Portfolio Management (PM)
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.
Portfolio Management: What to Expect in the CFA Level 1 Exam?
PM is one of the lower weighted topics on the Level 1 exam, along with Derivatives and Alternative Investments. Candidates should understand that PM is not considered less critical than heavily weighted topics like Financial Statement Analysis (FSA). However, PM is a more intricate subject that builds upon fundamental concepts introduced earlier in the CFA Program.
As you progress through the CFA Program, PM increases in importance; by Level 3, it is nearly half of the exam. Candidates should view this lower-weighted Level 1 content as a primer for the essential topic of the CFA Level 1 exam. Building a solid foundation in PM is critical to obtaining a CFA charter.
The topic weighs 5-8% of the total exam content, so approximately 9-14 of the 180 questions focus on this topic.
|Topic Weight||No. of Learning Modules||No. of Formulas||No. of Questions|
|5-8%||8||ca. 50||ca. 12|
Syllabus, Readings, and Changes
The exam weight of the PM section decreased from 2018 to 2019. Since 2021, weightage has fluctuated between 5-8%. The 2023 PM syllabus spans 8 learning modules and contains 55 LOS. The CFA Level 1 exam includes 73 total Learning Modules for 2023—eight center on PM (11% of the total curriculum).
While the weighting of the PM section stayed constant in 2019 and 2020, it remained at 5-8% from 2021 to 2023.
Reading-related updates for 2023 include:
- Portfolio Risk and Return Part I: Updated the content to support risk management for international investments with currency risk
- Portfolio Risk and Return Part II: New EORQs added
- Introduction to Risk Management: Content added to support risk management for international investments with currency risk
- Fintech in Investment Management: Updated content to reflect recent evolution in decentralized finance (DeFi) and blockchain
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 client’s needs. This assessment follows 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 investors.
- The material also covers mutual funds and other pooled investment instruments.
Portfolio Risk and Return: Part I
The most critical 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 reiterated throughout the CFA Level 1 exam’s PM 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 particular attention to client-centered planning.
- Candidates will learn more about the investment policy statement and the portfolio construction process.
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 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 navigate this environment. To do this, investment advisers and managers must be able to identify appropriate risk measures and keep risks aligned with investment goals.
- The reading offers a broad enterprise and portfolio risk management process overview.
- Candidates will learn about risk governance, tolerance, and measuring and managing risk.
Technical analysis consists of various techniques among traders, analysts, and investors. While technical analysis is 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, 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 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.
Sample Questions and Answers
The sample questions are typical of the probing multiple-choice questions on the L1 exam. During the exam, you have about 90 seconds to read and answer each question, carefully designed to test knowledge from the CFA Curriculum. UWorld’s question bank is built to expose you to exam-like questions and illustrate and explain the concepts tested thoroughly.
Companies that raise capital through an initial coin offering (ICO) most likely benefit from:
- less dilution of ownership than through an initial public offering
- more regulation of cryptocurrencies than of traditional currencies
- central authority confirmation of future transactions involving tokens from the ICO
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.