## I Love My Problems

For a chronological index of my path to the CFA, click here.

I really, really love the example problems in the CFA study guides.

I remember my university courses on probability. After presenting the dry theory, the example problems all started with something like…

• Suppose you have 5 dice, or
• Suppose you have 4 black balls and 3 white balls in an urn, or
• Suppose you have 2 coins…

In other words, the examples were BOR-ING. Maybe if I were a gambler I’d find the dice odds interesting. But as a young student it was hard to see much application to my life or future work.

Enter the CFA Institute study guides! Now, they get major kudos in my book for at least making all their example problems based on investing, not colored marbles in a sack – or worse, just random variables X, Y, and Z. If this was all they did that would be a major improvement to holding my attention.

But they take it a step further. The examples often consist of real investing problems using real historical data. This level of authenticity makes the problems infinitely more interesting.

Case in point, see Example 6 on pg. 481 of Volume 1. They give you the real annual rate of return mean and standard deviation for two different Dow stock strategies spanning 1946 to 1995. The Dogs of the Dow strategy outperformed buy-and-hold-the-Dow by an average of about 3% annually over this time period.

Dawg of the Dow

But then you have to ask yourself, what are the chances that the secret sauce of the Dogs’ strategy really does result in higher average returns, and we’re not just getting fooled by some anomaly due to our small sample size (n=50)?

Now that’s an interesting example question! And of course the study guide not only shows you how to determine whether the 3% is statistically significant, but also offers additional commentary as to other real-world issues (taxes, transaction costs) that must be taken into consideration too.

Well that’s all I really wanted to say today. On an unrelated note, I talked with a friend who is preparing for the CPA exam and got yet further input that when it comes to studying, I am doing it wrong.

His original approach was similar to mine. First, take time to read & understand the theory. Then work the practice problems at the end and pat yourself on the back if you score 85% or better.

But according to his CPA review course, that’s not at all the way to successfully prepare. Instead they tell him to go immediately to working problems. Maybe on the first pass you only get 10% right. No problem, read as much theory as you need to in order to understand what you did wrong (might only need the answer key) and rework, rework, and rework the problem sets.

In short, It’s the same thing the more experienced lads & lassies posting comments here have been saying. CPA or CFA, the approach appears to be the same.

I’m nearing the end of Volume I (currently on pg. 510 of 525). Starting with Volume II I’ll most likely abandon my current read & savor approach and go with a more pragmatic problem-set intensive study method as everyone is advising.

I hope that doesn’t take the depth of learning or fun out of it though…