The Three Funniest CFA Stories I Have Ever Heard



In all the stress and excitement of the CFA exam for more than 100,000 candidates, there are bound to be stories of the strange, funny and horrific. Whether it’s a personal experience or happened to another candidate, the stories can help you prepare or just blow off a little steam during a long day of studying.

I’ve heard a fair share of horror stories from candidates, from getting lost on the way to the exam to realizing they were studying the wrong material. This close to the exam, I won’t scare you with these but will relay a couple of the funniest anecdotes I’ve picked up over the years.

One of the most common stories I get is of problems getting to the exam site. The first comes from my home town of Des Moines, Iowa and a candidate that was taking the 2011 exam. The candidate arrived bright and early at the convention center downtown, more than an hour early and ready to ace the exam. The only problem was that he had remembered that the prior year’s exam was held at the convention center but had not bothered to check his admission ticket. An hour left to the exam start and the candidate was getting a little anxious. No one else had shown up for the exam!

Checking his exam ticket, the candidate saw that the exam location had changed to a casino convention center on the outskirts of town. He jumped in his care and floored it to get to the exam in time. Fortunately, the new site was only about a 20 minute drive from the old location and the candidate was able to get there with half an hour to spare.

Cell phones have become so common that everyone has heard of one going off during an exam. The proctors are supposed to collect cellphones before the test or to tell candidates to leave them with the rest of their personal items outside the room. This wasn’t the case at the exam in Mumbai a few years ago. According to one candidate, a cell phone beeped about an hour into the exam. It was fairly loud but only beeped twice so the proctors were not able to see from where it came.

Two proctors closed in on the general area from which they heard the beeps but no one said anything. It seemed the candidate would get away because everyone went back to their exams and the phone didn’t beep again. Then, just about 40 minutes later, the phone beeps again. Now the two proctors had stayed close to where they heard the first beeps but again could not tell exactly from where the sound was coming. They moved closer to where they thought the sound was, closing in on their prey. It was like an intense game of hide-and-seek. Fortunately for the candidate, the phone did not beep again and nothing ever came of the incident.

The last story is one of extreme preparedness from a candidate in Chicago. The candidate writes, “I thought it hilarious when the candidate next to me started laying out all of her resources for the exam. We were taking the Level III exam so she had both pens and pencils, and oh man did she have a few. I counted two packs of six pencils, 12 in all, and 20 blue ink pens. The candidate also had two calculators, an extra battery, a small pencil sharpener, a small eraser (even though each pencil had an eraser), a screwdriver for the calculator, a set of earplugs and a small watch. It looked like she was setting up a small convenience store! To my surprise, she actually used five of the pencils, not so much that she needed to because it looks like they were only used until they needed sharpening.”

We’ll get a post out on preparing for exam day next week. You’ve got another couple of weeks so start wrapping up your plans and getting those last few points. Good luck.

‘til next time, happy studyin’
Joseph Hogue, CFA

Free Cash Flows and the Level II CFA Exam



I’ve had quite a few questions on the Free Cash Flow material for the level 2 CFA exam so thought I would put together a post on the topic. Free cash flow is an extremely important measurement and you will need it extensively in the equity section of the exams as well as in your professional career. It represents the cash available to either equity investors or all capital providers after all working capital and fixed capital needs have been reduced.

Free Cash Flow to the Firm (FCFF) is the cash flow available to all capital providers (debt and equity) and equals:

Net income + Net noncash Charges (depreciation and amortization) – Investment in working capital – Investment in Fixed capital + after tax interest expense

FCFF is discounted at the weighted average cost of capital (WACC) since it is the after-tax cash flow to all suppliers of capital.

Free Cash Flow to Equity (FCFE) is the cash flow available to common shareholders and equals:

Net income + Net noncash Charges (depreciation and amortization) – Investment in working capital – Investment in Fixed +/- net borrowing

  • Notice that FCFE is FCFF except without adding back interest expense and taking net borrowing into account.
  • Understand how to arrive at FCFE or FCFF with CFO
  • FCFF = CFO + INT (1-t) – invest fixed capital
  • FCFE= CFO – invest fixed capital +/- net borrowing +/- net change in preferred shares

FCFE is discounted at the required rate of return for equity since it is the cash flow only to equity shareholders. Using the WACC for FCFE will overestimate equity value since the weighted average cost will be lower than the cost of equity.

