© CFA Institute. For candidate use only. Not for distribution.
PORTFOLIO
MANAGEMENT,
ETHICAL AND
PROFESSIONAL
STANDARDS
CFA® Program Curriculum
2024 • LEVEL 1 • VOLUME 6
,© CFA Institute. For candidate use only. Not for distribution.
©2023 by CFA Institute. All rights reserved. This copyright covers material written
expressly for this volume by the editor/s as well as the compilation itself. It does
not cover the individual selections herein that first appeared elsewhere. Permission
to reprint these has been obtained by CFA Institute for this edition only. Further
reproductions by any means, electronic or mechanical, including photocopying and
recording, or by any information storage or retrieval systems, must be arranged with
the individual copyright holders noted.
CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the
trademarks owned by CFA Institute. To view a list of CFA Institute trademarks and the
Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org.
This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or other professional service.
If legal advice or other expert assistance is required, the services of a competent pro-
fessional should be sought.
All trademarks, service marks, registered trademarks, and registered service marks
are the property of their respective owners and are used herein for identification
purposes only.
ISBN 978-1-953337-54-2 (paper)
ISBN 978-1-953337-28-3 (ebook)
May 2023
, © CFA Institute. For candidate use only. Not for distribution.
CONTENTS
How to Use the CFA Program Curriculum xv
Errata xv
Designing Your Personal Study Program xv
CFA Institute Learning Ecosystem (LES) xvi
Feedback xvi
Portfolio Management
Learning Module 1 Portfolio Management: An Overview 3
Introduction 3
Portfolio Perspective: Diversification and Risk Reduction 4
Historical Example of Portfolio Diversification: Avoiding Disaster 4
Portfolios: Reduce Risk 6
Portfolio Perspective: Risk-Return Trade-off, Downside Protection, Modern
Portfolio Theory 9
Historical Portfolio Example: Not Necessarily Downside Protection 9
Portfolios: Modern Portfolio Theory 12
Steps in the Portfolio Management Process 13
Step One: The Planning Step 13
Step Two: The Execution Step 14
Step Three: The Feedback Step 16
Types of Investors 17
Individual Investors 17
Institutional Investors 18
The Asset Management Industry 23
Active versus Passive Management 24
Traditional versus Alternative Asset Managers 25
Ownership Structure 25
Asset Management Industry Trends 25
Pooled Interest - Mutual Funds 27
Mutual Funds 28
Pooled Interest - Type of Mutual Funds 30
Money Market Funds 30
Bond Mutual Funds 30
Stock Mutual Funds 31
Hybrid/Balanced Funds 31
Pooled Interest - Other Investment Products 32
Exchange-Traded Funds 32
Hedge Funds 32
Private Equity and Venture Capital Funds 33
Summary 34
References 35
Practice Problems 36
Solutions 39
, © CFA Institute. For candidate use only. Not for distribution.
iv Contents
Learning Module 2 Basics of Portfolio Planning and Construction 41
Introduction 41
The Investment Policy Statement 42
The Investment Policy Statement 42
Major Components of an IPS 43
IPS Risk and Return Objectives 44
Return Objectives 50
IPS Constraints 52
Liquidity Requirements 52
Time Horizon 53
Tax Concerns 53
Legal and Regulatory Factors 54
Unique Circumstances and ESG Considerations 54
Gathering Client Information 56
Portfolio Construction and Capital Market Expectations 59
Capital Market Expectations 60
Strategic Asset Allocation 60
Portfolio Construction Principles 68
New Developments in Portfolio Management 72
ESG Considerations in Portfolio Planning and Construction 72
Summary 76
Practice Problems 78
Solutions 82
Learning Module 3 The Behavioral Biases of Individuals 85
Introduction 85
Behavioral Bias Categories 86
Cognitive Errors 86
Belief Perseverance Biases 87
Processing Errors 92
Emotional Biases 99
Loss-Aversion Bias 99
Overconfidence Bias 101
Self-Control Bias 102
Status Quo Bias 103
Endowment Bias 104
Regret-Aversion Bias 105
Behavioral Finance and Market Behavior 108
Defining Market Anomalies 108
Momentum 109
Bubbles and Crashes 110
Value 111
Summary 112
References 114
Practice Problems 115
Solutions 118
PORTFOLIO
MANAGEMENT,
ETHICAL AND
PROFESSIONAL
STANDARDS
CFA® Program Curriculum
2024 • LEVEL 1 • VOLUME 6
,© CFA Institute. For candidate use only. Not for distribution.
