CFA® Portfolio Management

What is the CFA Level 1 Portfolio Management Topic?

The CFA Level 1 Portfolio Management is one of the most lightly weighted topics on the Level 1 exam, along with Derivatives and Alternative Investments. However, candidates should not take this to mean that Portfolio Management is less important than more heavily weighted topics like Financial Statement Analysis (FSA), but it is a more complex topic that draws on a lot of fundamental learning that is presented earlier in the CFA Program.

As you progress through the CFA Program, Portfolio Management increases in importance; by Level 3, it is nearly half of the exam. Candidates should view this lightly weighted L1 content as a primer for what is perhaps the most important topic of the CFA. Building a solid foundation in Portfolio Management is critical to obtaining a CFA charter.

The material in Level 1 provides an overview of the portfolio management process and common measures of risk and return. Candidates will be introduced to investment policy statement (IPS) development, risk management frameworks, and the impacts of technical analysis and fintech on the investment industry.

Exam Weighting

The CFA Portfolio Management topic has a weighting of 5%-8% of the total exam content, so that approximately 9-14 of the 180 CFA Level 1 exam questions focus on this topic.

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Syllabus, Readings and Changes Overview

The weight of the Portfolio Management section decreased from 2018 to 2019. Since 2021, weightage has fluctuated between 5-8%.

Key Changes in Level 1 Portfolio Management:

The syllabus is divided into the following two study sessions:

The CFA Level 1 exam includes 60 total readings for 2022. Eight of these readings (48-55) center on Portfolio Management (13% of the exam weightage) .

Portfolio Management Overview

Due to the diversification of the investments held in the portfolio, portfolios can allow for a reduction in risk without compromising reward. One of the first steps in the portfolio management process is developing an investment policy statement (IPS) suited to the needs of the client. This assessment is followed by asset allocation, security analysis, portfolio construction/monitoring/rebalancing, performance measurement, and reporting.

• The reading introduces portfolio management and the asset management industry.
• Candidates will become familiar with the portfolio management process and the financial needs of various types of investors.
• The material also covers mutual funds and other pooled investment instruments.

Portfolio Risk and Return: Part I

The most important factors in portfolio development are the risk and return of individual assets, and the most efficient portfolios optimize that trade-off for the investor.

• The reading examines the characteristics of assets as they relate to risks and returns.
• Candidates will study risk aversion, the computation of portfolio risk, and how these tools narrow the choices of optimal risky portfolios.

Portfolio Risk and Return: Part II

The reading dives deeper into the nuances of portfolio risk and return by examining the computation of risk, systematic and unsystematic risk, the capital asset pricing model (CAPM), and the role of correlation in diversifying risk. Candidates will study various risk-related models and how risk influences portfolio valuation.

Basics of Portfolio Planning and Construction

A common theme that is reiterated throughout the CFA Level 1 Portfolio Management topic is the importance of understanding a client’s situation and goals. While financial professionals categorize investors into broad groups, variations remain within these groups.

• The reading examines the portfolio construction process with special attention paid to client-centered planning.
• Candidates will learn more about the investment policy statement and the portfolio construction process in general.

Behavioral Biases of Individuals

Human irrationality is a variable that befuddles even the most thorough financial forecasting formulas. People often rely on their biases when making judgments and decisions. Behavioral finance challenges the assumptions of traditional economic and financial theories by accounting for this irrationality.

• The reading examines the possible consequences of cognitive errors and emotional biases and how to mitigate their potentially negative effects.
• Candidates will also study how the aggregate expression of individual biases manifests as market anomalies.

Introduction to Risk Management

Investment decisions are always made within an environment of uncertainty. Risk management is a skill that allows investors to more adeptly navigate this environment. To do this, investment advisers and managers must be able to identify appropriate measures of risk and keep risks aligned with investment goals.

• The reading offers a broad overview of the enterprise and portfolio risk management process.
• Candidates will learn about risk governance, risk tolerance, and how risk is measured and managed.

Technical Analysis

Technical analysis consists of various techniques among traders, analysts, and investors. While technical analysis is indeed technical, an analyst’s perspective on the results is open to interpretation. Therefore, savvy analysts will test and implement a combination of techniques to suit their goals.

• Candidates will examine the principles and assumptions of technical analysis.
• The reading explores potential connections between behavioral finance, technical analysis, and fundamental analysis.
• The material also introduces technical analysis charts, indicators, and patterns.

