CFA Level II is the valuation level, and it is widely considered the hardest of the three. It returns to the same ten topic areas as Level I but changes the question entirely: instead of asking whether you know a concept, it gives you a case and asks whether you can apply it. Every question belongs to a vignette (item set), a short case followed by several linked multiple-choice questions, and the work shifts decisively toward valuing equities and fixed income. The defining challenge is the move from knowing to applying, under the time pressure of extracting the right data from a dense case. This guide is a full self-study course for Level II. It explains how the level differs from Level I, walks through each topic with its valuation emphasis (what it is, why it matters, how to study it, the traps), teaches the item-set reading skill, and turns it all into a plan, a practice strategy and an exam-day routine. It is original teaching and study guidance only. It contains no real or simulated exam questions, and you should always confirm the current weights and rules against CFA Institute’s own exam pages before you sit.
Chapter 1: What changes at Level II, and how to use this guide
From knowing to applying
The most important thing to understand about Level II is that it is not Level I with harder facts. It is a different cognitive task. Level I rewarded broad recall across standalone questions; Level II rewards applying concepts to a specific situation, pulling the relevant numbers out of a case, performing the right analysis and choosing among answers that are often deliberately close. Candidates who treat it as “more memorisation” tend to struggle, because the marks sit in application and analysis, not in recognition. The whole plan in this guide is built around that shift.
The item-set (vignette) format
Every question on Level II is part of an item set. You are given a vignette, a case of perhaps a page or two describing a company, a portfolio or a scenario with data scattered through the text and exhibits, followed by linked multiple-choice questions. The exam is 22 item sets with 88 accompanying questions in total, split into two sessions of 11 item sets each, with 132 minutes per session and a break in between. Of the 22 item sets, the scored questions determine your result and a small number are unscored trial items you cannot identify, so you treat every set as if it counts. This format is the real skill Level II tests: not just whether you know a valuation model, but whether you can find the inputs in a messy case and apply the model correctly under time.
Weights shift toward valuation
The ten topics return, but their balance changes and tilts toward valuation. Five topics sit in the top band at about 10-15% each: Ethics, Financial Statement Analysis, Equity Investments, Fixed Income and Portfolio Management. The other five (Quantitative Methods, Economics, Corporate Issuers, Derivatives and Alternative Investments) fall in the 5-10% band. Because Equity and FSA together drive so much of the valuation content, they earn the largest share of your hours. These are ranges that move between exam windows, so confirm the current weights with CFA Institute.
How to use this course
Read the topic chapters with the high-weight valuation topics first, because they carry the most marks and feed the others, and keep ethics in your weekly rotation throughout rather than saving it. Crucially, do not save the item-set format for the end: as Chapter 7 explains, build full-vignette practice in from the moment you finish each topic. The bold terms are your checklist of models and concepts you should be able to apply, not merely define. None of the illustrations here are exam questions; they are teaching examples.
Chapter 2: Financial Statement Analysis
What it is. At Level II, Financial Statement Analysis goes well beyond Level I’s reading of the three statements. It covers the more demanding accounting areas where management choices most affect reported results: intercorporate investments and how different ownership stakes are accounted for, employee compensation and pensions, multinational operations and currency translation, and the analysis of financial-institution and quality-of-earnings issues. It is one of the highest-weight topics (about 10-15%). Why it matters. Valuation is only as good as the numbers feeding it, and FSA at this level is where you learn to adjust reported figures so a valuation reflects economic reality rather than accounting presentation. It is also the foundation that the equity-valuation topic draws on directly: the inputs to a free-cash-flow or residual-income model come straight from the adjusted statements you produce here. How to study it. Focus on how each accounting treatment changes the financial statements and therefore the valuation inputs, and practise the adjustments inside full vignettes where the case gives you the disclosures to work from.
A practical theme runs through the whole topic: the same underlying economic event can be reported very differently depending on the accounting choice, and the analyst’s job is to see through to the economics. Intercorporate investments are the clearest example, where the level of ownership and influence dictates whether an investment is consolidated, equity-accounted or carried at fair value, and each treatment produces a different picture of assets, earnings and debt. Pensions are another, where assumptions buried in the disclosures shape the reported obligation and expense. Currency translation changes how a multinational’s foreign operations flow into the group accounts. In every case, the exam expects you to read the disclosures, understand the effect on the statements, and adjust where needed for a fair comparison or valuation. The trap. Learning the standards as abstract rules. Level II hands you a case and expects you to adjust its specific numbers, so the skill is applying the treatment to messy real data, not reciting it, and recognising when a reported figure needs adjusting before it can be trusted as a valuation input.
