Portfolio Management Process
The Portfolio Perspective
In studying the mean-variance analytical foundation created by Harry Markowitz, candidates have come to see how Modern Portfolio Theory emphasizes whole portfolio over its individual pieces.
The goal of portfolio management is to build a portfolio of assets with an appropriate risk/return profile for the individual investor (who could be a person or an entity, such as a foundation).
Steps in the Portfolio Management Process
The following list represents the steps in the portfolio management process.
- Identify investor Objectives and Constraints.
- Formulate the Investor Policy Statement (IPS).
- Forecast risk and returns for asset classes to derive capital market expectations.
- Use IPS and capital market expectations to create the investor's strategic asset allocation (SAA).
- Select securities for portfolio inclusion based on the Planning step.
- Purchase the selected securities.
- Sometimes portfolio managers are temporarily allowed to deviate from the strategic asset allocation based insights related to perceived asset mispricings. These temporary deviations are called Tactical Asset Allocations (TAA).
- Analyze returns through performance measurement.
- Determine the sources of returns through performance attribution.
- Use the results of the portfolio measurement and performance attribution to make a performance appraisal of the portfolio manager. This appraisal determines if the portfolio manager should be retained or fired.
- Over time the portfolio needs to monitor the investor's changes and the capital market expectation changes to rebalance the portfolio as appropriate.
- CFA Level 2: Portfolio Management – Introduction
- Mean-Variance Analysis Assumptions
- Expected Return and Variance for a Two Asset Portfolio
- The Minimum Variance Frontier & Efficient Frontier
- Diversification Benefits
- The Capital Allocation Line – Introducing the Risk-free Asset
- The Capital Market Line
- CAPM & the SML
- Adding an Asset to a Portfolio – Improving the Minimum Variance Frontier
- The Market Model for a Security’s Returns
- Adjusted and Unadjusted Beta
- Multifactor Models
- Arbitrage Portfolio Theory (APT) – A Multifactor Macroeconomic Model
- Risk Factors and Tracking Portfolios
- Markowitz, MPT, and Market Efficiency
- International Capital Market Integration
- Domestic CAPM and Extended CAPM
- Changes in Real Exchange Rates
- International CAPM (ICAPM) - Beyond Extended CAPM
- Measuring Currency Exposure
- Company Stock Value Responses to Changes in Real Exchange Rates
- ICAPM vs. Domestic CAPM
- The J-Curve – Impact of Exchange Rate Changes on National Economies
- Moving Exchange Rates and Equity Markets
- Impacts of Market Segmentation on ICAPM
- Justifying Active Portfolio Management
- The Treynor-Black Model
- Portfolio Management Process
- The Investor Policy Statement