CFA (Level III) Topic Overviews

CFA Refresher Readings



Portfolio Management (Level III) Topic Overviews



Study Session 1

Code of Ethics and Professional Standards

Readings in this study session establish a framework for ethical conduct in the investment profession. The principles and guidance presented in the CFA Institute Standards of Practice Handbook (SOPH) form the basis for the CFA Institute self-regulatory program to maintain the highest professional standards among investment practitioners. A clear understanding of the CFA Institute Code of Ethics and Standards of Professional Conduct (both found in the SOPH) should allow practitioners to identify and appropriately resolve ethical conflicts, leading to a reputation for integrity that benefits both the individual and the profession. Material under “Guidance” in the SOPH addresses the practical application of the Code of Ethics and Standards of Professional Conduct. The guidance for each standard reviews its purpose and scope, presents recommended procedures for compliance, and provides examples of the standard in practice.



Study Session 2

Ethical and Professional Standards in Practice

Using examples and case studies, the readings in this study session show the use of the CFA Institute Code of Ethics and Standards of Professional Conduct as a body of principles for ethical reasoning and decision making. The readings serve as effective aids in understanding and internalizing the values and standards presented in the CFA Institute Standards of Practice Handbook. By applying the Code and Standards to case study conflicts, the practitioner will gain experience identifying and explaining fundamental principles of conduct, which then become tools for dealing with real world challenges.




The Asset Manager Code of Professional Conduct uses the basic tenets of the CFA Institute Code of Ethics and Standards of Professional Conduct to establish ethical and professional standards for firms managing client assets. The Asset Manager Code of Professional Conduct also extends the Code and Standards to address investment management firm practices regarding trading, compliance, security pricing, and disclosure



Study Session 3

Behavioral Finance

Behavioral finance is introduced in the first study session on portfolio management because an understanding of the psychological factors that affect investment decision making is relevant for the management of both private wealth and institutional assets. There are two important aspects of these behavioral readings that should be considered within the context of portfolio management. First, behavioral finance provides insight into investors’ perceptions and preferences regarding financial risk; such insight can be helpful for understanding and serving clients. Second, with its analysis of the rationality of individual decision making, behavioral finance may provide a theoretical basis for investment strategies that attempt to exploit deviations from market efficiency.



Study Session 4
Private Wealth Management

Study Session 4 addresses the process of private wealth management and the construction of an investment policy statement (IPS) for the individual investor. The investment policy statement is a blueprint for investing the client’s assets. The IPS identifies the needs, goals, and risk tolerance of the investor, as well as the constraints under which the investment portfolio must operate, and then formulates an investment strategy that tax-efficiently reconciles these potentially conflicting requirements.




Because taxes and regulations vary from locality to locality, tax-efficient strategies for portfolio construction and wealth transfer are necessarily specific to the locality in which the investor is taxed. Study Session 4 focuses on investment strategies applicable to a wide range of localities. Although illustrations of such strategies may be presented from a country-specific perspective, practitioners should be able to apply the underlying investment principles to other tax settings.



Study Session 5

Portfolio Management for Institutional Investors

Broadly defined, institutional investors include defined benefit pension plans, defined contribution plans, foundations, endowments, insurance companies, banks, and investment intermediaries. Each group faces a unique set of portfolio management investment objectives and constraints that must be addressed in order to effectively manage their investment portfolios. This study session introduces the concepts and practices important to determining the investment policy statement for an institutional investment management client.



Study Session 6

Economic Concepts for Asset Valuation in Portfolio Management

After identifying the client’s objectives and constraints and creating an investment policy statement, the manager’s next task in the planning process is to formulate capital market expectations. These forecasts of risk and return characteristics for various asset classes form the basis for constructing portfolios that maximize expected return for given levels of risk. The first reading in Study Session 6 examines the process of setting capital market expectations and covers the major tools of economic analysis. The second reading specifically addresses the linkage between economic activity and stock market valuation.

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Study Session 7

Asset Allocation

After developing capital market expectations, the fourth and final task in the planning process is determining the strategic asset allocation. Here the manager combines the investment policy statement and capital market expectations to determine target asset class weights; maximum and minimum permissible asset class weights are often also specified as a risk-control mechanism. The investor may seek both single-period and multi-period perspectives in the return and risk characteristics of asset allocations under consideration. A single-period perspective has the advantage of simplicity. A multi-period perspective can address the liquidity and tax considerations that arise from rebalancing portfolios over time. Such a perspective can also address serial correlation (long- and short-term dependencies) in returns but is more costly to implement.


The first reading is a comprehensive overview of the topic. The second reading complements the first by delivering in detail a liabilities-sensitive approach to asset allocation using the example of a defined benefit pension plan.



Study Session 8

Management of Passive and Active Fixed Income Portfolios

The fixed-income market is one of the largest and fastest growing segments of the global financial marketplace. Government and private debt currently constitute close to half of the wealth in international financial markets.



The basic features of the investment management process are the same for a fixed-income portfolio as for any other type of portfolio. Risk, return, and investment constraints are considered first. As part of this first step, however, an appropriate benchmark must also be selected based on the needs of the investor. For investors taking an asset-only approach, the benchmark is typically a bond market index, with success measured by the portfolio’s relative investment return. For investors with a liability-based approach, success is measured in terms of the portfolio’s ability to meet a set of investor-specific liabilities. The first reading addresses these primary elements of managing fixed-income portfolios and introduces specific portfolio management strategies. The second reading introduces additional relative-value methodologies.



