Course Content
PORTFOLIO MANAGEMENT: AN OVERVIEW
This topic is covered in study session 18 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. describe the portfolio approach to investing; b. describe the steps in the portfolio management process; c. describe types of investors and distinctive characteristics and needs of each; d. describe defined contribution and defined benefit pension plans; e. describe aspects of the asset management industry; f. describe mutual funds and compare them with other pooled investment products.
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Portfolio Approach to Investing
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Portfolio Management Process
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Types of Investors
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Pension Plans
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Aspects of Assets Management Industry
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Pooled Investments
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PORTFOLIO RISK AND RETURN: PART I
This topic is covered in study session 18 of the material provided by the institute. After reading this chapter, a student shall be able to: a. calculate and interpret major return measures and describe their appropriate uses; b. compare the money-weighted and time-weighted rates of return and evaluate the performance of portfolios based on these measures; c. describe characteristics of the major asset classes that investors consider in forming portfolios; d. calculate and interpret the mean, variance, and covariance (or correlation) of asset returns based on historical data; e. explain risk aversion and its implications for portfolio selection; f. calculate and interpret portfolio standard deviation; g. describe the effect on a portfolio’s risk of investing in assets that are less than perfectly correlated; h. describe and interpret the minimum-variance and efficient frontiers of risky assets and the global minimum-variance portfolio; i. explain the selection of an optimal portfolio, given an investor’s utility (or risk aversion) and the capital allocation line.
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Return Measures
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Money Weighted vs. Time Weighted Rate of Returns
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Risk Aversion
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Measures of Risk
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Portfolio Risk
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Minimum Variance Portfolio
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PORTFOLIO RISK AND RETURN: PART II
This topic is covered in study session 18 of the material provided by the institute. After reading this chapter, a student shall be able to: a. describe the implications of combining a risk-free asset with a portfolio of risky assets; b. explain the capital allocation line (CAL) and the capital market line (CML); c. explain systematic and nonsystematic risk, including why an investor should not expect to receive an additional return for bearing nonsystematic risk; d. explain return-generating models (including the market model) and their uses; e. calculate and interpret beta; f. explain the capital asset pricing model (CAPM), including its assumptions, and the security market line (SML); g. calculate and interpret the expected return of an asset using the CAPM; h. describe and demonstrate applications of the CAPM and the SML. i. calculate and interpret the Sharpe ratio, Treynor ratio, M2, and Jensen’s alpha.
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Risky and Risk-free Asset’s Portfolio
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Capital Allocation Line/ Capital Market Line
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Systematic and Non-Systematic Risk
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Return Generating Models
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Calculation and Interpretation of Beta
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CAPM and SML
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Application of CAPM
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BASICS OF PORTFOLIO PLANNING AND CONSTRUCTION
This topic is covered in study session 19 of the material provided by the institute. After reading this chapter, a student shall be able to: a. describe the reasons for a written investment policy statement (IPS); b. describe the major components of an IPS; c. describe risk and return objectives and how they may be developed for a client; d. distinguish between the willingness and the ability (capacity) to take risk in analyzing an investor’s financial risk tolerance; e. describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances and their implications for the choice of portfolio assets; f. explain the specification of asset classes in relation to asset allocation; g. describe the principles of portfolio construction and the role of asset allocation in relation to the IPS. h. describe how environmental, social, and governance (ESG) considerations may be integrated into portfolio planning and construction.
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Investment Policy Statements
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Risk-Return Objectives
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Investment Constraints
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Asset Allocation
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ESG Considerations in Portfolio Management
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INTRODUCTION TO RISK MANAGEMENT
This topic is covered in study session 19 of the material provided by the institute. After reading this chapter, a student shall be able to: a. define risk management; b. describe features of a risk management framework; c. define risk governance and describe elements of effective risk governance; d. explain how risk tolerance affects risk management; e. describe risk budgeting and its role in risk governance; f. identify financial and non-financial sources of risk and describe how they may interact; g. describe methods for measuring and modifying risk exposures and factors to consider in choosing among the methods.
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Risk Management
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Risk Management Framework
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Risk Governance
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Risk Tolerance
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Risk Budgeting
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Sources of Risk
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Measuring & Modifying Risk Exposure
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TECHNICAL ANALYSIS
This topic is covered in study session 19 of the material provided by the institute. After reading this chapter, a student shall be able to: a. explain principles of technical analysis, its applications, and its underlying assumptions; b. describe the construction of different types of technical analysis charts and interpret them; c. explain uses of trend, support, resistance lines, and change in polarity; d. describe common chart patterns; e. describe common technical analysis indicators (price-based, momentum oscillators, sentiment, and flow of funds); f. explain how technical analysts use cycles; g. describe the key tenets of Elliott Wave Theory and the importance of Fibonacci numbers; h. describe intermarket analysis as it relates to technical analysis and asset allocation.
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Technical Analysis Explained
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Technical Analysis Charts
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Trend, Support, Resistance Lines, and Change in Polarity
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Common Chart Patterns
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Technical Indicators
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Cycles
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Inter-Market Analysis
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Portfolio Management
About Lesson

