CFA Level II · CFA Level II Exam

Guidance for Standard V: Investment Analysis, Recommendations, and Actions: formula sheet

Full chapter guide

Key formulas

Core requirement: Diligence + independence + thoroughness → reasonable and adequate basis, supported by research and investigation; Applies to investment analysis, recommendations and actions.
Adequacy test: Depth of research should match the type of action and the circumstances; No single level of work fits every case. Higher-stakes actions need deeper work.
Reliance on others' work: Rely on third-party or group research only after reasonable efforts to confirm it is sound; If it cannot be confirmed, do not rely on it or present it as your own conclusion.
Group research: If a group's recommendation lacks a reasonable basis, dissociate from it; Disagreeing member should have their name removed. Agreeing with a flawed group is not a defense.
Quantitative models: Understand inputs, assumptions and limits, including how the model behaves in stress or unusual conditions; Do not treat model output as sufficient without testing it.
Core requirement of Standard V(A): Reliance on others' research = reasonable effort to confirm it is sound; Responsibility for the recommendation or action stays with the member.
Factors to assess in third-party research: Assumptions + rigor + timeliness + independence/objectivity + past record; These are the checks the Handbook points to. You do not need to repeat the provider's full work.
Scale of diligence: Depth of checking rises as the importance of the conclusion and the provider's unfamiliarity rise; A guide, not a fixed rule. Some checking is always required.
Ongoing review: Firm should review its research providers periodically; A single initial review is not enough if quality may change.
Core duty: Reasonable basis = diligence + independence + thoroughness before any recommendation or action; Applies to own work, models, group views and third-party research alike.
Quantitative model rule: Understand inputs + assumptions + limitations; test, including stress and scenarios; You must be able to explain why you trust the output.
Group research rule: Believe the view lacks a reasonable basis → dissent and ask that your name be removed; You are not required to dissent from a view you accept. Staying associated with a view you believe unsupported is improper.
Reliance on third parties: Judge the provider; periodically review the process; Contrast with models, where you examine the mechanics.
Duty 1: Investment process disclosure: Disclose basic format + general principles of the process (analysis, selection, portfolio construction) + material changes; Applies to clients and prospects. Proprietary detail need not be revealed.
Duty 2: Important factors: Identify and communicate factors important to recommendations and actions, including limitations and risks; Includes risks of the process and assumptions behind forecasts.
Duty 3: Fact versus opinion: Fact (verifiable) ≠ Opinion (judgment or forecast); label each clearly; Breach arises when opinion is presented as fact or assumptions are omitted.
Recommended practice: Use the process consistently; update clients when it changes; keep communications clear and complete; Brief reports can be used, but must not omit significant factors.
Standard V(A) core duty: Recommendation or action requires: diligence + independence + thoroughness + reasonable and adequate basis supported by research; Judge the process used, not whether the investment made or lost money.
Standard V(B) core duty: Disclose process + significant limitations and risks + separate fact from opinion; Applies to all communications, including reports, calls and presentations. Include factors that are significant to the recommendation.
Standard V(C) core duty: Maintain records supporting analysis, recommendations, actions and client communications; Handbook recommends at least seven years unless local rules require longer. Records are the firm's property.
Third-party research rule: Relying on outside research requires prior due diligence on its assumptions and methods; A well-known source does not remove the duty to assess the basis.
Group research rule: A member may rely on group work if there is no reason to believe it lacks a reasonable basis; A dissenting member should ask that their name be removed if the report lacks a reasonable basis and they disagree.

Quick revision

V(A): exercise diligence, independence and thoroughness, and have a reasonable basis supported by research and investigation.
V(B): disclose the basic format and general principles of your investment process to clients and prospects, and promptly disclose changes.
V(B): identify important limitations and risks of your analysis and recommendations.
V(B): distinguish clearly between fact and opinion in communications.
V(B): include factors that are important to your analysis and recommendations.
V(C): develop and maintain records that support your analysis, recommendations, actions and communications.
Records belong to the firm. If you leave, you cannot take them without your employer's permission.
Third-party research: you must make reasonable efforts to confirm it is sound before relying on it.
Models: understand their assumptions and limits, and do not treat output as certain.
Group research: if you disagree with the group view and it lacks a reasonable basis, you may need to have your name dissociated from it.
Reasonable basis depends on the type of security and the client circumstances.
Overlapping Standards: always check I(B), I(C), III(A) and III(C) before you choose an answer.

Common mistakes

Judging a member by whether the investment made or lost money. Fix: V(A) tests the research process. A sound process with a poor result is compliant. A poor process with a good result is still a breach.
Saying any use of third-party research is a violation. Fix: Reliance is allowed after reasonable efforts to confirm the work is sound. The breach is blind reliance.
Thinking reliance on a reputable provider removes the member's duty to check. Fix: Reputation lowers the depth of checking but never removes it. Some reasonable effort is always required.
Believing the member must fully redo the provider's research. Fix: The Standard asks for reasonable effort to confirm soundness, not duplication of the work.
Treating a model output as a reasonable basis on its own Fix: Ask whether the analyst understood the inputs and limits and tested it. Without that, the basis is not reasonable.
Saying a violation occurs only because the model was wrong Fix: Judge the process. A diligent analyst can still be wrong; a careless analyst can be lucky.
Thinking forecasts and opinions are forbidden Fix: Opinions are fine when labelled and supported. The breach is passing them off as fact or hiding assumptions.
Believing you must reveal the full proprietary model Fix: Only the basic format, general principles and limitations are required, not secret code or exact parameters.
Judging a violation by whether the recommendation lost money. Fix: Ask whether the basis was reasonable and documented. A good process with a bad result is compliant.
Assuming a respected third-party report can be used without checking. Fix: Under V(A), the member should have a process to assess the report's assumptions and methods, and should be able to explain them.

Exam tips

Read the vignette for the shortcut: copied reports, unchecked models, ignored negative data, or groupthink. That is the V(A) trigger.
Choose answers that add verification or dissociation. Reject answers that excuse the member because the outcome was good or because others agreed.
Expect quantitative-model and third-party-research angles. The correct answer usually says the member must understand the limits and confirm soundness.
Watch for look-alikes: if the problem is how the recommendation was explained to the client, think V(B). If it is misstating credit or facts, think I(C).
Name the Standard in your reasoning. It helps you eliminate options citing the wrong one.
Look for the verb in the vignette: copied, adopted, relied on without review all point to a violation.
Check the provider's profile: unfamiliar, conflicted or unexplained methods mean more checking was needed.
Do not choose an answer based on outcome. The test is the process followed before acting.