CFA® Portfolio Management
The CFA Portfolio Management topic is at the very core of the CFA Program. In fact, portfolio management is the most highly ranked career of interest among CFA candidates. The material starts off relatively light at Level 1 (5-8%) and increases in scope and weight at Level 2 (10-15%). Portfolio Management makes up a whopping 35-40% of the Level 3 exam. Candidates would be wise to build a strong foundation on this topic, as it will pay dividends as they progress through the material.
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 first 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.
After careful due diligence (i.e., thorough review), the manager then selects specific securities for each asset class. These actions create the portfolio. As part of the feedback step, the manager monitors changes in the portfolio and determines whether revisions such as rebalancing the portfolio are necessary. The manager will also prepare timely performance reports and communicate findings to the client. Over time, the client’s needs may change, and the process repeats itself.
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.
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.
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.
|Topic Weight||No. of Readings||No. of Formulas||No. of Questions|
|5-8%||7||ca. 50||ca. 12|
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:
|Portfolio Management Level 1 Changes|
|Portfolio Management Overview||No Changes|
|Portfolio Risk and Return: Part I||No Changes|
|Portfolio Risk and Return: Part II||No Changes|
|Basics of Portfolio Planning and Construction||Major Revision|
|Behavioral Biases of Individuals||Added|
|Introduction to Risk Management||No Changes|
|Technical Analysis||Major Revision|
|Fintech in Investment Management||No Changes|
The syllabus is divided into the following two study sessions:
|17||3||24||Introduces the steps of the portfolio management process and common measures of risk and return. Teaches the portfolio approach to investments from the perspective of both individual and institutional investors.|
|18||5||31||Introduces portfolio and investment policy statement (IPS) development. Provides a risk management framework and covers technical analysis and fintech’s impact on the investment industry.|
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 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.
SimpleSheets are your easy access to Level 1 formulas!
Portfolio management questions can include calculation-heavy questions, usually centered around risk or return calculations. Make sure you get lots of practice in calculating and comparing returns (such as expected return), as well as calculating risk metrics (such as variance, covariance, standard deviation, beta). Download our FREE ReadySheets for all the formulas you need to get through Level 1.