FCFE is a more direct way to value equity, so preferred but FCFF may be preferred when the company has a volatile capital structure or is highly leveraged.

The most difficult part in FCF calculations, for me, was the adjustments to net income to arrive at FCFF. Remember: depreciation, amortization, restructuring expenses, losses on fixed asset sales, deferred tax liabilities, after-tax interest expenses and preferred stock dividends are all added back to net income. Any gains on the sale of fixed assets, the amortization of long-term bond premiums, deferred tax assets, and investments in FC and WC are all subtracted from net income.

It’s a pain but you absolutely have to understand and be able to calculate all the approaches of FCF estimation: net income, net cash flow, EBIT, EBITDA, and FCFE from FCFF. Start with the calculation from net income to get a good feel for the adjustments and what is being built into FCF, this should make the other equations more intuitive. Not only will practicing these formulas help get you points on the exam but they also help with a better understanding of the Statement of Cash Flows and how funding works for a company.

FCF models for valuation are most appropriate when the company does not pay a dividend and/or when the investor has a controlling share or influence in the company. FCF models may not be as appropriate for fast-growing companies with high capital expenditures and negative free cash flows.

As always, try to first understand the basic concept of what FCF means and what is happening in the formulas. Understand what non-cash items and capital expenditures are on the Statement of Cash Flows and why they added or subtracted to arrive at free cash flow. Understanding the accounting in terms of why things are adjusted instead of just numbers and symbols will go a long way to your success on the exams and as an analyst.

As with all topics, you need to understand the major difference between important concepts (i.e. FCFE versus FCFF) and when it is most appropriate to use each. Also understand the advantages, disadvantages and assumptions within the models. Understanding these conceptual ideas will get you a lot of the points even if your memory on the formulas fails you.

Less than a month to the exam, let me know if you have any questions and good luck.

‘til next time, happy studyin’
Joseph Hogue, CFA

CFA Institute Mock Exams are Available



The mock exams and topic-based practice tests are available from the CFA Institute. One mock exam is included in the price of registering for the test. The mock exam is a six-hour test in two parts and mimics the topic area weights of the actual exam. The practice tests are shorter than the actual exam and focus on specific topics. The Institute claims that the questions on both represent the approximate level of difficulty on the actual exams but I always felt they were slightly harder.

The semantics here always seemed a little confusing so let’s get a couple of definitions out of the way. A ‘mock’ exam is a six-hour, two-part test with the same number of questions and meant to replicate the experience of taking the actual CFA exam. A ‘practice’ test or problems are normally considered to be a shorter group of questions than the actual exam. A mock exam does not necessarily have to be one formalized set of questions but can be constructed from a test bank or by selecting individual problems and doing them all in one sitting.

Regardless of what you call it, you absolutely must take a few mock exams before you go to the actual exam in June.

Glucocorticoids and why you absolutely must take a mock exam
An overlooked benefit of practice problems and mock exams is as a stress reliever on the big day. Everyone is on edge when the proctors pass out test booklets for the exam but I have seen many candidates that appear close to a breakdown of Chernobyl-proportions. Being stressed out will not do you any good on the exam. In fact, the body reacts to stress by secreting hormones like glucocorticoids that impair the ability of the hippocampus to recall memories and diverts energy away from other important parts of the brain.

Do you think it might relieve a little of that stress knowing that you have completed multiple mock exams and have done well? Of course it would. Taking full-length mock exams helps not only by seeing your score across topic areas but also by seeing how your body reacts to a six-hour exam-athon.

Hopefully, you already have a few mock exams under your belt but it’s not too late to start. I would recommend doing at least six exams before the last week before the exam. At least a couple of these should be full six-hour exams but you can also do three-hour sets if time is hard to come by. Put your topic-level results in a spreadsheet and track the average and standard deviation of results. This will help build a confidence interval around your overall score and your score within each topic.

