AFA common mistakes
AFA · Understand the traps and how to avoid them.
When a question hinges on whether conduct violated the Code and Standards, the candidate answers based on gut instinct or on what seems legally permissible, rather than walking through the specific Standard line by line before choosing.
Ethics questions are written to tempt with 'everyone does it' or 'the client consented' reasoning, and under time pressure candidates default to personal moral intuition instead of the actual standard text.
What to do instead
For every ethics item, explicitly identify which Standard is implicated, state its core requirement in one sentence, then test the facts against it. Practice by taking 20 vignettes and writing the governing Standard next to each before looking at answer choices.
The candidate selects an answer that is legally allowed or disclosed to the client as sufficient, missing that the Standards can require more than disclosure or more than local law permits.
Candidates conflate 'legal' and 'ethical' or assume disclosure cures every conflict, when several Standards impose duties that disclosure alone does not satisfy.
What to do instead
Memorize the Standards where disclosure is not enough (e.g., duties of loyalty and prudence, fair dealing, priority of client interests) and drill items that pair a disclosure fact with a prohibited act so the distinction becomes automatic.
Under exam time pressure the candidate computes a ratio or adjustment from memory of the formula name, mixing up numerator and denominator or applying the wrong variant (e.g., averaging balance-sheet items that should be point-in-time, or using ending rather than average equity).
Financial reporting items deliberately supply both beginning and ending balances and multiple plausible inputs, and candidates grab the most visually prominent number instead of the definitionally correct one.
What to do instead
Build a one-page formula sheet where each ratio is written as a verbal definition alongside the formula, and before computing, say the definition aloud. Practice items that include distractor balances to train input selection.
The candidate treats an accounting change, one-time item, or non-GAAP adjustment as already reflected in reported earnings, or conversely fails to adjust reported figures for items the analyst should normalize.
Candidates read the reported bottom line as economic reality and skip the analytical adjustment step that the question is actually testing.
What to do instead
Adopt a fixed routine for every reporting vignette: list non-recurring items, identify accounting policy choices, decide which adjustments an analyst would make, then compute. Do this in writing even for multiple-choice items.
In capital budgeting and valuation questions the candidate discounts the wrong cash flow with the wrong rate, such as discounting equity cash flows at WACC or including interest expense in project cash flows.
The mechanics of NPV are easy, so candidates rush the setup and mismatch the cash flow definition with the discount rate, a conceptual error the exam targets directly.
What to do instead
Before any calculation, label the cash flow as firm or equity and match it to WACC or cost of equity. Use a checklist: exclude financing costs from project cash flows, include opportunity costs, ignore sunk costs, and treat working capital correctly.
The candidate computes a valuation multiple or terminal value using inconsistent inputs, such as an enterprise-value numerator over an equity earnings denominator, or a terminal growth rate that exceeds the growth implied by the discount rate assumptions.
Multiple-based and DCF valuation items combine several conventions, and candidates apply formulas mechanically without checking internal consistency or economic plausibility.
What to do instead
Maintain a matching table (EV with EBITDA/EBIT/sales; equity value with net income/book value) and always sanity-check terminal assumptions: growth below the long-run economic growth rate and below the discount rate. Practice mixed-numerator items.
The candidate confuses price, yield, and spread relationships, for example assuming a bond's price rises with yield, or failing to distinguish yield to maturity from yield to worst and from spot versus forward rates.
Fixed income has many closely related terms, and candidates memorize direction of relationships loosely rather than deriving them from present-value logic.
What to do instead
Anchor every relationship to the PV formula: price is the discounted sum of cash flows, so higher discount rate means lower price. Draw the inverse price-yield curve and label convexity. Drill yield-to-worst by computing all call and maturity scenarios.
The candidate misapplies put-call parity or misidentifies the payoff profile of a hedging or option strategy, often by forgetting that the risk-free bond term carries the present value factor or by confusing long and short positions.
Derivatives items require tracking signs and timing, and candidates write parity from memory without the discounting term or lose track of which leg is bought versus sold.
What to do instead
Write put-call parity as c + PV(X) = p + S with the PV explicitly shown, and for every strategy draw the payoff diagram at expiration before answering. Practice reconstructing synthetic positions from the parity identity.
The candidate answers portfolio construction and wealth planning questions using single-asset intuition, ignoring correlation, rebalancing, and the investor's constraints, or recommends an allocation without checking the IPS objectives and constraints.
Portfolio and planning items embed qualitative constraints (liquidity, time horizon, tax) that candidates skim past while chasing the return-maximizing option.
What to do instead
For every planning vignette, first extract and write down return objective, risk tolerance, and the five constraints (liquidity, time horizon, tax, legal, unique). Then eliminate answers that violate any stated constraint before comparing expected returns.
The candidate applies a statistical or economic concept by name without checking its assumptions, such as interpreting a regression coefficient causally, ignoring heteroskedasticity, or confusing nominal and real, or short-run and long-run, relationships.
Quantitative and economics items reward assumption-checking, but candidates pattern-match keywords to formulas and skip the interpretive step.
What to do instead
For each quant item, state the assumptions of the test or model being used and verify them against the vignette. For economics, label every variable as nominal or real and identify the time horizon before applying a relationship.