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CFA-combination mind map
This is a mind map about CFA-Portfolio. This mind map systematically discusses key portfolio management in the entire CFA system, making it easier for students preparing for the exam to learn and master.
Edited at 2021-07-07 20:37:42
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CFA-Portfolio
Portfolio management basics
The implementation process of portfolio management
basic concept
Portfolio
• Portfolio diversification Portfolio diversification
Diversify risks and avoid extreme events
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
Portfolio approach to investing portfolio investment method
Basic Steps in Portfolio Management
1. Planning
Understanding the clients' needs
Developing the investment policy statement (IPS) Developing the investment policy statement (IPS)
2. Execution
Asset allocation Asset allocation
Security analysis Security analysis
Portfolio construction
3. Feedback
Portfolio monitoring and rebalancing Portfolio monitoring and rebalancing
Performance measurement and reportingPerformance measurement and reporting
Investment Strategy Statement (IPS)
The benchmark should be specified in IPS for evaluation The evaluation benchmark should be specified in IPS
IPS should be reviewed regularly and updated frequently, at least once a year.
1. Investment objectives (RR)
(1) Return objectives
Absolute return objective VS relative return objective Absolute rate of return target vs relative rate of return target
(2) Risk objectives(risk tolerance risk objectives)
Absolute risk objectives vs relative risk objectives Absolute risk target vs relative risk target
Ability to bear risk Vs willingness to bear risk Ability to take risk vs willingness to take risk
2. Investment constraints (TTLLU)
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
Asset allocation
Strategic asset allocation (SAA) strategic asset allocation
More macro, longer term, and more focused on asset classes
Specifications of asset classes
Correlations of returns of assets within an asset class should be relatively high Correlations of returns of assets within an asset class should be relatively high
Correlations of returns between asset classes should below Correlations of returns between different asset classes should be relatively low
Tactical asset allocation (TAA) tactical asset allocation
Pay more attention to the short term and individual stocks and bonds
ESG-based considerations
ESG considerations
environmental issues, social issues, governance issues environmental issues, social issues, corporate governance issues
ESG Integration
Best-in-class gives priority to stocks with higher scores
Shareholder engagement Shareholder engagement
Thematic investing Thematic investing
Collective investment products
Mutual Fund
Open-end mutual funds open-end funds
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)
Can subscribe and redeem at any time
Not fully invested as some cash kept for redemption Not fully invested as some cash kept for redemption
Reserve some funds for emergencies
Closed-end mutual funds closed-end funds
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
Exchange Traded Funds (ETFs)
Has the characteristics of an open-end fund
Exchange-traded funds (ETFs) can be bought and redeemed, or it can trade its share in the secondary market Exchange-traded funds (ETFs) can be purchased and redeemed, and their shares can be traded in the secondary market Investors can buy and redeem with a basket of shares Investors can buy and redeem a basket of stocks Trading prices are close to the net asset value of the fund Trading at a price close to the fund’s net asset value ETFs are often having tax advantages over index mutual funds ETFs often have tax advantages over index mutual funds Transaction costs are lower compared to mutual funds Lower transaction costs than mutual funds
investor type
individual investor
Individuals individuals
Defined contribution(DC)pension plan defined contribution pension plan
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
corporate investor
Introduction to the asset management industry
Active management Active management
smart beta strategies
Passive management Passive management
Traditional management
long-only equity, fixed-income Go long stocks, go long bond market
Asset-based management fees Asset-based management fees
Alternative management
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 Management
Risk management basics
basic concept
Risk
Risk exposure risk exposure
Risk management Risk management
Risk management framework
Risk infrastructure risk management infrastructure
Risk governance Risk governance
top-down process high-level concepts
risk governance
Elements of effective risk governance Elements of effective risk governance
Enterprise risk management comprehensive risk management
Look at it from the perspective of the entire organization
Risk tolerance (risk appetite) Risk tolerance (risk appetite)
high-level guidance formulated by top personnel
Qualitative
Risk budgeting Risk budgeting
Quantitative
Risk budgeting: quantifies and allocates the tolerable risk by specific metrics Risk Budget: Quantifying and allocating tolerable risk through specific metrics
A way to connect high-level governance risk decisions to many management decisions
risk management process
Risk Identification
financial risk
Market risk
Credit risk
Liquidity risk
Non-financial 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
risk measurement
Measurement of market risk Measurement of market 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
Measurement of credit risk Measurement of credit risk
• 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
Risk treatment
Methods of risk modification methods of risk modification
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
Factor considered in choosing the methods Factors considered in choosing the methods
Trade-off between costs and benefits
modern portfolio theory
Rate of return calculation
basic concept
Arithmetic mean return Arithmetic mean return
Single issue
Geometric mean return Geometric mean return
Multiple periods, compound interest
Holding period return(HPR) Holding period return rate
HPR=(p1 d1) /p0 - 1 p1: end of period price d1: coupon, dividend p0: price at the beginning of the period
Annualized return Annualized return
time weighted return
money weighted return
Comparison of TWR and MWR
utility theory
risk appetite
Risk averse risk aversion
• 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
Risk neutral Risk neutral
• 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
Risk seeking risk preference
• 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
Utility Function
A: Measurement of risk aversion
The larger A is, the more risk-averse the person concerned is; for the same person who bears one unit of risk, the more averse the person, the more additional compensation is required.
