Last year I passed the CFA Level I exam with about 150 hours of study, working directly from the books provided by the CFA Institute. This year I am attempting to repeat the same process with the CFA Level II exam. It’s pretty well known that Level II is the most difficult of the three CFA exams. From my discussions with people who have have earned their CFA charters, it seems that very few of them passed Level II on their first try.
CFA Level II Exam Format
The format of Level II is similar to Level I in that all the questions are multiple-choice with three answer choices. However, for Level II there are only 120 questions total, compared to 240 questions for Level I. Since the exam is 6 hours long, this works out to three minutes per question. Many of the questions are qualitative concepts and can be solved in under a minute, so there’s really no time pressure. However, the quantitative calculation-based questions tend to be much more difficult than those found on Level I; some require extensive reworking of financial statements to get to the answer.
The questions in Level II are grouped into “item sets”. An item set means there is a short case study followed by six questions about a particular topic. For example, there may be a case study of an analyst doing a valuation of a common stock, with included financial statements and other metrics. The six questions in the item set will all relate to the information provided by the case study.
My out-of-pocket cost for Level II was just $830, as compared to $1,215 for Level I. For Level I there was an additional fee to join the CFA program.
CFA Level II Study Plan
Over the past few months I’ve slowly worked my way through the six books provided by CFA Institute. Some of the material expands upon concepts introduced in Level I, and some if it is brand new. I’ve tried to read every chapter and do as many of the end-of-chapters exercises as I could; however, there are some sections that are just too incomprehensible and I skimmed over them. In particular, I found the chapters related to derivatives and statistical methods almost impossible to get through. There is also a very opaque section on pricing bonds with embedded options that I don’t even want to look at.
However, for the most part, I’ve enjoyed reading the CFA books. I’m a career changer into finance and I’m interested in the material for its own sake. In particular, I liked the books about Corporate Finance and Equities. The Equities book spends extensive time discussing the concept of “economic profit”, which is profit that a business earns over and above its cost of capital. The concept of “net income” as widely reported in the financial press is an accounting measure that may be vastly different from economic reality; the concepts of free cash flow, economic profit, and residual income are more closely tied to the true profit-generating potential of a business.
As of now, I’ve taken two full-length practice exams. I’m a little disappointed to say that I scored only about 50% correct on each. According to the internet, the supposed ‘minimum passing score’ is around 70% correct; that would mean 84 correct answers out of 120 questions. So I clearly have room for improvement. However, in reviewing the exams it was clear that there were many questions for which I simply didn’t know the correct formula. For these types of questions, you either know it or you don’t; if you know the formula then you can calculate the correct answer, and if you don’t know the formula then you have to guess.
In passing Level I last year, I found that learning much of the material was amenable to brute-force memorization. I created a huge set of flash cards that included all of the formulas and concepts I needed to memorize – how to calculate financial ratios, what happens to them when conditions change, what are the key underlying concepts, etc. During the last few weeks before the exam I took these flash cards everywhere, read and reread them, and asked a work friend to quiz me during lunch. They were very helpful in passing the exam.
To some extent, I think this flash-card memorization approach works for Level II as well. Some formulas just need to memorized. However, some of the more difficult Level II material really requires a deep understanding of financial concepts and the ability to apply them in the specific context of a particular case study. On some of my flash cards I’ve had to write out whole paragraphs, and it’s better to understand a concept than to just memorize a paragraph. On the other hand, if you reread a paragraph enough times you do tend to eventually understand it.
There is another key study tip that I used last year. For the official Mock Exam provided by the CFA institute, I made sure I understood the correct approach to solving every single question. The official Mock Exam is the best source of questions available and it’s the most representative of the actual exam. Why wouldn’t you understand every single question? You don’t know what questions will appear on the actual exam, but you know the CFA Institute has provided guidelines in the form of the Learning Outcome Statements and Mock Exam questions, so you should be sure to understand them. Accordingly, I’ve been thoroughly reviewing the Level II Mock Exam and created a large set of notes and flash cards.
Right now the CFA Level II exam is just over two weeks away. Although I am behind in my study progress compared to last year, I intend to put in serious hours to get myself up to the 70% correct level. It’s likely that I will take another practice exam, review my notes, and do more end-of-chapter exercises from the CFA books.