From there it is simply a matter of focusing your study plan to improve your performance in select topic areas while maintaining your score in others. As always, look to the released topic weights and make sure you are doing well where it counts most. I always tried going into the exam with an average of at least 80% or better in the core topics and 70% or better in all others.

FinQuiz also provides a web-based test bank and full-length mock exams with its study packages. The FinQuiz test bank includes nearly 5,000 questions created directly from the curriculum and more than 100 item sets. Three mock exams are available for each exam and the level III material includes five AM session exams.

Whether you just use the Institute’s materials or a third-party provider’s, you need to know where you stand before the exam. Do not underestimate the effect confidence and stress could have on your test performance. Knowing with confidence that you are doing well on most or all topic areas can be a big boost to your score on June 7th.

If you are not doing so well on your practice exams, don’t get discouraged. Focus your study on the core topics; usually Ethics, FRA and Equity to make sure you get the most points possible. Do several practice exams and you should see your score improve.

‘til next time, happy studyin’
Joseph Hogue, CFA

Turning the last week before the CFA exam into big points



We’re coming down to the wire with just five weeks left to the June CFA exams. Hopefully you are almost through with your study plan. You should be through the curriculum at least once and have started taking practice exams. If you are not scoring around 70% or better on test bank and practice problems, you may need to kick your schedule into a higher gear.

I always took the last week before the exam off from work and swear by it to get those last few points to put you into a passing score. Whether you go to an intensive boot camp program or just stay close to home to study, the week can be a huge help in wrapping up your studying.

Is this really a vacation?

For me, that last week of study was always pretty enjoyable. Was it as nice as spending the week with an Emperor’s Package at Caesar’s Palace in Las Vegas…umm, not even close but it was a break from my day-to-day as an economist.

My own schedule would start each day with a three-hour test bank exam using the topic weights from the exam. The results from these mini-exams are extremely valuable in planning where you need more studying. If you are scoring under 70% in any of the high-value topics, this is where you need to spend your time.

Don’t feel like you have to cover the entire curriculum over the week. Review flash cards and notes in less important topics or in the areas where you are scoring well. I always tried covering a couple of study sessions completely each day and maybe hitting the important points in another one or two study sessions.

Spending 8 -10 hours a day studying means you’re probably going to need to mix it up with different resources to keep from getting bored. Spend some time reviewing flash cards and end-of-chapter questions to take the monotony off of just reading all day.

Three options for your last week vacation

You’ve got three options when planning your last week study plan if you decide to take the week off of work. If you stay home, you really do need to get out of the house to study. Go to the library or another quiet place where you can limit distractions. If you stay home, you are going to be tempted by the television, food and a number of time-killers. Turn off your cell phone and fight the urge to check your email while you are out. This week is still work, it’s just not your normal work but you need to set a 9-5 schedule and follow it. Avoid the temptation to stay out late with friends and pushing your morning study to later in the day.

My favorite plan comes from a friend in Chicago. He would plan a trip, usually to San Diego, for the week. Mornings would start early with a quick run on the beach and studying by 8am. His day still included at least 8-10 hours of studying but it would be done at the beach or the park. You may even ask the hotel to remove the television from the room. The trips gave him a real opportunity to relax but still devote some serious time to getting exam points. It also gets you away from your usual distractions and can re-energize your studying with new surroundings.

You also have the option of going to an intensive boot camp study program like the one offered by Creighton University. These are usually three or four days of intensive lecture on the curriculum. They can be a new perspective on the material and some great advice on how to approach the exam.

Take the Friday before the exam off from studying. You’ve put in the work and deserve a break. Spend the day relaxing and making sure you have your materials to take to the test center. If you are not familiar with where the test center is located, I would spend a little time looking online for routes to the test. Even better, connect with a candidate that lives near the test center for directions and possible road closures in town.

The end is in sight, stay focused.

‘til next time, happy studyin’
Joseph Hogue, CFA

Donald Sterling and the CFA as the Great Equalizer



Last week reminded me of an often overlooked benefit of the CFA exams and the designation itself.

