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Study Notes for Level II of the CFA® Exam

Every Learning Outcome Statement (LOS) Summarized with Question Examples

The Level II study course consists of a vast amount of material in a 5,000-page CFA Institute official books that make up the curriculum. There are 10 topic areas that vary in emphasis and weight at each exam level. The amount of information to memorize and understand can be overwhelming. For this reason, we’ve produced comprehensive study notes in an easy-to-read format to help you learn efficiently and effectively.

According to CFA Institute, candidates require a minimum of 300 hours of study at each level and at least 6 months to prepare for Level II of the CFA exam. With statistics showing the pass rate hovering at 40% over the past 10 years, you need to perform better than the average candidate to secure a pass. In a 2015 CFA Institute survey, more than 60% of candidates admitted to using third-party preparation materials in addition to reading the assigned books.

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mk-3.4 (1)

Example LOS from our Study Notes

Reading 2 – Multiple Regression

LOS 2 (c) Formulate a null and an alternative hypothesis about the population value of a regression coefficient, calculate the value of the test statistic, and determine whether to reject the null hypothesis at a given level of significance.

Hypothesis testing involves testing an assumption regarding a population parameter. A null hypothesis is a condition believed not to be true. We reject the null hypothesis in the presence of enough evidence against it and accept the alternative hypothesis.

Hypothesis testing is performed on the estimated slope coefficients to establish if the independent variables make a significant contribution to explaining the variation in the dependent variable.

The t-statistic for testing the significance of the individual coefficients in a multiple regression model is calculated using the formula:



  • \(\widehat{b_{j}}\) = Estimated regression coefficient.
  • \(b_{H0}\) = Hypothesized value.
  • \(S_{\widehat{b_{j}}}\) The standard error of the estimated coefficient.

Note that the test statistic has \(n-k-1\) degrees of freedom, where \(k\) is the number of independent variables, and \(1\) is the intercept term.

A t-test tests the null hypothesis that the regression coefficient is equal to some hypothesized value against the alternative hypothesis that it is not.

\(H_0:b_j=v\) v.s \(H_{a}:b_{j}≠v\)


  • \(v\) = Hypothesized value.

The following are the steps followed in hypothesis testing:

  i. Formulate a hypothesis.

  • For example, Null hypothesis, \(H_0: b_{j}=0\) vs Alternative hypothesis, \(H_{a}: b_{j}≠0\).

  ii. Determine the suitable test statistic.

$$t_{statistic}= \frac{\widehat{b_{j}}-b_{H0}}{S_{\widehat{b_{j}}}}$$

   iii. Specify the significance level.

  • 5% significance level is commonly used.

   iv. Make the statistical decision.

  • Reject the null hypothesis when the t-statistic is greater than the absolute value of the critical value of t.

Example: The Test of Significance for a Regression Coefficient

Consider the following multiple regression results of the price of USDX versur inflation rate and real interest rate.

$$\small{\begin{array}{l|c}\hline\textbf{Regression Statistics}\\ \hline\text{Multiple R} & 0.8264\\ \hline\text{R Square} & 0.6830\\ \hline\text{Adjusted R Square} & 0.5924\\ \hline\text{Standard Error} & 5.3537\\ \hline\text{Observations} & 10\\ \hline\end{array}}$$

$$\small{\begin{array}{l|c|c|c|c}{}& \textbf{Coefficients} & \textbf{Standard Error} & \textbf{t-statistic} & \textbf{P-value}\\ \hline\text{Intercept} & 81 & 7.9659 & 10.1296 & 0.0000\\ \hline\text{Inflation rates} & -276 & 233.0748 & -1.1833 & 0.2753\\ \hline\text{Real interest Rates} & 902 & 279.6949 & 3.2266 & 0.0145\\ \end{array}}$$

Test the statistical significance of the independent variable real rate of interest at the 5% significance level.


We are testing the hypothesis:

\(H_{0}\): Real Interest Rate=0 versus \(H_{a}\): Real Interest Rate ≠ 0.

The t-statistic is determined as:



The 5% two-tailed critical t-value with \(10-2-1 = 7\) degrees of freedom is 2.3646.

Since the t-statistic, \(3.22\), is greater than the critical value, \(2.365\), we reject the null hypothesis and conclude that the real interest rate regression coefficient is statistically significantly different from zero at the 5% significance level.


Consider the following multiple regression results of the return on capital (ROC) vs. performance measures (profit margin (%), sales and debt ratio).

$$\small{\begin{array}{|l|c|}\hline\textbf{Regression Statistics}\\ \hline\text{Multiple R} & 0.7906\\ \hline\text{R Square} & 0.6251\\ \hline\text{Adjusted R Square} & 0.5715\\ \hline\text{Standard Error} & 1.1963\\ \hline\text{Observations} & 25\\ \hline\end{array}}$$

$$\small{\begin{array}{l|c|c|c|c|c}{}& \textbf{Coefficients} & \textbf{Standard Error} & \textbf{t Stat} & \textbf{P-value} \\ \hline\text{Intercept} & 8.6531 & 0.9174 & 9.4323 & 0.0000 \\ \hline \text{Sales} & 0.0009 & 0.0005 & 1.7644 & 0.0922\\ \hline\text{Debt ratio} & 0.0229 & 0.0165 & 1.3880 & 0.1797 \\ \hline\text{Profit Margin%} & 0.2996 & 0.0564 & 5.3146 & 0.0000\\ \end{array}}$$

Adil Suleman, CFA, wants to test whether \(b_{o}\) is different from zero. Assuming a 5% significance level, the hypothesis used and the result of the hypothesis test are most likely: 

$$\begin{array}{|l|l|l|} \hline
\text{A} & H_{0}:b_{0}= 0, vs. H_{a}: b_0≠0 &  {\text{Fail to reject the null hypothesis and conclude that}\\ b_0  \text{ is equal to zero.}}\\ \hline
\text{B} & H_{0}:b_{0}= 0, vs. H_{a}: b_0=0 &  {\text{Reject the null hypothesis and conclude that}\\ b_0  \text{ is equal to zero.}} \\ \hline
\text{C} & H_{0}:b_{0}= 0, vs. H_{a}: b_0≠0 & {\text{Reject the null hypothesis and conclude that}\\ b_0 \text{ is not equal to zero.}} \\ \hline


The correct answer is C.

The hypothesis will be structured as:

\(H_0:b_0\), v.s. \(H_a: b_0 ≠0\)

\(\text{t-statistic}= 9.4323\)

This is a two-tailed test: The critical t-value with 23 degrees of freedom at the 5% significance level is ±2.069.

Notice that the t-stat is greater than the upper critical value. This prompts the rejection of the null hypothesis and conclusion that  is significantly different from zero.

Reading 2: Multiple Regression

LOS 2 (c) Formulate a null and an alternative hypothesis about the population value of a regression coefficient, calculate the value of the test statistic, and determine whether to reject the null hypothesis at a given level of significance.

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