Everything about CFA level II exam

Congratulations on passing CFA level I exam. You have crossed the first hurdle and now on your way to attaining CFA charter. The second hurdle, CFA level II exam, is relatively tougher hurdle than the CFA level I exam because of two reasons. First reason is that the curriculum of CFA level II is tougher than that of CFA level I and the competition among the more serious candidates being the second reason. Apart from that, this exam occurs only once a year. So, if you do not pass the exam, you have to wait for one more year which tests patience and many guys give up because of such a long wait. So, it becomes even more important to clear this exam in the first attempt. This exam contains two papers of 60 questions each. In CFA level I exam, we had 120 questions per paper but here that has been reduced to half. Do, the importance of every question increases by a factor of two. Few silly mistakes and carelessness in the exam can change the final result. So, one has to be extra cautious while attempting the papers. If this is your first attempt at CFA level II exam, then you must know few things before sitting for the actual exam.

• Few of you would have cleared level I by taking more than one attempt. But you must not think that you won’t be able to pass this exam in one attempt. Because this is a totally different animal and with a proper strategy, you can outsmart the competition and crack the exam with a focused 4-month preparation.

• The exam pattern will be the itemset based format. Each item set will have 6 questions. There will be 10 item sets in one paper of 3 hours and a total of 20 sets in morning and afternoon exam.

• The length of item set would be around 1-2 pages. There will be around 400-800 words to be read. Most of the item sets will have 1-3 exhibits with them. The exhibits will have some data and information which candidates have to use to answer the questions.

• The exam is not a reading comprehension exam. So, you should not worry about your reading comprehension skills. Questions will be direct and not inferential i.e. they will check the subject knowledge and not your comprehension skills.

• The weights of the subjects are not fixed as they were in CFA level I exam. They have provided a range for each subject. The ranges are 5-10%, 5-15%, 10-20%, 15-20% and 15-25%. The 5-10% range is for Economics and Quantitative Methods. You should rest assured that the weight of these subjects will be only 5% in the final exam i.e. only 1 item set based on these subjects. It has been the same for last 5 years. The 15-20% and 15-25% ranges are for Financial Reporting and Analysis and Equity Investments. In past years, they have asked 20% each from both of the topics. So, there is very less probability that they would change the weights. So, we can expect 4 item sets each from both Financial Reporting and Analysis and Equity Investments. (Note: Only 3 items sets were asked from Equity in 2016) Now the thing to be noticed is that these 4 item sets won’t be asked in one single paper. These will be spread over both the papers i.e. 2 item sets in morning and 2 in the afternoon. One can capitalize on that. Suppose there are 4 important areas in Financial Reporting and Analysis and they ask 2 item sets from 2 areas in the morning exam. Then, there are going to ask the rest 2 item sets from the remaining 2 important areas. So, you can revise the important concepts in the time gap between the two exams.

• Now the only remaining range is 5-15% which is for remaining 5 subjects – Corporate Finance, Alternative Investments, Derivatives, Fixed Income and Portfolio Management. Till June 2013 exam, the weights used to be 10% for Corporate Finance, Derivatives and Fixed Income and 5% for Alternative Investments and Portfolio Management. But in June 2013 exam, they changed the structure of weights. They asked 10% from Alternative Investments and 5% from Fixed Income in June 2013 CFA level II exam. These weights can again change in coming future. So, you need to concentrate equally well in these subjects and should not leave thinking that only 1 item set would come from the entire subject.

• The questions will be more calculation intensive than the CFA level I questions. So, you would be using calculator more in the exam. It is always better to get additional batteries for the calculator in the exam in case the calculator stops working. Even though the use of calculator would be more, most of the questions (more than 60%) would be still conceptual and theoretical. Ethics will be completely theoretical. For other subjects, out of 6 questions, you will most likely find 2 questions asking for calculations and rest questions will be conceptual.