First we saw the blowup by Donald Sterling, owner of the Los Angeles Clippers, in a taped conversation with his mistress. I won’t repeat the racist remarks by Mr. Sterling that led to his lifetime ban from the NBA and will mean the forced sell of the Clippers basketball team. The tirade still shows the amount of prejudice and unwarranted hate that many harbor for another simply because of their race, religion or sexual orientation.

Income inequality seemed to be a theme in the news last week as well. Whether it was universal or just related to other things I was looking at on the internet, I was struck by the number of studies and news reports I saw about income disparity around the world. The gap between the richest and poorest earners seems to be widening and its not only in the United States or other developed countries. I read studies on Latin America, China and for income inequality in Africa and they all seem to point to a widening gap.

Lady Justice and the CFA

It all reminded me of a benefit to the CFA program that most overlook and one of the things I respect most of the program and its charterholders. Like Lady Justice, standing blindfolded to judge right and wrong, the CFA program does not care if you were born with a trust fund or if all you have are the people you trust.

The fact that you pull up to the exam center in a shiny new Jaguar F-Type convertible or ride up on a donkey matters little to your score on the test. In fact, the Institute spent nearly $4 million in the twelve-months to August 2013 on needs- and merit-based scholarships to the program. While some of the wealthiest people in our industry hold the charter, i.e. Bill Gross and Mario Gabelli, it is not because they were able to buy the designation. They had to work for it just like everyone else.

The CFA exam is the same wherever you take it, from Afghanistan to Zimbabwe. There are 137 CFA societies in 59 countries and charterholders in every corner of the map. Growth of candidate enrollment in Asia and Africa has been running in the double-digits for several years as growth in the United States and Europe slows. The curriculum does not care about the color of your skin or the ethnicity you claim.

With all those prayers of passing the exams, organized religion may owe a debt of gratitude to the CFA program but the program itself doesn’t care if you pray to one God or many. It doesn’t care if you spend your Sundays reading a religious book or the five books covering the curriculum.

The CFA charter is the great equalizer in our industry. I am not saying that no one in the industry harbors the same prejudices and faults that are found in the general population but the designation is a standard that we can all reach to as just and fair. Earning the designation is a badge of your hard work and professionalism, something that people will notice immediately when they meet you. It is the scale by which all are judged not by the strength of their pocketbook but by the strength of their studying.

Less than five weeks to the exams. We are coming up to the point for which you’ve worked so hard these last couple of months. Stay strong and study hard.

‘til next time, happy studyin’
Joseph Hogue, CFA

Level III Essay Review – Question #2 2013 Exam



This post works through the second essay question on last year’s CFA level 3 exam. If you have not yet downloaded the exam and the guideline answers provided by the CFA Institute, do so here.

The second question on last year’s CFA level 3 essay exam was worth 15 points, a little over 4% of the entire test, and covered topics with which candidates often have a hard time. The four parts, each worth three or four points, cover estate planning and taxes. They are topics in which many candidates have not had much exposure and the curriculum includes a lot of legal points that can be difficult to remember.

The vignette material is relatively small so there isn’t too much information to handle. As always, I read through the material and highlighted data and important points before looking at the questions. Within the material, the investor’s age and any numerical data is usually pretty important as well as any preferences.

Part A was fairly straight forward from the text. The wife is entitled to one of two percentages of the estate, either the 25% of total assets or the 50% of the increase in the estate during the marriage.

As always, remember to show ALL YOUR CALCULATIONS on essay questions. The question was worth 4 points and I bet you would have gotten at least two points if you wrote out the calculations for both percentages even if you ultimately picked the wrong one.

Usually these heirship rules will be spelled out on the exam but make sure you understand the basic concepts and terms for estate planning.

Part B is an important one to study for this year’s candidates. Questions on trusts have come up frequently on the exam. It is not a quantitative section but you need to know the basic rules and especially the differences between revocable and irrevocable trusts, as well as the advantages/disadvantages of each. Notice that the guideline answers provide four possible answers but the question only asks for two. The grader will only look at your top two answers so lead with the best and do not waste your time writing down more than you need.

Remember, with trusts the idea is a transfer of assets outside of probate that may protect assets from other claims and avoid family disputes.

