The CFA Level 2 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 CFA Level II 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.
CFA Level 2 Format and Basic Strategy:
CFA Level II 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.
CFA Level 2 practice exams
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.
CFA Level 2 Exam Item set question – Read questions or vignette first?
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.
CFA Level 2 – Which item-set questions to answer first?
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.
CFA Level 2 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.
- CFA level II exam is much more heavily weighted towards asset classes than investment tools. The second exam is an analyst’s 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 Analysis section. 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 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.
Joseph Hogue, CFA
Last updated: August 8, 2016 at 7:30 am