Level II General

Access to all Level II general articles until the next Level II exam date

As a mathematician, I’ve been trained to write and speak (and, consequently, to think) using precise, accurate terminology.  There are, of course, occasions when even mathematicians abbreviate the things that they write or say, but on those occasions: We know that we’re abbreviating, and All mathematicians have agreed to the abbreviations used. As an educator, […]

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After reading a number of posts on AnalystForum in which candidates have had difficulty with linear interpolation or extrapolation, I figured it was time to write an article on the subject.  At Level I it applies to binomial trees for calculating the weights for equity options, and for combining risky portfolios with the risk-free asset […]

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Although you are not allowed to use Excel (or any other spreadsheet program) on the exam – you have to survive with your lowly financial calculator – it’s still useful to be able to create amortization tables in a spreadsheet, to help you visualize the cash flows and account balances in a variety of financial […]

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Throughout Level II and Level III – and a little bit at Level I – we see calculations that involve commodities; e.g., calculating the price or value of a forward or futures contract on an underlying commodity. In all of those calculations, the quantity of the commodity is constant; for example, if you’re given the […]

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Arbitrage means the ability to earn a profit without risk.  One method by which arbitrage is commonly accomplished by buying an asset in one market, and simultaneously selling an identical asset in another market at a higher price (e.g., T-Notes or T-Bonds).  Another is by borrowing an asset (e.g., a currency) and investing it at […]

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The ideas behind nominal and effective interest rates are fairly simple, but you need to be sure that you understand the differences, and that you know which convention is used for which common rate quotes.  At the heart of the difference is the idea of compound interest, so let’s start there.  Throughout this article, we’ll […]

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If you’ve never taken the Level II CFA exam, you’re in for a real treat.  (If you’ve taken it before, you already know what I mean.)  As with the Level I exam, this exam will be six hours – three in the morning, and three in the afternoon – and it will be exhausting, both mentally and physically.  Thus, you need to be prepared, both mentally and physically, to take this exam.

This time there are 120 questions, half as many as you had on the Level I exam: 60 in the morning session, 60 in the afternoon session, each in 10 item sets of 6 questions apiece.  Each item set consists of a vignette – generally a 1-2 page story that may include data tables – covering a single topic area: ethics, FRA, derivatives, whatever.

Because all of the questions come in groups of six on a single topic area, there is less flexibility in the Level II exam than there is in the Level I exam.  At Level I, they could ask you 14 questions on a given topic; at Level II they cannot: it will be 6, or 12, or 18, but not 14.  Thus, whereas at Level I you know for certain how many questions will be asked for each topic, at Level II you are given a range; for example, FRA is listed at 15% – 25% (3 – 5 item sets), Derivatives is 5% – 15% (1 – 3 item sets), and so on.

The implication of this uncertainty in the number of questions in each topic area is that you cannot afford to be weak in any area of the curriculum.  At Level I you could get away with being weak in derivatives, or alternative investments, or portfolio management, as long as you were quite strong in all of the other areas.  At Level II, if you were to be weak in derivatives or alternative investments or portfolio management, you may find that this is the year that they decide to have 3 item sets on derivatives, or 3 item sets on alternative investments, or 3 item sets on portfolio management.  You simply cannot risk being weak in any area, because this may be the year that they test that area with the maximum number of questions.  And there are only half as many questions on the Level II exam as on the Level I exam: every question that you don’t know counts twice as much against you.

As with Level I, every question on the Level II exam stands alone; for example, whether you get the correct answer on question 23 has no effect on whether you can answer question 24 correctly.  Once again, every question is worth the same amount as every other question: 1 point for a correct answer, 0 points for an incorrect (or no) answer.  Although CFA Institute never divulges the threshold score for passing the exam, there is a threshold: if you score more than the threshold you pass; if you score less than the threshold, you fail.  Your strategy, therefore, is simple: amass as many points – correctly answer as many questions – as possible.

