November 2004 Actuarial Review

Random Sampler
Chartered Financial Analyst Designation
Expands Actuarial Expertise

by Curtis Gary Dean
The initials CFA are showing up on some actuaries' business cards, including my own. The CFA Charter is awarded by the CFA Institute, formerly the Association for Investment Management and Research. Key requirements for award of the charter are sequentially passing the Level I, II, and III examinations, and at least three years of acceptable professional experience. Actuarial work is acceptable professional experience. Other requirements, including maintaining a high level of ethical and professional conduct, can be found on the CFA Institute Web Site.
The stated mission of the CFA Institute is: "To lead the investment profession globally by setting the highest standards of education, integrity, and professional excellence."
With more than 68,000 members in over 117 countries, the CFA Institute offers many educational conferences, Webcasts, and publications. About 82 percent of its members are CFA Charterholders, which translates into more than 55,000 Charterholders worldwide. According to their Web site, "The Chartered Financial Analyst (CFA®) Program is a globally recognized standard for measuring the competence and integrity of financial analysts." Its goals are similar to those of the CAS and American Academy of Actuaries, though their subject matter is different.
I scan each issue of their periodicals Financial Analysts Journal, CFA Magazine, and The CFA Digest, and usually read several articles to broaden my knowledge of finance and investment, both for professional education and to get ideas for managing my personal investment portfolio. Speaking to the latter purpose, the January/February 2004 issue of Financial Analysts Journal had an article, "Value and Growth Investing: Review and Update," in which the authors argue that the evidence continues to show that value investing generates superior returns over the long term, and the higher returns are not the result of assuming higher risk.
CFA Examinations
Each CFA examination is six hours in length: three hours in the morning and three in the afternoon. Level I is offered in December and June, and Levels II and III are offered only in June. There are 1,500-2,000 pages of reading for each exam. The CFA Institute estimates that 10-15 hours per week for 18 weeks is necessary to prepare adequately for each of Levels I and II. For the three-year period 2000-2002, the ranges for the percentage of passing candidates were as follows: Level I, 47-55 percent; Level II, 44-52 percent; and Level III, 58-82 percent. The effort required to pass CFA exams is definitely less than that for upper-level actuarial exams, but I don't think that that makes them any less effective as an educational tool. Actuarial exams often require the regurgitation of too much unimportant detail, a common criticism, and this detail is quickly forgotten when the exam is over.
The readings and examinations are excellent. The readings include both standard textbooks and materials specifically written for the CFA examinations. The readings are informative and quite readable. The exam questions are usually clear and relevant and I thought that it was fun to take the exams. Each exam has a corresponding study guide organized into about 18 study sessions listing the readings and a comprehensive set of learning outcomes, making it easy to develop an organized study plan.
Topics Covered on the Exams
The CFA curriculum is targeted towards the investment profession, but its broad curriculum makes it appealing to a much wider audience, including actuaries. Anyone with significant responsibilities in the financial area at a medium-to-large company might benefit from CFA studies, especially CFOs. For example, a colleague of mine in a local CFA Institute affiliate manages currency hedging for a company with international operations.
The topics are organized into four areas:

ethical and professional standards,

investment tools,

asset valuation, and

portfolio management.

Investment tools include economics, quantitative analysis, and financial statement analysis. In the quantitative analysis section of the syllabus, I got a nice review of statistics, multiple linear regression, and time series that helped me remember what I had forgotten from the actuarial exams.
A wide variety of financial assets are covered in the readings: bonds, asset-backed securities, stocks, real estate, venture capital, options, forwards, futures, and swaps, as well as combinations such as "swaptions." Both the valuation and risks of assets are studied. Most of the assets that you would find on an insurance company's balance sheet or in a pension fund's portfolio are analyzed. Risk analysis and the mitigation of risk through diversification and hedging are topics that should be of particular interest to actuaries. Financial risk, both its analysis and treatment, receive much greater attention here than on CAS exams.
Which Actuaries Would Benefit From CFA Studies?
I started CFA studies because I am a voracious reader, usually nonfiction, have a long-term interest in investing, and am totally committed to continuing professional education. I'm sure that many other actuaries have similar motivations.
There is overlap between the CFA and actuarial syllabi, but the corporate finance and asset sections of the actuarial exams are a subset of the much broader CFA curriculum.
If you work in the investment area of your company, you may have already started or completed the course of study. A chief actuary who is a member of the company's senior management team would benefit from CFA studies by developing a much broader perspective of the financial world. Actuaries heavily involved in DFA modeling can broaden their understanding of the asset side of the balance sheet as well as gain a better knowledge of important issues such as financial hedging.
One of the CAS core values is: "The belief that the continuing effectiveness of a casualty actuary is built upon dedication to the idea of life-long learning." A section of the CAS Centennial Goal is: "CAS members will be recognized as the leading experts in the evaluation of hazard risk and the integration of hazard risk with strategic, financial, and operational risk." CFA studies are consistent with both of these statements and actuaries who have completed the CFA exams should be particularly suited to help the CAS in the evaluation and integration of financial risk.