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Study Notes for CFA® Level II – Portfolio Management – offered by AnalystPrep

Study Notes for CFA® Level II – Portfolio Management – offered by AnalystPrep

Reading 38: Exchange-Traded Funds: Mechanics and Applications

-a. Explain the creation/redemption process of ETFs and the function of authorized participants;

-b. Describe how ETFs are traded in secondary markets;

-c. Describe sources of tracking error for ETFs;

-d. Describe factors affecting ETF bid-ask spreads;

-e. Describe sources of ETF premiums and discounts to NAV;

-f. Describe the costs of owning an ETF;

-g. Describe types of ETF risk;

-h. Identify and describe portfolio uses of ETFs;

Reading 39: Using Multifactor Models

-a. Describe arbitrage pricing theory (APT), including its underlying assumptions and its relation to multifactor models;

-b. Define arbitrage opportunity and determine whether an arbitrage opportunity exists;

-c. Calculate the expected return on an asset given an asset’s factor sensitivities and the factor risk premiums;

-d. Describe and compare macroeconomic factor models, fundamental factor models, and statistical factor models;

-e. Explain sources of active risk and interpret tracking risk and the information ratio;

-f. Describe the uses of multifactor models and interpret the output of analyses based on multifactor models;

-g. Describe the potential benefits for investors in considering multiple risk dimensions when modeling asset returns;

Reading 40: Measuring and Managing Market Risk

-a. Explain the use of value at risk (VaR) in measuring portfolio risk;

-b. Compare the parametric (variance-covariance), historical simulation, and Monte Carlo simulation methods for estimating VaR;

-c. Estimate and interpret VaR under the parametric, historical simulation, and Monte Carlo simulation methods;

-d. Describe the advantages and limitations of VaR;

-e. Describe extensions of VaR;

-f. Describe sensitivity risk measures and scenario risk measures and compare these measures to VaR;

-g. Demonstrate how equity, fixed-income, and options exposure measures may be used in measuring and managing market risk and volatility risk;

-h. Describe the use of sensitivity risk measures and scenario risk measures;

-i. Describe the advantages and limitations of sensitivity risk measures and scenario risk measures;

-j. Explain constraints used in managing market risks, including risk budgeting, position limits, scenario limits, and stop-loss limits;

-k. Explain how risk measures may be used in capital allocation decisions;

-l. Describe risk measures used by banks, asset managers, pension funds, and insurers;

 

Reading 41: Backtesting and Simulation 

-a. Describe objectives in backtesting an investment strategy;

-b. Describe and contrast steps and procedures in backtesting an investment strategy;

-c. Interpret metrics and visuals reported in a backtest of an investment strategy;

-d. Identify problems in a backtest of an investment strategy;

-e. Evaluate and interpret a historical scenario analysis;

-f. Contrast Monte Carlo and historical simulation approaches;

-g. Explain inputs and decisions in simulation and interpret a simulation;

-h. Demonstrate the use of sensitivity analysis.

Reading 42: Economics and Investment Markets

-a. Explain the notion that to affect market values, economic factors must affect one or more of the following: 1) default-free interest rates across maturities, 2) the timing and magnitude of expected cash flows, and 3) risk premiums;

-b. Explain the role of expectations and changes in expectations in market valuation;

-c. Explain the relationship between the long-term growth rate of the economy, the volatility of the growth rate, and the average level of real short-term interest rates;

-d. Explain how the phase of the business cycle affects policy and short-term interest rates, the slope of the term structure of interest rates, and the relative performance of bonds of different maturities;

-e. Describe the factors that affect yield spreads between non-inflation adjusted and inflation-indexed bonds;

-f. Explain how the phase of the business cycle affects credit spreads and the performance of credit-sensitive fixed-income instruments;

-g. Explain how the characteristics of the markets for a company’s products affect the company’s credit quality;

-h. Explain how the phase of the business cycle affects short-term and long-term earnings growth expectations;

-i. Explain the relationship between the consumption-hedging properties of equity and the equity risk premium;

-j. Describe cyclical effects on valuation multiples;

-k. Describe how economic analysis is used in sector rotation strategies;

-l. Describe the economic factors affecting investment in commercial real estate;

Reading 43: Analysis of Active Portfolio Management

-a. Describe how value added by active management is measured;

-b. Calculate and interpret the information ratio (ex-post and ex-ante) and contrast it to the Sharpe ratio;

-c. State and interpret the fundamental law of active portfolio management including its component terms—transfer coefficient, information coefficient, breadth, and active risk (aggressiveness);

-d. Explain how the information ratio may be useful in investment manager selection and choosing the level of active portfolio risk;

-e. Compare active management strategies (including market timing and security selection) and evaluate strategy changes in terms of the fundamental law of active management;

-f. Describe the practical strengths and limitations of the fundamental law of active management;

Reading 44: Trading Costs and Electronic Markets

-a. Explain the components of execution costs, including explicit and implicit costs;

-b. Calculate and interpret effective spreads and VWAP transaction cost estimates;

-c. Describe the implementation shortfall approach to transaction cost measurement;

-d. Describe factors driving the development of electronic trading systems;

-e. Describe market fragmentation;

-f. Distinguish among types of electronic traders;

-g. Describe characteristics and uses of electronic trading systems;

-h. Describes the comparative advantages of low-latency traders;

-i. Describe the risks associated with electronic trading and how regulators mitigate them;

-j. Describes abusive trading practices that real-time surveillance of markets may detect;

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    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.
    Nyka Smith
    Nyka Smith
    2021-02-18
    Every concept is very well explained by Nilay Arun. kudos to you man!
    Badr Moubile
    Badr Moubile
    2021-02-13
    Very helpfull!
    Agustin Olcese
    Agustin Olcese
    2021-01-27
    Excellent explantions, very clear!
    Jaak Jay
    Jaak Jay
    2021-01-14
    Awesome content, kudos to Prof.James Frojan
    sindhushree reddy
    sindhushree reddy
    2021-01-07
    Crisp and short ppt of Frm chapters and great explanation with examples.