Introduction

CFA Level 2 / Topics


Key Things to Know about CFA Level 2 Topics

Introduction


Do you have a clue how to deal with the topics that extend over a number of 3000 pages of your CFA Curriculum? Many questions will start popping into your head when you think about it...

Should I stick to the topic sequence as it is in the CFA Curriculum?

Should I treat all topics equally or are there any topics of special significance?

What are the things I should know about a topic when I start to study it?

With this and the next post, we’ll try to explain what CFA level 2 topics are all about. Our aim is to leave you with only the questions necessary to let you find the smart way to deal with the issue.


CFA Level 2 Topics & Their Description

During your CFA level 1 exam, you will be tested on:

This is how the topics are sequenced in your curriculum. But if you know more about the topics, it’s likely you’ll want to make changes to this order.


Ethical and Professional Standards (Ethics)

Topic Level Learning Outcome:*

*All Topic Level Learning Outcomes are cited from the CFA Level 2 Curriculum.

"The candidate should be able to demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct, identify violations of the Code and Standards, and recommend appropriate corrective measures."

Your goal: Being a moral person can help but is not enough! You need to learn to interpret investment situations, diagnose ethical challenges and be able to properly react to them.

Key terms: integrity, responsibilities towards clients and the employer, diligence, loyalty, prudence, due care, mosaic theory, Investment Policy Statement


Quantitative Methods (QM)

Topic Level Learning Outcome:*

"The candidate should be able to explain regression and time series analysis and their uses in investment decision-making. The candidate should be able to interpret the results of a regression or time-series analysis."

Your goal: Surely regression or time-series analysis take the lead here. But it’s not about the concepts per se. It’s all very statistical.

Key terms: correlation, ANOVA, multiple regression, confidence interval, hypothesis testing, dummy variables, adjusted R2, trend, autoregressive model, ARCH models, simulations


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Economics (ECO)

Topic Level Learning Outcome:*

"The candidate should be able to explain and demonstrate the use of economic concepts and methods in the determination and forecasting of currency exchange rates, the analysis of economic growth, and the analysis of business and financial market regulation."

Your goal: Explore economy to find out how its elements work together.

Key terms: bid-offer spread, forward premium, international parity, balance of payments, monetary & fiscal policy, growth relations, growth theories, regulations and regulators


Financial and Reporting Analysis (FRA)

Topic Level Learning Outcome:*

"The candidate should be able to analyze the effects of financial reporting choices on financial statements and ratios. The candidate also should be able to analyze and interpret financial statements and accompanying disclosures and to evaluate financial reporting quality."

Your goal: Learn to see beneath the surface. You can do that if you’re able to interpret, analyze and judge the numbers reported in financial statements.

Key terms: accrual basis, IFRS, U.S. GAAP, multinational operations, functional currency, current rate method, employee compensations, defined benefit pension obligation, reporting quality, analysis framework


Corporate Finance (CF)

Topic Level Learning Outcome:*

"The candidate should be able to evaluate capital budget projects, capital structure policy, dividend policy, corporate governance, and mergers and acquisitions."

Your goal: Learn how and why decisions about investment projects, dividends, share repurchase and M&A are made by a company.

Key terms: optimal capital project, real options, Modigliani-Miller propositions, target capital structure, dividend policy, share repurchases, corporate governance, post-merger EPS, HHI, M&A transactions


Equity Investments (EI)

Topic Level Learning Outcome:*

"The candidate should be able to analyze and evaluate equity securities using appropriate valuation concepts and techniques. The candidate should also be able to estimate risk and expected return of equities in global contexts."

Your goal: In-depth knowledge of various valuation models and their application in practice. Can be strenuous...

Key terms: CAPM, Fama–French model, Pastor–Stambaugh model, WACC, industry & company analysis, DDM, PVGO, H-Model, FCFF, FCFE, sensitivity analysis, normalized EPS, PEG, residual income, asset-based approach

Fixed Income (FI)

Topic Level Learning Outcome:*

"The candidate should be able to estimate the risks and expected returns for fixed income instruments, analyze the term structure of interest rates and yield spreads, and evaluate fixed income instruments with embedded options and unique features."

Your goal: The mechanisms behind fixed-income instruments to take in. Harder than you could have imagined.

Key terms: spot rates, forward rates, YTM, bootstrapping, Z-spread, swap rate curve, term structure models, interest rate tree, embedded options, effective duration & convexity, credit scoring, CDS


Derivative Investments (DI)

Topic Level Learning Outcome:*

"The candidate should be able to estimate the value of futures, forwards, options, and swaps and demonstrate how they may be used in various strategies."

Your goal: Learn about the valuation and pricing of derivatives. To do that, you’ll need to get to know many different models.

Key terms: valuation & pricing of forwards, futures, and swaps, European & American options, Black-Scholes-Merton model, Black model, Greeks, implied volatility, derivatives strategies


Alternative Investments (AI)

Topic Level Learning Outcome:*

"The candidate should be able to analyze and evaluate real estate and private equity using appropriate valuation concepts and techniques."

Your goal: Learn non-standard features of alternative investments and know how to value them.

Key terms: segments of real estate, direct capitalization method, DCF method, REIT, NAVPS, FFO, AFFO, buyouts, DPI, RVPI, TVPI, commodity market, contango, backwardation, commodity index


Portfolio Management (PM)

Topic Level Learning Outcome:*

"The candidate should be able to explain and demonstrate the use of portfolio theory in risk and return estimation, security selection, and other practical applications. The candidate should also be able to explain the portfolio management process."

Your goal: Get to know different types of portfolios plus how to measure their risks and estimate their returns.

Key terms: IPS, APT, active risk, information ratio, advantages & limitations of VaR, risk measures, yield spreads, term structure of interest rates, equity risk premium, active management, HFT


Summing up

That’s a heck of copious information to process! But these are the things you surely want to know before you go through your CFA Curriculum. If duly analyzed, this set of info not only describes all the CFA level 2 topics but also tells you about the most important, difficult, and probably the easiest topics.

The table below recapitulates what we’ve said so far. In the next post, we’ll explain in more detail what the table illustrates.

We hope that this blog post tandem about CFA level 2 topics will successfully guide you towards your own way about your CFA Curriculum.


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