How to approach Quantitative Methods in CFA L1

Quantitative Methods CFA, Quants CFA,

This is one of those sections which might give you sleepless nights before the exam. With a 12% weightage and a fair bit of complex statistical concepts this is one section which you should start practicing early in your CFA journey. In this blog I will share with you my approach to this section and how you can learn from some of my mistakes 🙂

Quantitative Methods (referred to as Quants from here on) is primarily divided into two sections – The basic stuff (like Time value of money, returns, etc) and then there is this advanced Statistical stuff like Normal distribution curve, P-Value etc. The basic stuff is really basic. It sets the foundation for rest of your CFA curriculum. It brings back primary school maths concepts (around compound interest) and expects you to know how 100 Rs. today is not of the same value one year later.

Do you remember your primary school maths problem where Mohan had Rs. 100 and was to invest it with a bank at 10% interest rate? Back then you were expected to calculate the amount Mohan was to receive 1 year later from the bank. In CFA there is just this small little flip in the same ‘Mohan Problem’. You are told that Mohan needs Rs. 110 at the end of year 1 for his personal expenses. You are to calculate for Mohan the amount of money he should invest today so as to be able to get that money from the bank. This they refer to as Present Value (PV) and is at the heart of any financial concept.

If I were to tell you that the first part of Quants module in CFA L1 is as simple as making the investment decision for Mohan, then will that make you happy? Trust me it is simpler than that 🙂 Once you get the Time Value of Money (TVM) concept, 50% of your Quants is sorted and you can be assured of cracking 10-12 questions in your Quants module in the final exam. Candidates who flunk this section are those who are unable to make this demarcation and neglect the overall Quant section under the pretext of it being incomprehensible. I would strongly recommend, irrespective of whether you join a training institute or prepare on your own, this 50% is very much in your reach.

Now lets talk of the remaining 50% – Fucking Statistics!

Statistics is area of maths which relies on samples to predict the behavior of a population. So if I believe that all girls in Delhi are hot it is impossible for me to scan all the Delhi Girls and prove my hypothesis. Hence, I pick up a sample of say first 50 girls which I see in Malviya Nagar Metro Station and categorise them as Hot or Not Hot. If say 50% or more of them are Hot then my hypothesis is correct else it is wrong.

Statistics is as simple as our Hot Girl example above. But unfortunately most of the candidates are being taught this beautiful subject with primary focus on the final formula, which not only kills the entire juice in the subject but also scares a candidate to death. Eventually a candidate loses interest in the subject and ignores the subject forever.

Let me boast about our establishment here but I think it is apt . At 360DegreeCFACoaching the focus is on the concept and not the formula. We focus on plucking real life examples to stamp the concept into the candidate’s head which then sticks with him even beyond the exam.

Yes its absolutely true that statistics is one of the toughest nuts to crack in the whole of mathematics but what is not true is that it is only composed of ugly looking formulas. Also most of the financial tools (like MS-Excel) which are used extensively in the finance industry do not require you to learn any of these formulas. All they need you to know is the concept and concept alone. The excel formula sheet will take care of the rest for you 🙂

To nail this section, do try and understand the logic behind the concept, be it normal distribution or T-Distribution or P-Value. The key to understanding the statistical analysis is to look at only the qualitative examples first. Do not even bother to look at the formulas or the problems. Once you have gone through enough examples and have formed a basic idea around the concept, it is then when you should start approaching the problems (not the formulas). See how the examples are then sorted using these formulas. Only after you have established a fair bit of linkage between the problems and the solution, try and then get into the formulas. Trust me this methodology would be really helpful and would give you enough comfort to perform decently well in this section 🙂

In the end, there is one last remark from my side. In case you find that statistical analysis is breaking into your confidence chuck it completely. Focus only on the first part and try and grab 6% (out of the total 12% of Quants). For the statistical part just randomly mark Option A and there is high probability you will get atleast 1/3 rd right. That my dear friend is good 4% 🙂

All the very best for this section 🙂 I hope this blog has answered few of your queries. In case there are any more queries do drop in your comments. In the next blog I will deep-dive into Economics 🙂