CFA Level II Book: Your Bridge to Advanced Analysis

Step Forward Into Deeper Finance Mastery

Having conquered CFA Level I or otherwise feeling ready for the next challenge, you’re now poised to deepen your expertise in areas such as advanced valuation, sophisticated portfolio management techniques, and rigorous financial statement analysis. This comprehensive resource aims to demystify the complex layers of the CFA Level II curriculum while reinforcing a strong practical focus.

What Sets This Book Apart?

1. Deeper Explanations in Plain Language
   Our approach enlarges on Level I by breaking down more complex models and scenarios, ensuring you can follow intricate calculations and advanced theories without getting lost. Flowcharts, case studies, and meticulous numeric examples help reinforce critical concepts.

2. 10 FREE Sample Questions per Page
   The best way to integrate complex topics is practice, practice, and more practice. Each page includes new, exam‐style questions that keep you engaged and test your evolving skill set.

3. Thousands of Quizzes
   Our robust question bank supports each topic with a wide array of scenario‐based and calculation‐intensive questions, reflecting CFA Level II’s more analytical style. Benchmark your progress so you can pinpoint and strengthen weak areas.

4. Open Source & Community‐Driven
   Just like our Level I resource, this book’s source code can be found on GitHub. Contribute your insights, data sets, or additional practice questions. Our collective efforts ensure that we’ve got the most current techniques and examples covered.

Which Topics Are Covered?

We provide thoroughly aligned coverage of the official CFA Level II curriculum, including:

• Quantitative Methods (regression, time‐series, machine learning applications)
• Economics (exchange rate determination, advanced growth theories)
• Financial Statement Analysis (multinational operations, intercorporate investments, pension analysis)
• Corporate Issuers (capital structure, corporate governance, and advanced valuation frameworks)
• Equity Investments (DDM, residual income, free cash flow, and private company valuation)
• Fixed Income (complex bond structures, credit risk, and yield curve modeling)
• Derivatives (forward/futures valuation, options, swaps, and risk management)
• Alternative Investments (hedge funds, private equity, real estate, and commodities)
• Portfolio Management (active vs. passive, multi‐factor models, risk analysis, and performance attribution)
• Ethical and Professional Standards (CFA Institute Code of Ethics, complex scenarios, global regulatory context)

Why Contribute?

• Collaborative Expertise: CFA Level II increasingly demands nuanced judgment. Share your practice scenarios and real‐world data, helping others develop stronger analytical instincts.
• Continuous Improvement: Feedback and pull requests let us fine‐tune the explanations or expand on new and evolving trends in finance.
• Advanced Learning: By exploring and articulating complex topics, you’ll further cement your own understanding and excel on exam day.

Ready to Elevate Your Skills?

1. Dive into Comprehensive Chapters: Each core topic is risk‐focused and vision‐oriented, reflecting Level II’s emphasis on deeper analysis.
2. Test Yourself Constantly: Use the free quizzes to transform passive reading into active mastery—critical for tackling the item‐set questions that define the Level II exam.
3. Engage on GitHub: Whether you propose an edit, share alternative valuation examples, or highlight advanced methods, your collaboration keeps this resource fresh.
4. Embrace the Journey: Level II is your steppingstone to higher‐level mechanics of finance and portfolio management—stay consistent, stay curious, and lean on the community for support.

Let’s Take Your CFA® Knowledge Further

Experience the power of clear instruction, relevant practice, and community collaboration. Whether you’re bridging the gap from Level I or seeking to refine the advanced topics that set Level II apart, this free, open‐source guide is here to support your success.

Get Started Now

Browse through the chapters, tackle the quizzes, and feel your analytical confidence rise. Together, we can master the intricate world of CFA Level II—every step of the way.

Disclaimer:
CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by FinancialAnalystGuide. The CFA® and Chartered Financial Analyst® marks are the property of CFA Institute.