LOS E requires us to:

describe aspects of the asset management industry

 

Buy-Side vs. Sell-Side

While talking about assets management or investment management, it is important to know the difference between the buy-side and the sell-side. These two sides complete the picture of financial markets.

BUY-Side

Buy-side is the side of the financial market that buys and invests large portions of securities for the purpose of money or fund management.

Sell-Side

Sell-side is the other side of the financial market, which deals with the creation, promotion, and selling of traded securities to the public.

Types of Asset Managers

Active vs. Passive Managers

a.  These are two main management strategies to generate returns on investments. 

b. Active portfolio management focuses on outperforming the market in comparison to a specific benchmark such as the Standard & Poor’s 500 Index.

c. Passive portfolio management, on the other hand, mimics the investment holdings of a particular index in order to achieve similar results.

d.  active portfolio management usually involves more frequent trades than passive management.

e.  Active managers form around 80% of the investment management industries.

f.  A manager may opt for both an active and passive approach. Alternatively, they can also go for either of the two approaches.

g.  Active management portfolios strive for superior returns but take greater risks and have larger fees.

Traditional vs. Alternative Asset Managers

a.  Traditional investments include long-only position stocks, bonds, and cash. All the other investments are classified as an alternative investment.

b.  Traditional management chooses from amongst the traditional investments to create a diversified portfolio for clients.  Whereas, alternative management uses leverage, derivatives, long-short strategies, etc. to either outperform a predetermined index or to create a return that is uncorrelated to the market.

c.  Traditional investment includes investment in: real estate, commodities, private equity, hedge funds, etc.

d. Alternative Investments includes investment in: derivatives, hedge funds, managed futures, art and antiques, etc.

e.  Alternative investments generally provide good returns, but they are characterized by:

     i.  lower liquidity

    ii.  low regulations

   iii.  low transparency

   iv.  higher fee

    v.  different tax and legal considerations.

f. Off-lately the line of difference between traditional and alternative management has been blurred. A lot of traditional managers are making investments in alternative assets for the clients.

Ownership Structure

Mostly the assets managers are privately owned firms, but there are some publically traded asset management firms like banks and insurance companies.

Asset Management Industry Trends

Growth of Passive Management

Due to the increased efficiency of the financial markets, and the inability of asset managers to beat the market, there has been a growth of passive management.

Big-Data

a.  Big data may be defined as extremely large data sets that may be analyzed computationally to reveal patterns, trends, and associations, especially relating to human behavior and interactions.

b.  Off-lately the computer-generated programs and algorithms are faster and more efficient in processing and estimating earnings from the economic news. So many managers are making use of machine learning to evaluate the data and forecast returns.

c.  Big data has proven to be better at generating alpha returns.

Robo-Advisors

a.  Robo–advisors (roboadvisors, robo–advisers) are digital platforms that provide automated, algorithm-driven investment services with little to no human supervision. Robo–advisors most often automate and optimize passive indexing strategies that follow mean-variance optimization.

b. The main advantage of robo-advisor is:

     i.  There is a very low cost involved with the robo-advisor. The cost is as low as 0.2 % to 0.5 % annually.

    ii.  They are more accessible than human advisors. They are available 24/7 as long as there is the internet connection.

   iii.  This is a good option even for low net worth investors.

   iv.  Robo-advisors are an attractive option for young investors.

    v. They provide a low barrier to entry to other firms, such as tech firms, to enter the lucrative asset-management industry.

 

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