CBOK of CFA Level III Ethical/ Professional Standards & GIPS (10%) Portfolio Management & Wealth Planning (45%-55%) CFA Level III Asset Classes (35%-45%) 2
Portfolio Management & Wealth Planning Private Wealth Portfolio Management Institutional Investment 3
The Portfolio Management (ongoing) Process 1 Behavioral Finance Specify investor objectives and constraints Economic, social, political, and security considerations 2 Investment Policy Statement Portfolio policies & strategies Specify 3 Capital market expectation Portfolio Construction & Revision 4 Asset allocation : security selection and portfolio optimization: 5 Execution : Portfolio implementation Monitor investor related inputs 6 Monitoring/ Rebalance 7 Evaluation/ Attribution Monitor economics & market related inputs Planning Stage Execution Stage Feedback Stage 4
Behavioral Finance Given a scenario, be able to identify the behavioral phenomenon Understand difference between cognitive and Emotional behavioral biases Be able to relate behavioral characteristics to level of risk aversion Be able to compare/contrast behavioral biases Understand implications for individual and professional investors Identify and explain the impacts of the client s behavioral characteristics and how they conflict with Modern Portfolio Theory 5
Behavioral Bias of Individual Investors Cognitive Errors Ability limitations on information Processing Emotional Biases Feeling & Intuition Belief Perseverance Information Process 1. Conservatism 1. Anchoring & Adjustment 1. Loss-aversion 2. Confirmation 2. Mental Accounting 2. Overconfidence 3. Representativeness 3. Framing 3. Self-control 4. Illusion of Control 5. Hindsight 4. Availability 4. Status Quo 4.1 Endowment 4.2 Regret-aversion 6
Private Wealth Management Prepare and/or critique an Investment Policy Statement (IPS) Select the best asset allocation for the client Taxes and estate planning Concentrated Single Asset Positions Mortality tables Life Time Financial Advice 7
Investment Policy Statement Return Objective RRLTTRU for both Private Wealth and Institutional Investment Taxes Risk Tolerance Liquidity Regulatory Unique Circumstances Time Horizon 8
Return Objective Statement in words: e.g. To generate sufficient (after taxed) return to meet on going liquidity needs. To keep real value of the portfolios. Required Return Calculation (on immediate time horizon): After-tax ROR (No end of period target) IRR based on Time value of money with end of period target To generate (before or after taxed) required return for both current and future needs. Time value of money nothing needs inflation adjustment Pre-tax required return given aftertax data 9
Risk Tolerance Willingness Ability Interpret from direct statement Situation profiling Utility adjusted returns Consider behavioral biases Based on before-tax Liquidity (income) needs Based on current wealth level. Consider behavioral biases Overall statement more conservative of two defend. 10
Liquidity Ongoing Needs Living Expenses Healthcare/Nursing Care Child care and education One Time/Occasional Home purchase Charitable contribution Emergency spending needs 11
Time Horizon Single Period vs. Multi-periods Pre-retirement vs. Post-retirement Pre-college, during college and post-college time length 12
Taxes Calculation of after-tax return based on different taxes from incomes and/or investment gains. Tax consequences in managing concentrated positions Tax consequence of foreign situated assets and foreign-sourced income 13
Prudent investor rule Trusts Regulatory 14
Institutional Investment Management Prepare and critique IPS for each type of institutional investors Compare and contrast different type of institutional investors Asset allocation, performance evaluation, risk management for different type of institutional investors Define Benefit Plan Foundations Endowment Life Insurance Nonlife Insurance Bank 15
Capital market Expectations Formulating capital market expectations Forecasting Tools Economic Growth Factor Business Cycles, inflation, and portfolio returns Economic Forecasting Application to asset selections and allocation 16
Asset Allocation Strategic asset allocation Corner Portfolios Methods of asset allocation Capital Allocation Line Objective Specification Defining asset classes Mean-Variance Optimization Black-Litterman model& Resampling methods Asset allocation characteristics for different type of investors Tactical asset allocation 17
Execution How to execute portfolio decisions? Market structure Market quality Implementations Shortfall and VWAP Major types of traders Trading tactics Measuring execution costs Ethic in trading 18
Monitoring & Rebalance What to monitor & when to rebalance allocation? Constance mix rebalancing to the strategic asset allocation %-of-portfolio rebalancing Dynamic asset allocation strategies: 1. Buy & Hold (B&H) 2. Constant mix (CM) 3. CPPI (constant proportion portfolio) 19
Evaluation & Attribution Performance measurement Risk-Adjusted methods Performance attribution Performance appraisal TWRR vs. MWRR Benchmarks Identification Macro Performance Attribution Micro Performance Attribution Bond Performance Attribution 20
Asset Classes 1 Equity Investment 2 Fixed Income Investment Portfolio Management Portfolio Management 4 Risk Management Portfolio Management 5 Derivative Application 3 Alternative Investment 21
Fixed income investment What risk associated with fixed-income portfolio? Managing funds against an index Aligning risk exposures of portfolio & benchmark How to select benchmark? Portfolio immunization Rebalance bond portfolio Return decompositionrelative-value methods Leveraged return calculation Risk hedging using Bond futures. Credit derivatives & spread products Credit default swaps International bond investment 22
Equity portfolio management Passive Equity investing Create a passive exposure using derivatives Construct index portfolios Active equity investing Semi-active equity investing Equity style analysis: 1. Return-based 2. Holding-based 3. Other aspects Long-short investing Core-Satellite Approach Selling disciplines of active investors Managing a portfolio of managers 23
Alternative investment Common Features Real Estate: role in a portfolio construction Private Equity and Venture Capital Commodity Investment to portfolio formation Hedge Funds: Structure Benchmark & Performance analysis Role in a portfolio Managed futures Distressed Securities Commodity Derivatives 24
Risk Management Risk management Process Source of Risk Market Risk Measurement VAR Methods Stress Testing Credit Risk Measures Risk-adjusted Performance Evaluation Currency & Portfolio Risk Active Currency trading Strategies Forward & FX swaps in currency hedge Cross, macro & Minimumvariance hedge 25
Derivative application Stock index futures Currency forwards Spread Trading using options: Butterfly Straddles & Collars Delta hedging Interest rate options & spread Interest rate Swaps Equity & Currency swaps and swaption 26
Ethical/ Professional Standards Asset manager code Supervisory Compliance Priority of transaction Fair dealing Disclosure Research reports Material non-public information 27
GIPS 1. Input data 5. Presentation & Reports 2. Calculation methodology 6. Real estate 3. Composite construction 7. Private equity 4. Disclosures 8 Wrap fee accounts Item set can test multiple concepts Presentation identify errors and omission Statement is statement correct? If not, what s wrong Disclosures focus on requirement & violations 28