Every CFA Level 1 candidate hits a wall at some point. You are cruising through Ethics, feeling confident about Economics, and then suddenly Financial Reporting and Analysis shows up and humbles you completely. I have been there, and so has every charterholder I know.
After clearing all three levels and mentoring hundreds of candidates, I have a clear picture of which topics cause the most pain and, more importantly, how to overcome them. Let me share what actually works.
The Four Topics That Break Most Candidates
Based on candidate feedback, pass rate data, and my own experience, these are the topics that consistently cause the most difficulty at Level 1:
- Financial Reporting and Analysis (FRA) — 13-17% weight
- Fixed Income — 11-14% weight
- Derivatives — 5-8% weight
- Quantitative Methods — 8-12% weight
Together, these topics account for roughly 37-51% of the exam. You cannot afford to be weak in any of them. Let me break down why each is tough and how to tackle it.
Financial Reporting and Analysis: The Beast
FRA is the single largest topic by weight and the one most candidates struggle with. Here is why it is so challenging:
The problem: FRA requires you to understand not just what the accounting rules are, but how they interact. Changing an inventory method does not just affect COGS — it cascades through gross profit, taxes, net income, balance sheet values, and ratios. You need to trace these effects across all three financial statements simultaneously.
Topics within FRA that cause the most trouble:
- Long-lived assets (depreciation methods, impairment, revaluation)
- Income taxes (deferred tax assets and liabilities)
- Intercorporate investments (equity method vs. consolidation)
- Inventory accounting (FIFO vs. weighted average, and the now-removed LIFO comparison)
- Financial statement quality and red flags
How to conquer FRA:
Step 1: Build the foundation. Before diving into complex topics, make sure you understand how the three financial statements connect. Draw out the links between income statement, balance sheet, and cash flow statement. If this is not crystal clear, everything else will feel impossibly hard.
Step 2: Learn through journal entries. I know this sounds old-fashioned, but understanding the debit/credit entries behind each transaction makes the logic visible. When you know that creating a deferred tax liability means debiting tax expense and crediting DTL, the concept clicks in a way that reading paragraphs never achieves.
Step 3: Practice with financial statement effects. For every accounting treatment, ask: What happens to total assets? Total liabilities? Net income? Cash flow from operations? Equity? Build a mental checklist and run every new concept through it.
Step 4: Do at least 300 FRA practice questions. This is not optional. FRA rewards repetition because the examiners test the same concepts from different angles. For a deeper dive into this critical subject area, see our dedicated guide on CFA Level 1 Financial Reporting and Analysis.
Fixed Income: Where Math Meets Concepts
Fixed income is deceptively difficult. The individual concepts are not terribly complex, but the sheer volume and the interconnections between bond pricing, yield curves, duration, and credit analysis overwhelm many candidates.
Topics within Fixed Income that cause the most trouble:
- Bond valuation and yield measures (YTM, current yield, BEY)
- Duration and convexity (Macaulay, modified, effective)
- Term structure of interest rates and yield curve theories
- Credit analysis and credit risk measures
How to conquer Fixed Income:
Understand duration intuitively, not just mathematically. Duration is the sensitivity of a bond’s price to changes in interest rates. Think of it as: “If yields go up by 1%, my bond price drops by approximately [duration]%.” Once this intuition is in place, modified duration, effective duration, and convexity become extensions of the same idea.
Master the yield calculations by hand. Do not just plug numbers into a formula. Understand why YTM assumes reinvestment at the YTM rate. Understand why current yield ignores capital gains. Calculate a few bonds manually before relying on shortcuts.
Draw the yield curve. Literally draw it for different scenarios — normal, inverted, flat, humped. Then understand what each shape implies about economic expectations. The theories (expectations, liquidity preference, segmented markets) explain the shapes.
Practice the relationship between price, yield, coupon, and maturity. These four variables interact in specific ways, and the exam loves testing whether you understand the direction of change. For example: for a given change in yield, longer maturity bonds experience larger price changes than shorter maturity bonds (all else equal).
Derivatives: Small Weight, Big Confusion
Derivatives carry a relatively small weight (5-8%), but candidates disproportionately struggle with this section. The fear factor is real — options, futures, swaps, and forwards feel abstract to anyone encountering them for the first time.
