Library/CFA (Chartered Financial Analyst)/JuiceNotes 2024: Portfolio Management - CFA Level I/Portfolio Management: An Overview

Portfolio Management: An Overview

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Portfolio Perspective and Process5 min

This section defines a portfolio as a basket of securities designed to reduce risk. It explains the 'Portfolio Perspective,' which evaluates assets based on their contribution to the total portfolio's risk and return. Modern Portfolio Theory concludes that markets do not reward the specific risk of single securities. The standard deviation is identified as the measure of volatility risk. The diversification ratio helps quantify the benefits of holding a basket of assets versus a single security. The process of management involves three steps: Planning (creating the IPS), Execution (allocating assets via top-down or bottom-up analysis), and Feedback (monitoring, rebalancing, and performance evaluation).

Key Points

Portfolio perspective evaluates assets in the context of the whole portfolio.
Modern Portfolio Theory suggests specific risk is not rewarded.
Diversification ratio measures the risk reduction benefit.
Step 1: Planning involves the Investment Policy Statement (IPS).
Step 2: Execution involves asset allocation and security selection.
Step 3: Feedback involves rebalancing and performance measurement.

Investor Types and Pension Plans6 min

This section categorizes investors such as individuals, banks, endowments, foundations, and insurance companies. It provides a comparative analysis of their risk tolerance, time horizons, liquidity needs, and income needs. For example, banks have short horizons and high liquidity needs, while endowments have long horizons and low liquidity needs. It also details the two main types of pension plans: Defined Contribution (DC) and Defined Benefit (DB). In DC plans, employees bear the investment risk, whereas in DB plans, the employer bears the risk and promises a specific payout upon retirement.

Key Points

Endowments are funds for ongoing financial support; Foundations are for charitable purposes.
Banks have low risk tolerance and short time horizons.
Defined Benefit (DB) plans: Employer bears investment risk; benefit is defined.
Defined Contribution (DC) plans: Employee bears investment risk; contribution is defined.
Life insurance companies generally have long horizons; P&C companies have short horizons.

Asset Management and Pooled Investments7 min

This section outlines the asset management industry, distinguishing between buy-side (asset managers) and sell-side (broker-dealers) firms. It describes pooled investment vehicles like mutual funds (open-end vs. closed-end), calculating Net Asset Value (NAV), and the fee structures (load vs. no-load). It introduces other forms like Exchange Traded Funds (ETFs), which trade like stocks and offer tax advantages, and Separately Managed Accounts (SMAs). It concludes with alternative investments, specifically Hedge Funds and their strategies (e.g., Equity Market-Neutral, Global Macro) and Private Equity funds (Buyout vs. Venture Capital).

Key Points

Open-end funds trade at NAV; Closed-end funds trade on exchanges.
ETFs are tax-efficient and trade intraday.
Hedge funds are less regulated and available to qualified investors.
Hedge fund strategies include Long/Short, Event-Driven, and Arbitrage.
Buyout funds take public companies private; Venture Capital invests in start-ups.

Questions

Question 1

What does the 'portfolio perspective' primarily refer to in the context of investing?

Portfolio Management: An Overview

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