To achieve this strategy, there are tactics which have proven useful.  Each candidate has topic areas in the curriculum in which they are strong, and other topic areas in which they are less strong.  There is no reason that you need to start with question 1 and answer the questions in numerical order.  Indeed, I encourage you to start on the topic area in which you are strongest: if your strength is in FRA, when you open the exam booklet you should turn immediately to the FRA questions and start answering those; if your strength is in Fixed Income, you should start with the Fixed Income questions, and so on.  The way I like to say this is: Get all of the points that God intended for you to get.

It is also a good idea to start with questions you can answer quickly, saving the more lengthy questions for the end.  Remember that if you spend 12 minutes trying to answer a difficult question, you have used up the time that should have been allotted to answering three other questions; you may have squandered three points in an effort to earn one point.

Although there are only half as many questions on the Level II exam as there are on the Level I exam, don’t conclude that you can relax on the Level II exam.  The vignette/item set format means that you have to read a lot of information and try to extract the important bits for each question.  If you have to read the vignette more than once, you are using up precious time that could be devoted to answering the questions.  Many candidates will start by reading the vignette, then move to the questions.  I believe that this is a losing strategy; it guarantees that you will have to read the vignette at least twice.  My suggestion is that you start by looking at the questions, so that you know what information you need to get from the vignette.  Then when you read the vignette, you do so with a purpose and a focus: find the information that you need for question 1, find the information that you need for question 2. and so on.

Remember that a point that you earn because you genuinely know the correct answer is worth the same amount as a point that you earn because you accidentally, or serendipitously, marked the correct answer.  You get zero points for any questions you leave unanswered – the same zero points you would get if you guessed wrong – and one point if you answer correctly, whether you knew the correct answer or not.  Do not leave any questions unanswered!

During the break between sessions, take a break.  Don’t dwell on questions you may have missed in the morning session; there’s nothing you can do about those.  Don’t discuss the morning session with other candidates; there’s nothing you can do to change the results, and you don’t need anyone else undermining your confidence.  Get something to eat, relax, and prepare yourself mentally for the afternoon session.  Even if you did poorly in the morning, you can still pass the exam if you do well in the afternoon; plan to do just that.

The best way to be prepared physically for the exam is to take as many practice / mock exams as you can, under conditions that best approximate those of the real exam.  On a Saturday or Sunday, kick your wife, husband, boyfriend, girlfriend, parents, children, dogs, cats, and so on out of the house, give yourself three hours in the morning to answer 60 questions, take a lunch break, and give yourself three hours in the afternoon to answer 60 more questions.

Here’s a list of things to remember before and during the exam:

  • Get a good night’s sleep before the exam.  If you live a distance from the exam site, consider booking a room in a hotel close to the exam site.
  • Remember your passport, exam ticket, pencils, and (CFA-approved) calculator.  Bringing extra batteries for your calculator is a good idea.
  • Get to the exam site early.  If you’re driving, make sure you know where you can park.  If parking is likely to be a problem, consider taking a bus, trolly, tram, taxi, Uber, or Lyft.
  • Lunch may be problematic: there may be hundreds of candidates trying to get lunch all at the same time.  Bringing a lunch with you is a good idea.
  • Leave your cell phone at home, in your car, or in your hotel room; remember that you are not allowed to bring it into the exam room.
  • When you start an item set, read the questions first, before you read the vignette; that way, when you read the vignette, you know the information you need to glean to answer each question.
  • Answer the easy questions (the ones you can answer quickly) first, starting with the topic areas in which you are strongest.  Move from there to the more difficult questions, and to the topic areas in which you are weaker.
  • Take half-a-second before you answer each question to make sure that the number on the question matches the number on the answer sheet; if you mark the answer to question 10 in the answer-sheet row for question 11, you’re going to be disappointed.
  • Leave no question unanswered.
  • Mind the time: if you’re taking too much time on one question, move on to the next.  If you have only 5 minutes left and 10 answered questions, make the best attempt that you can on the remaining questions in the time remaining.
  • Relax during the lunch break, and prepare your mind for the afternoon session.

Best of luck!