Portfolio Management

1. Asset allocation
2. Weighting shifts across major asset classes
3. Security selection within asset classes

Key theories:
- Portfolio Theory
- Capital Market Theory
- Security Valuation
- Market Efficiency
- Derivative valuation

Portfolio Management Process:

1. Planning
2. Execution
3. Feedback
   

Planning:

• Identify/specify investor's objectives and constraints
• Create Investment Policy Statement
• Form Capital Market expectations
• Create strategic asset allocation (combine IPS with capital market expectations to determine target asset class weights; max/min; single or multi-perspective)

Execution:

• Specific asset allocation
• Portfolio optimization
• Tactical asset allocation (responds to changes in short-term capital market expectations rather than investor circumstances)

Feedback:

• Monitoring/rebalancing
• Performance evaluation

Portfolio Management: CFA

• CFA level III thinks in terms of Investment Policy Statement
• IPS is client-specific summation of circumstances, goals and objectives, constraints, and policies that govern the relationship between the Advisor and the Client.
  
• Components could include:

- Background/Goals (use situational and psychological profiling)
- Return objective (sufficient to meet goals; don't forget inflation)
- Risk Objective/Tolerance (driven by Willingness and Ability to take risk; also has to be in line with Return Objective)
- Constraints (TTLLU = Time Horizon, Taxes, Liquidity, Legal/regulatory, Unique circumstances)
- Asset allocation (driven by risk/return profile - diversify, optimize return for given risk level, maximize likelihood of achieving goals, etc.)
- Portfolio Monitoring/Rebalancing/Evaluation

Risk
- Measured: Variance (volatility), Standard Deviation, Value at Risk
- Willingness
- Ability
- How much risk can investor bear?
Return
- Measured: Total Return - price appreciation plus income, Nominal (unadjusted for inflation) vs Real (inflation adjusted), Pre-tax vs After-tax
- How much does investor want?
- How much does investor need? Required Return
- Specific Return Objectives? Combine return desired, needed and risk objectives into measurable total annual return specification.