Posted by: Kent Westlund, CFA
Published: February 14, 2019
A frequent topic of discussion among CFA® Program candidates is how one level of the exam compares to the next. The near-universal consensus is that Level II is a significant step up from Level I in a number of ways. The following ten points outline some of the major differences a candidate will encounter between the Level I and Level II CFA Program exams:
At Level I, questions are normally defined using only a brief self-contained question stem, such as: “The period of time within which a hedge fund must fulfill a redemption request is called…” At Level II, vignettes are introduced. A vignette can be thought of as a mini-case, where a business scenario is described in several paragraphs using a mix of text, tables, financial statements, and so on. A Level II candidate must develop the ability to quickly scan through a vignette and pick out the pieces of data needed to answer a particular question.
The Level I CFA Program exam consists of 240 discrete standalone questions, and each of these questions is unrelated to the others. By contrast, the Level II exam is organized as 20 “item sets,” each based on a shared common vignette and containing 6 sub-questions. Generally these six sub-questions will all dig in to a single topic. This deep dive into individual topics makes it potentially more dangerous to skip a particular reading, because each item sets represents 5% of the points on the exam.
One convenient characteristic of the Level I exam is it is offered in two sittings per year—one in June and another in December. Unfortunately, the same is not true of the Level II exam, which has only one sitting every 12 months. A candidate who fails the Level II exam in June thus has to wait until the following June to take a second attempt at the test.
Candidates who tackle the CFA Program exams have at least an undergraduate degree under their belt, often in business or a related subject. As a result, many Level I candidates begin their studies with a solid understanding of major Level I concepts. However, at Level II, candidates generally find this advantage runs out, and their previous studies provide relatively little direct advantage on exam day.
Many candidates begin studying for the Level I exam when they have a lull in their education, family, or career commitments. Often, candidates find that a year later, when the Level II exam rolls around, they have a new personal situation and a fresh set of distractions related to school, work, or children. These new distractions may require a candidate to double down on their commitment to their CFA Program studies.
For the Level I CFA Program exam, CFA Institute specifies fixed topic weights; for example, exactly 6% in Portfolio Management, 6% in Derivatives, and so on. At Level II, CFA Institute instead provides ranges; for example, Level II Portfolio Management can have a weight anywhere from 5–15% (each 5% weighting represents one item set on the exam). Though CFA Institute has toned down their focus on particular Level II topics for 2019, there is still an outsized emphasis on specific subjects; Financial Reporting and Analysis, Equity Valuation, and Fixed Income all have June 2019 Level II topic weights of 10–15%, making these key topics for candidates seeking to pass the exam.
In the Level I curriculum, there is significant focus on rote recall of formulas and definitions. At Level II, memorization is de-emphasized, while greater conceptual understanding is required. Level II candidates are expected to demonstrate their ability to apply tools and relationships to analyze financial data and to value assets. Furthermore, at Level II, a candidate’s ability to link one theory or concept to another will be tested.
While the Level I exam is broad, most of the Level I material is a straightforward introduction to the concepts covered. The Level II curriculum, by comparison, is not only equally broad, but also contains numerous concepts that can be difficult to grasp. For example, swap valuation, CDS valuation, binomial options valuation, and Black–Scholes–Merton can all be mind-boggling topics.
Not only are Level II concepts generally more complex, but the questions on the Level II exam also require a big step up in ability. Compared to Level I, a candidate will need a higher level of preparation and skill to select the correct answer to a Level II question. Every topic is tested to a more sophisticated standard. A Level II aspirant might believe because they studied the CFA Code of Ethics and Standards at Level I, they don’t need to revisit the material again at Level II. This would be a mistake. In Level II Ethics, the same content is tested, but at a much more grueling level.
Perhaps the biggest difference between Level I and Level II is “almost anybody” can sign up for the Level I exam, while only candidates who have conquered the Level I exam can enroll to sit for the Level II exam. As a result, 100% of candidates sitting in the Level II section on exam day are serious about the exam process and have demonstrated an ability to correctly answer questions about CFA Program exam topics. In short, the competition at Level II is far higher because all the candidates have earned their right to be there.
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