The material on taxes is extremely long and quantitative but many of the prior essay questions have come down to qualitative ideas of whether taxes can be deferred and whether the future rate will be higher than the current. Part C was one of these types of questions and all the information was laid out in the vignette. In these instances, if the question seems difficult, try reading through the vignette focusing on only one solution (either the gift or the estate) and list out the tax rules that apply. Then you can compare the two side by side.

Part D was tough because you basically knew generation skipping or you didn’t. You probably would have gotten at least one point if you described the benefit without explicitly naming it ‘generation skipping’ so make sure you write out your reasoning on all questions. There are some quantitative sections on the estate and tax topics but it seems that the terms and concepts are the most important and will get you a good amount of the points.

The CFA Level 3 essays last year included three questions on individual portfolio management for a total of 14% of your total exam score. That is a huge chunk and combined with the institutional questions, portfolio management was almost a quarter of your exam score. Make sure you hit those two topics hard and be ready for this year’s exam.

‘til next time, happy studyin’
Joseph Hogue, CFA

Think you are ready for the CFA Exams? Think again.



With just six weeks to the CFA Exam, you might be feeling pretty confident about your preparation so far and ready to coast through to the June test. You are doing well on question bank problems and are sure you will be able to pass the exam.

Don’t take your focus off of the finish line! This is the time you need to double your efforts and finish strong for several reasons.

Surprised every year

Everyone knows that nearly half of the candidates taking an exam will not pass their level this year yet the statistics are always the same. While the Institue shifts the passing score from year to year, we should see pass rates increase if more candidates were getting at least a 70% or better across all topics. Even after experiencing the exams, candidates continue to underestimate the challenge.

While you may have already put in hundreds of hours in preparation, know that it may take another hundred hours or more to cement your place at the top of the pack. I put in a fairly tough schedule usually from September or October all the way through May each year I was a candidate and was still surprised every year when I went into the exams.

Put in that little extra time and you’ll be rewarded with a huge sigh of relief in June.

Exam, what exam?

One thing I have tried to stress on the blog is the fact that professional development is an enormous part of our industry. Not only is the competition among analyst jobs so fierce but trying to find the best investments in a fairly efficient market among a sea of investors seems impossible at times.

You need every tool at your disposal and the CFA material is the best toolbox around. Try to not think of studying for the exams so much as a one-and-done event but a continuous process in your new career as a true professional.

Obviously, this is tough to do when you are singularly focused on passing your next exam. I understand because I was in the exact same spot just three to five years ago. Keep focused and confident that you will pass the exam but keep the studying in perspective. Don’t stop when you think you are safe to pass the exam. Only stop when you feel you have mastered the material.

Putting it into perspective

While you might feel that the exams are consuming your life right now, putting the time spent in perspective might help a little. That 300+ hours studying for each CFA exam is insignificant over a lifetime.

The Bureau of Labor Statistics reports that Americans 15 years and older spend approximately 7.5 years in front of the television. That’s nearly three hours a day on sit-coms and reality TV.

Surfing the internet takes up nearly as much time with 10,000 hours or about 5 years of our lives. Some of it is time well spent connecting with friends and family or other worthwhile sites but there has got to be a few pointless hours within that total.

Thinking about some of the time wasted throughout the day makes a few hours of professional improvement a little easier. If you spend 300 hours on each exam, that’s just 37.5 days and a little over 11 hours a week over six months. Find that quality time with your family, make sure you get enough time where it counts and then get to work!

Good luck. You’re almost there and I know you can do it.

‘til next time, happy studyin’
Joseph Hogue, CFA

Making Level I Success a Step to Level II



If you’re a CFA level 1 candidate, your top priority right now is to pass that first hurdle and enjoy a well-earned six months of rest. The last thing you want to think about is putting in your time on the next two exams.

But if I told you that there was something you could do while studying for the CFA level 1 exam that would save you a lot of time next year, would you be interested?

You bet you would!

Remembering a few key points while studying for the first exam could help you pass the level 2 exam and even give you a head start on the third exam as well.

Relationships between the CFA exams

The secret is understanding the related material across the exams and what you need from one exam to the next. While the topic areas across all three exams are all related to an extent, there are a few in which your work on earlier exams is absolutely imperative to passing.

