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 B requires us to:

describe the steps in the portfolio management process

 

There are mainly three steps in the portfolio management process, i.e. the planning step, the execution step, and the feedback step. These steps are discussed as follows:

1.         Planning Step

a.  There are two main components of this step, i.e. the KYC or ‘Know Your Customer’ and IPS or ‘Investment Policy Statement’.

b.  In order to fulfill the KYC needs, the manager needs to understand the objectives and the constraints of the investors.

c.  The objectives may range from the safety of investment, income (or return on investment), and growth.

d.  The constraints may be in the form of liquidity needs, tax liabilities and exposures, and time horizon for investment.

e.  The IPS is the written planning document describing the objectives and constraints of the customers and the performance benchmark against which the performance of the portfolio would be measured. It needs to be revised periodically as the client’s circumstances may change, either by chance or just over time.

2.         Execution Step

a.  This step consists of asset allocation, security analysis, and portfolio construction.

b.  Asset allocation is the distribution of investible funds between various asset classes such as money markets, fixed income securities, equities, alternative investments, etc.

It is the asset allocation choices that explain most of the difference between the portfolio returns.

c.  The asset allocation may be made based on the top-down approach or the bottom-up approach.

The top-down approach involves moving from the macro-level factors that affect the investment decisions, down to the micro-level factors. This involves moving down from the analysis of the economy, to that of industry, and lastly of the security. This approach requires more rebalancing as the economy and the industry change.

The bottom-up approach is the opposite of the top-down approach. It involves moving upwards from the analysis of individual securities to the industries to the economy.

d.  The security analysis step involves the analysis of undervalued securities for investment.

e.  The portfolio construction involves ensuring that the portfolio is in line with the IPS, consistent with the stated risk tolerances. The target asset allocations and weightings should be consistent with the asset class and securities actually forming part of the portfolio.

At this stage, the buy orders are initiated.

3.         Feedback Step

a.  This step mainly involves portfolio monitoring and rebalancing, and performance measurement and reporting.

b.  Portfolio monitoring involves monitoring the economy, the markets, the asset classes, the securities, the investor needs, etc., and ensuring that they all fulfill the investment objectives.

c.  The rebalancing involves fixing the drift as the prices drift from the asset allocation mix. There are two types of rebalancing:

     i.  The dynamic rebalancing, that involves getting back to the original mix, and

    ii.  The tactical rebalancing, that involves intentional deviations from the original mix.

d.  The performance measurement and reporting are done in comparison to the benchmarks.

 

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