Portfolio Management

Construction, optimization, and management of investment portfolios.

Portfolio management involves the construction, optimization, and ongoing management of investment portfolios to meet specific investment objectives and risk tolerances. This includes asset allocation, security selection, performance measurement, and risk management. Analysts use various tools and techniques, such as modern portfolio theory, efficient frontier analysis, and factor investing, to build and manage portfolios effectively.

5 minutes 5 Questions

Portfolio Management is a cornerstone topic in the CFA Level 2 curriculum that builds upon foundational concepts from Level 1. At Level 2, candidates delve deeper into portfolio theory, risk management, and investment strategies with greater analytical complexity. The curriculum explores advanced asset allocation techniques, including strategic and tactical approaches. Strategic allocation focuses on long-term investment goals based on expected returns and correlations, while tactical allocation involves shorter-term adjustments to capitalize on market opportunities. Candiates study the Markowitz portfolio theory in greater mathematical depth, examining efficient frontiers, optimal portfolios, and the capital allocation line. The Capital Asset Pricing Model (CAPM) is expanded to include multi-factor models such as the Fama-French three-factor model. Level 2 introduces more sophisticated risk metrics beyond standard deviation, including Value at Risk (VaR), conditional VaR, and scenario analysis. Portfolio performance measurement includes risk-adjusted metrics like Sharpe ratio, Treynor ratio, and Jensen's alpha, with emphasis on attribution analysis to identify sources of returns. The curriculum covers behavioral finance biases affecting portfolio decisions and methods to address them. Alternative investments (real estate, private equity, hedge funds) are analyzed for their diversification benefits and unique risk characteristics. Portfolio management for institutional investors receives significant attention, including liability-driven investing, pension fund management, and endowment models. Global investing concepts address currency risk management and international diversification benefits. ESG (Environmental, Social, Governance) integration into portfolio construction represents an evolving area of focus. Level 2 portfolio management requires candidates to demonstrate analytical skills through complex calculations and case studies, applying theoretical frameworks to practical investment scenarios.

Concepts covered: Analysis of Active Portfolio Management, Exchange-Traded Funds: Mechanics and Applications, Backtesting and Simulation, Using Multifactor Models, Economics and Investment Markets, Measuring and Managing Market Risk

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