Formulas on the CFA Exam: Which do I REALLY need?

This is something that all candidates come up against, especially while studying for the Level II CFA exam which is extremely formula-intense.

Whether there are in fact ‘unnecessary’ formulas or not, the temptation is strong to ‘game’ the exam and only focus on the stuff with higher odds of showing up in questions.

The short answer is DON’T DO IT! The curriculum states in the front of the books that, “every question on the CFA examination is based on a specific page in the required readings and on one or more LOS. Frequently, an examination question is also tied to a specific example highlighted within a reading or to a specific end of reading question and its solution.”

Though, it appears that the exams focus strongly on actual LOS the above paragraph leads me to believe that anything in the readings is possible exam questions.

Further, though an LOS may not explicitly require calculating something it might be implicitly necessary to arrive at a decision or to understand the LOS.

With around 50% of candidates failing each exam in any given year, you need all the points you can get and can’t afford to miss from guessing wrong at which formulas might show up.

The time spent studying to earn your CFA designation is minuscule relative to the big picture. Spend the time necessary to learn this material, no matter how long it takes and be a stronger professional for having done it.

The long answer, of course, is more complicated. The fact is, unless you’re one of those quant geeks that I secretly envy but openly deride, you are not going to be able to memorize all the formulas in the curriculum.

There is an element of gaming the exam in that you have to spend the time on the topics and formulas that you will be able to pick up and less time on those where time is less well-spent.

There are really two issues here.

One, some formulas within the curriculum don’t seem to be a focus or are not explicitly mentioned in any learning outcome statements (LOS).

With so much material, why would you spend time on stuff with a lower probability of being tested? Secondly, some of the formulas are extremely intense and difficult, and the range of material is extensive. It is tempting to skip material that is more difficult.

The problem with the first issue is that, despite what you may hear from other candidates or through rumors, since we can’t talk about questions on the exams you really can’t know what will be on the test or not.

I would play it conservative and say that ANYTHING written in the curriculum is testable despite not being explicitly mentioned in an LOS.

The problem with the second issue is that, after dismissing a topic or formula, it becomes extremely tempting to dismiss others.

Before you know it, you are only reading half of the topic areas and neglecting a large section of the curriculum.

Try looking for help on internet forums or from other candidates that have tackled the formula.

Check out some of the study notes or summary sheets that might be able to explain it a different way.

I ran into this myself on the level II exam. After several hours on swaptions pricing and valuation, I still was not confident that I could replicate the procedure on the exam.

I could have spent a few more hours on the topic, but chose to spend the time on other areas. I got the general concept down so I might be able to make an educated guess on the test, then moved on to other topics.

Before totally dismissing a formula, at least try to get the concept of what is happening. One, this will most likely make it easier to memorize the formula since its not just rote learning. Second, you may be able to make a better educated guess on the exam.

The best advice I can offer is that which you’ve already heard. Focus on end of chapter questions and blue-box examples. These should give you plenty on which to concentrate.

Work your practice exams and make sure you have at least 70% or higher in all topic areas. Will you see every formula on the exam, no. Do you need to be able to answer every formula that even makes it to the tests, no.

You need to get 70% or better on the exam and you need to spend your time getting the most information learned as possible.

If this involves just getting the general idea on some material to be able to quickly move on to other areas, then so be it.

All for today. ‘til next time, happy studyin’
Joseph Hogue, CFA

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