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Summary CFA LEVEL 1 - PORTFOLIO MANAGEMENT & WEALTH PLANNING
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  • Course
  • CFA LEVEL 1
  • Institution
  • CFA Institute
  • Book
  • CFA Program Curriculum 2018 Level I

I create this summary of knowledge related to CFA level 1 for my 2017 December exam. I got into the top 10% with this. Hope this can help you. (This does not guarantee for your pass, which requires dedication, hardwork and consistency. In case having trouble with any part, please refer to CFA note...

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  • No
  • Portfolio management and wealth planning
  • October 26, 2018
  • 9
  • 2017/2018
  • Summary

Subjects

  • cfa
  • level 1
  • portfolio
  • management
  • wealth
  • planning
  • portfolio management
  • summary
  • finance
  • review note

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  • CFA Institute
  • CFA LEVEL 1
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Concepts Description
Portfolio management
Portfolio approach to investing Portfolio perspective: evaluate individual investments by their contribution to the risk and return of a portfolio
Diversified portfolio → reduced risk @ given level of expected return.
Investors that do not take portfolio perspective bear risk that is not rewarded with greater expected return




.

Types and characteristics of Investor type Risk tolerance Investment horizon Liquidity needs Income needs
investment management clients
Individuals Depend on individual Depend on individual Depend on individual Depend on individual

Banks Low Short High Pay interest

Endowments High Long Low Spending level

Insurance Low Life insurance ‐ Long High Low
Property & Casualty ‐ Short

Mutual funds Depend on fund Depend on fund Depend on fund Depend on fund

Defined benefit pension High Long Low Depend on age
Defined contribution pension / Defined contribution pension plan Defined benefit pension plan
Defined benefit pension
Definition: Firm promises to contributes a sum each period to the employee's retirement Definition: Firms promises to make periodic payments to employees after retirement
account Firm contributes to a fund established to provide the promised future benefits
Investment decisions are left to the employee Firm assumed all investment risk
Employee assumes all investment risk Poor performance of fund → increase required contribu on from firm
Firm makes no promise to employee about the future value of the plan assets

Steps in portfolio management Step 1 ‐ Planning step: Analyse investor's risk tolerance, return objectives, time horizon, tax exposure, liquidity needs, income needs, etc.
process → Create Investment policy statement (IPS) ‐ defines investment objectives and constraints, and objective benchmark for performance measurement. IPS should be reviewed /
updated periodically, or whenever there are significant changes in objectives and constraints

Step 2 ‐ Execution step: Construct portfolio by determining suitable allocations to various asset classes based on IPS
‐ Top‐down analysis : Examine and forecast macroeconomic conditions (GDP, inflation, interest rates) → iden fy most a rac ve asset classes
‐ Bottom‐up seurity analysis: Use model valuations to identify undervalued securities

Step 3 ‐ Feedback step: Monitor and rebalance the portfolio to adjust asset classes allocations and securities holding in respond to the market performance; evaluate portfolio's
performance against benchmark (IPS)

Mutual fund Definition: a form of pooled investment. Each investor owns share representing ownership of a portion of the overall portfolio
Net asset value (NAV) of each share = Total fund's NAV / number of shares issued

Open‐end / Closed‐end funds Open‐end funds Closed‐end funds

‐ Investors could purchase newly issued shares and redeem their shares to the fund @ ‐ Do not take new investments into the fund or redeem investor shares. Shares of closed‐
NAV. Newly invested cash is invested in additional portfolio securities end funds are traded like equity shares
‐ Management fees are charged ‐ Management fees are charged
‐ No‐load fund: no additional fees for purchasing new shares or redeeming shares
‐ Load fund: additional fees for purchasing new shares and / or redeeming shares

Types of mutual funds 1. Money market funds:
‐ Invest in ST debt securities
‐ Provide interest income
‐ Low risk of change in share value
‐ Differentiate by types and average maturities of money market securities purchased

2. Bond mutual funds:
‐ Invest in fixed income securities
‐ Differentiate by types, issuers, credit rating, and maturities of bonds

3. Stock mutual funds:
a. Index funds: Passive managed ‐ constructed to match performance of a particular index (S&P500)
b. Actively managed funds: individual securities are selected for greater returns than benchmark indexes
Actively managed funds have higher annual management fees as well as higher turnover than index funds

, Other Pooled investments 1. Exchange traded funds (ETFs): Similar to closed‐end funds. Funds shares are traded in the market (with brokerage fee). However, ETFs are invested to match particular index.
Management fee are low.
2. Separately managed accounts: portfolio managed by individual investors.
3. Hedge funds: Funds for limited qualified investors, with high minimum investment (often from $250k to $1M)
a. Long/short funds: Buy securities long (buy and hold) that are expected to overperform the market ; and Sell securities short (sell and buy back) that are expected to
underperform the market.
b. Equity market neutral funds: long/short funds with long stock positions that are just offset in value by stocks sold short→neutral with the overall market movements
c. Event‐driven funds: invest during one‐time corporate events (M&A)
d. Fixed income arbitrage funds: trading debt securities, attempting to profit from minor mispricings, minimise the effect of interest rate chanes on portfolio values
e. Convertible bond arbitrage funds: trading convertible bonds and equity that the convertible bonds could be converted into. Profit from mispricing between those 2
f. Global macro funds: speculate on change in international interest rate, currency exchange rates. Often use derivative securities, and a greater amount of leverage
4. Buyout funds (private equity funds): Buy entire company, often funded by a significant increase in debt (leverage buyout) → reorganise the firm → ↑ CF, payout debt → resell
restructured company
5. Venture capital funds: Invest in start‐up companies → grow into valuable companies → sold via IPO or to an established firm

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