Chapter 3: Equity Investments
What it is. Equity Investments is the heart of Level II and a top-weight topic (about 10-15%). It is the level where you actually value companies using a toolkit of models: the dividend discount model and its variants (single-stage and multi-stage growth), free-cash-flow models (free cash flow to the firm and to equity), residual income, and market-based valuation using price and enterprise-value multiples, alongside private-company valuation and industry analysis. Why it matters. Equity valuation is the central analytical task of an investment analyst, and it is the most heavily applied skill on the exam. Mastery here disproportionately drives your score. How to study it. Learn each model deeply enough to know not just how to compute it but when it is appropriate, what assumptions it rests on, and how its inputs come from the financial statements you analysed in FSA. Then drill full item sets where you must select the right model for the case and source its inputs from the vignette.
A useful way to organise the toolkit is by what each model values and what it needs. The dividend discount family values a share as the present value of expected dividends and suits stable, dividend-paying firms; the multi-stage versions handle companies whose growth is expected to change over time, which is most of the interesting cases. The free-cash-flow models value the firm or the equity directly from the cash a business actually generates, which makes them appropriate when dividends are not representative of value, for example in a fast-growing company that pays little out. Residual income values a firm as its book value plus the present value of earnings above the required return on capital, and it is often useful when cash flows are volatile or negative early on. Market multiples value a company relative to peers, which is fast and grounded in market prices but only as good as the comparability of the peer group. Knowing these distinctions is what lets you pick correctly when a vignette gives you the data for more than one approach.
The trap. Treating the models as interchangeable formulas. Many item sets hinge on choosing the correct model for the situation and recognising when an assumption (a growth rate, a discount rate, a normalised earnings figure) makes one approach more suitable than another, which is exactly where weaker candidates lose marks. A second common trap is mishandling the sensitivity of these models to their inputs: a small change in an assumed growth rate or discount rate can swing a valuation substantially, and item sets are often built around exactly that, so understanding which inputs the answer is most sensitive to is part of the skill.
Chapter 4: Fixed Income
What it is. Fixed Income at Level II deepens into valuation and risk: the term structure and how interest rates drive bond prices, valuing bonds with embedded options (callable and putable bonds) using the appropriate frameworks, the use of spreads, and credit analysis including structured products. It is a top-weight topic (about 10-15%). Why it matters. The bond market is enormous and the instruments are intricate; valuing bonds whose cash flows are uncertain because of embedded options is a genuinely harder problem than Level I’s straight discounting, and it is squarely tested here. How to study it. Build on the present-value foundation from Level I, then concentrate on how optionality changes a bond’s value and risk, and on reading the spread and credit information a vignette provides. Practise within item sets so you get used to extracting yields, spreads and option features from a case.
The central new idea is that an embedded option changes who controls the bond’s cash flows, and therefore its value. A call option lets the issuer redeem the bond early, which benefits the issuer and so reduces the bond’s value to an investor relative to an otherwise identical option-free bond; a put option lets the holder sell it back, which benefits the investor and so adds value. This is why a callable bond is worth the option-free bond minus the value of the call, and a putable bond the option-free bond plus the value of the put. Optionality also distorts the usual price-yield relationship and the standard duration measures, which is why the topic introduces effective duration and the option-adjusted spread as ways to compare bonds whose cash flows can change. Understanding these relationships conceptually makes the item sets tractable, because the questions typically describe an option feature and ask how it affects value, spread or risk. The trap. Trying to memorise option-adjusted valuation mechanically. The understanding that matters is conceptual (how an embedded option benefits the issuer or holder and therefore shifts value), applied to the case in front of you, alongside the credit-analysis judgement the topic also tests.
Chapter 5: Derivatives, and the applied supporting topics
This chapter groups Derivatives with the topics that sit in the 5-10% band but are tested in an applied, case-based way: Quantitative Methods, Economics and Corporate Issuers. They carry less weight individually, but together they are a meaningful share of the exam and should not be skipped.
Derivatives
What it is. Derivatives at Level II moves from Level I’s “what is it” to pricing and valuation: valuing forwards, futures, options and swaps, and understanding the no-arbitrage logic and the option-pricing frameworks that underpin them. It is in the 5-10% band. Why it matters. Pricing derivatives correctly is essential to hedging and risk management and is built on at Level III. How to study it. Focus on the no-arbitrage reasoning that links a derivative’s value to its underlying, and practise the valuation inside item sets. The trap. Getting lost in formula detail without the underlying arbitrage intuition, which makes questions far harder to reason through under time.
Quantitative Methods, Economics and Corporate Issuers
What they are. Quantitative Methods at Level II centres on regression and applied modelling (interpreting multiple regression, its assumptions and pitfalls, and time-series basics); Economics focuses on currency exchange rates and applied macro relevant to valuation; Corporate Issuers covers applied corporate-finance topics such as capital structure, dividends and corporate actions. Why they matter. Each supports the valuation core (regression underpins analysis, currencies feed multinational valuation, corporate-finance decisions affect equity value), and each appears in its own item sets. How to study them. Learn them as applied tools used on cases, not as theory: be able to interpret a regression output or a currency relationship presented in a vignette. The trap. Dismissing them as minor and arriving unable to handle their item sets, surrendering marks that are very gettable with modest, applied practice.
