What To Expect on the CFA Level II Exam (2024)

Exam Topics

Let's take a brief look at each of these 10 topics.

Quantitative Methods

You can expect about one to two item sets from the quantitative section. The case statement will most likely present data regression and ask you to analyze and interpret the data. You may even be asked to calculate key metrics based on the provided data. This section is heavily focused on data analysis and modeling.

Economics

You can expect one item set for this topic. You need to have a good conceptual knowledge of economics, as many of these concepts can be tested along with other topics. In addition to economic concepts, it's beneficial to have a good grasp on how financial markets are regulated, who the authorities are, and the effects regulation has on the markets.

Financial Reporting and Analysis

Financial reporting and analysis represent a large portion of the exam. You can expect about four to five item sets from this section. The important concepts are:

• Intercorporate investments: This topic includes International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP); you'll need to be able to evaluate how businesses classify, measure, and disclose their finances.
• Employee compensation: You'll need to be able to explain different types of compensation and benefits and how they are modeled, valuated, and forecasted.
• Multinational operations: This topic deals with how finances, valuation, and reporting are affected by subsidiaries in other countries, analyzing the effects exchange rates and different economic circ*mstances have.
• Financial institutions: An understanding of banks and insurance companies and how they are affected by regulations is important, as is being able to analyze a bank using its financial statements.
• Financial report quality evaluation: You'll need to understand and be able to describe and evaluate the quality of a company's financial reports.
• Financial statement modeling: This topic includes comparing different methods and approaches to modeling and demonstrating forecasting methods for ratios and metrics used in financial analysis. You'll also need to be able to explain factors that affect prices and costs, forecast industry sales and costs based on these factors, and develop and explain your projections.

You are more likely to be asked item set questions based on a combination of these concepts. You need to learn the processes and principles and practice their application thoroughly.

Corporate Issuers

Key concepts in the corporate issuer section include capital structure, cost of capital, dividend and repurchase policy issues, corporate governance, and restructuring issues. You'll also need to describe the effects different types of dividends have, explain the different theories behind them, and perform calculations regarding shares, dividends, repurchases, and tax effects. Additionally, you should understand and be able to explain environmental, social, and governance (ESG) considerations and the investment risks related to ESG.

Equity Valuation

This is an important section for financial analysts, and you can expect about four to five item set questions. There is a lot of material on this topic:

• Equity valuation methods, terms, definitions
• Discounted dividend valuation methods, descriptors, and modeling
• Free cash flow modeling and methods
• Market-based valuation techniques
• Residual income calculation, modeling, and explaining
• Private company valuation models and methods

Note that this section is heavy on formulas—you will be asked to perform formula-based calculations and interpretations.

Fixed Income

Fixed income is another important part of the exam that is quite similar to the equity valuation section. You can expect one or two item sets on this topic. Like equity investments, fixed income is also heavy on formulas, and some concepts are pretty complex. Key concepts include credit analysis, credit default swaps, bonds, arbitrage-free valuation, term structure, and interest rates.

Derivatives

This is a challenging section—you can expect at least two item set questions from derivatives. The material covers futures and forwards, options, swaps, carry arbitrage, currency forwards, and interest rate futures. You'll need to be able to valuate and price forward commitments and contingent claims on both American and European options.

Alternative Investments

This section tests your ability to evaluate investment opportunities in public and private real estate, hedge funds, and commodities. There will be one or two item sets from this section. You should be able to describe how commodity swaps are used, explain roll return in contango and backwardation, and thoroughly understand commodity sectors, the role of real estate in a portfolio, and hedge fund strategies, among many other topics.

Portfolio Management

You can expect one or two item set questions from portfolio management. This is another section where the amount of material is vast. It might be wise to keep this section for the end. Remember that the portfolio management material will get deeper in the Level III exam, so it's a good idea to have a general understanding of concepts here. You will be tested on the mechanics of exchange-traded funds, multifactor models, and backtesting. You will also need to be able to explain economics and the markets and compare active and passive portfolio management strategies.

Ethics and Professional Standards

This section covers the code of ethics and professional and global investment performance standards. Ethics is one section that is equally important in all of the three levels. The questions will be aimed at applying the seven Standards of Professional Conduct and the six Components of the Code of Ethics.

The Bottom Line

The CFA Level II exam is fairly difficult and asks you to apply concepts rather than just understand them. So, it's critical that you spend time practicing and taking sample tests while reviewing the areas where you are weak throughout your preparation.Best of luck on the exam!