We don’t know the result of the December 2008 exam yet, but the passing rate for the June 2008 exam is a mere 35%. Daunting indeed! 

I was actually very excited when I found out about this passing rate. I was always one of the very top students in class, from elementary all the way to university. I loved the feeling of studying, understanding, and then acing a test or an exam. Since my graduation, I haven’t tested myself against a challenging test like this again, and I thought it’d be fun to do this like the old times, and ace the exam as always. 

So when I got the thick CFAI books (they weigh at 8 kgs–roughly 17.6lbs):

1. I immediately set up a plan to study those books. 
2. I even thought at that time that using commercially available study notes like Schweser was surely something that only a lazy bum would do. Smart, diligent people would surely read through the CFAI books and produce their own study notes!
3. I planned to go through the CFAI books in the order that I thought would give me the biggest bang for the buck.

I was very much looking forward to my study sessions! 

In the 3 months that followed, I read, and read, and read, and read the CFAI books. I updated the plan and created study notes. I started a Google group for CFA email study group. I hung around analystforum.com a lot. On top of that, I continued researching and reading more about the exam itself.

What 3 Months Have Taught Me

If I could go back 3 months and redo this all over again, would I?

Definitely not.

Because within this 3 months I learned quite a bit of things:

1. It’s not rocket science. The material itself is OK, even if you don’t have a finance background (I don’t). Sure, it can be quite hairy sometimes, but it ain’t rocket science. As long as you spend time to read and understand it, there shouldn’t be any problem with understanding. 
2. But there is a LOT of material to cover. Ha ha, oh, big surprise, right? Well the 3 months just made me realize how much was really there. You need to dig into each topic deep enough to be able to answer questions, which is OK, but here’s the main challenge: you need to maintain that depth for every topic for months, at least until the exam is over.
3. You WILL forget more than a few details in just a few weeks if you don’t keep revisiting the material. I really spent a lot of time reading up on quants. By the time I finished reading fixed income, I didn’t even remember what platykurtic was. And don’t even start talking about Ethics! 
4. The best-laid study plan will go awry. No matter how good a study plan sounds in the beginning, if you’re a married 30-something with a fulltime job like mine, trust me, there’ll be many occasions where you wouldn’t be able to stick to the plan.
5. Forget study notes. Creating your own study notes is actually very time-consuming, and worse, you don’t really know what you need to know and what you don’t need to know. You can follow the LOS, but the LOS can be quite broad sometimes. Schweser does a lot better job at this than one man doing this part time ever will.
6. Practice with lots of questions. You can only truly know what you don’t know by answering questions. Lots of questions. Breezing through bank discount yield, HPY, EAY, and money-market yield is easy. They are easy to understand. Having the definitions stored in your head so you can answer questions about them is a different thing. This is an exam. The best way to prepare is by taking lots of practice exams.
7. If you’re like me, you need study notes and practice questions. For the longest time I resisted even the idea of buying any kind of study notes and practice questions. After burning a few weekends studying, though, it dawned on me that paying around a thousand dollars to make sure that I don’t have to do this again is very much WORTH IT. The hours spent to repeat this the second time, the hours I’ll never get back, the hours I can use to research more investments and running my business, are worth much, much more than just a thousand dollars.

New Strategy: 140 Days To Go

So. with 140 days to go, I’ve only covered Quants, Ethics, Fixed Income, and half of Derivatives, and I’m changing my strategy:  

1. I’ve stopped updating my Study Notes. Sorry guys. I enjoyed writing down these notes, but it’s just not the right strategy for something like this. The majority of the time should be spent working on practice problems, not writing notes.
2. I’ve stopped planning using the waterfall model, and have switched to iterative model now. No more extended review at the end of a reading. Read everything, and reread again near to the exam. Read everything first once is my top priority now.
3. For reading, I’ll use the Schweser study notes. Have you seen how thin those Schweser notes are? We’re racing against time here. We can always go back to reading CFAI books after passing the exam.
4. I’ll use CFAI books only for: (a) the chapter summaries, (b) the exercise problems, and (c) further research in areas where the Schweser’s explanations aren’t clear enough. 
5. I’ve started doing practice questions everyday to cover areas that I have covered so far. This is mainly to help with retention–I don’t want to forget kurtosis again until July 2009

I will revisit this strategy again in March 2009. 140 Days To Go!!!

