CFA® Level I Equity Investments

Sitting the exam in 2027? This guide follows the 2026 curriculum. For 2027 the topic (renamed Equities) is rebuilt around an analyst's workflow; market efficiency, margin and leverage calculations and order types leave the curriculum. See what changed in 2027.

The 8 learning modules

1. 01 Market Organization and Structure

   What the financial system does, the main classes of assets and contracts, and the intermediaries that connect buyers and sellers, from brokers and dealers to exchanges and clearing houses. The testable core is positions: short sales, buying on margin, the leverage ratio, leveraged returns and the price at which a margin call occurs. You also need order types (market, limit, stop), validity and execution instructions, primary market offerings, and the difference between quote-driven, order-driven and brokered markets and between call and continuous trading.

   8 lessons · 2 videos in the Academy →

2. 02 Security Market Indexes

   How an index value and its price and total returns are calculated, and how the choice of weighting (price, equal, market capitalisation, float-adjusted or fundamental) shapes an index and its biases. Expect calculations of index returns, weights and a new price-weighted divisor after a split or a change of constituent. The module also covers rebalancing and reconstitution, the uses of indexes, and the particular features of equity, fixed-income, commodity, real estate and hedge fund indexes.

   7 lessons · 3 videos in the Academy →

3. 03 Market Efficiency

   What it means for prices to reflect information, the difference between market value and intrinsic value, and the factors that make a market more or less efficient, such as the number of participants, disclosure, limits on trading and transaction costs. You need the weak, semi-strong and strong forms and what each implies for technical analysis, fundamental analysis and passive investing. The rest of the module covers anomalies, including calendar effects, momentum, size and value effects, closed-end fund discounts, earnings surprises and IPOs, and the behavioural explanations for them.

   7 lessons · 2 videos in the Academy →

4. 04 Overview of Equity Securities

   The features of common and preference shares, including voting rights and whether preference dividends are cumulative, participating or convertible, and how these features change risk. You compare public and private equity and the ways to invest across borders, especially depository receipts. The module links book value and market value, and asks you to calculate return on equity and to see why a company's accounting return is not the same as investors' required return.

   8 lessons · 2 videos in the Academy →

5. 05 Company Analysis: Past and Present

   How an analyst studies what a company does now before forecasting it. It covers the structure of research reports, how to describe a business model, and revenue analysis through drivers such as volume and price, pricing power and market share. You then separate fixed and variable costs, measure margins and working capital, including the cash conversion cycle, and judge whether capital investment and the capital structure create value, for example by comparing return on invested capital with the cost of capital.

   8 lessons · 1 video in the Academy →

6. 06 Industry and Competitive Analysis

   Why industry analysis matters and how to do it: classifying companies with third-party schemes or by cyclical sensitivity, and surveying an industry's size, growth, profitability and concentration, including the Herfindahl–Hirschman index. The main frameworks are Porter's five forces for industry profitability and a PESTLE review of external influences. The module ends with competitive positioning through cost leadership, differentiation and focus strategies.

   8 lessons · 2 videos in the Academy →

7. 07 Company Analysis: Forecasting

   How to build a forecast: choosing what to forecast, how far ahead, and which approach to use, whether historical results, base rates and convergence, management guidance or the analyst's own judgement. You forecast revenue top-down, bottom-up or with a mix of both, then gross margins, operating expenses, working capital, capital spending and capital structure. Questions often ask which approach fits a company, or test a short calculation such as average store count or revenue from volume and price. The module finishes with scenario analysis.

   7 lessons · 1 video in the Academy →

8. 08 Equity Valuation: Concepts and Basic Tools

   The link between estimated value and market price, and the three families of models: present value, multiples and asset-based. You value shares with the dividend discount model in its no-growth, Gordon growth and multistage forms, value preferred shares, and meet free cash flow to equity (cash from operations less fixed capital investment plus net borrowing). The module also covers the effect of cash and stock dividends, splits and repurchases, justified and comparable price multiples, enterprise value multiples, and asset-based valuation. It carries the most calculations in the topic.

