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 A requires us to:

explain principles of technical analysis, its applications, and its underlying assumptions

 

What is Technical Analysis?

a.  Technical analysis is a form of market analysis that studies the demand and supply for securities and commodities based on trading volume and price studies.

b.  Technical analysts make use of charts and modeling techniques and attempt to identify the price trends in a market.

c.  Technical analysis is not based on a strong conceptual framework but depends fully on the use of historical trends to predict future prices. 

d. Though technical and fundamental analysis provide diagonally opposite approaches to valuation, in practice, a judicious blend of the two approaches is attempted to arrive at better results.

e.  Technical analysis can be conducted for all the assets operating in a free market. In a free market, the willing buyers and sellers can interact freely without being subjected to government restrictions or any other constraints.

Assumptions Inherent in Technical Analysis

Following are the main assumptions and principles behind the technical analysis:

1. Markets are not efficient

a.  This is the basic assumption about the market in the case of technical analysis is that they are not efficient; which means that the investors are not rational and behave on the basis of emotional impulses as well.

b.  These markets have consistently biased understated and overstated securities.

c.  Since these markets are based on the behaviors of their participants, which are usually patterned, the price movements in the markets are also patterned.

2. Prices reflect all the available information and sentiments

This means that the prices at which the securities are trading reflect all the information related to the stocks along with the market sentiments affecting the prices. Therefore, there is not much use doing the fundamental analysis, as the market prices do not only get affected by the important information but the investors’ and traders’ sentiments also affect it.

3. Price/volume lead fundamental information

It is assumed that it is the trends in prices that affect the movements in the prices of the securities rather than the information as provided by the fundamental analysis.

Technical Analysis Vs. Fundamental Analysis

a.  Technical analysis, as discussed above, is based on the behavioral pattern of trading volume and prices.

b.  Fundamental analysis, on the other hand, is a more conservative technique. It involves a detailed study of the information provided in the recorded financial statement. It aims at measuring the intrinsic value of security to ascertain whether it is undervalued or overvalued.

Limitations of Technical Analysis

Some of the biggest limitations of the technical analysis are:

a.  The trends and patterns, based on which the technical analysis is conducted, are only obvious after they are formed.

b.  Fundamental analysis has always proved to be a better tool for analysis in comparison to technical analysis.

c.  There is no academic support for the technical analysis.

Applications of Technical Analysis

a.  There are assets that do not provide cash flows in the form of dividends, interests, etc. Technical analysis is a good way of pricing such assets.

b.  Sometimes financial statements may be unreliable, fraudulent, or even manipulative. In such cases, fundamental analysis is relatively difficult. One may use technical analysis in such cases.

c.  Technical analysis is done using the historical data and is done graphically and displayed in form of charts. It can also be performed using various software. So it is easy to conduct and understand in comparison to fundamental analysis. However, its reliability and accuracy may be questioned sometimes.

 

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