Strategies to crack CFA level II

The passing percentage for CFA level I exam and CFA level II exam in June 2012 are 38% and 42% respectively. It means that 38% and 42% of the candidates passed the exam who applied for level I and level II respectively.  The CFA level II candidates do not need to rejoice by looking at the pass percentage thinking that their chances of passing are more in level II as compared to level I. They tend to forget that now competition has increased. They need to be in top 60 percentile out of the candidates who passed in level I which makes it equivalent to 85 percentile in level I exam. Now do not get tensed by looking at 85 percentile figure. Level II exam can be cracked by following proper strategies.

Difference between level I and level II exam pattern:

Level I exam has 120 questions each in both the exams while level II has 60 questions. Level II questions are based on cases. 10 cases will be provided in each of the paper and 6 questions will be asked per case. Cases will be evenly distributed across the papers. Like if Ethics has a weight of 10%, then total 2 cases will come from Ethics and those 2 cases will be evenly distributed i.e. 1 in the morning session and other in the evening session. Similar is the case with subjects like FRA, Equity, FIS,Corporate Finance, and Derivatives. So, if some important topic is missed from the morning exam, then it is a high probability to get that topic tested in the afternoon exam and you can just have a look at that particular topic in the break between the exam (however, it would not be ideal for most of the candidates).

The most common difficulty faced by the students is to get confused by the redundant data. Redundant data is provided only for that purpose. If concepts are not crystal clear, it becomes very confusing with loads of data. For example, there is a case based on equity valuation and there is a lot of data to calculate the cost of equity. So, one must be comfortable with all the ways to calculate the cost of equity. If the cost of equity is calculated wrongly, then it can lead to the wrong answer of many questions. So, the fundamentals of every subject must be cleared from the root level. Students must also look at what is really being asked rather than getting lost in data. So, reading few questions before reading the case might help.

Ethics (approximate weight  10%)

The curriculum of Ethics is almost similar to that of level I with the addition of 1-2 extra topics. Candidates must concentrate on those new topics as there is a high probability that they would be tested in the exam. The research objectivity topic is particularly very important and students can expect one case based on that. Ethics curriculum is very small as compared to the weight it has got (kind of having the best Sharpe ratio). With a little practice, one can easily score more than 70% in this section.

Equity (approximate weight 20%)

Equity is one of the most important areas in level II. There has been a slight change in 2013 curriculum wrt 2012 curriculum. Three readings (Note on Asset Valuation, Industry Analysis and Valuation in Emerging Markets) have been dropped. Valuation in emerging markets used to be quite complex. Now it has left mainly with Dividend Discount, Free Cash Flow, Market-based, Residual Income, and Private Company valuation. Students can expect 4 cases out of these 5 topics. These readings can easily be cracked with little effort. It is just comprehensive and not that difficult. Once the student is familiar with all kinds of valuation methodologies, he/she can easily score above 80% marks in this section and 80%+ marks will definitely boost the chances of clearing the exam.

Financial Reporting and Analysis (approximate weight 20%)

FRA is almost as important as Equity but its syllabus is relatively less than equity. The major areas are Inventory, Long-lived assets, Intercorporate investments, Employee compensation, and Multinational operations. The last 3 topics are extremely important and student can expect one case from each of the last 3 topics. The readings are quite small but it takes time to comprehend them. It is advisable that one study the important 3 topics from the CFAI books as well. Once understood and retained in the memory, this is a high scoring area and one can expect 80 %+ marks. Equity and FRA (around 40% weight) are the most important topics. The candidates doing well in these two areas can expect a good overall score and ensure their success. Lots of practice and revision is recommended for these areas. Candidate can make a formula list and put it on the study table and can daily give 20-30 minutes for the revision. That will definitely boost the score in these subjects.

Corporate Finance (approximate weight 10%)

Corporate finance is one of the easiest areas of the level II curriculum but conceptual one as well. Generally, students have a tendency to take this area lightly and commit a mistake in the main exam. The important areas are Capital budgeting and Mergers & Acquisitions. Clear understanding and one revision before the exam are enough to sail through it.

Fixed Income Securities (approximate weight 10%)

FIS is one of the tough areas of the curriculum. The important areas are valuing bonds with embedded options and term structure. This requires lots of understanding. There is no shortcut to succeed in this subject (in fact any of the subjects). Focused reading and clear understanding are required.

Derivatives (approximate weight 10%)

One can expect 2 cases from derivatives, one is each session. The important areas are Forwards, Options, and Swaps. Students need to understand how these instruments are valued and should do lots of problems to improve in this area. One who is strong in this area can easily score 100% marks as most of the questions are numerical based. The students can find few conceptual questions in options related to Greeks. The candidate is more likely to get valuation problem in Forwards or Swaps and conceptual problem in Options. Reading in Credit derivatives have been updated. So, students should give proper attention to that topic as well. Practice is the key.

Quantitative Methods (approximate weight 5%)

QM is clearly the toughest area in the CFAI curriculum especially for those who find it tough in level I curriculum as well. It involves Linear regression, Multiple regression, and Time-series analysis. The student is more likely to get a case from Multiple regression. The readings are difficult but the questions asked are generally straight forward. One just needs to understand what is being asked and then solve it accordingly. Its weight is quite less which gives students a reprieve. But still one should not leave it lightly. With good strategy and learning of formulas, one can expect to get 3-4 out of 6 questions correct.

Portfolio Management (approximate weight 5%)

Portfolio concepts are similar to that of level I. International asset pricing and ‘Note on Harry M. Markowitz..’ has been dropped making it easier for the students. The important areas are Portfolio concepts and The theory of active portfolio management. Students will surely enjoy these readings as they make overall sense and they get the feeling that they are reading something related to management of investments in the market. This will also make them curious about the level III curriculum which has a weight of around 50% for PM.

Alternative Investments (approximate weight 5%)

The important areas are the valuation of real estate investments and private equity valuation. Readings in real estate valuation have been updated. So, there is a high probability that they might be tested in the exam. The readings are an extension of level I curriculum. The student should not leave this topic lightly as it is a high scoring area as questions will be direct.

Economics (approximate weight 5%)

The economics curriculum has been changed almost completely. Students need to read all the topics carefully as the case is expected to cover multiple topics. Reading is the key. It is quite simple and mainly deals with currency exchange rates and interest rate parity.

So, you know now what needs to be done. FRA, Equity, FIS, Derivatives, Corp Fin, and Ethics constitute around 80% of the exam. Scoring well in these areas is extremely important though one must not leave other 4 topics as well. The course might look tougher and larger than the level I, but with practice and discipline, one can easily master the topics. The good thing is that most of the curriculum is conceptual. Once concepts are clear, students do not need to revise them again and again like in L1. They just need proper practice in problem-solving. All the best for your preparations.

Read more about CFA level II exam from here – Everything about CFA level II.

Download 4 months study planner from here – 4 Months Study Plan for CFA level II.



4 thoughts on “Strategies to crack CFA level II

  1. Purvi Joshi December 4, 2012 at 5:33 am Reply

    Thanks. that was helpful 🙂

  2. […] to clear the CFA level II exam in more detail in another post. For the time being you can refer to this post about the CFA level II […]

  3. Nikhil Yadav January 25, 2013 at 8:48 pm Reply

    Thanks for the wonderful insights !!

  4. […] have already discussed the strategy to crack CFA level II exam earlier. I missed few points in the previous article like how to go about the course? Which topics […]

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A blog of the NYU Colloquium on Market Institutions and Economic Processes

Fundoo Professor

Thoughts of a teacher & practitioner of value investing and behavioral economics

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