Cr.FA common mistakes
Cr.FA · Understand the traps and how to avoid them.
When a vignette asks for the standard of professional conduct that was violated, the candidate names the general principle (e.g., Integrity) instead of the specific Standard (e.g., I(D) Misconduct) or cites the wrong sub-standard letter.
The candidate studies the seven principles and their high-level descriptions but does not memorize the detailed sub-standard structure (I–VII with lettered subsections) or practice mapping fact patterns to the narrowest applicable standard.
What to do instead
Build a one-page table of the Standards of Practice Handbook: for each sub-standard, write a one-line definition and one concrete example of a violation. Before answering, identify the specific behaviour (e.g., misrepresenting performance, not disclosing a conflict) and match it to the lettered standard. Drill with short vignettes until the mapping is automatic.
In ethics questions, the candidate answers with what is legally permissible or what a 'reasonable person' would do, rather than what the Code and Standards require (which is often stricter).
The candidate conflates legal compliance with ethical compliance and relies on personal intuition instead of the explicit requirements of the Code and Standards, which may impose duties beyond local law.
What to do instead
For every ethics question, ask: 'What does the Standard require, not what is legal or customary?' Review the sections on the relationship between the Code and Standards and local law, and practice questions where the correct answer is the stricter ethical choice. Write down the rule: when the Code and local law conflict, follow the more strict requirement.
The candidate calculates financial ratios or adjusts financial statements using the wrong numerator/denominator or fails to adjust for non-recurring items, off-balance-sheet items, and accounting policy differences before comparing companies.
The candidate memorizes formulas superficially and does not practice the analytical adjustments required for comparability, such as capitalizing operating leases, adjusting for LIFO versus FIFO, or separating recurring from non-recurring income.
What to do instead
Create a checklist of common adjustments (leases, pensions, inventory methods, capitalization of costs, non-recurring items) and practice applying them to short financial statement excerpts. For each ratio, write the formula and the economic meaning. When comparing companies, always ask whether the accounting policies differ and adjust before concluding.
The candidate misinterprets the output of a regression or hypothesis test, e.g., treating a p-value as the probability that the null hypothesis is true, or ignoring heteroskedasticity and serial correlation when interpreting standard errors.
The candidate learns the mechanics of regression but not the assumptions and correct interpretation, and rushes through the interpretation questions because they seem qualitative.
What to do instead
Review the assumptions of multiple regression and the consequences of violations: heteroskedasticity makes standard errors inconsistent (use robust standard errors), serial correlation biases standard errors (use Newey-West), multicollinearity inflates standard errors. Practice interpreting coefficients, t-statistics, p-values, R-squared, and F-tests in context. Memorize that a p-value is the probability of observing a test statistic at least as extreme as the one computed, assuming the null is true.
In economics questions, the candidate confuses the direction of shifts in aggregate demand/aggregate supply or misapplies the effect of monetary and fiscal policy on interest rates, inflation, and exchange rates.
The candidate memorizes definitions of shifts but does not practice tracing the chain of effects through the economy, and often relies on real-world intuition that may not match the model assumptions.
What to do instead
Draw the AD-AS diagram for each scenario and trace the short-run and long-run effects step by step. For monetary and fiscal policy, write the transmission mechanism: policy tool → money supply/interest rate → investment/consumption → aggregate demand → output and price level. For exchange rates, practice the interest rate parity and purchasing power parity relationships with numerical examples.
The candidate calculates a project's NPV or IRR correctly but makes the accept/reject decision using the wrong criterion (e.g., choosing IRR when projects are mutually exclusive and scale differs, or ignoring the multiple IRR problem).
The candidate focuses on computation and does not review the decision rules and their limitations, especially for mutually exclusive projects and unconventional cash flows.
What to do instead
Memorize: for mutually exclusive projects, choose the one with the highest NPV (not the highest IRR). IRR can be misleading when projects differ in scale or timing, and multiple IRRs can occur with non-conventional cash flows. Practice ranking projects by NPV and by IRR and explaining the conflict. Also review the profitability index and payback period limitations.
In equity valuation, the candidate applies a single-stage Gordon growth model to a company with high growth or uses the wrong discount rate (e.g., WACC instead of cost of equity for FCFE) and fails to adjust for non-operating assets.
The candidate memorizes formulas but does not check the model's assumptions against the company's characteristics, and often mixes free cash flow to firm and free cash flow to equity definitions.
What to do instead
Before computing, classify the company's growth stage and choose the appropriate model (multi-stage DDM, FCFE, FCFF). Match the discount rate to the cash flow: FCFF uses WACC, FCFE uses cost of equity. Add non-operating assets and subtract debt to get equity value. Practice with a checklist: cash flow definition, discount rate, growth assumptions, terminal value, and bridge to equity value.
In fixed income, the candidate confuses duration measures (Macaulay, modified, effective) and misapplies convexity, or incorrectly computes the price change for a given yield change without adjusting for the bond's embedded options.
The candidate memorizes formulas without understanding the assumptions and the differences between the measures, and does not practice with option-free versus option-embedded bonds.
What to do instead
Write the definitions: Macaulay duration is the weighted average time to cash flows; modified duration is Macaulay divided by (1 + y/m); effective duration is used for bonds with embedded options. For a yield change, use modified duration for small changes and add the convexity adjustment for larger changes. Practice computing price changes for callable and putable bonds, where effective duration and convexity differ.
In portfolio management, the candidate confuses the capital allocation line with the capital market line, or misidentifies the optimal risky portfolio and the investor's optimal complete portfolio on the efficient frontier.
The candidate learns the graphs visually but does not practice the underlying math and the distinction between the CAL (using a risky portfolio) and the CML (using the market portfolio).
What to do instead
Review the portfolio theory chapter and practice drawing the efficient frontier, the CAL, and the CML. Memorize: the CML uses the market portfolio and applies only to fully diversified portfolios; the CAL can use any risky portfolio. The optimal risky portfolio is the tangency point of the CAL with the efficient frontier. Practice computing the weights of the optimal risky portfolio and the complete portfolio given risk aversion.
In alternative investments and risk management, the candidate treats hedge fund returns as normally distributed and ignores illiquidity, survivorship bias, and backfill bias when evaluating performance, or misapplies VaR without understanding its limitations.
The candidate applies traditional mean-variance tools to alternative investments without adjusting for their unique risk profiles, and does not review the biases in hedge fund databases.
What to do instead
Memorize the key biases in hedge fund indices: survivorship, backfill, and selection bias. Understand that hedge fund returns often exhibit negative skewness and excess kurtosis, making standard deviation and Sharpe ratio misleading. For VaR, review its limitations: it does not describe the magnitude of losses beyond the threshold, is not sub-additive, and depends on the assumed distribution. Practice interpreting VaR and conditional VaR in context.