Break through for the 2014

CFA Level II Exam

Agenda
CFA Exam Fast Facts & Challenges
Why Candidates Fail?
Exam Forecast & Program Highlights
Q
Q&A

Few while important words to L2 Candidates

CFA Level 2 Exam is challenging but not that
threatening
p y reading
g Schweser Notes will not be
Simply
sufficient enough to pass the exams
Having a big picture in your mind is very
necessary
After studying level two you are equivalent to a
finance master degree graduate
Lets get the ball running

Level II Challenges

Why Level II is a big Challenge

Perspective from the Pass Rates
Year

Level 2 Pass Rate

(Exam Actually Taken)

2005
2006
2007
2008
2009
2010

56%
48%
40%
46%
41%
39%

2011
2012

43%
42%

Why Level II is a big Challenge

Perspective from the Pass Rates

Around 40% recently

Body of Knowledge
Ethical and Professional Standards
Quantitative
Q
tit ti Methods
M th d
Economics
Financial Statement Analysis
Corporate Finance

Investment
Tools

Analysis of Equity Investments

Analysis of Debt Investments
Analysis of Derivatives
Analysis of Alternative Investments

Asset
Valuation

Portfolio Management and Performance

Presentation

Portfolio
P
tf li
Management

Why Level II is a big Challenge

Perspective from the Content
Exam

Topic Focus

Learning Focus

Level I

Investment
Tools
oo s

Knowledge
and
a
d Ethical
t ca Sta
Standards
da ds

Level II

Asset
Valuation

Application
pp
and Ethical Standards

Level III

Portfolio
Management

Synthesis and
Ethical Standards

Why Level II is a big Challenge

Perspective from the Exam Format
How is Level 2 Different from Level 1?
Level 1 is building block for Level 2 (like a prerequisite for a
university course)
Level
Le el 1 command words:
ords define
define, e
explain,
plain describe
describe,
calculate
Level 2 command words: analyze,
analyze, formulate,
formulate, evaluate,
evaluate,
contrast, modify, demonstrate, illustrate
Questions can address combined LOS

2013 Level 2 Exam Format

120 selected response questions (more commonly known
as multiple choice)
Grouped into six-question item sets
1 minute
i t = 1 point;
i t 3 minutes
i t per question;
ti
18 minutes
i t per
item set; 360 minutes (6 hours) for exam
60 Qs
Q s (10 item sets) in 3-hour AM session
60 Qs (10 item sets) in 3-hour PM session

2013 Topic Area Weights

Topic
p

Item Sets

10%

Quantitative Methods

5 - 10%

1-2

Economics

5 - 10%

1-2

Financial Statement Analysis

15 - 25%

3-5

Corporate Finance

5 - 15%

1-3

Equity

20 - 30%

4-6

Fixed Income

5 - 15%

1-3

Derivatives

5 - 15%

1-3

Alternative Investments

5 - 15%

1-3

Portfolio Management

5 - 15%

1-3

Ethics

Exam Major Focus - Cannot follow?

Do not Worry, will covered during revision
course

Exam Forecast: Ethics (2 Item Sets)

Standards of Practice is the same as Level 1

(and this is also the key to success at Level 2)
Al
Also iincludes
l d P
Prudent
d t IInvestor
t R
Rule,
l S
Soft
ft
Dollar Standards, and Research Objectivity
St d d
Standards

Ethics
The most important topics are (1) soft dollars
arrangements,
t (2) fid
fiduciary
i
d
duties
ti (i
(including
l di
the prudent man vs. prudent investor rules),
and
d (3) R
Research
h Obj
Objective
ti St
Standard.
d d
However, in one item set you must be well
acquainted
q
with the Standards of Professional
Conduct. Be ready for a random sampling of
topics.
p

Quant (1 - 2 Item Sets)

Correlation Analysis
y
((Simple
p and
Straightforward)
Simple Linear regression with one
independent variable (the basics)
Multiple Regression with more than one
independent variable (basics again plus model
misspecification and problems with regression)
Time Series Analysis (observations over
successive
i ti
time periods;
i d e.g. monthly
thl stock
t k
returns, quarterly revenue data)