• It is advisable that you attempt at least 2-3 full-length mock exams to make yourself comfortable with the pattern of the exam. You have to read a lot in the exam. So, you must have enough practice of doing that otherwise you could find time short for attempting all the questions.

• The one hour time between the exams can be utilized effectively. But it can work opposite as well as you can forget other things in a panic mode. So, revise the topics in between the exams only if you have already followed the same approach in your mock exams and got good results because of it.

Exam Preparation

How much time should I devote to preparation for CFA level II exam? CFA level II curriculum is more conceptual and relatively tougher than CFA level I curriculum. So, one should devote more time than the time devoted to CFA level I exam. However, it might be the case that in level I, you studied finance for the first time and took considerably longer time to understand the concepts. In that case, you would need less time for level II as you already know most of the basic stuff needed for the understanding. You should devote more time to problem-solving than just passive reading. Most of the learning will be by solving new questions. You might miss many important points while reading the content but those things will be cleared as you attempt more and more questions. It is always better to keep more time for the preparation as the exam occurs only once in a year and even in the second attempt, everything would look new again because of the gap between the exams. If you are planning to keep 300 hours for exam preparation, then out of those 300 hours at least 150 hours should be kept for problem-solving.

From where should I study – CFA curriculum books or third party content providers’ notes? The curriculum books are recommended. Level II exam is about valuation and you must need to understand everything in detail which could be best done by using the curriculum books. Not a single content provider is as comprehensive as curriculum books. The additional benefit of using curriculum books is that most of the problems in the curriculum books are in itemset based format which might not be the case with the third party content providers’ notes. However, you must understand that the curriculum books are going to take a good amount of time in revision as well. So, you must make your own notes or you can use third party content providers’ notes for revision. You may also do the subjects with more weight (Ethics, Financial Reporting and Analysis and Equity Investments) from curriculum books and rest of the subjects from third party content providers’ notes.

How many questions should I practice and from where should I attempt those? You should do as many questions as you can. Most of the concepts will get cleared only after solving the problems. Please make sure that the most of the questions are in item set format. You can find many item set format questions in the curriculum books. But still, those won’t be sufficient. So, we recommend that you get item set format questions from third party content providers or you can get those questions from previous mock exams given by the CFA Institute. CFA Institute provides only 1 mock test each year but you can always find previous mock exams on the great thing called the internet. You should attempt at least 300 item sets (1,800 questions) apart from solving individual questions to be perfectly prepared for the exam. You must also attempt at least 2-3 mock exams to make yourself familiar with the pattern and boost your confidence.

Free item set questions

You can practice free item set question from here.

Strategy for attempting item set questions

You can find many strategies to attempt item set questions from here.

How should I go about the preparation? Which subjects should be studied first and which should be studied later? You can either follow the pattern as given by the CFA Institute curriculum books or can make your own customized study plan. If you want to start lightly, you should start from Equity Investments and can follow it with other subjects like Financial Reporting and Analysis and Corporate Finance. Derivatives, Fixed Income, Quantitative Methods and Economics are relatively tougher in the level II curriculum. You can sandwich these topics between the other subjects and make your own customized schedule. But the main focus should be on three subjects – Equity Investments, Financial Reporting and Analysis and Ethics. These subjects have a total weight of 50% in the exam. These are very crucial subjects and luckily easier as well on a relative basis.

Ethical and Professional Standards (2 item sets: 1 in each paper – 10% – 15% weight)

The course of this subject includes everything you covered in your level I curriculum except the reading related to GIPS. There are few additional readings as well. These new readings are more important as compared to old readings from CFA level I. The most important reading is related to research objective standards. You can expect one item set from it. The other item set is expected to come from the seven standards. Given the importance of Ethics (Ethics adjustment) and its small course relative to other subjects, you must focus extensively on this subject and try to solve as many questions as possible. By solving more cases, you can maximize your score and can target a score of 10 out of 12 questions. The best practice questions are from the previous mock exams by CFA Institute. You can even solve Ethics from mock exams of level III for the common syllabus.

