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Chartered Financial Analyst Level 2· Exam reference card · 2026 · Edureify AI
Chartered Financial Analyst Level 2

2 Cheat Sheet

CFA Level 2 Is Application Heavy — Formulas Without Judgment Will Fail You

Level 2 uses item sets (mini-cases) with 4–6 questions each. You must apply concepts to complex scenarios, not just recall definitions.

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Among the harder certs
Avg: Approximately 44–47% pass rate historically (CFA Institute data)
Pass: 750 / 1000
Most candidates understand Chartered Financial Analyst Level 2 concepts — and still fail. This exam tests how you apply knowledge under pressure.
Core Framework

CFA Level 2 Valuation Decision Framework

CFA Level 2 tests application through vignette-based item sets. Each vignette is a mini-case with exhibits, tables, and 4–6 questions. Reading comprehension and data extraction are as important as technical knowledge.

  1. 01
    Equity Valuation — Match the model to the company's characteristics and data available
  2. 02
    Fixed Income — Understand spread analysis, term structure, and embedded options
  3. 03
    Financial Reporting — Identify accounting choices that affect cross-company comparability
  4. 04
    Derivatives — Value options, forwards, and swaps; understand hedging mechanics
  5. 05
    Portfolio Management — Apply factor models and performance attribution
Scenario Traps

Wrong instinct vs correct approach

Choosing a valuation model for a company with no dividends and negative free cash flow
✕ Wrong instinct

Use DDM since it's the standard equity valuation model

✓ Correct approach

When dividends and FCF are unavailable or negative, use a residual income model or relative valuation multiples; DDM requires dividends and stable growth — it's inapplicable here

Comparing companies with different depreciation methods
✕ Wrong instinct

Use reported net income directly for comparison

✓ Correct approach

Normalize earnings by adjusting for different depreciation assumptions; compare EBITDA or adjusted FCFF to neutralize accounting method differences

A firm uses operating leases instead of finance leases
✕ Wrong instinct

Accept the income statement classification as reported

✓ Correct approach

Capitalize operating leases for comparability (per IFRS 16/ASC 842 most leases are now on-balance-sheet anyway); adjust leverage ratios and interest coverage accordingly

Quick Rules

Know these cold

  • ▸ Match the valuation model to the company — DM for stable dividends, FCFF for general cases, RI for when ROE exceeds cost of equity
  • ▸ FCFF discounted at WACC; FCFE discounted at cost of equity — never mix these
  • ▸ Temporal method — onetary items at current rate, non-monetary at historical rate
  • ▸ Current rate method — ll assets and liabilities at current rate; equity at historical
  • ▸ GIPS compliance is voluntary; once claimed, all firm assets must be included
  • ▸ Residual income = Net income − (equity capital × cost of equity)
  • ▸ Beta reflects systematic (market) risk only — not total risk
Self Check

Can you answer these without checking your notes?

In this scenario: "Choosing a valuation model for a company with no dividends and negative free cash flow" — what should you do first?
When dividends and FCF are unavailable or negative, use a residual income model or relative valuation multiples; DDM requires dividends and stable growth — it's inapplicable here
In this scenario: "Comparing companies with different depreciation methods" — what should you do first?
Normalize earnings by adjusting for different depreciation assumptions; compare EBITDA or adjusted FCFF to neutralize accounting method differences
In this scenario: "A firm uses operating leases instead of finance leases" — what should you do first?
Capitalize operating leases for comparability (per IFRS 16/ASC 842 most leases are now on-balance-sheet anyway); adjust leverage ratios and interest coverage accordingly
Failure Patterns

Common Exam Mistakes — What candidates get wrong

Trying to memorize every formula without understanding when to apply it

Level 2 tests formula application in context. Knowing the Gordon Growth Model is useless if you don't know when it's appropriate vs. the H-model or multistage DDM. Context selection is the primary skill tested.

Misreading vignette exhibits under time pressure

Item sets contain distractors in the exhibits. Candidates who don't read carefully use the wrong input (e.g., book value instead of market value, or pre-tax instead of after-tax figures). Read each exhibit entry deliberately.

Confusing FCFF and FCFE in valuation questions

FCFF is the cash flow to all providers of capital (discounted at WACC). FCFE is the cash flow to equity holders only (discounted at cost of equity). Using the wrong discount rate with the wrong cash flow is a systematic error.

Misapplying currency effects in international analysis

Functional currency vs. presentation currency translations produce different results. The current rate method and temporal method affect both balance sheet values and income statement items differently — these are frequently confused.

Underestimating the Ethics component at Level 2

Ethics at Level 2 is more nuanced than Level 1 — it tests complex cases involving research objectivity, soft dollar arrangements, and performance presentation standards (GIPS). Candidates who coast on Level 1 ethics knowledge underperform.

CFA Level 2 vignettes require applied judgment, not formula recall. Test your item-set thinking now.

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