In this section

• Chapter 1: Advanced Quantitative Methods—Multiple Regression, Time-Series, and Machine Learning
  • Multiple Regression Foundations and Applications
    Explore the building blocks of multiple regression analysis, its assumptions, interpretation, and practical applications in finance, especially in equity analysis and macroeconomic forecasting.
  • Model Specification, Misspecification, and Extensions
    Explore how to choose the right variables, functional forms, and diagnostics in multiple regression models, including common pitfalls and best-practice extensions.
  • Time-Series Analysis and Forecasting Techniques
    An in-depth exploration of how to model and forecast financial and economic data using time-series techniques, focusing on stationarity, AR/MA, and ARIMA frameworks.
  • Advanced Topics in Time-Series—Volatility and Seasonality
    Explore ARCH and GARCH models for volatility forecasting, handle deterministic and stochastic seasonality, and discover practical applications of time-series methods in equity and commodity markets.
  • Machine Learning and Big Data in Finance
    Explore how supervised, unsupervised, and deep learning techniques are transforming finance, from credit risk modeling to algorithmic trading. Learn best practices for data wrangling, feature engineering, and avoiding overfitting while navigating ethical and regulatory considerations.
  • Simulation Methods for Scenario Testing
    Dive into historical and Monte Carlo simulations, scenario analysis, and stress-testing methods. Explore practical applications, limitations, and implementation tools for robust risk assessment in finance.
• Chapter 2: Macroeconomic Analysis, Exchange Rates, and Policy Implications
  • Economic Growth and Productivity Analysis
    Explore major growth theories, convergence hypotheses, and the drivers of productivity that shape modern economies and investment opportunities.
  • Exchange Rate Determination and Forecasting
    An in-depth exploration of how spot and forward rates are set, the theories behind exchange rate movements, and practical methods for forecasting currency values.
  • International Parity Conditions and Economic Balances
    Discover the core principles behind covered and uncovered interest rate parity, purchasing power parity, and how these conditions relate to balance of payments, policy interventions, and currency dynamics.
  • Macro Analysis in Sector and Corporate Valuation
    Explore how macroeconomic trends influence sector performance, corporate earnings, and valuation models in a top-down context. Learn practical techniques like scenario and sensitivity analyses, examine specific industry examples, and gain strategic insights for CFA® Level II success.
  • Canadian and U.S. Policy Perspectives
    Explore central banking frameworks, fiscal policy contrasts, and regulatory divergences between the United States and Canada. Understand how monetary and fiscal policy decisions influence capital flows, currency values, and macroeconomic stability in both nations.
• Chapter 3: Advanced Financial Statement Analysis and Interpretation
  • Intercorporate Investments, Mergers & Acquisitions
    A comprehensive, slightly informal yet instructive guide to intercorporate investments, focusing on IFRS vs. US GAAP classification, measurement, disclosure, and the key aspects of M&A accounting.
  • Employee Compensation and Post-Employment Benefits
    Explore types of employee compensation, share-based awards, pension plans, and best practices for analyzing and forecasting post-employment benefits under IFRS and US GAAP.
  • Multinational Operations and Currency Translation
    Explore how global firms handle foreign currencies, including local, functional, and presentation currencies, translation methods under IFRS & US GAAP, and hyperinflationary considerations. Gain practical insights through real-world examples and best practices for CFA Level II success.
  • Evaluating Financial Reporting Quality and Earnings Sustainability
    Discover how to evaluate financial reporting quality and assess the sustainability of corporate earnings. This comprehensive CFA® Level II guide explores potential red flags, indicators of earnings manipulation, mean reversion in accruals, and techniques to appraise cash flow and balance sheet quality—everything you need to deepen your mastery.
  • Analysis of Financial Institutions
    Explore the CAMELS framework, regulatory environments, and fundamental metrics for evaluating the financial health of banks and insurers.
  • Comprehensive Integration of Financial Statement Techniques
    Learn how to reconcile and normalize financial statements across different accounting standards, detect management bias, and make accurate valuations using integrated financial statement analysis.
• Chapter 4: Corporate Finance, Governance, and Valuation
  • Capital Structure and Leverage Analysis
    Explore capital structure theories, optimal leverage strategies, and practical applications to enhance corporate valuation in this comprehensive guide.
  • Corporate Governance, Risk Management, and ESG
    Explore how effective governance structures, comprehensive risk management, and ESG integration can safeguard stakeholder interests and drive sustainable corporate value.
  • Valuation of Corporate Issuers
    Explore essential techniques for valuing corporate issuers, including free cash flow methods, relative valuation, APV, and key adjustments in Canadian and global contexts.
