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CIFA INTERMEDIATE LEVEL
COURSE OUTLINE
GENERAL OBJECTIVE
This paper is intended to equip the candidate with the knowledge, skills and attitudes that will enable him/her to apply investment tools in portfolio management.
LEARNING OUTCOMES
On successful completion of this paper, the candidate should be able to:
- Apply various investment strategies to manage a portfolio
- Construct and manage portfolios
- Assess the risk levels of portfolios
- Prepare investment policy statements
- Understand the application of tax in private wealth management
- Apply behavioural finance concepts in portfolio management.
CONTENT
Overview of portfolio management
- Definition of portfolio management and strategies
- Portfolio perspective and its importance
- Steps of the portfolio management process and the components of those steps
- Types of investors, their distinctive characteristics and specific needs
- Pooled investment products (mutual funds, exchange traded funds, separately managed accounts, hedge funds, buyout funds/private equity funds and venture capital funds)
Introduction to risk and return of a portfolio
- Measures of return, their calculation, interpretation, and uses: holding period return(HPR), average returns (arithmetic average return, geometric average), time- weighted return, money weighted return, gross return, pre-tax nominal return, after tax nominal return, real return, leveraged return
- Characteristics of major asset classes used to construct portfolios
- Portfolio selection; concept of risk aversion; utility theory
- The effect of the number of assets in a multi asset portfolio on the diversification benefits
Capital market theory
- Introduction to modern portfolio theory
- Implications of combining a risk-free asset with a portfolio of risky assets
- Capital allocation line (CAL) and capital market line (CML)
- Systematic and non-systematic risk
- Return generating models and their uses
- Capital asset pricing model (CAPM): assumptions; applications; practical limitations; implications
- Security market line (SML) and its application, the beta coefficient, market risk premium
- Market model: predictions with respect to market returns, variancesand co-variances
- Adjusted beta and historical beta: their use as predictors of future betas
- Minimum variance frontier: importance and problems related to its instability
- Arbitrage pricing theory (APT): underlying assumptions and its relation to multifactor models, estimation of expected return on an asset given its factor sensitivities and factor risk premiums, determination of existence of an arbitrage opportunity and how to utilise it
- Understanding and interpretation of active risk, tracking error, tracking risk, information ratio, factor portfolio and tracking portfolio
Download Portfolio Management Notes
Portfolio planning and construction
- Definition of portfolio planning
- The investment policy statement (IPS): major components and its importance
- Capital market expectations
- Investment objectives: risk and return objectives for a client
- Investors financial risk tolerance: investors ability (capacity) to bear risk and willingness to take risk
- Investment constraints: liquidity, time horizon, tax issues, legal and regulatory factors, unique circumstances, and their effect to the choice of a portfolio
- Ethical responsibilities of a portfolio manager
- Introduction to asset allocation:
Active portfolio management: Residual risk and return
- Definition of active portfolio management
- Alpha and information ratio (IR): their definition in both post ante and ex ante
- Relationship between information ratio and alphas T-statistic
- The concept of the value added (VA) and the objective of active portfolio management in terms of value added
- The optimal level of residual risk to be assumed with respect to manager ability and investor risk aversion
- Relationship between the choice of a particular active strategy and investor risk aversion
Fundamental law of active management
- Information coefficient (IC) and breadth (BR) as used in determining information ratio
- The ‘Fundamental law of active management’: Definition; assumptions; relationship between the optimal level of residual risk, information coefficient, and breadth; relationship between the value added, information coefficient, and breadth
- Market timing versus security selection in relation to breadth and investment skill
- Effect of augmenting original investment strategy with other investment strategies or information changes
Behavioural finance
- Introduction to behavioural finance: Definition; traditional finance versus behavioural finance
- Expected utility versus prospect theories of investment decision
- Effect of cognitive limitations and bounded rationality on investment decision making
- Behavioural biases of individuals: cognitive errors versus emotional biases; commonly recognised behavioural biases for financial decision making and their implications; individual investor’s behavioural biases; the effects of behavioural biases on investment policy and asset allocation decisions, and how these effects could be mitigated
- Behavioural finance and investment process: uses and effects of classifying investors in personality types; effects of behavioural factors on advisor client interactions; the influence of behavioural factors on portfolio construction; application of behavioural finance on portfolio construction process; effects of behavioural factors on an investment analyst forecasts and investment committee decision making: mitigation of these effects
Risk management
- Introduction, risks faced by an organisation: market risk, credit risk, liquidity risk, operations risk, model risk, settlement risk, regulatory risk, legal risk, tax risk, accounting risk
- The risk management process: strengths and weaknesses of a company’s risk management process
- Risk governance and risk reduction.
- Enterprise risk management system: steps in an effective enterprise risk management system
- A company’s or a portfolio’s exposures to financial and non-financial risk factors
- Value at risk (VaR): its role in measuring overall and individual position market risk.
- Methods for estimating VaR: the analytical (variance–covariance), historical, and Monte Carlo methods
- Extensions of VaR: Cash flow at risk, earnings at risk, and tail value at risk
- Stress testing and its alternative types
- Methods for managing market risk: risk budgeting, position limits, and other methods
- Methods for managing credit risk: exposure limits, marking to market, collateral, netting arrangements, credit standards, and credit derivatives
- Measures of risk- adjusted performance: Sharpe ratio, risk- adjusted return on capital, return over maximum drawdown, and the Sortino ratio
- Use of VaR and stress testing in setting capital requirements
Private Wealth Management
Taxes
- Local taxation regimes as in relation to the taxation of dividend, income, interest income, realised capital gains, and unrealised capital gains
- Impact of different types of taxes and tax regimes on future wealth
- Computation of accrual equivalent tax rates and after-tax returns
- Tax profiles of different types of investment accounts and explain how taxes and asset allocation relate.
Estate planning
- Purpose of estate planning and the basic concepts of domestic estate planning
- Forms of wealth transfer taxes and impact of important non tax issues such legal system
- A family’s core capital and excess capital
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