Ethics and Professional Standards is probably the most consistent across all three exams. You will see a couple of new sections in the level 2 and 3, but the core material is exactly the same. The topic area is worth more nearly 12% of your total score across all three exams so definitely points you can’t afford to miss.

Not only is the topic extremely important across the exams, it’s been my experience from candidate comments that it is the one they are most often disappointed by on the first exam. Candidates assume they are ethical people and will be able to pick the correct answer out of the three possibles. They neglect the section and then are surprised at how difficult it is on the exam. Spend a little extra time on this area, do the end of chapter problems and save yourself a ton of time and stress in the next two exams.

Quantitative methods is another topic where mastery of the CFA level 1 curriculum will pay off big time on the second exam. While it is not a high-point section, only 12% of your first exam and 5% – 10% of the second, understanding the material in the CFA level 1 is critical to do the work on the next exam. The level 2 curriculum usually even includes optional refresher material for those candidates that didn’t learn or forgot the prior material. Think of it as the difference between two mathematics courses, one teaching the basics of multiplication and the other moving on to algebra. You would be absolutely lost in the algebra class without mastering the prior course.

Financial Reporting and Analysis is one of two or three core topics to the entire curriculum and worth more than a fifth of your first two exams. The readings on the financials statements in the first exam must be mastered to be able to do the intense analysis work in the second exam. Talk to almost any level 2 candidate and they will tell you that one of the hardest parts of the exam is the FRA material, especially intercorporate investments, multi-national operations and pensions. To be able to understand these readings, you must understand the relationships between the financial statements which is Level 1 material. Save yourself the time of reviewing this by mastering it early.

Study session 14 in the Equity Investments topic area will also be a very important reading for progressing to the level 2 exam. In fact, it looks like a lot of the level 1 material is repeated in the level 2 curriculum. Equity Investments are a quarter of your total score at the second level so you want to be ready for the topic.

The usual disclaimer applies that you cannot afford to completely neglect any topic area. You will need around 70% on your exam to pass to the next level. These exams are extremely difficult on a mental and physical level so do not expect to get all the points in any one section. Spend enough time on the secondary topic areas so you can get at least 60% or more and then focus on the higher-point and higher-importance sections.

‘til next time, happy studyin’
Joseph Hogue, CFA

Your Most Frequent Questions on the CFA Exams



It’s always around this time that I see an increase in questions from candidates. Six weeks to the exam and everyone is second-guessing their readiness to face that 6-hour marathon. I decided to use this post to review five of the most frequent questions I get and some previous posts to address them. Click through the text to be redirected to specific posts on the topics.

If you’ve been a regular follower of the blog, you might have seen some of the posts before but it might help to refresh on the ideas or suggestions. I’m always open to hearing your recommendations and thoughts so use the comment section below if you think I missed anything.

Five most common questions by candidates

Basic strategies for each of the exams is always a popular subject. The format for each exam varies a little and you need to go into the test knowing what to expect. Besides insight on the format, our basic strategies cover the relative point importance on the topic areas and strategies for studying.

Click on the links below for basic strategy on each exam. The posts were written ahead of the 2012 exam but the formats and strategy have not changed. There are a few changes to the actual curriculum but that won’t change how you approach the tests.

CFA Level 1 Basic Strategy
CFA Level 2 Basic Strategy
CFA Level 3 Basic Strategy

The intense quantity and complexity of formulas is always a sticking point for candidates, especially on the second exam. While the formulas on each exam vary, the way you study for them is consistent. One of the most popular posts on the blog explains the difference between active and passive learning. It may not be as easy as sitting back and reading through the material but actively working through problems and flashcards is the best way to learn the material.

Speaking of flashcards, a recent post on how (and why) to make your own flashcards offers good insight on remembering the formulas. Flashcards were a core resource when I was studying for the exams. They can be carried anywhere and you can use them when you’ve just got a couple of minutes free. Absolutely essential for learning the tough formulas and processes.

No matter what you are doing in life, there never seems to be enough time. Studying for the CFA exams is no different and time management is one of the top questions by candidates. Whether you are a full-time student or have a family and a 9-to-5 job, you’ll need to find ways to effectively use limited time.

