A few words on level 2 - 1

Good afternoon everyone! I'd like to write a few things on level 2 this week, but before I get to today’s post, I’d like to say a few words for these of you who are writing the December l1 exam, I hope you have made it through all reading materials by this weekend without experiencing too much frustration; so next 4 weeks will just be practice, practice and practice. I hope everyone is ready to do timed exams by now. It is absolutely key to go through timed exams, at least once a week now before the exam. So you get 4 exams out of the way to prepare for the exam day. I’ve introduced the key weights for l1 earlier, use that as a guideline when you are doing practice exams, keep in mind how much time you should allocate to each question and try to improve the accuracy while strictly following the time schedule to simulate the actual exam. Only 4 weeks to go guys, we are almost getting there, this is time for the sprint, prioritize your tasks and the heavily weighted sections, start practice these sections as soon as possible.

Now back to level 2. For l2 candidates out there, I’ve tried to consolidate some thoughts here on the l2 exam, the list started to get bigger and bigger so I am going to write two separate posts on this topic. So here we go.

In quant section, if you are struggling, try to focus on the basics to start, for example, interpretation of the regression line, t-test for the significance of the slope coefficients, the definition and impact of assumption violations, trend models, and the basics of AR(1) models.  As always, focus on the LOS to keep from getting overwhelmed by the concepts. This section will likely be integrated with material from other topic areas, so interpretation is the key. There are lots of concepts in quant, but since you got past L1, you can certainly get on top of the L2 quant material.

The economics material is somewhat less intense than quant, but the challenge remains the volume of material. Watch out for topics relating to foreign exchange and international economics and focus on how the economic concepts presented affect the value. For example, economic growth has value implications, as does the regulatory structure of an economy. And, the key in the study session is foreign exchange rates: be sure you know your way around the “FX triangle”. The l2 exam not only requires you to know the material, but also to be able to apply it, most of this stuff are best learned through practice questions.

Level 2 is really about accounting to many candidates. The key to being successful on FR&A is to remember that you are being tested on your skills as a user of financial statements, not a preparer of financial statements, so don’t get lost in the details of the accounting rules. Instead, focus on how the choice of accounting method affects reported financial results and especially financial ratios. This should be somewhat a guide line in next few weeks when you are doing questions.

In FR&A, the differences between accounting treatments under IFRS and US GAAP remain important for the exam. It is imperative that you devote the time necessary to understand this topic. At 15 to 25% of the Level II exam, it is almost impossible to achieve a passing score without passing the FR&A section.

What separates l2 from l1 is partially due to pensions and multinational currency translation, it is important to practice this section and master this material. Pension accounting is particularly challenging because you are expected to know the IFRS standards and the new standards under U.S. GAAP. Remember that the income statements are the same under both methods, but the balance sheets treatment of the net pension asset is substantially different. Under U.S. GAAP, the net pension asset reflects the true (economic) funded status, while under IFRS there are “unrecognized items” that cause the pension asset or liability recorded on the balance sheet to be different from the true economic position of the plan. The big-picture analytical issues are the adjustments required to reflect economic reality and to enable you to compare balance sheets prepared using different pension accounting methods. While accounting rules may seem tedious to some, focus first on how PBO and fair value of plan assets are calculated. Then you will know how changes in assumptions affect financial statements.  Then look at economic reality vs. accounting values (economic pension expense) and finally the cash flows associated with post-retirement benefits.   

This material is not that bad to comprehend if you can: a) understand the big picture, b) view pension plans as a time value of money problem, and c) are familiar with the terminology. For stock options and grants, the current treatment is straightforward. As long as the terms of the grant or options are known on the date they are granted, they are just valued as of the grant date and spread the expense over the service period necessary for the share-based compensation to be fully vested. Currency translation is a difficult topic at best and will require some work. You’ll know when you have a good understanding when you can explain the foreign currency exposure for entities based on the appropriate translation method and how the choice of accounting method affects the financial ratios.

If you are overwhelmed by pension accounting and foreign currency translation adjustments, remember that these are two of the most challenging topics in the curriculum. Also, keep in mind that the exam weight on FR&A make it worthwhile to spend the extra time to master this material.

Have a productive Sunday guys, more on l2 is on the way!

Exam strategy - 6

Late September is supposed to be already cold here, but it feels like summer this week. The temperature is a bit odd in a season where leaves are changing colours. The short fall is one of the two seasons I like in a year; it’s short and sweet.  I am sure everyone is full on CFA and having a productive weekend so far. 2 more months to go, it’s getting REALLY close.

To continue the topic yesterday, I will list a few things you absolutely must clear out for passing the level 2 exam. The l2 exam built on the foundation of l1 is a test of your understanding of the application of securities valuation tools. I always believe L1 is a test for your knowledge base, you will pass the l1 exam if you simply have a knowledge base. L2, however, requires candidates to apply the knowledge base, especially focus on security valuations. So the key here is to know what tools/techniques are available to you, and know how to apply these tools.

