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CFA1: Portfolio Management

Asset allocation decision

  • Investment policy statement

Portfolio policy statement

  • Investment objectives & constraints
    • liquidity
    • time horizon
    • tax concerns
  • Return objectives
    • capital preservation: savings, risk-free
    • current income: produce stable income, rental
    • total return: long term horizon, bonds, security
    • capital appreciation: capital gain/ common stock

Markowitz portfolio theory

  • risk aversion
  • utility maximization
  • standard deviation as risk measure

Markowitz efficient frontier

set of portfolios with highest return at each level of risk

Capital market theory

  • Capital market line (CML)

risk/return tradeoff of various combinations of the market portfolio and a riskless asset 

  • Security market line (SML)

risk/return tradeoff for individual securities or portfolios