Chartered Financial Analyst (CFA) is a professional designation offered by the CFA Institute (formerly known as AIMR) to financial analysts who complete a series of three examinations and work for at least four years in the investment decision making process. CFA charterholders are also obliged to adhere to a strict Code of Ethics and Standards governing their professional conduct.

The CFA designation is a significant qualification for people engaged in the financial and investment sector and has become a prerequisite for advancement at many firms. A study by the CFA Institute showed that professionals with the designation earn salaries 100% higher than their peers with equivalent credentials in equivalent positions. From 1963 (when the CFA designation was first used) to 2006, approximately 69,600 people from 126 different countries have been awarded the right to use the CFA designation. As of 2006, more than 116,000 more people are currently enrolled to take one of the examinations.

The CFA program began in the United States, but became increasingly international similar to the UK's Association of Chartered Certified Accountants (ACCA) which offers the Chartered Certified Accountant qualification (Designatory letters ACCA or FCCA) worldwide. By 2003 fewer than half the candidates in the CFA program were based in the US and Canada, with most of the other candidates based in Asia or Europe. India and China have shown some of the highest growth from 2005-2006 with increases of 25% and 53% respectively in the total number of charterholders.[1]

The basic requirements for prospective CFA candidates include a four-year university degree with being allowed to apply at the final year of the degree program (or international equivalent) or four years of qualified, professional work experience. [2] The program focuses on portfolio management and financial analysis, and provides only a generalist knowledge of other areas of finance.

Note: The CFA designation is not affiliated with the Chartered Financial Analyst degree offered by a university in India known as ICFAI or its affiliate the Council of Chartered Financial Analysts. ICFAI offers Masters degrees in Finance which to lead to a CFA Charter issued by the CCFA. AIMR sued and won a judgment [3] prohibiting the organization and its members from using the CFA or Chartered Financial Analyst mark in the United States and Canada. In August 2006, an Indian court issued a temporary injunction against the Indian organization as well. [4] The judgments made no assessment of the quality of the Indian program and merely discussed the trademark violation. The Indian Association of Investment Professionals[5] is the only organization in India which is affiliated with the CFA Institute.

The CFA exam

Candidates generally take one exam per year over three years and are written at a postgraduate level for financial professionals. Exams are challenging, with only 40% passing the Level I exam in June 2006; Europe achieved the highest pass rates in the recent exams with a 57% pass rate. [6] The December 2005 Level I Exam resulted in a worldwide pass rate of 34%. The Level II and III passing rates for 2006 were 48% and 76% respectively. [7]

* The Level I study program emphasizes tools and inputs and includes an introduction to asset valuation and portfolio management techniques.
* The Level II study program emphasizes asset valuation and includes applications of the tools and inputs (including economics, financial statement analysis, and quantitative methods) in asset valuation.
* The Level III study program emphasizes portfolio management and includes strategies for applying the tools, inputs, and asset valuation models in managing equity, fixed income, and derivative investments for individuals and institutions.

All three exams are administered on paper, on a single day; the Level I exam is administered twice a year (usually the first weekend of June and December). The Level II and III exams are administered once a year, usually the first weekend of June. Each exam consists of two three-hour sessions. Both Level I and Level II are entirely multiple choice, while Level III consists of a session of short-answer questions and a session that is multiple choice. On the multiple-choice sections, there is no penalty for wrong answers.

Candidates who have taken the exam receive a score report that is intended to be fairly unspecific: there is no overall score for the test, only a Pass/Fail result. For each category of questions, each test-taker is given a broad range within which his or her performance falls: below 50%, between 50% and 70%, and above 70%. There is no pre-set passing grade for the exams; instead, the threshhold for passing is determined by multiplying by a certain percentage the score of the top performers on the specific year's exam. The wide variation in pass rates from year to year may partially stem from this calculation.

The CFA curriculum

The curriculum for the CFA program is based on a Candidate Body of Knowledge established by the CFA Institute. The curriculum includes:

* Ethics and Professional Standards
* Quantitative Methods (such as the time value of money, and statistical inference)
* Economics
* Financial Statement Analysis
* Corporate Finance
* Analysis of Investments (stocks, bonds, derivatives, venture capital, real estate, etc.)
* Portfolio management and Analysis (asset allocation, portfolio risk, performance measurement, etc.)

The ethics section is primarily concerned with compliance and reporting rules when managing an investor's money or when issuing research reports, although there are some rules which pertain to more general professional behaviour (such as prohibitions against plagiarism). There are also rules that specifically relate to the proper use of the designation for charterholders and candidates. All of these rules are delineated in the 'Codes and Standards'.

The section on quantitative analysis is dominated by statistics and time series analysis. Other financial fundamentals such as the time value of money are also addressed. The statistics topics are fairly broad, but the main focuses are risk analysis, hypothesis testing and regression analysis. For the test, there are two calculators allowed, both of which have special financial functions for statistics and time value of money. The test also features other quantitative topics, but these are covered in other sections. For example, calculating depreciation of assets is a part of financial statement analysis (accounting), and determining currency arbitrage is a part of international economics.

Both micro and macro economics are covered. There are sections for international economics, mainly related to currency conversions and how they are affected by international interest rates and inflation.

The accounting section is heavily tested at Levels I and II, but is not a significant part of Level III. It is divided into financial statements analysis and corporate finance. Financial statement analysis considers the statement of cash flows, the balance sheet, and the income statement. Each of these documents gives a distinct view into the state and operations of a company. Corporate finance uses these views of the company to make decisions about projects, deciding how they will impact the company.

The section on security analysis is divided by the types of security. There is a general section on global markets, sections on equity (stocks), fixed income (bonds), and derivatives (futures, forwards, options and swaps). The first levels of the test require familiarity with these instruments, then the focus develops into correctly valuing them, and how to properly use them.

The final section is portfolio management. This section increases in importance with each of the three levels. Portfolio management is an analysis of the process of managing money. It depends heavily on all of the other topics. When managing money for others, ethics is obviously important. This section deals with how the investor's needs are met by the portfolio manager. Modern portfolio theory is also tested, the efficient frontier, Capital asset pricing model, etc.