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.

Dow Dog
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…

2 thoughts on “I Love My Problems”

  1. Far be it from me to advise someone else on study techniques…everyone learns differently…but here goes.

    If your goal is a complete understanding of the material then it can not hurt to read the materials. If your goal is to pass the test this June, then I believe the method you outline here is correct (I passed the CPA and got a 700 on the GMAT on the first tries). The critical issue is to get a study guide that provides the reasons why an answer is incorrect. Understand that and the next time you will golden.

    As my uncle (a CPA) explained to me that creativity is not a strong suit of those creating these multiple choice tests. By pounding the pavement so to speak, you will see all of the types of questions available to be asked. On multiple occasions I noted a question on the actual test that was solved the same as a practice test – the difference was the scenario and amounts. This was very encouraging during the test and obviously helpful as well.

    You seem to care as much about the material as you do passing the test – so why the rush. Change the test to December, take until June to do it your way and then use the rest of the year to hit the practice tests.

    PS – A critical element of success in the method noted above is how you learn and the retention rate. I learn from making these sort of mistakes and understanding why I made them. Additionally, with a pass rate of 75% for the CPA exam, I knew that if I could get a 60% on an area the first time out, then by understanding my mistakes I could get to a 75%. I have an unusually high retention rate. This approach proved true for me. Also note that taking the CPA exam indicates that many accounting classes were taken. This was not true for you regaring finance so by reading the books you are essentially taking self-taught finance classes.

    Confused yet??……..good luck

  2. Thanks for the comments & suggestions Charlie.

    Yes I seem to be a bit of a split personality when it comes to the CFA exam. Some days I’m slowly reading & savoring the material, remembering that the reason I’m doing this is first and foremost to learn the theory.

    Other days I wake up with an incredible sense of urgency about how little I will know by test day if I keep studying at the current pace.

    I do see on the CFAI site that they consider a candidate’s request to change test dates “on a case-by-case basis”. Never even thought that was a possibility…

    I’m unfortunately not blessed with strong retention but do learn well from mistakes. Anyway, thanks much for the tips – and reminding me that there is no rush. 🙂

    – Lumilog

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