CFA Level II 2027 Cheat Sheet: Valuation, Risk and Case Checks

Use this selective reference to check a relationship, its assumptions and the case fact that could change your answer. It supports 2027 CFA Level II preparation. Use the Exam Blueprint to check scope and the assigned curriculum for complete methods and exceptions.

Before calculating, mark the valuation date, currency, units, accounting basis and investor’s position. Write 5% as 0.05 and 30 basis points as 0.003. Keep intermediate precision until the final answer.

Quantitative Methods

For an estimated multiple regression, substitute the supplied explanatory values:

\[ \widehat y=b_0+b_1x_1+\cdots+b_kx_k \]

A slope measures the change in the fitted dependent variable for a unit change in that regressor, holding the others fixed. For a coefficient test, compare \((b_j-\beta_{j,0})/SE(b_j)\) with the appropriate reference distribution. A joint restriction needs a joint test; several individual t-tests do not answer the same question.

For a stationary AR(1) process \(x_t=b_0+b_1x_{t-1}+\varepsilon_t\), with zero-mean innovations and \(|b_1|<1\):

\[ E[x_t]=\frac{b_0}{1-b_1} \]

Economics

For domestic currency per one foreign unit, with compatible risk-free effective annual rates and consistent maturity \(T\), covered interest parity is:

\[ F_{D/F}=S_{D/F}\frac{(1+r_D)^T}{(1+r_F)^T} \]

Reversing the quote reverses the rate ratio. Use executable bid/offer prices when testing a trade, and the stated day-count/compounding convention. The forward relationship prices a hedge under its assumptions; it does not guarantee the future spot rate or a profitable unhedged carry trade.

For growth questions, distinguish expanding inputs from improving productivity. Trace a change in potential output through the particular company’s cash flows, rates or valuation rather than assuming every asset benefits equally.

Financial Statement Analysis

The official exam uses IFRS unless U.S. GAAP is specified. Do not import a remembered exception without first checking the stated reporting basis and measurement date.

Corporate Finance

For a debt-and-common-equity capital structure:

\[ WACC=w_ek_e+w_dk_d(1-\tau) \]

Use appropriate market-value weights and marginal financing costs; include other capital components when present. The tax shield assumes the interest deduction is applicable. A company-wide WACC may be unsuitable for a project with different operating risk, leverage or currency.

Equities: match the cash flow and discount rate

For a simplified debt-and-common-equity structure, a common construction from net income is:

\[ \begin{aligned}\mathrm{FCFF}={}&NI+NCC+\mathrm{Int}(1-\tau)\\&-\mathrm{FCInv}-\mathrm{WCInv}\end{aligned} \]\[ \begin{aligned}\mathrm{FCFE}={}&NI+NCC-\mathrm{FCInv}-\mathrm{WCInv}\\&+\mathrm{NetBorrowing}\end{aligned} \]

Here \(NI\) is net income available to common shareholders, \(NCC\) net noncash adjustments (add charges, subtract gains), \(Int\) interest expense, \(FCInv\) net fixed-capital spending, and \(WCInv\) investment in noncash operating working capital, excluding financing debt. Treat investment outflows as positive deductions and net borrowing as borrowing less principal repayments. Adjust for any additional claims or accounting classifications in the case.

Arithmetic check: NI 60, NCC 18, interest 12, tax rate 25%, fixed investment 30, working-capital investment 7 and net borrowing 5 give FCFF 50 and FCFE 46, in consistent currency units.

Discount FCFF at WACC for operating enterprise value, then reconcile non-operating assets and non-equity claims to common equity. Discount FCFE at the cost of equity for equity value. CFA Institute’s free-cash-flow reference explains these continuing valuation methods; the assigned 2027 curriculum controls exam scope.

For a constant-growth terminal dividend:

\[ V_n=\frac{D_{n+1}}{k_e-g},\qquad k_e>g \]

This is value at time n, using the following period’s dividend; discount it back separately. A perpetual growth assumption needs economic support.

Residual income charges accounting earnings for equity capital:

\[ RI_t=NI_t-k_eB_{t-1} \]

Under consistent clean-surplus assumptions, equity value is current book value plus discounted expected future residual income. Positive net income can coexist with negative residual income. Check accounting distortions and the continuing-value assumptions. Residual-income reference .