• Securities valuation is key in l2, so logically, you need to make sure the sections on securities are well covered, that is equity (SS10, 11, 12), fixed income (SS14, 15), derivatives (16, 17), and least importantly alternatives (SS13). Here I would focus my study on chapters where the application of models is discussed and practice questions on those topics. For equity, SS11 and SS12 focus on the application, the DCF models, multiple models and private company valuation will be key to any valuation modeling. For fixed income, it’s a short chapter, there’s only two readings but weighted from 10 to 20%, so don’t miss out on that. I personally struggled when I was studying for l2 Derivatives, topics like forward contracts i.e. FRA, currency forwards took me a lot of time, you will need to practice a few questions at least on each type of forwards before the exam, you just never know what will be on the exam. And of course there are alternatives, which I’m not too worried about.

• FRA (SS5, 6, 7): the good old FRA is also key in l2 because that’s what’s driving the valuation engine. Financial ratios and their implications will be important throughout this topic, the employee compensation and pension sections were also very important when I took the exam 2 years ago.

•  Corporate finance (SS8, 9): this section is weighted 5-15% of the exam, where the key topic highlights will be related to optimizing capital projects, capital budget analysis, capital structure of a company, and dividend/repurchase analysis.

At this point, your strategy should shift from studying the materials to focusing on what will make you pass the exam. The above sections in total will count for 70% of the exam, large enough to determine your exam score, remember you will need (and only need) 70% to pass any of the 3 exams. I didn’t mention other topics because they are either not the main component of the l2 exam (this doesn’t mean you should not study them), or candidates have seen enough of them in level 1. Topics like quant, economics, I would expect l2 candidates to have a solid knowledge base on those topics when they pass l1, and only need to review in l2 and practice more questions. Stuff like portfolio management is nice to have, but it only worth 5-10% of the exam, plus PM is the main theme in l3, not l2. And lastly, there’s the ethics, like I mentioned in previous post, you should be reading the code and standards during your commute, or whenever you are waiting for something, focus on the examples they provided in the books, understand how they positioned each scenario, this section probably has the highest reward for the number of hours you put in.

One last note, remember level 2 is an entirely different beast than level 1 in that you are no longer answering an individual questions, so you can’t use the same exam taking techniques you exceled in l1, you must adapt to the new dynamic on exam day. Closer to the exam I will write my strategy on exam day and how I approached each individual question in l1, and each question set in l2 and l3.

Still warm out, but it’s time to do more readings or practice questions. For me, I need to get back to work too. Have a productive Sunday. 

Exam strategy - 4

Hello guys, hope everyone is having a productive Thursday night and is all pumped for a full weekend study schedule on Saturday and Sunday. I understand many of your guys found my post on studying on weekends quite depressing, sadly true, but if you have a full time job, this is the best opportunity to get through some LOS’s. I know sleeping in would be so nice after a long week at work, just remind yourself there’s 80 more days before exam day, hurry up to maximize your marginal utility in the CFA studies and place your indifference curve tangent to your CFA demand curve, trade off your play time for more study hours :) If you can use my weekend story for motivation, don’t hesitate to do so, just know some people somewhere are studying harder than you.

Assuming an average person takes 5 to 6 months to study for each of the 3 exams, most candidates should have put in about 8 to 10 weeks of work so far. Ideally you have created your own study summary while you go through each LOS in the past few weeks, question remains: did you take the best notes that will put you above the pass rate? If not, with the 2.5 months left, how can you improve?

I can never overstate the importance of the very first point I made on this blog about the LOS command words. Whether you are using the CFAI curriculum or any other providers, always go back to the base and understand what you are expected to do. Same goes for your note taking. Candidates need to not  only take notes on definition and formulas, but also pay special attention on underlying relationships between concepts that occur in different chapters and how each topic is inter-related to other chapters.

For example in l3, you understand personal profiling using key factors such as time, tax, liquidity, legal, unique circumstance. From l1 and l2, you also understand the risk characteristics of bonds and equities securities. The exam, however, will not test these concepts alone. You will need to demonstrate you understand the client financial needs by applying the tools, and recommend an appropriate asset mix based on the risks of different securities classes.

So writing down the knowledge points will help you, but only to a certain extent, in helping you memorize what they mean, you must understand and be able to apply the underlying relationships that support these concepts in a question set.

While you are doing that, leave some space on the sides or between lines, so later on in your review you can add more notes, you can even use your favourite colour pens!  I realized I didn’t truly understand many knowledge points reading for the first time.  It was until I did questions and reviewed these questions, I started to register these concepts, so what I did was I kept adding supplementary notes in red next to the corresponding LOS on my notes.

So by the end of my 5 month studies, I had not only created my study notes, I created a fantastic notebook of CFA proven knowledge network that’s interrelated with one and other. This approach helped me reference back to the LOS/knowledge points every time I encounter new questions of the same topic. It made studying so much easier for me to go back and forth to reference between chapters that are tested in the same question set.

One last note before I leave you to your studies tonight, use a colour pen and be creative!

Have a great Thursday evening.

Addition to Exam Strategy 1 LOS Command Words

Hey guys, I've been meaning to put this out a few days ago to illustrate what I meant in my first strategy post (Exam Strategy - 1). The link is embedded here. If you haven't read this post, please do give it a read because I believe this is a key technique you need to exercise on a routine basis during your studies for all levels and that's why I've put this one on top of all other strategies.

Exam strategy - 3 Ethics

Thank you guys for viewing my blog and thank you for all the comments. I was carried away at work for a few days, finally had sometime tonight to finish this post on ethics, which I believe is one of the first few things you need to understand for any exams. So today’s strategy is on ethics.

Passing the ethics section is absolutely critical for all 3 levels.