If you see the examples in Study Session 2 of the Schweser Notes, it’s full of sentences such as “On the TI, enter…”

Darn RPN haters. Sigh.

Calculating EAR by following the formula

Anyway, today I’d like to share a shortcut that I had learned before encountering the Schweser examples on computing the Effective Annual Rate (EAR). The concept itself is quite straightforward: if a quoted annual rate of X% is compounded more than once annually–let’s say quarterly–then the effective annual rate is actually higher than X%.

The formula given is:

EAR = (1 + periodic rate)^m – 1

So in one Schweser example, where the stated annual rate is 12% and it’s compounded quarterly, it goes like this:

1. Compounding period is 4, so periodic rate is 12%/4 = 3%.
2. Realize that 3% = 0.03, so to calculate the EAR following the standard formula, in HP12c we should type this:
   

   1.03 [ENTER] 4 [y^x] 

3. Which, on default settings in HP12c, gives the result of 1.13, since by default the calculator displays to two decimal places.
4. Then we need to remember to subtract 1 from it, and realize that 0.13 is 13%, which is the effective annual rate. 
5. Except we realize that the answer given in that Schweser example is 12.55%, which is pretty bloody different from 13%.

So troublesome. Here’s a much faster and straightforward way to do it in HP12c–I suspect you can do it on TI BAII as well (note the slash “/” is used to represent the division key):

12 [ENTER] 4 [n] [/] [i] [CHS] [PMT] [FV]

Which I’m happy to report displays exactly 12.55.

Why does this work?

Let’s think for a while why this works. Here, instead of manually converting figures in percent to decimal, adding 1, raising to the m^th power, subtracting 1, and converting it back to percent, we’re turning this into a simple TMV calculation.

That is, when we type in:

12 [ENTER] 4 [n] [/] [i] [CHS] [PMT] [FV]

we’re doing these steps (see the picture below, too):

• setting 4 as compounding periods (n)
• setting 3% as the periodic rate (i)
• -3 as periodic payment (negative means money that is paid out by us).  
• calculating the Future Value (FV), which turns out to be the EAR.

So… why does this work? This works because this is the exact calculation that happens when we limit our calculation just to the interests alone, taking the original present value (assumed at $100 in this shortcut–remember that 3% out of 100 is 3 dollars) out of the calculation. 

That is, this calculation answers the following question: “Let’s say I put in $100 now. From now onwards, every 3 months, the bank is going to pay me 3% interest on the principal, which will be added back to the principal. At the end of 1 year, how much interest will the bank have paid me?”

The answer is $12.55, which, for a principal of $100, means an effective annual rate of 12.55%.

Also, I’ve created a Google group for our email study group for June 2009 Level 1 exam. Please feel free to email me for membership by clicking this link! See you there!

After seeing the CFA exam result (not mine) though, I’m thinking of, er, rethinking my strategy. The exam result looks roughly like this:

As you can see, we have a total of 240 questions for CFA Level 1 Exam. There are 36 questions on Ethical & Professional Standards. That’s a BIG chunk of the exam, especially considering that Ethics only take up 160+ pages of the CFAI Book 1, including many pages of optional materials, whereas Economics (24 questions) is one whole Volume 2 by itself with around 480 pages!

Conclusion: not every topic is created equal. Ethics is the lowest-hanging fruit of the bunch. Definitely one to read through first!

The rightmost column in the table below tells you which chapters give you the biggest “bang for the buck”; that is, the most number of questions covered by reading the least number of pages

I’m thinking that after finishing Ethics (just left with GIPS now), I’ll go to either Volume 4 (covering 32 questions), or Volume 5 (covering 52 questions). I’ll skip Economics for now–there are simply too many pages (480+) with relatively too little number of questions covered!

(And somehow I find that Economics is very, very boring. Some people may find this a surprise–but I find Ethics and Quants a LOT more interesting than Economics. Oh well.)

(Click here if you’d like to download the image.)

The Excel sheet (well, Zoho sheet) is part of my overall strategy: it’s smart enough to expand or shrink the plan, depending on whether I underestimate or overestimate the time it takes to finish an activity. That way, as I update the plan, I always get immediate feedback on how the update is going to affect my schedule.