A Reflection on CFA Level 2 preparation.

It sure gives a big relief to get the Congratulations email. I wanted to share the path and the hard work it took me to accomplish that with the recent June 2016 exam.

Started studying in November . To start with, it was a warm up phase spending no more than 6 hours a week and gradually increasing to around 12 hrs per week. I used CFA provided material for 100% of my preparation to start with. It took me till end of December to complete the Equity chapter and 50% of FRA.  During my workout at the gym atleast 3 days a week for an hour , I listened to the free youtube videos to get a feel for other topics.

With the start of the new year and reading through the forums, the fear factor kicked in me to expedite my study pace and also increase the daily study time. I had put together a study plan to complete the remaining readings by end of April, so the last month can be completely for mock exams , topic tests by CFA and revisions.

I quickly realized that just reading through  CFA material wouldn’t get me enough time. While different providers have their own merits, the youtube from fintree fit my style and understanding. I signed up for fintree to take advantage of videos and it paid off. I was able to listen to those videos as I simultaneously connected it with the CFA provided material. I did take time to complete the EOC questions as and when I finished a chapter. This was very useful as it solidified the concepts, gave confidence and let me revisit my weak areas.

The priority of my study sequence was based on the high weightage areas and for those that were equal weights, it was based on the complexity and my strength areas. At any point, I had asked myself a question if there was an emergency personal situation and I end up missing a month, how can I still increase my probability of success.

Fast forwarding… it is end of April and I still had few unvisited LOS  from portfolio management, Alternate investments, Quants and Economics. It almost came to a point for me to compromise and make up the mind on just 2 and only skim the other 2. I took a chance and skimmed portfolio management and Quants and met my April goal only by mid May. While the forums could be daunting for many, it gave me that extra fear and seriousness. For the last 2 weeks in May, I was fully into mockup exams, topic tests and EOC questions and revising my notes.

Entering into June, I had a pretty good feeling that i nailed down the high weightage sections and the left overs in a few areas didn’t make me lose my sleep. The exam was reasonably easy and there were less than 5 questions that i had no clue on due to my lack of study. The wait until the result day was even more painful, but hearing the good news now feels like worth the wait !!

On the hind sight, i would suggest that one start laying down a weekly calendar and try the best to stick to it and also give a week or two buffer time in case the actual progress lags the plan. Prioritize the sequence to focus on high weightage areas first to boost the confidence level ( though all sections are important). Do as many problems as soon as you finish theory since that really proves the knowledge level and gives clarity. Also good to remember the shortcuts or mnemonics for those equations or ethics topics for effective time management on the exam. Last of  all, pray for the luck factor to be with you :))




Equity Valuation – CFA Level2

A brief refresh from Level 1:

Equity valuation can be using DCF, Relative Value, Asset Based valuation.

Discounted Cash Flow (DCF) – PV of future cash flows. This DCF includes DDM, FCFF, FCFE.

DDM – Assumptions  – Return on Equity is constant, Dividend ratio is constant, Growth rate will remain constant, Cost of Equity > growth rate. Value of stock = D1/(k-g) when dividend is not the same every year. K = cost of equity.

Relative Value can be based on P/E, P/S, P/CF, P/EBITA etc. How should the price be relative to competitor as well as to sales , earning etc.

Asset Based Valuation would be (Assets – Liabilities) / # of shares.

Now lets get to Level 2 study as below


If Req Return (RR) > HPR , then stock overvalued.

If RR < HPR then stock undervalued.

Equity Risk Premium for a given stock can be calculated using

ERP = Historical Return – RFR

Forward looking ERP can be calculated using

  1. GGM ::: where ERP = D1/P0 + g – RFR where D1 = next period’s dividend, P0= current stock price, g = consensus growth rate , RFR = Risk free rate or benchmark rate.

2. Ibbotson and Chen Model ::: ERP = ((1+Expected Inflation) * (1+Expected real EPS growth rate ) *(1+

SS6 – FRA Intercorporate Investments


The candidate should be able to:

a describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities;

b distinguish between IFRS and US GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities;

c analyze how different methods used to account for intercorporate investments affect financial statements and ratios.


Good video link 

A company’s investment in another company can be categorized as

a.Investment in financial assets – This is generally when investment is <20% and don’t have influence to make decisions.

b.Equity investment in associates – This is typically 20-50% investment and has significant influence. (Equity method is used for accounting).

c.Investment in subsidiaries – This is greater than 50% investment and has control on the invested firm. (Consolidation method is used for accounting)

Now, the investment in financial assets can be further categorized as Held to maturity (HTM), Available for Sale(AFS) and Trading or Designated at FV.

Balance sheet and Income statement classifications for the above

Financial Statement                       HTM                                   AFS                                   Trading

Balance sheet                Amortized cost  ,                 Market or FV           ,                  Market or FV

Income Statement         Realized gain or Amortized gain,   Realized gain,                      Realized gain + Unrealized gain

OCI                                N/A                                            Unrealized gain                               N/A

Difference between IFRS and USGaap for AFS (Equity method)

Under IFRS, the foreign exchange gains/loss goto Income statement where as this goes to OCI under USGAAP.

All other unrealized income goes to OCI in both IFRS and USGAAP.

Equity method: Video here 

Company A invests in Company B shares.

While creating financial statements for Company A, the equity portion of B should be listed in the Equity portion of BS for Company A. At the end of the year, if Company B has a profit, that proportion of profit should be added as a profit to A’s financial statement as well. Also on BS of A, the increased retained earning ( net income ) should be added to both equity side and shares inventory on the asset side. Any dividend coming out of this profit should goto the cash portion of A’s BS.

ETHICS – Code and Standards (Reading 1a)

Reading 1a Objectives (Source)

The candidate should be able to:

a. describe the six components of the Code of Ethics and the seven Standards of Professional Conduct;

b explain the ethical responsibilities required of CFA Institute members and candidates in the CFA Program by the Code and Standards.

6 Components of Code of Ethics

Act with DRICE ( Diligence, Respect, Integrity, Competence, Ethical)

Place integrity of investment profession and interests of clients above personal interests.

Reasonable care related to independent due diligence analysis / research for customer investment decisions and with objectivity.

Practice and encourage others to practice in professional and ethical manner  to maintain the credibility and integrity of the profession.

Promote the integrity of rules governing capital markets

Maintain and improve both your and other’s professional competence

7 Standards of Professional Conduct (PIDDICR)

Professionalism – KIMM

Knowledge of Law, Independence and Objectivity, Misrepresentation, Misconduct.

Integrity of Capital Markets – MM

Market Non public information, Market manipulation

Duties to Clients – LFSPP

Loyalty Prudence and Care, Fair dealing, Suitability, Performance presentation, Preservation of Confidentiality.

Duties to Employers – LAR

Loyalty, Additional Compensation Arrangement, Responsibilities of Supervisors.

Investment Analysis Recommendations and Actions – DCR

Diligence and Reasonable basis, Communications with Clients and Prospective Clients, Record Retention ( recommended 7 years )

Conflicts of Interest – DPR

Disclosure of Conflicts, Priority of Transactions, Referral fees.

Responsibilities as a CFA Member  – CR

Conduct as Members and Candidates in the CFA Program, Reference to CFA Institute Designation and Program.