CFA® exam Level II to Level III Preparation
Well done on your Level II success! You’ve celebrated wildly but you know the sooner you make a start on Level 3, the less stressful the first half of 2017 will be!
First the good news – no Financial Reporting, Corporate Finance and Quants at Level III (yes, it’s true!). But there are bits from Level II that carry through to Level III without which preparing for that final hurdle becomes just that bit tougher. So what’s really worth reviewing before 2017 creeps up on you?
Well, there are three areas that get more emphasis at Level III – Portfolio Management (which also includes Economics at Level III), Fixed Income and Derivatives – so that’s where your focus should be. Here are some suggestions for each of these areas.
Portfolio Management – it is no exaggeration to say that your performance in this area will make or break your Level III exam. Make sure you really understand risk-adjusted performance measures like Sharpe, Treynor and Roy’s safety first. You’ll also be surprised how often you need to calculate a holding period return in many areas of the syllabus. Then read up on investor objectives and constraints (better still, use the Level III readings if you have the books already). If you think you’re really familiar with them, take a look at a recent Level III essay paper at https://www.cfainstitute.org/programs/cfaprogram/exams/Pages/level_III_exam_prep.aspx to get an idea of the type of questions that you could be asked. The sooner you get a sense of what’s expected of you in the exam, the more you’ll be able to tailor your studies towards passing it first time.
Fixed Income – all the usual but important stuff like different measures of duration (effective, modified, Macaulay’s, key rate) crops up again at Level III. You must be able to confidently calculate portfolio duration (whether modified or effective) and portfolio dollar duration.
Finally, there’s Derivatives. You can expect a fair bit of number crunching here, but nowhere near the amount required at Level II. It’s more about applying your knowledge about how forwards, futures, options and swaps work in order to use them for hedging purposes and for specific option strategies. For example, working out the profit or loss on a currency forward position, pricing commodity futures, delta hedging with options and understanding how to hedge interest rate risk and currency risk using swaps can all still be tested (and often is!) at Level III.
So get started sooner rather than later – you know it’s good for you!
If this is a bit daunting, don’t worry; our 1 day Level III intro courses in December and January are designed to get you back up to speed before you start the challenge of the new curriculum.
All the best!