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Contents 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Foreword Ethical and Professional Standards: SS 1 & 2 Quantitative Methods: SS 3 Economics: SS 4 Financial Reporting and Analysis: SS 5 & 6 Corporate Finance: SS 7 & 8 Equity Valuation: SS 9, 10, & 11 Fixed Income: SS 12 & 13 Derivatives: SS 14 Alternative Investments: SS 15 Portfolio Management: SS 16 & 17 Essential Exam Strategies Copyright FOREWORD Secret Sauce® offers concise and readable explanations of the major ideas in the Level II CFA curriculum. This book does not cover every Learning Outcome Statement (LOS) and, as you are aware, any LOS is “fair game” for the exam. We focus here on those LOS that are core concepts in finance and accounting, have application to other LOS, are complex and difficult for candidates, or require memorization of characteristics or relationships. Secret Sauce is easy to carry with you and will allow you to study these key concepts, definitions, and techniques over and over, an important part of mastering the material. When you get to topics where the coverage here appears too brief or raises questions in your mind, this is your cue to go back to your SchweserNotes to fill in the gaps in your understanding. There is no shortcut to learning the vast breadth of subject matter covered by the Level II curriculum, but this volume will be a valuable tool for reviewing the material as you progress in your studies over the months leading up to exam day. Pass rates remain around 45%, and returning Level II candidates make comments such as, “I was surprised at how difficult the exam was.” You should not despair because of this, but more importantly do not underestimate the challenge. Our study materials, practice exams, question bank, videos, seminars, and Secret Sauce are all designed to help you study as efficiently as possible, grasp and retain the material, and apply it with confidence on exam day. Best regards, Bijesh Tolia Kent Westlund Dr. Bijesh Tolia, CFA, CA Kent Westlund, CFA, CPA Vice President of CFA Education Senior Content Specialist and Level II Manager Kaplan Schweser ETHICAL AND PROFESSIONAL STANDARDS Study Sessions 1 & 2 Topic Weight on Exam 10–15% SchweserNotes™ Reference Book 1, Pages 1–115 For many candidates, ethics is difficult material to master. Even though you are an ethical person, you will not be prepared to perform well on this portion of the Level II exam without a comprehensive knowledge of the Standards of Professional Conduct. Up to 15% of Level II exam points come from the ethics material, so you should view this topic as an area where you can set yourself apart from the person sitting next to you in the exam room. Futhermore, CFA Institute has indicated that performance on the ethics material serves as a “tie-breaker” for exam scores very close to the minimum passing score. (This is referred to as the “ethics adjustment.”) To summarize, the ethics material is worth taking seriously. With 10–15% of the points and the possibility of pushing a marginal exam into the pass column (not to mention the fact that as a candidate you are obligated to abide by CFA Institute Standards), it is foolhardy not to devote substantial time to Level II ethics. A STUDY PLAN FOR ETHICS The big question is, “What do I need to know?” The answer is that you really need to be able to apply the ethics material. You simply must spend time learning the Standards and developing some intuition about how CFA Institute expects you to respond on the exam. Here are several quick guidelines to help in your preparation: Focus on the Standards. The Standards of Professional Conduct are the key to the ethics material. The Code of Ethics is a poetic statement of objectives, but the heart of the testing comes from the Standards. Broad interpretation. A broad