This is the second installment of two-part series on how to crush the CFA exams. Make sure to check out the first part.

The key to success is studying for Level I and Level II not for the sake of passing that level, but for the sake of passing Level III.

Level III is a beast. It will catch you off guard. The entire goal of Level III isn’t merely to test your knowledge of Level III material. Instead, it’s to assess whether you can synthesize all three levels of learning in the most twisted and unexpected ways. 

When answering a Level I or II fixed income question, you know it’s a fixed income question. But at level III, it’s hard to distinguish among the topics. A fixed income question is an economics, portfolio management and a derivatives question all at once.

With that in mind, let’s explore how one can potentially improve Level III outcomes at each level.

LEVEL I

While Level I is generally considered the easier level, it doesn’t mean that everything is equally easy or of equal importance. If you aim to succeed at Levels II and III, here’s the essential material you really need to grasp.

Quantitative Methods: Level I “quant” is the most crucial topic at all three levels. It’s not even close. You need to know this stuff by heart, as everything of importance in the following two levels refers back to this topic. Whether it’s fixed income, derivatives valuation, modern portfolio theory, multiple regression, time series analysis, factor modeling, and even investment manager selection at Level III, it all boils down to your understanding of Level I quant. If you’re going to spend extra time in any given topic at any level, this is it.

Fixed Income: Consistently one of the hardest topics at all three levels, fixed income does not get any easier. Understanding duration and duration measures is critical at all three levels, but especially at Level III. If you do not know this stuff by heart, it’s hard to see how one can successfully clear Level III.

Derivatives: The derivatives readings at Level establish a solid foundation for both Level II and Level III derivatives and the concepts are pervasive throughout at Level III. Not to spoil the fun, but derivative overlays can easily shape portfolio risk/reward characteristics, and Level III focuses heavily on portfolio construction. Thus, you can imagine just how crucial this topic becomes down the road.

Financial Statement Analysis: At Level II, the FSA, fixed income credit and equity topics fully rely on a deep understanding of Level I FSA. The “Financial Analysis Techniques” reading in particular, while the most boring, is also the most important.

Portfolio Management: Three words. Modern portfolio theory. All-around fun and critical readings.

Economics: Though not particularly hard, the macro readings do set a strong foundation for Level II and III “econ”. The “Monetary and Fiscal Policy”, “International Trade and Capital Flows” and “Currency Exchange Rates” readings need special attention. Many of these resurface with greater complexity at Level III.

Hardest readings/topics:  Hypothesis Testing, Intro to Linear Regression, Income Taxes, Understanding Fixed-Income Risk and Return, Pricing and Valuation of Futures & Swaps, Portfolio Risk and Return.

Favorite readings: Time Value of Money, Intro to Linear Regression, Monetary and Fiscal Policy, Currency Exchange Rates, Equity Valuation, Fixed Income Valuation, Understanding Fixed-Income Risk and Return, Pricing and Valuation of Options, Portfolio Risk and Return. 

TLDR: Pay special attention to quant and make sure to truly grasp duration!

LEVEL II

Level II is the most challenging level, in my opinion. It may not be the hardest exam, but it’s definitely the most intellectually demanding. You might have heard the saying that “Level I is a mile wide and an inch deep”, while “Level II is an inch wide and a mile deep.” Level II builds upon concepts introduced in Level I and greatly expands upon them.

Here’s what you should keep in mind to succeed at Level III, which again, should be your main purpose at Level I and II.

Quantitative Methods: Though some of these readings feel like silos (“Machine Learning” and “Big Data” in particular), the multiple regression reading serves as a foundation for Level II and III readings, specifically when it comes to factor models. If you’re a factor investor, this chapter should be music to your ears!

Fixed Income: While fixed income is considered one of the most challenging topics at this level, it’s super crucial to you pay attention to the details. The “Term Structure” and “Credit Default Swaps” readings are foundational for Level III fixed income, but all of them ripple into Level III. And trust me, you do not want to ignore Level III fixed income. It’s way too important. Spend additional time making sure you absolutely crush these readings.

Derivatives: This topic is considered the hardest at all three levels. In my opinion, though this level requires extra time and effort, once you grasp it, it can be as straightforward as Level I “Time Value of Money”. Currency swaps can be particularly challenging, but the concept doesn’t go away! Additionally, forwards, futures and swap valuation topics do resurface at Level III.

Portfolio Management: The active management, factor and risk management readings have the most significant ripple effect of all portfolio management readings. Pay close attention to these! Active management, in particular, lays a strong foundation for Level III equity.

Economics: Although the economic growth reading has some ripples into Level III, it’s not too consequential. The currency reading, however, is pivotal. Make sure to pay attention, as the Level III currency reading is widely regarded as one of the most challenging readings at all three levels.

Hardest readings/topics:  Economic Growth, Employee Compensation: Post-Employment Benefits, Multinational Operations, Credit Analysis Models, Pricing and Valuation of Forward Commitments, Analysis of Active Portfolio Management.

Favorite readings: Multiple Regression, All of Equity, Valuation and Analysis of Bonds with Embedded Options, Valuation of Contingent Claims, Intro to Commodities and Commodities Pricing, Using Multifactor Models, Measuring and Managing Market Risk, Analysis of Active Portfolio Management.

TLDR: Pay special attention to fixed income!

LEVEL III

Level III can be treacherous. Once Level II is completed, it’s easy to feel like the hardest part is over and that the Level III readings are a breeze in comparison. Don’t get too overconfident!

While Level II is often considered the hardest level intellectually, Level III can arguably present a tougher exam. It tests your ability to think critically and synthesize concepts unlike any other level. Moreover, mastering the structured response format requires much more practice than you might anticipate.

Since we’ve already covered how to study to pass Level III at Level I and II, allow me to give you a quick snapshot of what I believe are the two most important topics at Level III.

Fixed Income: These readings are potentially the most pivotal at all three levels. If you’ve done your homework at Level I and II, grasping them should be easier. However, make no mistake—failing to succeed at Level III fixed income is failing to succeed at Level III.

Equity: These readings encapsulate the essence of Level III: seemingly easy content with tediously difficult and tricky application. Despite its deceptively simple appearance, the weighting for this topic is significant. Therefore, it’s crucial to spend some extra time here. Keep practicing questions until you fully grasp it!

TLDR: Crushing fixed income and equity is the key.

Hardest readings/topics:  Swaps, Forwards, and Futures Strategies, Fixed-Income Active Management: Credit Strategies.

Favorite readings: Options Strategies, Yield Curve Strategies, Active Equity Investing: Portfolio Construction, Hedge Fund Strategies, Trade Strategy and Execution.

Lastly, make sure to spend ample time hammering mocks! Mastering the structured response format is the key to passing Level III, and unfortunately, the only way to do this is to “mock till you drop.” So, put in the time!

Additionally, do some research as to which mocks you should take at Level III. You should look for those that closely resemble the exam. Those can help a ton!

I hope you found this series to be helpful. Remember, even if you fail to pass an exam it’s no the end of the world – it’s just a bump in the road. The CFA program is an extremely challenging endeavor to take on, so cut yourself some slack and try to enjoy the journey. If you’re passionate about the field, I’m sure you will find it rewarding, no matter how challenging it may seem.

Godspeed!