CFA Level II curriculum 2016 – changes from 2015 to 2016

10 / 12 / 2015
Category: Blog

Let’s start with the Big One.

Portfolio Management: Readings 53, 54 and 55

Three out of four readings are new, and the unchanged one (56) is the straightforward description of investment policy statements.

Reading 53: An Introduction to Multifactor Models. To be fair much of the content here was in the previous incarnation of the topic. The reading starts by reminding you all about CAPM … then destroying it: we need more than a single factor to determine portfolio returns. Various models are introduced: arbitrage pricing theory, macroeconomic and fundamental factor models, each with its own idiosyncratic foibles. You need to understand the models’ assumptions, how to solve for arbitrage (with APT), and how to identify portfolio returns. The four-factor Carhart model is introduced (similar to the Fama-French model that is in the Equity section) and although it isn’t referred to by name in the LOSs it is used sufficiently frequently through the reading for us to recommend you knowing and understanding the factors. A detailed return attribution is then calculated (“Ok the manager did well this year – but how much of that was actually skill?”), with risk attribution and factor portfolios bringing the reading to a close.

Reading 54: Analysis of Active Portfolio Management. There’s no doubt this is a tough chapter, in our opinion by far the most complex of the new ones. Most of the content relates to the Sharpe ratio (remember that one?) and the information ratio. Now, did you know that you can link these two together? Unfortunately most of the connections here are presented without algebraic proof – you may not care much for pages of algebra, but this does remove an element of the understanding. There is a list of formulae that you’ll need to learn. The good news is that with a basic knowledge alongside the formulae you should be able to resolve most questions presented to you.

Reading 55: Economics and Investment Markets. The central theme of this reading is the breakdown of the discount rate. Much of this is relatively straightforward to understand, calculating the discount rate from a combination of the default-free real rate, inflation, and various premiums for inflation uncertainty, credit, equity and liquidity risks. Certainly some easy questions could arise from this. There are some added complexities in terms of what is called the inter-temporal rate of substitution (a ratio of marginal utilities, now vs the future), as well as lots of analysis of the yield curve. One question that left us scratching our heads afterwards was: why is this in Portfolio Management? Answers on a postcard please.

Quantitative Methods: Simulations (Reading 12)

This is the first addition to Quants in many years. The reading is on simulations but is an excerpt by the charismatic Aswath Damodaran of NYU from a longer essay entitled “Probabilistic Approaches:
Scenario Analysis, Decision Trees, and Simulations”. Much of the content boils down to common sense: if we’re doing a financial simulation, what are the key variables, their probability distributions and correlations? We explore various issues relating to simulations, such as decision-making, constraints and risk assessment. Scenario analyses and decision trees, mostly outside the examinable part of the original essay, are briefly described and compared to simulations.

Fixed Income

You will no doubt be upset to hear that the securitisation chapter (“An Introduction to Asset-Backed Securities”) has dropped off the Level II curriculum for 2016. Up until 2014 securitisation was a full study session within Fixed Income. However it reduced to a single reading in 2015 at both Levels I and II, and for 2016 remains just at Level I. Fixed Income at Level II now has just four readings, and with a topic weighting of 10 to 20% (2 to 4 item sets) expect a lot of testing in this area.


Overall the changes in 2016 are restricted to Portfolio, Quants and Fixed Income, with no adjustments in  any other topic. All of the Quartic materials have been fully updated to reflect the new content, and of course as a candidate you have the full 2016 CFA curriculum.

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