Cfa portfolio management

Life Insurance Pricing Example

The net payment cost index assumes that the insured person will die at the end of a specified period, such as 20 years. Calculation of the net payment cost index includes the following steps: Calculate the future value of an annuity due of an amount equal to the premium, compounded at a 5% discount rate … Read more

CFA Equity

Types of Active Management Strategies

Active equity investing may reflect a variety of ideas about profitable investment opportunities. However, with regard to how these investment ideas are implemented—for example, how securities are selected—active strategies can be divided into two broad categories: fundamental and quantitative. Fundamental research forms the basis of the fundamental approach to investing. Although it can be organized … Read more

Cfa portfolio management

Evaluating Managers

Investment Philosophy The entire investment process should be driven by a succinct and precise investment philosophy. Some managers believe that markets are very efficient and that active management will underperform after considering all related costs. Therefore, those managers will execute passive strategies and attempt to earn risk premiums instead. To earn risk premiums, passive strategies … Read more

Cfa portfolio management

Quantitative Elements

Style Analysis Style analysis examines the manager’s risk exposures in relation to an appropriate benchmark and the changes in those exposures over time. The risk exposures allow for the classification of managers by style for selection purposes and to perform returns-based style analysis (RBSA) and holdings-based style analysis (HBSA). Monitoring the RBSA and HBSA output … Read more

Cfa portfolio management

Investment Manager Selection Framework

Evaluating an investment manager is a complex and detailed process that encompasses a great deal more than analyzing investment returns. The investigation and analysis in support of an investment action, decision, or recommendation is called due diligence.   Manager Selection Process Typically, a search starts with a benchmark that represents the manager’s role within the portfolio. … Read more

Cfa portfolio management

Performance Appraisal

Investment performance appraisal identifies and measures investment skill, providing the information to assess how effectively money has been invested given the risks that were taken.  Performance appraisal is most often concerned with ranking investment managers who follow similar investment disciplines. Return attribution provides information that can complement a performance appraisal analysis by providing more details … Read more

Cfa portfolio management

Benchmarking Alternative Investments

Hedge Funds Three general types of benchmarks could be considered for hedge funds: (1) broad market indexes, (2) risk-free rate, and (3) hedge fund peer universes. However, they present some problems. Broad market indexes are not appropriate to use as a benchmark for hedge funds because hedge funds cover a wide range of investment strategies. … Read more

Cfa portfolio management

Benchmarking Investments and Managers

In investment practice, we use benchmarks as reference points for segments of the sponsor’s portfolio, communication of instructions to the manager, communication with consultants and oversight groups (e.g., a board of directors), identification and evaluation of the current portfolio’s risk exposures, interpretations of past performance and performance attribution, manager selection and appraisal, marketing of investment … Read more

Cfa portfolio management

Return Attribution Analysis at Multiple Levels

The return attribution presented in the Brinson examples focused on the bottom-up approach, where the attribution effects were calculated at security and sector levels and then summed to determine their impact at the total portfolio and fund levels. A similar return attribution approach can be done at multiple levels of the decision process to evaluate … Read more

Cfa portfolio management

Risk Attribution

Selecting the most appropriate risk metric for attribution analysis requires an in-depth understanding of the investment process of the portfolio manager. It is critical to identify whether the portfolio manager follows a top-down or bottom-up investment process and to define the portfolio’s appropriate benchmark. Risk attribution identifies the sources of risk taken by the investment … Read more