Quantitative Methods (1 item set: In one of the papers – 5-10% weight)

Quantitative Methods contains only 3 readings. The first reading is Correlation and Regression. The second reading is related to multiple regression and issues in regression. The last reading is related to time series analysis which most of the candidates find relatively tough. The second reading is the most important one and you are most likely to get the only item set from this reading or they can combine second reading with third reading and can ask 1-2 questions from third reading and rest from second reading. It is very difficult to get one full item set from the third reading. If you understand the second reading related to multiple regression and issues in regression, then you need not worry about the first reading as it is just a subset of the second reading. First reading is about linear regression with one independent variable. The most important area which can be tested in the exam is the issues in regression – heteroskedasticity, serial correlation and multicollinearity. If you know how to look at the ANOVA table and what all the variables in ANOVA table specify and the issues in regression, you are most likely to ace this subject. This subject looks tough but if understood clearly, you can revise this subject in 30 minutes and can score good marks.

Economics (1 item set: In one of the papers – 5-10% weight)

Economics has three readings. The last reading is a very small one regarding regulation and chances of getting the only item set from this reading are extremely small. However, you can get an odd question from this reading on that item set. The first and second readings are the important ones. The first reading deals with currency exchange rate determination and forecasting. It is a quite long reading and will take a good amount of time during first reading. Candidates tend to forget the small details and findings of this reading. So, it is a must that you prepare small notes and note down the important things and keep revising that stuff on a regular interval. The second reading is little bit quantitative in nature. It is about economic growth and investment decision. This is also very important reading. No topic can be considered less important. Candidates generally find it difficult to deal with economics in level II exam and generally ignore it given that its weight is most likely to be 5% only. But one should not ignore the entire subject and concentrate on the findings of the readings. Most probably the item set will be covering 2 readings out of 3 readings. So, you should not leave anything. But also do not spend too much time on understanding it. Just concentrate on the learning from the reading and move on to other subjects.

Financial Reporting and Analysis (4 item sets: 2 in each paper – 15-20% weight)

It has a total of 8 readings. First two readings discuss inventory and long-lived assets. These readings are almost similar to level 1 readings with a little more detailed version. You can easily master these readings with one reading. The next three readings are the most important ones and form the backbone of level II curriculum. These are related to inter-corporate investments, employee compensation, and multinational operations. You are most likely to find 3 item sets out of 4 from these 3 readings. Rest 1 item set can be asked from a combination of other readings. It is very important to absorb everything from these three readings and practice enough questions to gain mastery of these topics. It is highly advisable that you must read these three readings from the CFA curriculum books. The last two readings have been modified this year. These readings deal with financial reporting quality and the integration of financial statements. Some new stuff has been added into these readings this year. So, you must concentrate more on those newly added topics. There is one important thing which you guys must know. Whenever CFA Institute changes syllabus i.e. adds some additional readings or updates some already existing readings, then the probability of getting questions from those readings are higher than the other readings. Keeping this in mind, you can concentrate on the important areas.

Corporate Finance (2 item sets: 1 in each paper – 5-15% weight)

This subject contains 6 readings in total. The first 5 readings deal with capital budgeting, capital structure, dividends and share repurchase and two readings of corporate governance. These readings look exactly similar to the readings of corporate finance being covered in CFA level I. These are detailed versions of those topics. This subject looks easy but still many candidates fail to score good marks in it. The reason behind that is a lack of practice and complacency. One should concentrate on finer concepts while reading this subject. The last reading is about mergers and acquisitions and is one of the most important for the exam point of view. Most of the candidates enjoy reading it. You are most likely to get one item set from this reading and the other item set from rest of 5 readings. Focus on the blue box examples given in the curriculum book. You are most likely to find exact similar questions on the exam.