Topics within Derivatives that cause the most trouble:
- Put-call parity
- Pricing and valuation of forwards and futures
- Swap mechanics and valuation
- Option payoff and profit diagrams
How to conquer Derivatives:
Start with payoff diagrams. Before you touch a formula, draw the payoff diagram for a long call, short call, long put, and short put. Understand what each position means economically. This visual approach makes everything that follows much more intuitive.
Understand put-call parity as a relationship, not a formula. Put-call parity says that a protective put (stock + put) has the same payoff as a fiduciary call (call + bond). Once you see this equivalence visually through payoff diagrams, the formula becomes obvious rather than something to memorize.
Use real-world examples. A forward contract is simply an agreement to buy something at a fixed price in the future — like pre-ordering a phone at today’s price for delivery next month. A swap is just a series of forwards. Making these connections to everyday transactions removes the abstraction.
At Level 1, keep it simple. The derivatives section at Level 1 is conceptual, not heavily mathematical. Focus on understanding mechanics, payoff structures, and basic pricing relationships. Do not get lost in complex pricing models — those come at Level 2. Our CFA Level 1 Derivatives guide walks through the key concepts and common pitfalls in more detail.
Quantitative Methods: The Unexpected Hurdle
Many candidates underestimate Quant. If your statistics background is weak, this section can be surprisingly time-consuming.
Topics within Quant that cause the most trouble:
- Hypothesis testing (particularly choosing the right test and interpreting p-values)
- Probability distributions (normal, t-distribution, chi-square, F-distribution)
- Time value of money calculations (especially with uneven cash flows)
- Regression basics
How to conquer Quant:
Nail TVM first. Time value of money is the foundation of almost everything in the CFA curriculum. If you can confidently handle present value, future value, annuities, and perpetuities, you have a head start on Fixed Income, Equity, and Corporate Finance as well.
For hypothesis testing, follow a rigid framework. Every hypothesis test follows the same steps: state the hypotheses, determine the test statistic, find the critical value or p-value, make the decision. Drill this framework until it is automatic.
Practice with your calculator. Whether you use the TI BA II Plus or HP 12C, get comfortable with the statistical functions. Know how to compute mean, standard deviation, and NPV without fumbling. Speed with your calculator saves precious time on exam day.
Focus on interpretation, not just calculation. The exam increasingly tests whether you understand what a result means, not just whether you can compute it. A p-value of 0.03 means there is a 3% probability of observing the result if the null hypothesis is true — make sure you can explain these concepts clearly in your mind.
A Study Strategy for Tough Topics
Here is the approach I recommend to my mentees:
-
Do not save tough topics for last. Study FRA and Fixed Income early when your energy and motivation are highest. Leaving them for the final weeks is a recipe for panic.
-
Interleave your study. Study a tough topic for 2-3 days, then switch to an easier one (Ethics, Corporate Issuers) for a day. This prevents burnout and allows concepts to consolidate in your memory.
-
Use the Feynman technique. After studying a concept, try explaining it in simple language as if teaching a friend. If you cannot explain it simply, you do not truly understand it.
-
Track your weak areas. When doing practice questions, keep a log of topics where you consistently get below 60%. These are your priority review areas in the final month.
-
Do not aim for perfection in tough topics. You do not need 90% in every section. Aim for 70%+ in tough topics and 80%+ in your strong areas. The MPS (minimum passing score) typically sits around 60-65%. Pairing this targeted approach with solid time management strategies will help you allocate your study hours where they matter most.
The Mindset Shift
Here is what separates candidates who clear Level 1 from those who do not: the ones who pass accept that confusion is part of the process. The first time you read about deferred tax assets or put-call parity, it will not make sense. That is normal. The understanding builds through repetition, practice, and active recall.
Do not measure your progress by how a topic feels when you read it. Measure it by how accurately you answer practice questions. Feeling confused while reading but getting 70% on practice questions means you are on track.
Struggling with specific CFA Level 1 topics and need targeted guidance? I provide free mentorship to help candidates build effective study strategies. Get in touch here and let us work through your challenge areas together.