©2023 by CFA Institute. All rights reserved. This copyright covers material written
expressly for this volume by the editor/s as well as the compilation itself. It does
not cover the individual selections herein that first appeared elsewhere. Permission
to reprint these has been obtained by CFA Institute for this edition only. Further
reproductions by any means, electronic or mechanical, including photocopying and
recording, or by any information storage or retrieval systems, must be arranged with
the individual copyright holders noted.
CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the
trademarks owned by CFA Institute. To view a list of CFA Institute trademarks and the
Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org.
This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or other professional service.
If legal advice or other expert assistance is required, the services of a competent pro-
fessional should be sought.
All trademarks, service marks, registered trademarks, and registered service marks
are the property of their respective owners and are used herein for identification
purposes only.
ISBN 978-1-953337-54-2 (paper)
ISBN 978-1-953337-28-3 (ebook)
May 2023
, © CFA Institute. For candidate use only. Not for distribution.
CONTENTS
How to Use the CFA Program Curriculum xv
Errata xv
Designing Your Personal Study Program xv
CFA Institute Learning Ecosystem (LES) xvi
Feedback xvi
Portfolio Management
Learning Module 1 Portfolio Management: An Overview 3
Introduction 3
Portfolio Perspective: Diversification and Risk Reduction 4
Historical Example of Portfolio Diversification: Avoiding Disaster 4
Portfolios: Reduce Risk 6
Portfolio Perspective: Risk-Return Trade-off, Downside Protection, Modern
Portfolio Theory 9
Historical Portfolio Example: Not Necessarily Downside Protection 9
Portfolios: Modern Portfolio Theory 12
Steps in the Portfolio Management Process 13
Step One: The Planning Step 13
Step Two: The Execution Step 14
Step Three: The Feedback Step 16
Types of Investors 17
Individual Investors 17
Institutional Investors 18
The Asset Management Industry 23
Active versus Passive Management 24
Traditional versus Alternative Asset Managers 25
Ownership Structure 25
Asset Management Industry Trends 25
Pooled Interest - Mutual Funds 27
Mutual Funds 28
Pooled Interest - Type of Mutual Funds 30
Money Market Funds 30
Bond Mutual Funds 30
Stock Mutual Funds 31
Hybrid/Balanced Funds 31
Pooled Interest - Other Investment Products 32
Exchange-Traded Funds 32
Hedge Funds 32
Private Equity and Venture Capital Funds 33
Summary 34
References 35
Practice Problems 36
Solutions 39
, © CFA Institute. For candidate use only. Not for distribution.
iv Contents
Learning Module 2 Basics of Portfolio Planning and Construction 41
Introduction 41
The Investment Policy Statement 42
The Investment Policy Statement 42
Major Components of an IPS 43
IPS Risk and Return Objectives 44
Return Objectives 50
IPS Constraints 52
Liquidity Requirements 52
Time Horizon 53
Tax Concerns 53
Legal and Regulatory Factors 54
Unique Circumstances and ESG Considerations 54
Gathering Client Information 56
Portfolio Construction and Capital Market Expectations 59
Capital Market Expectations 60
Strategic Asset Allocation 60
Portfolio Construction Principles 68
New Developments in Portfolio Management 72
ESG Considerations in Portfolio Planning and Construction 72
Summary 76
Practice Problems 78
Solutions 82
Learning Module 3 The Behavioral Biases of Individuals 85
Introduction 85
Behavioral Bias Categories 86
Cognitive Errors 86
Belief Perseverance Biases 87
Processing Errors 92
Emotional Biases 99
Loss-Aversion Bias 99
Overconfidence Bias 101
Self-Control Bias 102
Status Quo Bias 103
Endowment Bias 104
Regret-Aversion Bias 105
Behavioral Finance and Market Behavior 108
Defining Market Anomalies 108
Momentum 109
Bubbles and Crashes 110
Value 111
Summary 112
References 114
Practice Problems 115
Solutions 118
