CFA Level 1 Study Notes – Portfolio Management

Study Session 18

Reading 51 – Portfolio Management: An Overview

LOS 51a: describe the portfolio approach to investing
LOS 51b: describe types of investors and distinctive characteristics and needs of each
LOS 51c: describe defined contribution and defined benefit pension plans
LOS 51d: describe the steps in the portfolio management process
LOS 51e: describe aspects of the asset management industry
LOS 51f: describe mutual funds and compare them with other pooled investment products

Reading 52 – Portfolio Risk and Return: Part I

LOS 52a: calculate and interpret major return measures and describe their appropriate uses
LOS 52b: compare the money-weighted and time-weighted rates of return and evaluate the performance of portfolios based on these measures
LOS 52c: describe characteristics of the major asset classes that investors consider in forming portfolios
LOS 52d: calculate and interpret the mean, variance, and covariance (or correlation) of asset returns based on historical data
LOS 52e: explain risk aversion and its implications for portfolio selection
LOS 52f: calculate and interpret portfolio standard deviation
LOS 52g: describe the effect on a portfolio’s risk of investing in assets that are less than perfectly correlated
LOS 52h: describe and interpret the minimum-variance and efficient frontiers of risky assets and the global minimum-variance portfolio
LOS 52i: explain the selection of an optimal portfolio, given an investor’s utility (or risk aversion) and the capital allocation line

Reading 53 – Portfolio Risk and Return: Part II

LOS 53a: describe the implications of combining a risk-free asset with a portfolio of risky assets
LOS 53b: explain the capital allocation line (CAL) and the capital market line (CML)
LOS 53c: explain systematic and nonsystematic risk, including why an investor should not expect to receive additional return for bearing nonsystematic risk
LOS 53d: explain return generating models (including the market model) and their uses
LOS 53e: calculate and interpret beta
LOS 53f: explain the capital asset pricing model (CAPM), including its assumptions, and the security market line (SML)
LOS 53g: calculate and interpret the expected return of an asset using the CAPM
LOS 53h: describe and demonstrate applications of the CAPM and the SML
LOS 53i: calculate and interpret the Sharpe ratio, Treynor ratio, M2, and Jensen’s alpha

Reading 54 – Basics of Portfolio Planning and Construction

LOS 54a: describe the reasons for a written investment policy statement (IPS)
LOS 54b: describe the major components of an IPS
LOS 54c: describe risk and return objectives and how they may be developed for a client
LOS 54d: distinguish between the willingness and the ability (capacity) to take risk in analyzing an investor’s financial risk tolerance
LOS 54e: describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances and their implications for the choice of portfolio assets
LOS 54f: explain the specification of asset classes in relation to asset allocation
LOS 54g: describe the principles of portfolio construction and the role of asset allocation in relation to the IPS
LOS 54h: describe how environmental, social, and governance (ESG) considerations may be integrated into portfolio planning and construction.

Reading 55 – Introduction to Risk Management

LOS 55a: define risk management
LOS 55b: describe features of a risk management framework
LOS 55c: define risk governance and describe elements of effective risk governance
LOS 55d: explain how risk tolerance affects risk management
LOS 55e: describe risk budgeting and its role in risk governance
LOS 55f: identify financial and non-financial sources of risk and describe how they may interact
LOS 55g: describe methods for measuring and modifying risk exposures and factors to consider in choosing among the methods

Reading 56 – Technical Analysis

– LOS 56a: explain principles of technical analysis, its applications, and its underlying assumptions
– LOS 56b: describe the construction of different types of technical analysis charts and interpret them
– LOS 56c: explain uses of trend, support, resistance lines, and change in polarity
– LOS 56d: describe common chart patterns
– LOS 56e: describe common technical analysis indicators (price-based, momentum oscillators, sentiment, and flow of funds)
– LOS 56f: explain how technical analysts use cycles
– LOS 56g: describe the key tenets of Elliott Wave Theory and the importance of Fibonacci numbers
– LOS 56h: describe intermarket analysis as it relates to technical analysis and asset allocation

Reading 57 – Fintech in Investment Management

LOS 56a: describe “Fintech”
LOS 56b: describe Big Data, Artificial Intelligence and Machine Learning
LOS 56c: describe Fintech Applications to Investment Management
LOS 56d: describe Financial Applications to Distributed Ledger Technology

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