Equity (4 item sets: 2 in each paper – 20-25% weight)

This is the most important subject in level II curriculum. The chance of passing improves to a greater extent if one scores well in this subject. Scoring in this subject is also relatively easier than the other subjects as most of the readings are related to each other and have the same theme i.e. valuation. It has around 10 readings. Two of the readings have been adding recently – Your strategy needs a strategy & Industry and Company Analysis. Please spend more time on those readings. Apart from newly added readings, the most important reading is free cash flow valuation. Other chapters related to valuation like market-based, dividend, residual income, private company valuation are also important. The valuation from free cash flow involves decent knowledge of accounting statements like balance sheet, income statement and statement of cash flows. It is advisable that one go through this primer on financial statements before starting the topics related to valuation. One can expect 1-2 item sets based on free cash flow valuation and rest item sets from other valuation techniques. Practicing many item sets is the key to ace this subject. Your focus should be to minimize the silly mistakes. If you can minimize the silly mistakes, you could score as high as 90% in this topic. One can get the answer by following more than one path for cash flow valuation. It is always a better strategy to recheck the answer by working through uses of cash flows. It is less likely to find an item set from residual income chapter as the problem would become too lengthy for the exam. However, one can get theoretical conceptual questions from that reading. Private company valuation is also an important topic and you should get yourself familiar with the discounts of marketability and control and how they are actually applied. You are most likely to find 1-2 questions based on that.

Alternative Investments (1 or 2 item sets: 1 in each paper – 5-15% weight)

In CFA level I, we just touched the subject of alternative investments. In CFA level II, the topics have been explained in detail. It is always a fun to read this topic as it is very interesting. There are four readings in it. The first two readings deal with private and public real estate investments and are very important readings. It covers the real estate industry in detail. It is very important to understand every blue box example given in the book as you are most likely to find the similar questions on the exam. The third reading is about private equity valuation. This chapter covers the valuation of private equity and other things related to the PE industry. You should focus again on the blue box examples. Earlier they had asked 1 or 2 item sets from Alternative Investments but this time, you might find only 1 item set from it as the weight of Fixed Income has been increased this time.

Fixed Income (2 or 3 item sets: One in each of the papers – 10-20% weight)

There have been few changes in fixed income this year. The first change is obviously its weight in the exam. Earlier it used to be 5-15% and now it is 10-20%. Earlier they used to ask 1-2 item sets. But this time, you will get at least 2 item sets.  Few new concepts have been added in the third chapter related to key rate duration, one sided duration etc. The third chapter is the most important one and you are more likely to find one item set from it. The first 2 chapters are similar in a way and are quite easy to understand. The fourth chapter is related to credit models where you would find the most lengthy formulas. But you need to worry as they are not going to ask questions from those lengthy formulas. However, you may need to remember formula dealing with the reduced form model with constant volatility and constant loss-given-default. You must try to focus on the concepts behind the models like differences between structural models and reduced form models. Another important thing is the difference between expected loss and the present value of expected loss and what are the two factors (risk premium and time value) separating them. Your main focus in fixed income should be on chapter 1st, 3rd, and 4th.

Derivatives (2 item sets: One in each paper – 5-15% weight)

This subject contains 6 readings. The first 4 readings deal with 4 major derivative markets – forwards, futures, options, and swaps. These 4 readings are extremely important. Although the reading of options markets is the most important one but item set can be asked from any of the readings. You must concentrate on areas like swap valuation, option valuation using the binomial method, Greek letters and their importance for options, valuation of forward rate agreement and currency forwards and futures. The fifth reading deals with interest rate derivative instruments and covers topics like cap and floor. Once you master the topic of options, this reading would be a cakewalk. The last reading is regarding credit default swaps and has been added recently, thus requiring additional emphasis. As with most of the other subjects, the practice is the key for cracking this subject. The notation for forward rate agreement in the CFA curriculum book is little obscure but you can make your own notations which are easy to remember and work with. This is the subject if understood correctly can pay rich dividends. The candidates who are good at derivatives can target a score of 100% in the exam.

