• Portfolio diversification Portfolio diversification

Portfolio diversification also generally offer equivalent expected returns with lower overall volatility of returns Portfolio diversification also generally offers equivalent expected returns with lower overall volatility of returns

Understanding the clients' needs

Developing the investment policy statement (IPS) Developing the investment policy statement (IPS)

Asset allocation Asset allocation

Security analysis Security analysis

Portfolio construction

Portfolio monitoring and rebalancing Portfolio monitoring and rebalancing

Performance measurement and reportingPerformance measurement and reporting

(1) Return objectives

(2) Risk objectives(risk tolerance risk objectives)

1. Time horizon investment period

2. Tax concerns Tax issues

3. Liquidity: the potential need for cash. Liquidity: the potential need for cash.

4. Legal and regulatory Legal and regulatory

5. Unique needs and preferences Unique needs and preferences

More macro, longer term, and more focused on asset classes

Specifications of asset classes

Pay more attention to the short term and individual stocks and bonds

environmental issues, social issues, governance issues environmental issues, social issues, corporate governance issues

Best-in-class gives priority to stocks with higher scores

Shareholder engagement Shareholder engagement

Thematic investing Thematic investing

Investors can buy and redeem the mutual fund shares at net asset value (NAV) Investors can buy and redeem the mutual fund shares at net asset value (NAV)

Not fully invested as some cash kept for redemption Not fully invested as some cash kept for redemption

No new investments are accepted No new investments are accepted

Could be fully invested Could be fully invested

Traded at a premium or discount to net asset value Traded at a premium or discount to net asset value Traded at a price higher or lower than net asset value

Individuals make specified contributions to pension plan An individual contributes a certain amount of money to a pension plan The benefits are not guaranteed Benefits are not guaranteed Individuals accept the investment risks and rewards Personal acceptance of investment risks and rewards

long-only equity, fixed-income Go long stocks, go long bond market

Asset-based management fees Asset-based management fees

hedge fund, private equity, venture capital strategies Hedge funds, private equity, venture capital strategies

Both management and performance fees Management fees and performance fees

Risk infrastructure risk management infrastructure

Risk governance Risk governance

Enterprise risk management comprehensive risk management

Risk tolerance (risk appetite) Risk tolerance (risk appetite)

Risk budgeting Risk budgeting

Market risk

Credit risk

Liquidity risk

• Model risk: the risk of a valuation error from improperly using a model Model risk: the risk of incorrect valuations due to incorrect use of models • Tail risk: the probability of extreme losses is higher than predicted Tail risk: The probability of extreme losses is higher than expected • Operational risk: risk that arises from the people and processes Operational risk: risks from people and processes • Solvency risk: the entity does not survive or succeed because it runs out of cash Solvency risk: The entity cannot survive or succeed because it runs out of cash • Settlement risk Settlement risk • Legal risk Legal risk • Compliance risk Compliance risk

• Probability possibility • Standard deviation standard deviation • Beta β • Sensitivity (Delta, Gamma, Duration) Sensitivity • Value at Risk (VaR) & Conditional VaR (CVaR) Risk Price • A measure of the minimum amount of loss expected for a given period at a given level of probability A measure of the minimum amount of loss expected over a given period of time, given a given level of probability. • Extreme value theory (EVT) extreme value theory • Scenario analysis and stress testing Scenario analysis and stress testing

• Credit rating Credit rating • Solvency ratios debt service ratios • Profitability ratios Profitability ratios • Leverage measures Leverage measurement • Credit VaR, probability of default, expected loss given default, and the probability of a credit rating change Credit VaR, probability of default, expected loss given default, and the probability of a credit rating change • Ex-ante risk cost Ex-ante risk cost

1. Risk prevention and avoidance Risk prevention and avoidance 2. Risk acceptance: self-insurance and diversification Risk Acceptance: Self-Insurance and Diversification 3. Risk transfer Risk transfer 4. Risk shifting Risk shifting

Trade-off between costs and benefits

Single issue

Multiple periods, compound interest

• Investors want to minimize risk for the same amount of return Investors want to minimize risk and obtain the same return • Investors want to maximize return for the same risk Investors want the maximum return for the same risk

• Investors are indifferent about gamble or guaranteed outcome Investors are indifferent to gambling or guaranteed outcomes • Investors care only about return Investors only care about returns

• Investors get extra "utility" from the uncertainty Investors derive additional “utility” from this uncertainty • Investors love higher risk given certain expected return Investors like high risk with a certain expected return

A: Measurement of risk aversion

• A > 0. when investor is risk-averse risk aversion • A = 0. when investor is risk-neutral risk neutral • A < 0, when investor is risk-seeking Risk seeking

Includes risky assets and excludes risk-free assets

Premise: Unanimous expectations: All investors have the same expectations for the return and risk of the asset - unrealistic Based on consistent expectations, all optimal CALs become 1 line (CML) CML is a special CAL The tangent point M of CML and efficient frontier: market combination

Assumption: Investors can borrow and lend without restrictions at risk-free interest rates

• Caused by macro factors: interest rates, exchange risk, policy risk Caused by macro factors: interest rates, exchange rate risks, policy risks • Measured by Beta of the asset, which is a measure of systematic risk of an asset, representing how sensitive an asset's return is to the market as a whole Measured by an asset's Beta, this is a measure of an asset's systematic risk and represents how sensitive a single asset is to market returns.

Unsystematic risk is the risk can be reduced or eliminated by holding well-diversified portfolios Non-systematic risk refers to the risk that can be reduced or eliminated by holding a diversified investment portfolio (increasing the types of assets in the portfolio can play a diversification role - reducing the portfolio's non-systematic risk. Premise: Build a fully diversified portfolio Combination at no additional cost)

• The expected return is only measured by beta (systematic risk) Expected return can only be measured by beta (systemic risk) • Used for assets valuation by investors and capital budgeting Used by investors for asset valuation and capital budgeting

：market risk premium market risk premium

Rm: market portfolio return

subtopic

Principles of technical analysis

Studying the price and volume data Studying the price and volume data

Trying to find the market price it will trade Trying to find the market price it will trade

Can work in commodities markets Can work in commodities markets

Numerous estimates and assumptions are added in financial statements Numerous estimates and assumptions are added in financial statements

Trying to find the intrinsic value it should trade Trying to find the intrinsic value it should trade

May not work in commodities markets May not work in commodities markets

Trend Trend

Support line vs resistance line support line and resistance line

Reverse patterns Vs continuing patterns Reverse patterns Vs continuing patterns

Price-based indicators Price-based indicators

Momentum indicators Momentum indicators

Sentiment indicators Sentiment indicators

Flow of funds indicators Flow of funds indicators

Kondratieff wave: 54-year

18-year cycle

Decennial cycle: 10 years

Presidential cycle: 4 years

Up trends and down trends Up trends and down trends

Wave sizes conform to Fibonacci sequence Wave sizes conform to Fibonacci sequence

Sources of traditional data Sources of traditional data

Sources of non-traditional (alternative) data Sources of non-traditional (alternative) data

Volume A large amount

Velocity is fast

Variety Diversity

Supervised learning Supervised learning

Unsupervised learning Unsupervised learning

Deep learning Deep learning

Machine learning still requires human judgment Machine learning still requires human judgment

Overfitting and underfitted Overfitting (treating some noise as normal data); Underfitting (it is normal data, but it is treated as noise and not processed)

Hash function, decentralization

Permissionless networks Permissionless networks

Permissioned networks require permissioned networks

Cryptocurrencies Cryptocurrencies

Tokenization asset tokenization

Post-trade clearing and settlement Post-trade clearing and settlement

Compliance