For multiples, match price with equity earnings and enterprise value with a compatible operating measure. Normalize nonrecurring items and compare growth, risk and accounting before calling a lower multiple cheap.

Fixed Income

For certain cash flows and annual-effective spot rates:

\[ P_0=\sum_{t=1}^{N}\frac{CF_t}{(1+s_t)^t} \]

Each maturity has its own discount factor. A one-year forward rate for the second year satisfies \(1+f_{1,2}=(1+s_2)^2/(1+s_1)\). A tree must be calibrated to the relevant curve before its model prices are useful.

Derivatives and Risk Management

For a non-income-paying asset with no carrying benefits or costs, a frictionless forward with effective annual risk-free rate \(r\) has:

\[ \begin{aligned}F_0(T)&=S_0(1+r)^T\\v_t^{\mathrm{long}}&=S_t-\frac{K}{(1+r)^{T-t}}\end{aligned} \]

The second expression values an existing contract with delivery price \(K\), using the applicable remaining-term risk-free rate. Inception forward price and current contract value are different quantities. Include income, carry, collateral or settlement conventions where relevant.

European put–call parity for a non-dividend-paying stock, with common strike and maturity, is:

\[ C+PV(K)=P+S \]

Exercise rights and cash distributions change the appropriate relationship. In a binomial model, work backward using risk-neutral valuation; for an American option compare continuation with immediate exercise. Risk-neutral probabilities are pricing inputs, not forecasts of actual up/down likelihoods.

A delta hedge offsets local exposure after applying contract multipliers. It does not remove gamma, volatility, jump or rebalancing risk. Check whose position is long or short before choosing the hedge direction.

Alternative Investments

For stabilized property income capitalized at an appropriate rate:

\[ \text{Property value}=\frac{NOI_{next}}{\text{Capitalization rate}} \]

Match the income period and definition to the rate. The cap rate is not automatically the discount rate; a terminal value must also be discounted back and adjusted for relevant sale costs. Financing changes equity cash flows even when the property value is unchanged.

• Commodity exposure: distinguish spot-price change, futures roll effects, collateral return and implementation costs. A futures return is not simply the spot return.
• Hedge funds: identify the actual strategy, leverage, liquidity and fee terms. Apply hurdle/high-water-mark provisions in their stated order; do not subtract two headline percentages mechanically.
• Comparisons: check stale valuations, selection effects, illiquidity and the measurement period before interpreting reported risk or diversification.

Portfolio Construction

Expected information ratio relates active return to active risk:

\[ IR_{expected}=\frac{E[R_P-R_B]}{\sigma(R_P-R_B)} \]

The denominator is tracking error, not total portfolio volatility. An ex-post ratio uses observed active returns and their variability; do not interchange expected and realized inputs.

A common fundamental-law approximation is:

\[ IR_{expected}\approx TC\times IC\times\sqrt{BR} \]

\(IC\) describes forecasting skill, \(BR\) independent decision breadth and \(TC\) the transfer of forecasts into implemented positions. Match horizons and assumptions. More securities do not necessarily mean more independent decisions; constraints and trading costs can reduce implementation value. Proportional scaling of active positions does not imply that every other portfolio change preserves the ratio.

For multifactor models, separate expected factor premia from realized surprises. For ETFs, distinguish NAV, market price, creation/redemption, spreads and trading costs. VaR is a loss quantile for a specified horizon/confidence/model, not a maximum possible loss; expected shortfall concerns the relevant tail beyond that quantile.

Ethical and Professional Standards

Use the current Code of Ethics and Standards , including the curriculum’s Level II applications. Do not turn one remembered case outcome into a rule that ignores different facts.

Finish each case with a setup check

Record whether the mistake came from a missing concept, wrong model, missed case fact, units/sign or execution. Rework that setup on a fresh case. Knowing the previous answer is not evidence that the underlying decision is now reliable.

The free practice exam provides 22 original cases and 88 questions. Compare this reference with the 2027 outline and current errata ; it is not an official formula list or a reproduction of CFA Institute materials. Sources checked October 18, 2026.