  • Dividend Policy and Share Repurchases
    Discover the key theories and practical considerations behind dividend policy strategies and share repurchases, including signaling effects, tax implications, agency issues, and sustainability analysis for CFA Level II candidates.
  • Advanced Cost of Capital and Corporate Restructuring
    Explore key strategies and methods for determining an advanced cost of capital and effectively managing corporate restructuring, including M&A, divestitures, and LBOs.
• Chapter 5: Equity Valuation—Models, Applications, and Market Nuances
  • Dividend Discount and Free Cash Flow Models
    A comprehensive guide examining how Dividend Discount and Free Cash Flow valuation models are applied in equity valuation, including theoretical underpinnings, practical examples, US/Canadian perspectives, and tips for CFA Level II candidates.
  • Residual Income Valuation and Applications
    A comprehensive exploration of the Residual Income Model (RIM), highlighting single-stage and multi-stage approaches, real-world examples, IFRS vs. US GAAP nuances, and best practices for CFA® Level II candidates.
  • Market-Based Valuation and Relative Valuation
    Learn how to value companies using comparables, price multiples, and enterprise value multiples, with practical examples and tips for CFA® Level II exam preparation.
  • Private Company Valuation
    Discover the essential principles and practical applications of private company valuation, including income, market, and asset-based methodologies, crucial discounts and premiums, and cross-border considerations for both Canadian and U.S. contexts.
  • Specialized and Advanced Valuation Perspectives
    Explore advanced equity valuation strategies for resource-sector companies, real options, ESG factors, cross-border listings, and synergy valuation in M&A under a practical and approachable lens. Learn specialized approaches, pitfalls, and best practices for your CFA® Level II studies.
• Chapter 6: Fixed Income Valuation and Analysis
  • Term Structure Analysis and Yield Curve Modeling
    Explore the relationship among spot rates, forward rates, and yield to maturity, master bootstrapping techniques, and learn to model and interpret yield curves for fixed-income valuation.
  • Credit Analysis and Credit Risk Modeling
    Unlock a deep understanding of PD, LGD, credit spreads, and structured vs. reduced-form models for enhanced credit risk assessment.
  • Valuation of Bonds with Embedded Options
    Learn how to value bonds with embedded call, put, and conversion features using binomial lattice models, option-adjusted spreads, and key measures like one-sided durations and effective convexities.
  • Credit Default Swaps and Structured Finance
    Explore the mechanics and valuation of credit default swaps, along with structured finance instruments like MBS, ABS, and CDOs. Understand credit events, premium spreads, securitization flows, and practical strategies for portfolio hedging and speculative opportunities.
  • Practical Applications in Canadian and U.S. Fixed Income Markets
    An in-depth exploration of how Canadian and U.S. bonds are issued, traded, and valued, covering liquidity, credit spreads, currency considerations, and practical portfolio strategies relevant to CFA Level II candidates.
• Chapter 7: Derivatives Valuation and Applications
  • Forward and Futures Contract Valuation
    Explore key concepts, practical strategies, and in-depth examples of forward and futures contract valuation, including the cost-of-carry model, marking to market, arbitrage, and real-world applications.
  • Options Valuation and Strategies
    Explore the fundamentals of call and put options, discover payoff diagrams, delve into the Binomial and Black–Scholes–Merton models, examine option Greeks, and master common option strategies for hedging and speculation.
  • Swap Valuation and Applications
    A comprehensive guide to understanding, pricing, and applying various types of swaps—including interest rate, currency, and equity swaps—along with practical insights and real-world examples.
  • Advanced Derivatives Usage and Risk Management
    Explore how volatility and correlation-based products, clearing mechanisms, and strategic derivative overlays can mitigate risk and generate alpha in modern financial markets.
• Chapter 8: Alternative Investment Analysis
  • Real Estate Valuation and Analysis
    A comprehensive guide to real estate investments, valuation methods, and risk factors for CFA Level II candidates, covering everything from direct ownership and REITs to appraisal-based indexing and due diligence. Ideal for those seeking an in-depth understanding of real estate fundamentals and advanced analytical techniques.
  • Private Equity Valuation and Performance
    Explore the full spectrum of private equity investments—from venture capital startups to large buyouts—along with valuation approaches, performance metrics, and regulatory considerations.
  • Hedge Fund Strategies and Analysis
    Explore hedge fund strategies, risk exposures, factor analysis, and operational due diligence to deepen your understanding of alternative investments.
  • Commodities and Other Alternative Investments
    In-depth exploration of commodity fundamentals, futures strategies (including contango and backwardation), and diverse alternative investments like infrastructure, timber, and collectibles. Includes practical examples, diagrams, best practices, exam tips, and quiz questions to reinforce CFA Level II knowledge.