Fintech in Investment Management

Fintech employs big data, artificial intelligence, and machine learning to more effectively assess and identify investment opportunities, reduce risk, and develop successful portfolios. Automated robo-advisors fall under the umbrella of fintech and represent one way that finance is becoming more personalized and automated.

• The reading provides an outline of fintech’s key areas of influence in the investment industry.
• Candidates are introduced to the applications of big data, artificial intelligence, data science, and machine learning.

Study Tips for Level 1 Portfolio Management

The most sought-after profession for current CFA candidates is portfolio management. Therefore, it makes sense that PM is the CFA program’s core component. Candidates will discover that the curriculum begins simply at Level 1 with a general introduction before gradually getting more difficult and weighty as you move on to Level 3, when it makes up 35–40% of the overall exam.

While a candidate learns how to value individual securities, analyzing a portfolio as a whole is 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 the risk profiles of various clients.

• Calculation-intensive questions, typically centered on risk or return calculations, can be found in portfolio management questions.
• Make sure to practice calculating risk measurements (such as variance, covariance, standard deviation, and beta), as well as returns (such as expected return) and comparing them .
• Keep the terminology and definitions in mind. In portfolio management, there are numerous definitions.
• Make sure you are familiar with and can recite the objectives, constraints, risk categories, and asset classes of the Investment Policy Statement (IPS).
• Because it will come up frequently in questions, be familiar with beta and the CAPM.
• 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.

What is CFA Level 2 Portfolio Management?

The CFA Level 2 Portfolio Management topic is one of the more heavily weighted topics on the exam. The weight of Portfolio Management increases with every level of the CFA, making up nearly half of the weight of the Level 3 exam.

The Level 2 portfolio management syllabus discusses the creation, trading, costs, and risks of exchange-traded funds (ETFs) and how to use them strategically. Candidates explore the connections between financial markets and the real economy and are introduced to the Fundamental Law of Active Management . The material wraps up with case studies of portfolio management, which demonstrate how securities trading relates to the investment process.

Exam Weighting

The CFA Portfolio Management topic has a weight of 10%-15% of the total exam content, so that approximately 9-13 of the 88 CFA Level 2 exam questions focus on this topic.

Syllabus, Readings and Changes Overview

The weight of the Portfolio Management section decreased from 2018 to 2019. Since 2021, the weighting has fluctuated between 10-15%.

Key Changes in Level 2 Portfolio Management:

The CFA Level 2 exam includes 47 total readings for 2022. Seven of these readings 38-44) center on Portfolio Management (14.8% of the exam weightage).

The syllabus is divided into the following two study sessions:

Exchange-Traded Funds: Mechanics and Applications

Exchange-traded funds (ETFs) were developed as an alternative to mutual funds based on the Modern Portfolio Theory discussed in the CFA curriculum. They have grown in popularity due to access, relatively low cost, transparency, and the diversity of available assets. ETFs are also typically more tax-efficient than mutual funds and can be shorted, making them more useful for diversifying positions and portfolios.

• The reading introduces the primary and secondary markets for ETFs and how ETFs are used effectively in relation to portfolio development.
• Candidates will also examine the risks and costs of ETFs and other important considerations for investors.

Using Multifactor Models

Multifactor models allow financial analysts to construct a more clear and nuanced view of risk than would be possible with a single-factor approach. This has made multifactor models a dominant investment practice for measuring and navigating risk.

• The reading provides a background on the modern portfolio theory of multifactor models.
• Candidates will be introduced to arbitrage pricing theory and various types of multifactor models and their applications.

Measuring and Managing Market Risk

Market risk may mean fluctuations in stock prices, interest rates, exchange rates, or commodity prices. The practice of risk management allows financial analysts to align risks with investment goals through the classification and measurement of such risks. This is done through a combination of financial models, experience, and good judgment.

• The reading provides a foundation for understanding and assessing Value at Risk.
• Candidates will learn about the constraints in risk management and sensitivity measures used for equities, fixed-income securities, and options.

Backtesting and Simulation

Backtesting is the practice of simulating the performance of an investment strategy without risking capital. This allows financial analysts to test hypotheses using historical data to simulate results that they can analyze for return. Backtesting and simulation have become increasingly popular in quantitative investing due to the rise in big data and other associated technological developments.

• The reading introduces backtesting techniques.
• Candidates will learn how these tools increase the usefulness of otherwise “random” data.

Economics and Investment Markets

Financial market activity is intimately interwoven with the overall state of the economy. Through financial markets, savers are able to defer consumption,which provides governments and corporations with greater access to capital.