Study Session 9

Portfolio Management of Global Bonds and Fixed Income Derivatives

Study Session 9 builds on the basics of fixed-income portfolio management presented in Study Session 8 and introduces more targeted portfolio management strategies. In particular, Study Session 9 addresses international and emerging market strategies and the use of derivatives to manage interest rate and credit risks.



Study Session 10

Equity Portfolio Management

Because equity securities represent a significant portion of many investment portfolios, equity management is often a critical component of overall investment success. The role of equities in an investment portfolio, the three major approaches used to manage equity portfolios, and the evaluation of equity managers constitute the major focus of "Equity Portfolio Management." Management techniques such as benchmark selection and style analysis are presented as tools for effectively measuring and controlling equity portfolio attributes in an international environment in "International Equity Benchmarks." "Corporate Governance" addresses the alignment of interests between a corporation’s managers and its equity shareholders. Although other investor classes are also concerned with corporate governance, the issue is particularly relevant for equity portfolio managers. Agency problems and conflicts of interest reduce a company’s appeal to investors and therefore directly affect its valuation. The reading concludes with an examination of the relationship between a corporation and its stakeholders and the arguments for and against a stakeholder-based governance structure.


Study Session 11

Alternative Investments for Portfolio Management

Alternative investments comprise groups of investments with risk and return characteristics that differ markedly from those of traditional stock and bond investments. Common features of alternative investments include:



Relative illiquidity, which tends to be associated with a return premium as compensation
Diversifying potential relative to a portfolio of stocks and bonds
High due diligence costs
Unusually difficult performance appraisal, due to the complexity of establishing valid benchmarks



Many institutional and high-net worth individuals make portfolio allocations to alternative investments that are comparable in size to those they make to the traditional asset classes of stocks and bonds. In doing so, such investors may be seeking risk diversification and/or greater opportunities to apply active management skills and capture alpha. Portfolio managers who take advantage of the opportunities presented by alternative investments may have a substantial advantage over those who do not.


The first reading in Study Session 11 presents an overview of the investment classes generally considered as alternative investments. The balance of the study session examines the role of swaps, forwards, and futures in managing certain alternative investments.



Study Session 12

Risk Management

Effective risk management identifies, assesses, and controls numerous sources of risk, both financial and non-market related, in an effort to achieve the highest possible level of reward for the risks incurred. With the increasingly complex nature of investment management firms and investment portfolios, sophisticated risk management techniques have been developed to provide analysts with the necessary tools to properly measure the varying facets of risk. The reading in this study session describes a framework for risk management, focusing on the concepts and tools for measuring and managing market risk and credit risk.

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Study Session 13

Risk Management Applications of Derivatives

This study session addresses risk management strategies using forwards and futures, option strategies, floors and caps, and swaps. Collectively referred to as derivatives, these investment vehicles can be employed for a variety of risk management purposes, including modification of portfolio duration and beta, implementation of changes in asset allocation, and synthesis of cash market instruments. Derivatives strategies have proven useful to both investors and borrowers, which accounts for their broad appeal. A growing number of security types now have embedded derivatives, and portfolio managers must be able to account for their effect on the return/risk profile of the security. After completing Study Session 13, the practitioner will better understand the advantages and disadvantages of derivative strategies, including the difficulties in creating and maintaining a dynamic hedge.



Study Session 14

Execution of Portfolio Decisions

Because the investment process is not complete until securities are bought or sold, the quality of trade execution is an important determinant of investment results. The methods by which managers and traders interact with markets, choose appropriate trading strategies and tactics, and measure success in execution are key topics in "Execution of Portfolio Decisions."



Study Session 15

Monitoring and Rebalancing

Ongoing monitoring and rebalancing of the investment portfolio are integral parts of the portfolio management process. Portfolio managers must understand the reasons for monitoring portfolios and be able to formulate appropriate portfolio rebalancing policies.



Study Session 16

Performance Evaluation and Attribution

Performance evaluation is a feedback step in the investment management process. It plays an integral role in assessing manager skills, as well as confirming manager compliance with investment policy, and should be documented in the investment policy statement. Performance evaluation and attribution also provide an essential measurement service to investment managers themselves. Competent portfolio managers should be proficient in the use of current concepts and methodologies for calculating, benchmarking, and interpreting investment returns.



Study Session 17

Portfolio Management in a Global Context

This study session begins with a comprehensive survey, in "The Case for International Diversification", of the advantages and disadvantages of international diversification. The study session continues with an overview of currency management, as global investing involves not only exposure to local market returns but also to exchange rate movements. The final two readings address emerging markets, a dynamic and important sub-category of international investing. "Emerging Markets Finance" presents a summary of financial and economic research relevant to investors in emerging markets. The fourth reading examines the economic conditions under which certain developing countries could become a much stronger force in the world economy and the implications that would have for investors.



Study Session 18

Global Investment Performance Standards

The Global Investment Performance Standards (GIPS®) contain ethical and professional standards for presenting investment performance to prospective clients. These guidelines provide for standardized performance calculation and presentation across investment managers, enabling investors to objectively compare manager return histories and clearly evaluate performance. This study session consists of a single reading which provides grounding in the requirements of GIPS.