  • Practical Considerations for North American Investors
    Explore taxation, regulatory constraints, ESG considerations, and cross-border nuances for alternative investments in the U.S. and Canada.
• Chapter 9: Portfolio Construction, Risk Measurement, and Performance
  • Portfolio Risk and Return Measurement
    Learn how to effectively measure portfolio risk and return in the context of the CFA Level II curriculum, including weighted average returns, portfolio variance, systematic risk, CAPM, Sharpe ratio, and more.
  • Active Portfolio Management Strategies
    Explore the core principles of active portfolio management, including the search for alpha, fundamental law of active management, and best practices for strategy implementation.
  • Performance Evaluation and Attribution
    Comprehensive guide to Performance Evaluation and Attribution including the Brinson model, factor-based attribution, and best practices for measuring manager skill.
  • Risk Management and Asset Allocation
    Explore strategic vs. tactical asset allocation, liability-driven investing, multi-asset strategies, and risk budgeting to develop robust, goal-aligned portfolios.
  • Multifactor Models and APT
    In-depth coverage of Arbitrage Pricing Theory and multifactor modeling, exploring macroeconomic, fundamental, and statistical factors, factor loadings, risk premiums, and real-world portfolio applications.
  • Measuring and Managing Market Risk (VaR and Beyond)
    Discover the essentials of measuring and managing market risk in your portfolio, from core Value at Risk (VaR) concepts to tail-risk considerations and beyond. Learn how to apply parametric, historical simulation, and Monte Carlo VaR approaches, stress testing, scenario analysis, and risk budgeting best practices.
  • Backtesting, Simulation, and Strategy Validation
    Explore how to design, test, and validate investment strategies with historical data, simulations, and scenario analysis—mitigating biases and ensuring robust portfolio performance.
  • Exchange-Traded Funds (ETFs) and Practical Applications
    Explore the creation/redemption mechanism of ETFs, the role of authorized participants, key sources of tracking error, and the practical ways ETFs are used in portfolio construction, sector rotation, and factor tilts. Understand specialized structures like leveraged and inverse ETFs, and learn how market liquidity impacts ETF premiums and discounts.
• Chapter 10: Ethical Standards, Professional Conduct, and Compliance
  • 10.1: CFA Institute Code of Ethics and Standards of Professional Conduct
    Explore the six core principles of the CFA Institute Code of Ethics, the seven Standards of Professional Conduct, and how they inform day-to-day professional responsibilities. Understand real-world compliance considerations, local law alignment, insider trading, conflicts of interest, and practical exam-focused insights.
  • 10.2: Application of Ethical Principles in Complex Scenarios
    Explore how to apply CFA Institute's Code of Ethics and Standards of Professional Conduct to complex global scenarios. This comprehensive guide covers insider trading, conflicts of interest, personal trading, and more.
  • 10.3: Enforcement, Regulatory Considerations, and Global Context
    Explore how enforcement mechanisms, regulatory considerations, and global obligations impact ethical practice under the CFA Standards, with special emphasis on U.S. and Canadian frameworks.
• Chapter 11: U.S. and Canadian Regulations, Practices, and Industry Nuances
  • Securities Regulation in the U.S. and Canada
    Explore key securities regulators, historical foundations, cross-border disclosure requirements, and enforcement actions in the U.S. and Canada, with practical insights for CFA Level II candidates.
  • Differences in Accounting and Disclosure (IFRS, U.S. GAAP, and ASPE)
    Explore key differences between IFRS, U.S. GAAP, and Canada’s ASPE, focusing on revenue recognition, financial instruments, leasing, and impairment to enhance cross-border financial analysis.
  • Taxation and Cross-Border Implications
    Explore how Canadian and U.S. tax structures, treaties, and planning strategies affect cross-border investing, corporate entities, and estate considerations. Learn to minimize multinational tax liabilities through smart asset allocation and advanced planning.
  • Market Microstructure and Trading Environments
    An in-depth exploration of North American exchange structures, ATS nuances, short selling, clearing, settlement, and best execution considerations in U.S. and Canadian markets.
  • Industry-Specific Valuations in North America
    Explore unique valuation challenges and best practices for key North American industries, including energy, mining, technology, and cannabis, with a focus on ESG, currency fluctuations, and financial statement normalization.
  • Pension Plans, Healthcare, and Other Long-Term Liabilities
    Explore how U.S. and Canadian pension plans, post-retirement healthcare obligations, and other long-term liabilities are regulated, funded, and analyzed. Learn key differences in solvency requirements, discount rates, and the impact on corporate financial statements and valuations.
  • Future Trends and Developments in North American Capital Markets
    Discover emerging trends in regulatory harmonization, fintech, ESG disclosures, and demographic shifts shaping the future of North American capital markets, with practical examples and exam-focused insights.