CFA Portfolio Management

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CFA Portfolio Management session provides the critical framework and context for subsequent Level I study sessions covering equities, fixed income, derivatives, and alternative investments. Furthermore, this study session also provides a basis for the coverage of portfolio management at Levels II and III.

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CFA Portfolio Management

  1. 1. www.edupristine.com Portfolio Management Topic Weight: 5%© PristineThis Presentation has been prepared to provide general information about theCompany to whom it is addressed. This Presentation does not purport to contain allthe information. The information provided in this presentation is meant only forthe recipient and is not to be shared with anyone else.
  2. 2. Expected Return & Risk Investment objectives Return Risk It specifies whether the investor looking Amount of risk the investor can bear for capital preservation or capital (measured in term of standard deviation) appreciation or regular income Two Asset Portfolio: Two Asset Portfolio: E(Rp) = wAE(RA) + (1-wA)E(RB) σp = wA2σA2 + wB2σB2 + 2 wAwB σAσBρAB (SD)Pristine www.edupristine.com
  3. 3. Concept Checker  Consider a portfolio with $30,000 in Equity and 20,000 in Bonds. The Correlation between the two asset classes is 0.7. Given the data below, the expected return and risk of the portfolio is: Investme Standard Assets Return nt Deviation 30000 Equity 13% 20% 20000 Bond 10% 10% A. 12% & 14.2% B. 11.8% & 15.07% C. 11.8% & 14.2%Pristine www.edupristine.com
  4. 4. Answer  B  Weight Equity = 30000/50000 =60% Bond = 1- 60% = 40% Expected Return E(Rp) = 0.6 * 13% + 0.4 * 10% = 11.8% σp  (0.6 2 * 0.2 2 )  (0.4 2 * 0.12 )  (2 * 0.6 * 0.4 * 0.2 * 0.1* 0.7)  0.0144  0.0016  0.00672  0.02272  0.1507  15.07%Pristine www.edupristine.com

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