Part of this comes from effective time management and moving your schedule around to find blocks of study time but another important idea is using your time responsibly and prioritizing.

The most exam specific question I get is how to approach the level 3 essay section. I loved the morning section when I took the third exam because it is the only group of questions where the Institute actually gives you the questions and answers to previous exams. The morning essays can be extremely easy points if you work through prior exams, or they can be a frustrating mess of lost confidence if you don’t.

We have worked through 14 prior essay questions going all the way back to the 2009 exam. The individual and institutional portfolio questions usually have similar formats across years so be sure to study those and how to approach them. The post linked here is our review of last year’s individual portfolio management question. Click on “Level III” at the top of the blog and scroll through to review the posts on the other essay questions.

Getting a job after earning the designation or even while you are studying is always a top concern for candidates. While I explain in one post that the designation will NOT get you a job by itself, it is an important step in your career as a professional. Instead of relying on the charter to get you a job, follow the advice in another post on how to stand out from the other applicants and get the job you really want.

Have a question about the exams? Send me an email or use the comment section below.

‘til next time, happy studyin’
Joseph Hogue, CFA

Do Not Let the CFA Level 2 Exam Surprise You



The pass rate for the CFA level 2 exam has only been lower than that of the first exam in three of the last 10 years. For many candidates, that is a welcome relief after a grueling introduction to the exams and it must mean that the second exam is easier. Right?

Wrong! And it catches a lot of candidates off guard.

While the CFA level 2 exam may indeed be easier for a few, most candidates find it incredibly difficult especially compared to the CFA level 1 exam. Which exam is the most difficult for you will obviously depend on your own abilities but you need to go into the second exam knowing exactly what you are facing.

Quantitative Monster

It is often said that the CFA level 1 curriculum is a mile wide and an inch deep because it covers a huge range of material but really only teaches to the basic ideas within each. The CFA level 2 material covers the same topics but seems to focus more on the detail within a few. While the range of material can still seem daunting, candidates usually agree that the level two curriculum is a mile deep and maybe a few feet wide (to paraphrase the saying).

This becomes a little clearer looking at the topic weights across the exams. While the first exam is more evenly spread out, the second exam is more focused in a couple of topics. In fact, Financial Reporting & Analysis and Equity Investments alone will account for between 35% to 55% of your entire score.

This is obvious enough to anyone preparing for the exam. What is not so obvious is the quantitative difficulty you will see on the exam. Those problem sets are a monster!

Given that nearly half of the exam could be from just two topic areas, I hope I don’t have to tell you where you should be spending your time. You absolutely must know the FRA and Equity material, especially the formulas.

We covered some of the most important formulas on last year’s exam in three posts (First, Second, Third) and linked here. Almost all will still be applicable to this year’s exam so feel free to look through the posts for hints on each.

There’s two things you can do to help get through the formulas.

  • First, you need to understand what is conceptually happening in the formula. Trying to understand the myriad of symbols is crazy. If  WACC = (Vd/(Vd +Vce))rd (1-t) + (Vce/(Vd+Vce))rce) doesn’t make you go cross-eyed you are a stronger person than I am. Think about it intuitively and it makes sense. The overall cost of a firm’s funding capital is the cost and proportion of equity and debt. The percentage of each funding type relative to the total is multiplied by its cost. Debt is tax advantaged, so you need the after-tax cost.
  • Secondly, you have to work these formulas through practice and repetition. One of the most popular posts here shows that active learning (engaging the material through practice and conversation) allows you to remember much more than passive learning. The best way to approach tough formulas is to put them on flash cards. We covered the importance of flash cards and why you should make your own set in the previous post.

Just because a higher percentage of candidates usually pass the second exam than the first doesn’t necessarily mean it is easier. Think of it this way, candidates are fully aware of the immense challenge presented by the exams after the first test and still less than half typically pass the second exam. That should give you an idea of difficulty on the CFA Level 2 exam.

The good news is that tens of thousands of candidates pass the exam every year and you can too. Focus on those formulas, especially in the high-point topic areas, and you will do well. Less than two months ahead of the CFA exams. Be ready.

‘til next time, happy studyin’
Joseph Hogue, CFA