Portfolio Management (PM)

Summary, Syllabus, Topics, and Sample Questions (L1, L2, L3)

The Portfolio Management (PM) topic is at the core of the CFA® Program, thus making it the most highly ranked career of interest among the candidates. The material starts relatively light at Level 1 (5-8%) and increases in scope and weight at Level 2 (10-15%). PM makes up 35-40% of the Level 3 exam. Candidates should build a strong foundation on this topic, which will pay dividends as they progress through the material.

The Importance of Portfolio Management in the CFA Program

The portfolio management process's fundamentals are broken into three main steps: planning, execution, and feedback. During the planning phase, a manager gains knowledge of the client's (e.g., individual or institutional) needs. Subsequently, the manager captures critical information on managing the client's portfolio in the Investment Policy Statement. Once a documented plan is in place, the manager executes the program by setting an asset allocation. The client's initial asset allocation is the amount placed in each broad asset class (e.g., equity, fixed income) that matches the client's risk and return profile. The curriculum also covers risk management, behavioral biases, and technical analysis; recently, fintech topics were added to the curriculum, including machine learning, big data, and distributed ledger technology.

Strategies for Excelling in Portfolio Management on the CFA Exam

While a candidate learns how to value individual securities, analyzing a portfolio is also crucial to becoming a competent asset or wealth manager. A great financial advisor must also be able to customize the combination of securities to fit clients' risk profiles.

  • Portfolio management questions may be heavy on calculations, typically involving risk, return, and/or diversification (i.e., correlation).
  • Make sure to practice calculating risk measurements (such as variance, covariance, correlation, standard deviation, and beta) and returns (such as time-weighted or holding period return) and comparing them.
  • Keep the terminology and definitions in mind. In portfolio management, they are numerous.
  • Memorize and understand the objectives (risk and return) and constraints of the Investment Policy Statement (IPS) and the risk categories and asset classes appropriate for institutional and individual investors.
  • Understand how to describe the capital market line (CML), the capital allocation line (CAL), and how the SML is produced from the CML. And be familiar with the Efficient Frontier and the optimal portfolio.
  • At Level 3, PM questions usually have one or two item sets. It's important to remember that the PM content will be more in-depth on the Level 3 exam, so it's a good idea to have a general grasp of the concepts already.
  • Though few, the principles that can be tested are significant. The Investment Policy Statement and its components, which is highly testable, is one such crucial notion.
  • PM is included in the exams for Levels 1 and 2, but it is the focus of the Level 3 exam. Asset allocation, risk management, managing institutional investor portfolios, and assessing portfolio performance are additional key ideas at Level 3.

Visit our CFA Level 1 Study Guide and Plan and CFA Level 2 preparation plan for more information.

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Frequently Asked Questions

Portfolio Management on the CFA Level 1 exam varies in difficulty for each candidate based on their prior knowledge and experience. It is moderately challenging, building upon fundamental concepts from earlier sections. Candidates need a basic understanding of theories and concepts like diversification, asset allocation, and risk management. Familiarity with investment products and securities is important. To prepare, candidates should allocate ample study time, solve practice problems, and focus on grasping underlying theories. This builds a strong foundation and improves their chances of success.
To prepare for CFA portfolio management questions, start by reviewing the curriculum and understanding the concepts. Solve practice questions from various sources, including the CFA Institute, study materials, and online forums like UWorld. Analyze your mistakes and learn from them. Practice time management by solving questions within the exam’s time limits. Focus on key topics like Financial Statement Analysis and Ethics, while allocating sufficient time to portfolio management. Seek feedback from study groups or a tutor to improve your study plan. Following these steps will help you develop an effective practice routine for the CFA Level 1 portfolio management section.
Yes, the CFA charter can be an excellent credential for a career in Portfolio Management. The CFA program provides a comprehensive and rigorous education in investment management, covering a wide range of topics such as ethics, financial analysis, economics, and portfolio management. Having the CFA charter demonstrates to employers and clients that you have a deep understanding of these concepts and are committed to ethical practices. It can also increase your marketability and career opportunities in the field of Portfolio Management, as the credential is highly respected within the industry. However, it’s important to note that while the CFA charter can enhance your career prospects, it’s not a guarantee of success. A successful career in Portfolio Management also requires experience, strong analytical skills, and the ability to communicate effectively with clients and colleagues.
Yes, the Portfolio Management topic gets more challenging in the CFA Level 2 exam compared to the CFA Level 1 exam. In Level 2, the Portfolio Management topic builds upon the foundational concepts introduced in Level 1 and includes more advanced concepts and techniques. In particular, Level 2 Portfolio Management covers topics such as asset allocation, risk management, and performance evaluation. The material is more quantitative, and candidates are expected to have a good understanding of statistical concepts and financial modeling techniques. Additionally, the CFA Level 2 exam places a greater emphasis on application and analysis of concepts, requiring candidates to be able to apply their knowledge in real-world scenarios. Overall, while Portfolio Management is not the most heavily weighted topic in the CFA Level 2 exam, it is still an important topic and requires a significant amount of time and effort to master.

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