CFA Exam Journey Part 2: Deep dive into level 1 and 2 overlaps

I have covered three subjects: ethics, economics and quantitative analysis and also touched upon core accounting that is the fundamental portion of the level 1 curriculum. Here I would touch upon corporate finance, equity, fixed income and alternative investments which are the foundation of the curriculum and are progressively leveled up from the first exam to the second.

Corporate Finance

This topic can prove to be quite easy for most if the basic finance concepts are well understood. Certain finer points are often tested in the exam and one can presume that the examiners are looking for a good understanding rather than calculation accuracy here. Between Level 1 and Level 2 this topic is covered exhaustively. Given the breadth of the course, practice of 100-150 questions if enough across the preparation cycle to give one a high probability of scoring 90% in this section. I kept Corporate Finance as a high scoring option in both the Levels and it did not disappoint.

Fixed Income

This was the most difficult part of the entire curriculum for me from a conceptual as well as a testing point of view because of little to no exposure to this asset class before taking on the CFA journey. I have to admit that I struggled considerably during level 1 and 2 to even understand the concepts and might have spent about 40% of the entire study hours on fixed income.

I did step back during the preparation to see if it is worth spending so much time on this topic to finally conclude that if one truly needs to master and grasp portfolio management – fixed income is an absolute must to concur. During my Level 1 preparation I decided that I will focus my energy on Financial Analysis and maybe take a par or lower than par score on Fixed Income and it probably was a good move. However, during my Level 2 the only way forward was to master this topic as the concepts were overlapping with other topics as well and the comprehension deficit was proving to be a burden.

I tried every strategy possible in the book to master this topic. I completed the course work, did the back questions and the practice exams sets and attempted as many online quizzes as I could find. At the end of it, I was consistently scoring 67% and I felt another 10% push is needed for a sure shot Level 2 clear. I must have gone over the coursework at least 8-10 times and could probably recollect every single line from the notes. I even took help from the curriculum where needed. There were couple of times when the answers due to the PV calculations wont match but if I could retrace the logic correctly the exercise gave a sense of comfort.

Within this topic, I think measures like ModDur and Effective Convexity are most important. As Level 3 approaches, the use of portfolio management measures and management of Fixed Income portfolios are introduced and both level 1 and 2 are condensed into one overview chapter to be built on at Level 3. It is quite fun to explore Fixed Income portfolio management once one gets the hang of it and I think one of the most remarkable takeaways of the CFA course for me was Fixed Income at Level 3.

Equity

Equity was generally a familiar and general topic during all levels. Equity valuation techniques seem easy to comprehend but getting the answers right required a bit of practice. In terms of time versus effort – this is a rewarding section and with a high accuracy I was able to target 90% in this section. However, certain portions emphasis on retention skills as well and quite naturally this section finds relevance and mention across the curriculum as well. I believe a thorough revision as part of the final few days schedule to helpful in acing this section.

Alternative Investments

Alternative investments sparked a lot of interest for me because of the numerous asset classes that it touches upon – from real estate to hedge funds to commodities. There are certain core concepts that are well tied to the learning objectives in this section. I realized based on my Level 1 experience that this section requires relatively less time and knowing the testable portion helps target the right things to know rather than spend considerable time on this topic.

Conceptually, this section can potentially throw one off as there are asset class specific as well overall portfolio hedging requirements addressed and both are tested. Certain new concepts were difficult to retain for me but with a good revision and practice – I could cover the broad testing areas.

Exam Pattern and Exam Day Approach

Let me talk about my Level 2 experience now. The sheer breadth of the course at Level 2 and the number of formulae are enough to give a scare but I had gone over a couple of full mock sessions (full exam sessions: morning and afternoon) a fortnight into the exam and got a chance to address few of the shortcomings.

With regards to the plan for the exam my approach was as below:

a)?????? Start with ethics and economics – requires most attention and needs high accuracy – across the mocks this also helped me keep time in hand.

b)????? Move on to Fixed Income and Derivatives – being calculation intensive and weaker – in case there are more than 2 sets then switch to next step.

c)?????? Cover Equity and Corp Finance portion – that takes care of the major chunk of the sets and gives a sense of completion

d)????? Take care of Alternative Investments and Accounting

e)?????? If time permits – address the leftover FI/Derivatives portion followed by any leftover questions

Another point I must emphasis is that this was the first ever Computer-based Level 2 administered in my city. I was slightly worried about this fact as practicing ?a CBT environment was not possible but in general I found the UI of the exam to be quite easy to navigate and marking questions to revise and ensuring no question is left unanswered is easier in the CBT format. I believe that most exam takers these days are comfortable with the CBT exams and thus there was not any considerable change. CFAI also went out of the way to ensure that those experiencing this change along with it had a smooth journey.

Now back to the plan. I had rehearsed the above plan and it worked for me across both the sessions. While in the morning session I felt considerably short of time with a numerical in the Derivatives giving me a scare which I chose to skip and revised the answers in the Ethics portion. I did not think of changing anything in the strategy though. In the afternoon session there was no time pressure at all. Between the two sessions I do not remember feeling any additional pressure – rather there was a sense of relief after having attempted the Fixed Income portion. I utilized the break time to the full.

After the exam, as I was leaving the venue I did identify a few areas where I could not recollect the concept like in the accounting section and was really eager to go over my calculation on a valuation question – nonetheless I was not sure if I had done enough, to be honest. I went over some chat groups and felt that many people had a similar exam experience as mine and decided to focus energy on planning ahead in either of the two scenarios.