Portfolio Management
Portfolio Management in short lessons: risk and return, the efficient frontier, the CML and CAPM, performance measures, the IPS and asset allocation, behavioural biases and risk management, with worked examples and exam traps.
How this topic is tested, its exam weight and study tips: Portfolio Management exam guide.
FlashcardsPDF · A4 · 24 pages
Portfolio Management formula sheet
All 65 formulas of the topic, each explained. Every module page ends with its own formulas; the key formulas are here. Downloads come with a subscription or a pass; the free trial does not include them.
How investors trade off risk and return: the historical record of the major asset classes and their other characteristics, risk aversion and the utility function, indifference curves and the capital allocation line, the risk of two-asset and many-asset portfolios, diversification through low correlation, the minimum-variance and efficient frontiers, and how each investor's optimal portfolio is chosen.
- Asset classes: return, risk and other characteristics13 min
- Risk aversion and utilityVideo · 7 min13 min
- Indifference curves and the capital allocation lineVideo · 7 min14 min
- Measuring asset and portfolio riskVideo · 7 min14 min
- Correlation and the power of diversificationVideo · 7 min14 min
- Integrated cases: a foreign bond with currency, and pairs from a scenario table16 min
- Minimum-variance and efficient frontiersVideo · 7 min12 min
- Optimal risky portfolio and the optimal investor portfolioVideo · 7 min14 min
Capital market theory and the CAPM: combining the risk-free asset with the market portfolio (the CML, lending and borrowing), why only systematic risk earns a return, return-generating models and beta, the CAPM and the security market line, the Sharpe ratio, Treynor ratio, M² and Jensen's alpha, and how the CAPM is used for capital budgeting, security selection and portfolio construction.
- The risk-free asset, the market portfolio and the CMLVideo · 7 min14 min
- Lending, borrowing and leveraged portfolios on the CMLVideo · 6 min11 min
- Systematic and nonsystematic riskVideo · 6 min12 min
- Return-generating models, the market model and betaVideo · 7 min15 min
- The CAPM: assumptions, the SML and its limitsVideo · 6 min15 min
- Sharpe ratio, Treynor ratio, M² and Jensen's alphaVideo · 7 min15 min
- Applying the CAPM: budgeting, security selection and portfolio buildingVideo · 7 min14 min
The big picture of portfolio management: why investors should judge assets by what they do to the whole portfolio, the planning-execution-feedback process, what different individual and institutional investors need (including DC versus DB pension plans), how the asset management industry is organised, and how mutual funds compare with ETFs, separately managed accounts, hedge funds and private equity or venture capital funds.
- The portfolio approach and diversification14 min
- The portfolio management process: planning, execution, feedback13 min
- Individual investors and DC versus DB pension plans13 min
- Institutional investors and their needsVideo · 7 min15 min
- The asset management industry14 min
- Mutual funds: open-end, closed-end and fund types15 min
- SMAs, ETFs, hedge funds and private equity15 min
How an adviser turns a client's goals and circumstances into a written investment policy statement (risk and return objectives plus constraints), and how that statement, combined with capital market expectations, becomes a strategic asset allocation and then a real portfolio, with ESG preferences built in along the way.
- The investment policy statement: why and what12 min
- Risk objectives and risk tolerance: ability vs willingnessVideo · 6 min14 min
- Return objectives and the required returnVideo · 7 min12 min
- Constraints: liquidity, horizon, tax, legal and unique circumstancesVideo · 7 min14 min
- Asset classes and the strategic asset allocation15 min
- Integrated case: IPS thresholds, client exclusions and the efficient frontier15 min
- From SAA to portfolio: risk budgeting, TAA, selection and rebalancing15 min
- ESG considerations in planning and construction13 min
Why real investors depart from the rational decision maker of traditional finance: the split between cognitive errors (faulty reasoning, which can be corrected) and emotional biases (feelings, which usually have to be accommodated), the fifteen named biases with their consequences and remedies, and how the same biases, added up across many investors, help explain market anomalies such as momentum, bubbles and crashes, and the value effect.
- Cognitive errors versus emotional biasesVideo · 7 min13 min
- Belief perseverance I: conservatism and confirmation12 min
- Belief perseverance II: representativeness, illusion of control and hindsight14 min
- Information-processing biases: anchoring, mental accounting, framing and availabilityVideo · 7 min15 min
- Emotional biases I: loss aversion and overconfidenceVideo · 7 min13 min
- Emotional biases II: self-control, status quo, endowment and regret aversion14 min
- Integrated case: a multi-bias file with 'least likely' and 'not shown' items14 min
- Behavioural finance and market anomalies14 min
What risk management is (and is not), the framework and governance that support it, how risk tolerance and risk budgeting turn the board's appetite into limits, the financial and non-financial risks organisations and individuals face and how they compound each other, and the tools for measuring risk and modifying it through avoidance, self-insurance, insurance and derivatives.
- Risk, risk exposure and what risk management is12 min
- The risk management framework13 min
- Risk governance and the enterprise view12 min
- Risk tolerance and risk budgetingVideo · 6 min14 min
- Financial and non-financial risks, and how they interact15 min
- Risk drivers and risk metrics14 min
- Modifying risk: avoid, accept, transfer or shiftVideo · 7 min15 min
- Integrated case: hedging the currency of a foreign bond holding15 min