What CFA Level 1 Equity Investments actually tests
Equity Investments is 11-14% of the Level 1 exam:
| Area | What it covers |
|---|---|
| Market Organisation | Quote-driven vs. order-driven markets, execution instructions |
| Equity Securities | Common stock, preference shares, depositary receipts, rights, warrants |
| Security Market Indices | Price-weighted, equal-weighted, market-cap-weighted, float-adjusted |
| Market Efficiency | Weak, semi-strong, strong form; implications for active management |
| Industry Analysis | Life cycle, Porter's Five Forces, peer group analysis |
| Company Analysis | Competitive advantage, financial modeling |
| Equity Valuation | DDM, Gordon Growth, multi-stage DDM, FCFE, price multiples (P/E, P/B, P/S, EV/EBITDA) |
Why the Gordon Growth Model is worth over-preparing
It's one of the few equity valuation formulas Level 1 expects you to apply directly, not just recognize conceptually — and it reuses time value of money reasoning from Quantitative Methods. Getting the mechanics automatic here pays off again at Level 2, where multi-stage DDM builds directly on top of it.
Sample question: Gordon Growth Model
Equity Investments · Medium difficulty
A stock just paid a dividend of $2.00 per share. Dividends are expected to grow at a constant 5% per year indefinitely. If the required rate of return is 9%, what is the stock's intrinsic value under the Gordon Growth Model?
A. $42.00
B. $47.25
C. $52.50
D. $60.00
The correct answer is C — $52.50.
V₀ = D₁ / (r − g) = D₀(1 + g) / (r − g) = $2.00 × 1.05 / (0.09 − 0.05) = $2.10 / 0.04 = $52.50.
Choice A ($42.00) is the common error of dividing $2.00 (D₀, not D₁) by 0.04 — using this year's dividend already paid instead of next year's expected dividend, which the model actually requires in the numerator.
V₀ = D₁ / (r − g) = D₀(1 + g) / (r − g) = $2.00 × 1.05 / (0.09 − 0.05) = $2.10 / 0.04 = $52.50.
Choice A ($42.00) is the common error of dividing $2.00 (D₀, not D₁) by 0.04 — using this year's dividend already paid instead of next year's expected dividend, which the model actually requires in the numerator.