• The reading explores the connection between the real economy and financial markets and demonstrates the usefulness of economic analysis in the valuation of securities and their aggregates.
• Candidates will review how the economy influences the prices of various forms of debt, equity, and credit.

Analysis of Active Portfolio Management

Modern portfolio theory (MPT) has its roots in the 1952 Markowitz framework and has since evolved into the dominant framework for discussing and applying the principles of risk and return in portfolio management. Since 1952, various models, concepts, terminology, and mathematics have been combined with the Markowitz framework to create MPT.

• Candidates are expected to have an understanding of basic portfolio theory (from Level 1) before reading this section.
• The reading introduces the mathematics of “value-added” through active portfolio management, compares various measurements of risk, and provides examples of active portfolio management strategies in equity and fixed-income markets.

Trading Costs and Electronic Markets

Trading is often considered the least understood and appreciated function of the investment process. However, understanding it is critical to understanding how explicit and implicit trading costs are measured and how trading strategies adapt to or can exploit market fragmentation.

• The reading discusses the direct and indirect costs of trading and how electronic trading has affected these costs.
• Candidates will become familiar with how electronic trading facilities are used, the risks associated with electronic trading, and how regulators attempt to mitigate these risks.

Study Tips for CFA Level 2 Portfolio Management

Candidates will discover that the curriculum begins simply in Level 1 with a general introduction before progressively getting more challenging as you move on to Level 2, where it makes up between 5 and 15% of the exam.

Portfolio Management questions usually have one or two item sets. It’s important to keep in mind that the Portfolio Management 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.

What is CFA Level 3 Portfolio Management?

The CFA Level 3 Portfolio Management is the most heavily weighted topic of the Level 3 CFAexam. At 35-40%, Portfolio Management comprises nearly half of the weight of the Level 3 exam. The material is covered over 7 study sessions, 15 readings, and 141 learning outcome statements (LOS).

The readings begin with a primer on behavioral finance, its influences on portfolio management, and its applications. Candidates will then dive more deeply into portfolio management topics covered in previous levels and be introduced to novel concepts, frameworks, models, tools, regulations, and perspectives.

The readings end with three case studies that combine material covered over all the study sessions presented in the CFA Level 3 Portfolio Management topic. Here, candidates will assess the needs of clients given various scenarios and provide solutions.

Exam Weighting

The CFA Portfolio Management topic has a weight of 35-40% of the total exam content, so that approximately 15-17 of the 44 CFA Level 3 multiple choice exam questions focus on this topic.

Syllabus, Readings and Changes Overview

The weight of the Portfolio Management section decreased from 2018 to 2019. Since 2019, it has fluctuated between 35-40%.

The CFA Level 3 exam includes 35 total readings for 2022. Fifteen of these readings (1-7/21-30) center on Portfolio Management (43% of the exam weightage).

The syllabus is divided into the following seven study sessions:

Key Changes in Level 3 Portfolio Management:

The Behavioral Biases of Individuals

The reading examines the potential consequences of cognitive errors and emotional biases and how to mitigate their potentially negative effects. Candidates will also study how the aggregate expression of individual biases manifests as market anomalies.

Behavioral Finance and Investment Processes

The reading explores an understanding of an individual investor’s decision process through the lens of behavioral finance: individual investors are not as rational as they may think. Candidates will examine how irrationality impacts portfolio construction, forecasting, client relationships, and the market in general.

• The material also introduces the classification of investors into types and the limitations of such classifications.
• Candidates will examine market anomalies that arise from market behavior and conclude with practice problems.

Overview of Asset Allocation

Asset allocation is one of the first decisions financial analysts must consider when developing a portfolio. The effective choice of portfolio asset classes and allocations has a huge influence on levels of return.

• The reading focuses on aligning asset allocation with the investment objective of the investor’s financial situation and goals.
• The material covered in this reading ties into portfolio management, risk management, and behavioral finance and is revisited in other readings.
• Candidates will be introduced to broad approaches to asset allocation and their associated risks and objectives.

Principles of Asset Allocation

Developing an effective, diversified, multi-asset portfolio involves the asset allocation decision process and its implementation via specific investments.

• This reading builds on the material covered in the previous reading “Overview of Asset Allocation” by diving deeper into the primary frameworks for developing an asset allocation.
• Candidates will study how to match the optimal asset allocation to the needs of various investors and how to develop an efficient mix of asset classes in the absence of liabilities.

Asset Allocation with Real-World Constraints

Asset allocation must be adapted to the financial situation and goals of particular asset owners.