Economics (1 - 2 Item Sets)

Currencyy Exchange
g Rate determination and
forecasting
International Finance (FX markets, Spot Vs Forward, parity
conditions, arbitrage)
Balance of Payment
Carry Trade
Monetary and Fiscal policies on exchange rate

Determinants of Economic growth

Growth Theories

Government Regulation

Financial Statement Analysis (3 - 5 Item Sets)

Inventory Valuation and Long-term Asset
Intercorporate Investment (Cost method vs
equity
q y method vs consolidation vs p
proportionate
p
consolidation)
Employee compensationDefined contribution
plan, defined benefit plan; share based
compensation
Multinational Operations: FX translation
Earnings
E i
Q
Quality
lit and
d sustainable
t i bl cash
h flflow
Integration of Financial Statement Analysis
Techniques

Corporate Finance (1 - 3 Item Sets)

Capital
p
Budgeting
g
g ((evaluating
gp
projects
j
with
NPV)
Capital Structure (optimal capital structure;
lots of theory)
Dividend Policy (optimal dividend policy)
and Share Repurchase analysis
Corporate
C
t Governance
G
Merger and Acquisitions (Quantitative
Questions)

Equity (4 - 6 Item Sets)

Equity Valuation: Applications and Processes

Return Concepts
Porters Competitive Strategy Model
Your strategy needs a strategy(new)
y (
)
Industryy and companyy analysis(new)
Dividend Discount Models
Free cash Flow Models
Market-Based Valuation: Price and Enterprise
Value Multiples
Residual Income Model and EVA
Private Company Valuation

Alternative Investments (1 - 2 Item Sets)

Private Real Estate Investments

Publicly Traded Real Estate Securities
Private Equity Valuation
Investing in Hedge Funds: A Survey
A primer on commodity investing (new)

There are basically two things you can see here

here. The first is
venture capital. The likely scenario is a question from the
viewpoint of a pension fund portfolio manager.
The second possible topic is real estate. In real estate, you will
see either a numerical real estate valuation problem or
discussion problem of the value of real estate as a diversification
tool for an equity portfolio. Be ready for either

Fixed Income (1 - 3 Item Sets)

Credit analysis models (modified)
Term Structure Theories
Callable Puttable
Puttable, Convertible bonds
Valuing Callable,
(the binomial model)
Mortgage-backed
Mortgage backed and Asset
Asset-backed
backed Securities
(different types of MBS and ABS and their
features)
Valuing Mortgage-Backed and Asset-Backed
S
Securities
iti

Derivatives (1 - 3 Item Sets)

Valuation of:

Forward Markets and Contracts

Futures Markets and Contracts
Options Markets and Contracts
Swaps Markets and Contracts
Interest Rate Derivative Instruments

Credit Default Swaps (modified)

Portfolio Management (1 - 3 Item Sets)

Portfolio concepts:
p CAPM and APT,, Multi-Factor
Models
Residual Risk and Return: The Information Ratio
(new)
The Fundamental Law of Active Management
(Treynor-Black model) (modified)
Portfolio
P tf li Management
M
t Process
P
(intro
(i t to
t Level
L
l 3)

Solution to Success: Find An Effective

Study
y Strategy
gy

Points about The CFAI Curriculum Book

Remember:

They are not Schweser Study Notes

- Repackaged textbook readings as set by CFA
Institute
- Equally voluminous and unwieldy as previous
volumes,, which used to be for separate
p
p
purchase

Study Approach

1. Attend class and make

notes in slide packs

4. Practice Mock Exams

2. Practice questions in the

3 slide
3.
lid packs
k

3. Work through study material

further annotating slide packs

Mock Exam & Review

T
Target
t important
i
t t BOK

Dry run for the real exam

Find weak areas

Focus additional review

Time management and techniques

The End
Q
Q&A