   9 lessons · 7 videos in the Academy →

What the questions cover

• Market organisation: long, short and leveraged positions, margin calls and order types
• Calculating price-, equal-, market-cap- and fundamentally weighted index values and returns
• The three forms of market efficiency, market anomalies and behavioural explanations
• Common and preference shares, depository receipts, and return on equity
• Company analysis: business models, revenue drivers, costs, working capital and capital structure
• Industry classification, concentration, Porter's five forces and competitive strategies
• Dividend discount models, price and enterprise value multiples, and asset-based valuation

Key formulas

Leverage ratio (maximum)

$\displaystyle \text{Leverage ratio} = \frac{1}{\text{Initial margin}}$Ignoring interest and commissions, the return on equity equals the leverage ratio times the return on the shares.

Margin call price (long position)

$\displaystyle P = P_0 \times \frac{1 - \text{Initial margin}}{1 - \text{Maintenance margin}}$For a short position it becomes P0 × (1 + initial margin) / (1 + maintenance margin), and the call comes when the price rises above it.Learn it: Long, short and leveraged positions: leverage ratio, margin return and margin calls →

Index price and total return

$\displaystyle \text{PR} = \frac{V_1 - V_0}{V_0}, \quad \text{TR} = \frac{V_1 - V_0 + \text{Inc}}{V_0}$Inc is the income (dividends) received on the constituents over the period. Multi-period index values link returns geometrically.

Price-weighted index

$\displaystyle V_{PW} = \frac{\sum_{i=1}^{N} P_i}{D}$After a split or a change of constituent, choose the new divisor D so that the index value is unchanged.

Market-cap weight

$\displaystyle w_i = \frac{Q_i P_i}{\sum_{j=1}^{N} Q_j P_j}$Q is shares outstanding. For a float-adjusted index, multiply each Q by the fraction of shares that trade freely.Learn it: Market-cap, float-adjusted and fundamental weighting →

Gordon growth model

$\displaystyle V_0 = \frac{D_1}{r - g} = \frac{D_0(1 + g)}{r - g}$Requires r > g. In a multistage model the terminal value Vn = Dn+1 / (r − g) is dated at time n, so discount it n years.Learn it: Preferred stock and the Gordon growth model →

Sustainable growth rate

$\displaystyle g = b \times \text{ROE}$b is the retention rate, 1 − dividend payout ratio.Learn it: Preferred stock and the Gordon growth model →

Justified forward P/E

$\displaystyle \frac{P_0}{E_1} = \frac{D_1 / E_1}{r - g}$The numerator is the payout ratio. Multiplying the result by E1 gives the same value as the Gordon growth model.Learn it: Price multiples and the method of comparables →

Enterprise value

$\displaystyle \text{EV} = \text{Market cap} + \text{Preferred} + \text{Debt} - \text{Cash and short-term investments}$EV multiples such as EV/EBITDA suit comparisons between companies with different capital structures.Learn it: Enterprise value multiples, asset-based valuation and choosing a model →

The Equity Investments formula sheet: the key formulas explained

Common mistakes

• Putting D0 in the numerator of the Gordon growth model. The model needs next year's dividend, so grow D0 by one year first unless the question gives D1.
• Discounting a multistage terminal value one period too many or too few. The value found from Dn+1 is a value at time n.
• Leaving the divisor unchanged after a stock split in a price-weighted index. The index value must be the same immediately before and after the split, so the divisor falls.
• Using 1 / maintenance margin as the leverage ratio, or forgetting that a short seller's margin call comes from a price rise, not a fall.
• Including preferred equity in book value per common share, or using net income before preferred dividends in ROE for common shareholders.
• Treating an anomaly as proof of inefficiency. If the abnormal return disappears once transaction and information costs are counted, or has faded since it was published, the market can still be efficient.
• Adding volume growth and price growth to get revenue growth. They compound: (1 + volume growth) × (1 + price growth) − 1.

How to study it

• Practise margin call and index return calculations until they are automatic.
• In dividend discount models, check whether you are given D0 or D1, and date every terminal value before you discount it.
• For index questions, write out the weights at the start of the period first. Most wrong answers come from using the wrong weights, not from the arithmetic.
• Treat the company analysis and forecasting modules as applied accounting: link each revenue driver or cost line to the financial statements you already know from FSA.
• For market efficiency, learn which information each form covers and which strategy it rules out. Most questions are a classification exercise.

Try 3 Equity Investments questions

Practise and prove Equity Investments

The question bank and the mock exams are the practice half of CheapMocks Academy. Try the free sample questions, see the topic weights for the whole exam and the latest Level I pass rates.

Equity Investments FAQ