• The reading covers how various adaptations can be made given a set of inputs and what circumstances warrant a re-evaluation of long-term asset allocation.
• Candidates will study how investors’ biases and behaviors can create obstacles to successful asset allocation long-term.

Overview of Private Wealth Management

An increase in global wealth has resulted in an increase in individual investors interested in taking on more responsibility for their finances. Private wealth managers help these investors generate wealth and achieve success in a complex financial environment.

• The reading covers the process of developing and implementing investment strategies for individual investors using various tools and techniques.
• Candidates will compare and contrast private clients with institutional clients and learn how private wealth managers can better understand their individual clients and plan accordingly.

Topics in Private Wealth Management

Private client asset management is broken down into three key areas of technical competency: the influence of taxes on wealth accumulation, the basic tools and strategies for retaining wealth from generation to generation, and the management of concentrated positions.

• The reading discusses the importance of taxes in determining an investor’s final returns and important points for managing assets with taxes in mind.
• Candidates will also learn about managing concentrated positions in public and private equity and real estate.

Risk Management for Individuals

An individual’s financial burdens, priorities, and goals change as they age. Life-cycle finance seeks to aid investors as they confront new financial realities. Proximity to retirement, prolonged illness, sudden or chronic disability, and the dwindling of resources are all variables that fall under the umbrella of life-cycle finance.

• The reading covers the potential risks that individuals and households face and strategies that can help mitigate such risks.
• Candidates will study the financial stages of life and associated financial products.

Portfolio Management for Institutional Investors

Institutional investors represent over $70 trillion (USD) in investable assets. These institutional investors include trusts, corporations, and legal entities tasked with investing on behalf of groups and individuals.

• The reading contextualizes important variables that influence institutional investing and introduces the policies they work with.
• Candidates will examine a variety of factors that influence the asset allocation of various institutional investors.

Trade Strategy and Execution

Portfolio managers must work together with traders to develop optimal trading strategies. Trade execution quality is determined by the seamlessness of a strategy’s integration with its execution and the proper assessment of market conditions and a trader’s trading goals and risk aversion.

• The reading examines trading and execution from the perspective of a portfolio manager.
• Candidates will become familiar with a range of trade implementation options and trading algorithms. The material goes on to examine how trade costs and executions are measured and evaluated.

Portfolio Performance Evaluation

Evaluating the efficacy and quality of an investment approach leads to iterative progress and a greater probability of future success. This makes performance evaluation a particularly potent tool in the area of investment analysis. Financial analysts will further benefit from a thorough understanding of how and why such analyses work and how results are generated.

• The reading broadly covers the topics of performance measurement, attribution, and appraisal and how these topics tie together.
• Candidates will learn to use tools to evaluate the effectiveness of analyses and the strengths and weaknesses of various approaches.

Investment Manager Selection

The reading examines frameworks for selecting investment managers and conducting manager interviews. Candidates will learn how to apply risk and return measures to manager selection and unique considerations when selecting managers for traditional versus alternative investments.

Case Study in Portfolio Management: Institutional

This case study is divided into a section dealing with asset allocation and liquidity management, and a second section examines the use of derivatives in portfolio construction from the perspective of tactical asset allocation (TAA) overlay and rebalancing. Candidates will assess potential ethical violations in manager selection and the potential risks and rewards linked to increasing exploration of illiquidity through both private real estate and private equity.

Case Study in Risk Management: Private Wealth

In this case study, candidates will confront the challenges that arise when providing advice on risk management to individuals and families. Financial circumstances and their associated risks evolve over time, so the financial analyst must provide updated solutions addressed specifically to individual clients.

Integrated Cases in Risk Management: Institutional

This is a fictional case study that focuses on the portfolio of a sovereign wealth fund (SWF) examining the risk of long-term investments. This case study requires review of financial, social, and environmental risks associated with the portfolio strategy of institutional investors and readings that cover the risk management associated with long-term direct investments of institutional investors.

Study Tips for CFA Portfolio Management L3

Portfolio Management makes up almost half of the Level 3 exam. Both sections of the exam will be dominated by Portfolio Management. The curriculum is quite thorough and incorporates fresh ideas like behavioral finance and lifecycle investing. Concepts of risk management, including instruments and methods for assessing and controlling risk, are also covered. In addition to this, you can be asked questions on institutional and individual wealth.

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. Portfolio Management is included in the exams for Levels 1 and 2. Asset allocation, risk management software, managing institutional investor portfolios, and assessing portfolio performance are additional key ideas at Level 3.