Chapter 6: Alternative Investments, Portfolio Management and Ethics
Alternative Investments
What it is. Alternative Investments at Level II goes deeper into valuing and analysing real estate, private equity, commodities and other alternatives, including the methods used to value private and real assets. It is in the 5-10% band. Why it matters. Allocators rely on alternatives, and valuing illiquid assets is a distinct skill that previews the depth the CAIA designation specialises in. How to study it. Concentrate on the valuation approaches specific to each alternative class and practise applying them to case data. The trap. Under-preparing because it feels peripheral; its item sets reward the candidate who learned the valuation methods rather than skimmed the descriptions.
Portfolio Management
What it is. Portfolio Management is a top-weight topic at Level II (about 10-15%) and broadens from Level I’s introduction into applied territory: the portfolio-management process, return and risk concepts, factor models and the basics of constructing and analysing portfolios. Why it matters. It carries heavy weight and bridges toward the portfolio-centric Level III, so strength here pays twice. How to study it. Connect it to the risk and return foundations from Level I, and practise the applied calculations and reasoning inside vignettes. The trap. Treating a high-weight topic as a footnote because it is less obviously “valuation”; it deserves time proportional to its weight.
Ethics
What it is. Ethics remains a top-weight topic (about 10-15%) and is tested through cases built on the Code of Ethics and Standards of Professional Conduct, now applied to more nuanced, realistic situations than at Level I, with GIPS also in scope. Why it matters. As at every level, ethics can decide a borderline result, and the case format makes it harder to coast on familiarity. How to study it. Re-read the Standards and their guidance, then practise applying them to vignette scenarios where the right action is genuinely ambiguous. The trap. Assuming Level I ethics knowledge is enough; the application is subtler here, and complacency is exactly how marks slip on a topic that should be a strength.
Chapter 7: The item-set skill and your study plan
The content matters, but at Level II how you practise matters just as much, because the format is itself a skill.
Learn to read a vignette
The item set rewards a specific habit. Read the whole case before touching the questions, noting where the numbers, assumptions and option features sit, because a single line in the case can change an answer. Watch for figures placed there to tempt a wrong method (a book value where you need market value, a nominal rate where you need real). In practice, give yourself a realistic time budget per set, and after every set take each missed question back to the concept it tests rather than just reading the correct letter. Practising isolated questions is not enough preparation for a case-based exam; train on full item sets from early on.
Turn 300 hours into a weekly plan
CFA Institute recommends around 300 hours. Count back from your exam date: roughly 19 hours a week over 16 weeks, 12 to 13 hours over 24 weeks, or 9 to 10 hours over 32 weeks. Pick a pace you can sustain, and leave a buffer so you finish new material four to six weeks before the exam, with that final block protected for mocks. Sequence by weight: the high-weight valuation topics first (FSA and Equity), then Fixed Income and Portfolio Management, then the 5-10% supporting topics, with ethics threaded throughout and a dedicated pass near the end. To turn this into dated weeks for your own start date, use the free study-plan generator. If you are weighing this exam against a more specialist route, the CAIA vs CFA comparison lays out who each credential is for.
Refresh Level I lightly, then start
Level II builds straight on Level I, so begin while that foundation is fresh, and if a long gap has passed, spend a little time at the start reviving only the tools Level II reuses constantly (the time value of money, the basics of reading financial statements, core quantitative methods). Do not re-study all of Level I, which is a common way to waste weeks you do not have.
Chapter 8: Mock exams, the final stretch and exam day
Mock exams as diagnosis
Reserve the final four to six weeks for full-length, timed mocks sat in the real two-session, item-set shape. Treat each one less as a score and more as a diagnosis: it tells you which topics still leak marks, whether your timing holds across the 132-minute sessions, and how your accuracy drops as fatigue sets in late. After each mock, list the specific item sets you mishandled, trace each miss back to the concept, and make that list the plan for the days before the next mock. Aim to be scoring comfortably above your passing target on recent mocks before exam day. Mocks taken without this review loop teach far less than they could.
The final stretch
In the closing weeks, stop adding new material and consolidate. Cycle through mocks, your weakest valuation topics and a focused ethics review, since ethics is tested at every level and can decide a close result. In the last few days, taper: light review, logistics and rest beat cramming.
Exam day and format
On the day, the exam is 22 item sets with 88 questions across two 132-minute sessions with a break, sat at a Prometric test centre in a scheduled window, with strict identification rules and only the approved calculator (the Texas Instruments BA II Plus or the HP 12C) allowed. Budget your time per item set, read each vignette carefully before answering its questions, and resist the data placed there to mislead. Keep moving rather than perfecting one set at the cost of another, and never leave a question blank. Having trained on full item sets under time, the format will feel familiar rather than overwhelming, which is exactly the advantage the weeks of application-focused practice were designed to build. Always confirm the current format, fees and weights on CFA Institute’s own site, since they are reviewed regularly.