• 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
Indifference curve Indifference curve
There is no difference in utility at all points on this curve
Markowitz portfolio theory
Returns and risks of investment groups
Return of the portfolio with two assets Return of the portfolio with two assets
Risk of the portfolio with two assets Risk of the portfolio with two assets
The concept of efficient frontier
Minimum-variance frontier of risky assets Minimum-variance frontier
Global minimum-variance global minimum variance point
Efficient frontier of risky assets Efficient frontier of risky assets
The optimal portfolio on the efficient frontier
Optimal portfolio along efficient frontier Optimal portfolio along efficient frontier
Less risk-averse investor (A=2) will select portfolio “y” (more in risky assets) Less risk-averse investor (A=2) will select portfolio “y” (more in risky assets)
capital allocation line CAL
The concept of capital allocation line
A is any point on the efficient frontier curve
Using leverage, the effective frontier can be expanded into a ray
The Sharpe ratio of CAL(C) is the highest Sharpe ratio is the highest
CAL(C) should be selected because it provides the highest utility among the three CALs
The optimal investment portfolio on the capital allocation line
The introduction of the risk-free interest rate changes the effective frontier from a curved black line to a green ray, and the optimal point moves from point x to point P. Both utility and Sharpe ratio have been improved.
Investor should choose "Y" as the optimal risky portfolio, which will be combined with risk-free asset Investors should choose "Y" as the optimal risky portfolio, which will be combined with risk-free asset
Investor should choose portfolio "P" as the optimal investor portfolio Investors should choose portfolio "P" as the optimal investor portfolio
capital market line CML
market portfolio(M)
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
Capital market line (CML)
Assumption: Investors can borrow and lend without restrictions at risk-free interest rates
Rm is the tangent point between CML and the efficient frontier curve
capital asset pricing model CAPM
Systematic risk and unsystematic risk
Systematic risk Systematic risk
• 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 Unsystematic risk
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)
Because diversification is cost-free, investors are only rewarded for taking systemic risks
System risk: has an impact on the entire economy. Non-system risk: only affects a certain industry or a certain company. Bear system risk: reward is available Bearing non-system risks: no reward
The premise of the model
Assumptions of Capital Asset Pricing Model(CAPM) Capital asset pricing model (CAPM) assumptions ·Investors are risk averse, utility-maximizing, rational individuals Investors are rational individuals who avoid risks and pursue utility maximization. ·Investor plan for the same single holding period Investors plan for the same single holding period ·Investors have homogeneous expectations or beliefs Investors have homogeneous expectations or beliefs and think alike ·Investors are price takers Investors are price takers ·All investments are infinitely divisible All investments are infinitely divisible ·Markets are frictionless, including no cost and no taxes Markets are frictionless, including the absence of costs and taxes
model formula
• 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
securities market line
subtopic
Performance evaluation indicators
technical analysis
Technical analysis basics
Technical analysis and fundamental analysis
Technical Analysis
Principles of technical analysis
• Analyzed using price and volume 分析使用价格和数量（过去式） • Prices are determined by supply and demand 价格由供给和需求决定 • Market reflects the collective knowledge and sentiment of many varied participants and the amount of buying and selling activity in a particular security 市场反映了许多不同参与者的集体知识和情绪，以及在某一特定证券的买卖活动的数量
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
Fundamental Analysis
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
Prerequisites for using technical analysis
1. The trades determine volume and price Transactions determine volume and price 2. Market price reflects both rational and irrational behavior of market participants Market prices reflect the rational and irrational behavior of market participants 3. The Efficient Market Hypothesis (EMH) does not hold The efficient market hypothesis (EMH) does not hold true 4. The securities are freely traded in the market These securities are freely traded in the market 5. The trends and patterns tend to repeat themselves which makes the price predictable Trends and patterns tend to repeat, which makes prices predictable
Advantages and Disadvantages of Technical Analysis
Advantages of technical analysis Technical Analysis Advantages ·It is based on actual trade data It is based on actual trade data ·It can be used for assets with no cash flows to be discounted for valuation (e.g. commodities, currencies) It can be used for discounted valuation of assets without cash flow (e.g. commodities, currencies)
Disadvantages of technical analysis Disadvantages of Technical Analysis ·May not work in illiquid markets May not work in illiquid markets ·May not work in markets subject to manipulation May not work in rigged markets ·May not work for valuing bankrupt companies May not be useful in valuing bankrupt companies
Technical analysis application
Commonly used technical forms and technical indicators
Patterns of charts Chart patterns
Trend Trend
Support line vs resistance line support line and resistance line
Change in polarity polarity reversal
Reverse patterns Vs continuing patterns Reverse patterns Vs continuing patterns
Technical analysis indicators Technical analysis indicators
Price-based indicators Price-based indicators
Momentum indicators Momentum indicators
Sentiment indicators Sentiment indicators
Flow of funds indicators Flow of funds indicators
