How to Pass the CFA Level II Exam

Posted on May 15, 2012 by josephhogue

The Level II CFA exam is considered by most to be the most difficult of the three exams.
Whereas the first exam was largely conceptual and tested your basic understanding of a broad
range of information, the second exam takes that same broad range but tests detailed concepts and
data interpretation. On top of this, the exam is extremely formula intense. You will be responsible
for calculating two and three-part formulas in almost every study session.
There are strategies that will get you through all three exams and those that you will need to
change for each test. We will cover those strategies and advice specific to the Level I CFA exam
here and hold the broader suggestions for a future post. We will also look at two different
schedules in the strategy post that could aid in planning.
Format and Basic Strategy:
The Level II CFA exam consists of 20 item-set questions, each with six separate multiple choice
questions that must be answered from information in an approximately one-page vignette. Each
item set question will only cover one study session (i.e. ethics, quantitative methods, asset
allocation, etc.) which makes it a little easier to concentrate on one topic at a time. As with all
levels of the CFA, there are a total of 360 points possible, so each item set is worth five percent
of your total points.
While the CFA Institute does not publish what the passing score is for each year, they have said
that no score of 70% or above has ever failed the exam. What does this mean? It means you
should be completing practice exams and aiming for a score of at least 75%. Your practice exams
may not mimic the actual exam exactly, but shooting for a higher average will give you some
breathing room when it comes to test day.
There are two schools of thought when tackling the individual item sets on the level II exam.
Many candidates read through the six questions quickly to better understand the information for
which they are looking. Other candidates start by reading the vignette, looking for information
that may be important. After studying through the curriculum in preparation for the exam, you
will begin to get a sense of what information is important for questions.
Remember, you are able to make notes in your exam booklet, so be sure to underline or highlight
numerical information or other important points to find them more easily while answering the
questions.
You may want to complete those item sets first in topics in which you are stronger. This will do
two things. First, answering a good portion of the questions quickly and strongly will boost your
confidence for the harder item sets. Secondly, answering those questions you are more likely to
get right will save time and book the easy points before moving on to the less probable points.
Just remember to effectively watch your bubble-sheet answer form to make sure you are filling in
the correct numbers.
Topic Weight Differences on the Exam
Comparing the topic weights for the level II and the level I exam provided by the CFA Institute,
there are a couple of things you should note.
Ethics is still a good portion of the exam, but not as much so as the level I exam. Your time
spent here depends on part by how much you remember from the first exam and how well
you did. If you got above 70% on the first exam and can score well on practice tests, then
you will not have to study quite as much. Do not neglect the area because you will see it
again on the level III exam.
The level II is much more heavily weighted towards asset classes than investment tools.
The second exam is an analysts exam because you are going to spend a ton of time
learning how to analyze the specific assets and investments within each. It is much
more quantitatively intensive than the first exam.
Equity investments is the single biggest section and should be treated as such in your
study schedule. Closely behind this is the Financial Reporting and Analysissection.
Hopefully, you spent the time necessary to build a good base of knowledge in the three
financial statements on the first exam. If not, you will need to review to be able to do well
on FRA.
Ethical and Professional Standards, while not worth as many points as in the first exam is still
very important. It is still a guaranteed 10% of your points, and you will see almost the same
material at level III. I was able to reduce my time studying on the ethics portion of the level III to
just looking over the new material because of my time spent studying for the other two exams.
Corporate Finance and Economics is again fairly conceptual though you will be responsible for
some growth and emerging market formulas as well as dividend policy formulas. Summary
sheets are often the best way to approach conceptual study sessions because you can outline the
ideas and key points. This should get you the majority of points on the exam and free up study
time for other areas.
Financial Reporting and Analysis is, with equity, your two core topic areas for the level II
exam. These two topics are worth between 35-55% of your total exam score. If you picked up a
good base of understanding in the three financial statements at the first level, then the second
exam is just detailing separate accounts and valuations. The readings here are extremely long and
you will need to work through them. Do not expect to pick up the material with reading alone.
The material is practice-based and you need to actively work through the examples in the books.
Quantitative Methods is slightly less important in the second exam and more so when you get to
the third exam. The material here builds on some of the methods learned in the first exam. Do not
neglect the section because you will get at least one item set, maybe two. You should be able to
get the majority of the points by understanding the basic procedure in the formulas and any
strengths, weaknesses, or biases.
Alternative Investments is slightly more important at the second and third level exams
compared to the first, but still of secondary importance overall. The curriculum follows a finite
set of alternative assets (i.e. real estate, hedge funds, private equity, etc.) and each level builds
in little more detail. While there are more calculations required in the second exam, it is still
largely conceptual. Again, with conceptual topic areas, use a summary guide to learn the key
points, strengths, weaknesses and biases.
Derivatives is also marginally more important on the second exam but extremely more
quantitatively intense. You will confront some fairly lengthy pricing formulas here and will see
between one and three item sets on the exam. For the formulas, first try to understand the logic
behind the calculation to better memorize the formula. Often, working over practice problems is
the only way to really convert the material to long-term memory.
Equity Investments is potentially the largest part of the exam with between four to six item sets.
This and Financial Reporting & Analysis is where you really need to spend your time and learn
the material. Working through practice exams, you should be aiming for at least 75% or higher
going into the exam.
Fixed Income is also more quantitatively intense at the second level of the CFA exams. Many
candidates are less familiar with debt instruments and do poorly on the topic. Begin with a basic
understanding of the topic before you proceed to the detailed formulas. Do not neglect pricing
and amortization of debt or some of the other formulas.
Portfolio Management is only slightly more important on the second exam but will set you up
for the third exam where it is extremely important. Pay particular attention to the Investor Policy
Statement (IPS) because it is pivotal to the third exam. Fortunately, much of the section is
conceptually-based so you can get the majority of the points by understanding key points and
ideas.
While you cannot afford to neglect any of the study areas in the level II curriculum, there are
some on which you can spend more or less time. Ethics, FRA, Equity and Fixed-Income will
account for upwards of two-thirds of the exam. If you concentrate your study time in these
sections, aiming for a score of 75% or higher, you will have a very good chance of passing the
exam.
You have a finite time before the exam so remember to use your study time efficiently. Take
advantage of condensed study guides, summary sheets and flash cards to focus on the key
concepts and formulas.
Wrapping up the week, we will look at strategies that should help on all three exams.
til then, happy studyin
Know and understand the topic weightings for Level II - they are outlined as below. Yes, I
know they don't potentially add up to 100%, but that's because some questions can cover
more than one topic.

1. Ethics - 10%
2. Investment Tools (Corp Fin, Econs, FRA, Quant) - 30%-60%
3. Asset Classes (Alt Invs, Derivatives, Equity, F.Income) - 35%-75%
4. Portfolio Mgmt and Wealth Planning - 5%-15%

This is helpful, but much more meaningful when viewed in the context of potential item-sets:

1. Ethics - 2 item-sets
2. Investment Tools (Corp Fin, Econs, FRA, Quant) - 6-12 item-sets
3. Asset Classes (Alt Invs, Derivatives, Equity, F.Income) - 7-15 item-sets
4. Portfolio Mgmt and Wealth Planning - 1-3 item-sets