals-based and liability-driven investment

For CFA Program Level III candidates, the biggest change is the reorganization of the asset allocation section, with an increasing focus on liability-driven investment (LDI).

“What we’re focusing on there is more liability-driven investing and liability management for institutional asset managers, as well as goals-based investing in a wealth management context,” Horan says. “Goals-based investing is a manifestation of the increasing importance of private wealth in the industry, as individual investors are taking on greater responsibility over their assets, and as defined-contribution plans replace defined-benefit plans, we see the wealth management industry around the globe expand, and in general wealth creation globally as well.

“Candidates will definitely see the liability-driven investing content show up in the fixed income side, not just the asset allocation section,” he says.

Fixed income

Changes are coming to the fixed income questions as well.

“Some of the interesting things we’re seeing on the fixed income side – we’re focused on issues with regard to credit ratings, trying to set candidates up to arrive at more independent opinions and judgments of individual securities,” Horan says. “Some of the particular strategies that the curriculum is gravitating towards are credit spreads from both a bottom-up and a top-down perspective.

“We’re focusing more on ESG in the fixed income space, whereas traditionally that had been more prevalent in the equities space,” he says.

Alternative investments

Alternative asset classes represent 25% of all assets under management and that’s a growing number.

“While much of the analytical frameworks for publicly traded assets apply, there are a lot of unique elements in alternatives,” Horan says. “We’re focusing on new classes of alternative investments – infrastructure and public real estate, including public-private partnerships, are new ones.

“We refined our treatment of different valuation methods of illiquid securities and sharpened the focus on what the particular characteristics are of various alternative strategies, including both the potential benefits and risks,” he says.

“Candidates need to be able to do an analysis of the risk-return equation of the various alternative asset classes and strategies, as well as managerial issues associated with things like private equity, such as operational issues at the portfolio-company level.”

Financial reporting

Know your generally accepted accounting principles (GAAP).

“One of the things that we’ve dialed up is a greater attention to the quality of financial reporting,” Horan says. “We’ve gone into greater detail so that analysts know how to drill down past the top-line estimates.

“There’s a plethora of non-GAAP reporting out there,” he says. “We’re giving our candidates the ability to drill down to the notes that are included in the financial reports and use those to better understand the quality associated with the topline numbers and make the necessary adjustments to their valuation models.”

Risk management

You should familiarize yourself with exchange-rate risk management.

“We’ve been dialing up the notion of risk-related changes in currency,” Horan says. “We’ve also augmented our treatment of valuation at risk and simulation techniques of Monte Carlo simulations and scenario analysis.

“There will be questions about advanced analytical techniques and non-traditional methods, and it even starts to bleed into AI, which is an extension of simulation analysis,” he says. “Simulation analysis creates a large volume of data and scenarios, then you analyze those – AI starts with a lot of data and you’ve got to have analytical techniques to deal with that data and make sense of that.”


As always, micro- and macroeconomics will be part of the exams, but certain areas will be emphasized more so than in the past.

“We’re updating our treatment of business cycles, expansions, retractions, recessions and recoveries – we’ve seen expansions of those cycles over the past 120 years,” Horan says. “You have to be able to evaluate the effects of economic activity, unemployment, inflation and other traditional measures of economic activity, not in isolation but how do they interact together, especially central banks’ treatment of monetary policy, which has been so influential in recent years.

“We’re also building out our treatment of international trade and government regulations,” he says.

Photo credit: kali9/GettyImages

Comments (1)

  1. Sad, if true, that CFA Institute will be including ESG in its exam process. Hopefully, academic rigor, professional ethics/standards and investment analysis won’t be fully replaced by Social Justice Warrior criteria. One man’s ESG is another man’s eco-fascism. CFA Institute should remain apolitical (learn from the NFL).

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