Portfolio Management

Portfolio Management is a central concept in the CFA Level 1 curriculum that addresses how to construct, evaluate, and maintain investment portfolios aligned with specific client objectives. The process begins with understanding investment policy statements (IPS), which outline clients' return objectives, risk tolerance, time horizon, liquidity needs, tax considerations, legal constraints, and unique circumstances. Portfolio management follows these key steps: 1. Asset Allocation - Perhaps the most critical decision, involving the distribution of investments across major asset classes like equities, fixed income, cash, and alternatives. 2. Security Selection - Choosing specific securities within each asset class based on fundamental or technical analysis. 3. Portfolio Construction - Combining selected securities to achieve optimal risk-return characteristics, often using mean-variance optimization. 4. Risk Management - Measuring and controlling various risks including market risk, credit risk, liquidity risk, and operational risk. 5. Performance Measurement - Evaluating returns against appropriate benchmarks and attribution analysis to identify sources of returns. Modern Portfolio Theory (MPT) provides the theoretical framework, introducing concepts like: - Efficient frontier (optimal portfolios offering maximum return for a given level of risk) - Capital Asset Pricing Model (CAPM) linking expected returns to systematic risk - Diversification benefits through correlation analysis Behavioral finance aspects are also considered, recognizing how investor psychology impacts decision-making. Portfolio managers must understand market efficiency concepts to determine appropriate active or passive strategies. The curriculum covers various investment strategies including: - Active vs. passive management - Growth vs. value investing - Top-down vs. bottom-up approaches - Strategic vs. tactical asset allocation Portfolio rebalancing techniques and tax-efficiency strategies complete the portfolio management process, ensuring continued alignment with investment objectives.

Portfolio Management is a central concept in the CFA Level 1 curriculum that addresses how to construct, evaluate, and maintain investment portfolios aligned with specific client objectives. The pro…

Concepts covered: Performance Evaluation, Behavioral Finance, Portfolio Management Process, Risk Management, Basics of Portfolio Planning and Construction