Cycle and Wave Theory
Cycle analysis cycle analysis
Kondratieff wave: 54-year
18-year cycle
Decennial cycle: 10 years
Presidential cycle: 4 years
Elliott wave theory Elliott wave theory
Up trends and down trends Up trends and down trends
Wave sizes conform to Fibonacci sequence Wave sizes conform to Fibonacci sequence
Fintech
Fintech Basics
big data analysis
Sources of big data Big data sources
Sources of traditional data Sources of traditional data
Financial markets Financial markets
Governments
Sources of non-traditional (alternative) data Sources of non-traditional (alternative) data
Individuals
business process
Sensors
Characteristics of big data Characteristics of big data
Volume A large amount
Velocity is fast
Variety Diversity
Artificial Intelligence(AI)
Computer systems that exhibit cognitive and decision-making ability comparable or superior to that of human beings Computer systems that exhibit cognitive and decision-making ability comparable or superior to that of human beings
Neural networks: programming based on how our brain learns and process information Neural networks: programming based on how our brain learns and process information
machine learning
types of machine learning types of machine learning
Supervised learning Supervised learning
The output results are selected in the form
Unsupervised learning Unsupervised learning
The output variable cannot be defined
Deep learning Deep learning
A combination of the above two
Limitations of machine learning Limitations of machine 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)
Application of financial technology
Text Analysis and Natural Language Processing
Text analytics Text analytics
Natural language processing (NLP) natural language processing
Robo-advisory
Fully automated digital wealth managers Fully automated digital wealth managers
Adviser-assisted digital wealth managers Adviser-assisted digital wealth managers
Risk Analysis
Monitoring risk in real time Monitoring risk in real time
Assess data quality Assess data quality
Stress tests and scenario analysis Stress tests and scenario analysis
Algorithmic trading Algorithmic trading
High speed of execution, anonymity, and lower transaction costs High speed of execution, anonymity, and lower transaction costs
High-frequency trading are executed on ultra-high-speed, low-latency networks High-frequency trading is executed on ultra-high-speed, low-latency networks
Distributed accounting technology
Distributed ledger is a type of database that may be shared among entities in a network Distributed ledger is a type of database that may be shared among entities in a network
Hash function, decentralization
Permissionless networks Permissionless networks
Permissioned networks require permissioned networks
Decentralization
Application of DLT
Cryptocurrencies Cryptocurrencies
Initial coin offering (ICO) initial coin offering
Compared with IPO, ICO will have: Compared to an IPO, an ICO will have: ·Unregulated process unregulated process ·Lower issue cost Reduce issuance costs ·Shorter capital raising time frames Shorter funding time ·Do not typically have attached voting rights Usually no additional voting rights
Tokenization asset tokenization
Post-trade clearing and settlement Post-trade clearing and settlement
Compliance
Technical analysis---price volume Fundamental analysis---financial report data
Commodity products do not have cash flow—fundamental analysis does not apply, but technical analysis does
Risk-taking capacity---objective factors Risk-taking willingness---Subjective factors
Fully diversified = no non-systemic risk = systematic risk = beta treynor ratio= Rp-Rf/beta
Buying risk-free assets = lending funds = "lending" portfolios. Using risk-free borrowed funds to leverage M = borrowing funds = "borrowing" portfolios.
market portfolio = special optimal risk portfolio
The intercept of all cal is Rf The slope of each cal is the Sharpe ratio of the risky assets that make up that cal
The optimal CAL has the greatest slope among all available CALs. The slope of the optimal CAL is the largest of all available CALs.
The point on the upper left of the optimal CAL cannot be reached by any asset; the point on the optimal CAL is the best batch of the left and right asset portfolios.
The optimal CAL is composed of a risk-free asset and an optimal risk portfolio
Optimal risk portfolio: the tangent point between Rf and the efficient frontier
The efficient frontier, which is the part of the minimum-variance frontier, lies above the global minimum-variance portfolio.
The efficient frontier is not affected by risk-free assets; CAL is affected by the risk-free asset, (the intercept of CAL is Rf and the slope is the Sharpe ratio)
When other factors remain unchanged, the smaller the correlation coefficient between assets, the smaller the overall risk of the portfolio.
The intercept between the indifference curve and the y-axis is the utility represented by the curve. The greater the curvature of the indifference curve: the greater the risk aversion coefficient, the more risk-averse you are.
1. Divide the entire flow into n self-intervals according to major occurrences 2. Calculate the HPR of each sub-interval 3. Bring in the TWR calculation formula (TWR: annualized geometric mean retum) Calculate the overall TWR opening N times, N: the number of years of the entire holding period MWR=IRR
DB plan pension factors need to be considered: 1. Employee service years; 2. Salary level at retirement
Interactions of risks: Risks do not usually arise independently, but generally interact with one another Interactions of risks: Risks do not usually arise independently, but generally interact with one another
Key trends in the asset management industry Key Trends in the Asset Management Industry 1. Growth of passive investing Growth of passive investing 2. Big data in the investment process Big data in the investment process 3. Robo-advisers in the wealth management industry Robo-advisors for the wealth management industry