Portfolio Management (1 item set: In one of the papers – 5-15% weight)

There are 4 readings in this subject. The first reading deals with portfolio concepts and is almost the recap of level I syllabus. It is important reading but you will most likely find questions from the next two readings which have been added recently. These readings deal with information ratio and active management. These readings are very important and you will certainly enjoy reading them. Almost all the topics in the reading “Fundamental law of Active Management” are important and can be asked in the exam. The last reading covers the investment policy statement and the process of portfolio management. This is mostly theoretical reading and prepares you for the portfolio management topics for CFA level III where the weight of portfolio management is around 50%.

Passing Score

The minimum passing score (MPS) for level II depends on the toughness level of the paper. The CFA Institute tries its best to prepare average difficulty paper but sometimes paper can be relatively difficult and sometimes very easy. However, the MPS varies between 60-70%. If you score above 70% marks, you are safely above the passing score. Sometimes few topics could be very difficult to attempt but you must not lose your focus and try to get all the answer correct from the easier topics like Equity and Financial Reporting and Analysis.


The result will be announced after 6-8 weeks from the exam date and it will be announced on Tuesday. The pass percentage has been around 42% in recent few years. But you should not concentrate on pass percentage. Your focus should be on getting more than 70% marks in the exam. That will certainly cross you over the passing line. Please focus on the important areas (Equity, Financial Reporting and Analysis, and Ethics) and work out and execute your strategy. Practice more and more item set questions. Everything will be fine. Wish you all the best for the exam.

Download 4 months study plan for CFA level II from here – 4 months CFA level II study plan.



12 thoughts on “Everything about CFA level II exam

  1. Manik September 18, 2013 at 6:27 pm Reply

    Thanks for this kind of guide.

  2. […] Read more about CFA level II exam from here – Everything about CFA level II. […]

  3. CFA level II in 2 months | konvexity April 8, 2014 at 3:21 pm Reply

    […] to study extremely well and come out with flying colors after the exam. You may want to this read this post as well for CFA level II exam. Wish you all the […]

  4. Adam April 9, 2014 at 6:29 pm Reply

    Can the MPS go as low as 62%?

    • konvexity April 9, 2014 at 6:35 pm Reply

      Yes. It depends on the paper. In 2011, paper was relatively tougher and MPS was quite low in that year. One guy got 70+ in 2 subjects and less than 50% in 4 subjects and between 51-70 in remaining 4 and still managed to pass. However, generally MPS remains around 65-68% level in CFA level II exam.

  5. Richard May 21, 2014 at 9:00 pm Reply

    Thank you!

  6. Khaleesi May 22, 2014 at 4:39 pm Reply

    I am thinking about skipping Econ completely. Last I appeared for level 2 was the 2011 exam: i got 71% = in 3 tiny subjects, 51 to 70% in 3 big subjects (FSA & Equties included), and less than 50% in rest – i got rank 10! Ugh so close …then was too lazy/mad to study until now.

  7. Jitendra Kumar August 3, 2014 at 8:06 am Reply

    I have passed level 2 and subscribed your sectional test, it was really very helpfull especially in heavy weights such as Equity & FRA, Corporate Finance, where I am able to score more then 70 %.

    I will definietly recommend to anyone to go through your sectional test for all subjects .

  8. Yeji February 26, 2015 at 12:04 am Reply

    I’ve found your postings very helpful, thank you! Are these still valid for Level II on June, 2015?

    • konvexity February 26, 2015 at 5:26 pm Reply

      Yes. These are valid for June 2015 CFA level II exam except few changes. The fixed income weight has been increased this time. So, concentrate more on this topic and especially on the newly added topics. In Ethics, soft dollar standards (which used to be favorite topic for exam) has been dropped this time. I guess I need to update the blog accordingly. I will do that in a couple of days.

      • Sonia Danthy March 20, 2015 at 10:01 pm


        Just waiting for the update, found your outlines useful for level 1, need the same for level 2 now.

        Thanks a ton!


  9. […] 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 […]

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A blog of the NYU Colloquium on Market Institutions and the Leipzig Colloquium on the Market Order

Fundoo Professor

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

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