CFMA PORTFOLIO MANAGEMENT
4/20/23
Portfolio Management: Definition, Types, and
Strategies
PORTFOLIO MANAGEMENT: collection of assets /
investments.
● Art and science of selecting and overseeing a
group of investments that meet the long-term
financial objectives and risk tolerance of a
client, a company, or an institution.
● Involves building and overseeing a selection of
assets such as stocks, bonds, and cash that
meet the long-term financial goals and risk
tolerance of an investor.
PORTFOLIO MANAGERS: manage portfolios.
● Also: brokers, fund managers
● Can be professionals
○ Have to be licensed
○ Work on behalf of clients
● Can be the investors themselves as
individuals who choose to build and manage
their own portfolios.
● Ultimate goal
○ To maximize the investments’
expected return within an appropriate
level of risk exposure
RISK MANAGEMENT: process of identifying and
measuring investment risks, and implementing
strategies to mitigate those risks.
Key Elements of Portfolio Building and
Maintenance
ASSET ALLOCATION: process of dividing an
investment portfolio among different asset categories,
such as stocks, bonds and cash, to achieve a specific
investment objective.
DIVERSIFICATION: process of investing in a variety of
assets to reduce risk and increase potential returns.
● Don’t put all your eggs in one basket.
REBALANCING: used to return a portfolio to its
original target allocation at regular intervals, usually
annually.
TAX-EFFICIENCY: how your portfolio is shaped to
minimize taxes in the long-term.
● Pertains to how different retirement accounts
are used, how long securities are held on for,
and which securities are held
Active Portfolio Management
ACTIVE PORTFOLIO MANAGEMENT: requires
strategically buying and selling stocks and other assets
in an effort to beat the performance of the broader
market.
● involves attempting to beat the performance of
an index by actively buying and selling
individual stocks and other assets.
● use any of a wide range of quantitative or
qualitative models to aid in their evaluations of
potential investments.
Passive Portfolio Management
PASSIVE PORTFOLIO MANAGEMENT: seeks to
match the returns of the market by mimicking the
makeup of an index or indexes.
● set-it-and-forget-it long-term strategy.
● Also: index fund management
INDEXING / INDEX INVESTING: involve investing in
one or more exchange-traded (ETF) index funds.
● May use MPT
Discretionary and Non-discretionary
These approaches dictates what a third-party may be
allowed to do relating to your portfolio,
● Only pertains if you have an independent
broker managing your portfolio.
If you only want the broker to execute trades that you
have explicitly approved, you must opt for a
NON-DISCRETIONARY investment account.
● The broker may advise on strategy and
suggest investment moves. However, without
your approval, the broker is simply an adviser
that must follow your discretion.
Some investors would prefer placing all of the
decision-making in the hands of their broker or
financial manager, therefore DISCRETIONARY.
● In these situations, the financial adviser can
buy or sell securities without the approval of
the investor.
Common Portfolio Management Strategies
AGGRESSIVE: prioritizes maximizing the potential
earnings of the portfolio.
CONSERVATIVE: relates to capital preservation.
MODERATE: simply blend an aggressive and
conservative approach.
INCOME-ORIENTATED: to generate income that can ● Open end investment company that trades its
be used to live off of. shares in the stock exchange
● Issues shares in blocks called “creation units”
TAX-EFFICIENT: focus primarily on minimizing taxes, ○ Normally done by institutional
even at the expense of higher returns. investors
● One of the fastest growing investments
Challenges ● Simple to understand and provide
opportunities for investors to create a
Even if an investor has a foolproof portfolio diversified portfolio of stock
management strategy, investment portfolios are
subject to market fluctuations and volatility which can MF ETF
be unpredictable.
TRADING Does not trade on Traded on an exchange
an exchange
Though diversification is an important aspect of
portfolio management, it can also be challenging to PRICING Based on NAV at Determined throughout the
achieve. the end of the day day by buyers and sellers on
the exchange

To devise the best portfolio management strategy, an

investor must first know their risk tolerance, investment HEDGE FUNDS: pooled funds from high-net worth
horizon, and return expectations. clients.
● Cannot be sold to the general public
Last, should an investor turn to a portfolio manager to ● Has fewer reporting requirements as
manage their investments, this will incur a compared to mutual funds
management fee (.25% to 1%). ● Different from hedging
● Why invest in hedge funds?
4/24/23 ○ To beat the market
○ To earn alpha (abnormal return)
Visual aid used

Third-Party Managed Portfolio

1. Pooled funds
a. Mutual funds
b. Exchange traded fund (ETF)
c. Hedge funds
2. Separately managed funds

How do POOLED FUNDS work?

1. Investors contribute money to the fund
2. Fund manager invests the money
In the PH, the best proxy of the market is the PSEi.
Into/from stocks, bonds, alternative asset class
3. Fund is managed and grown
Common Approach to Creating a Portfolio
● Choose a handful of stocks that are expected
MUTUAL FUNDS: an example of pooled fund.
to outperform the market.
● Professionally managed by an investment
company
MODERN PORTFOLIO THEORY: new approach to
● Based on end-of-day-pricing or NAV (net asset
investing.
value)
● Developed by Harry Markowitz in 1952
● Examples
● Incorporates risk management into security
○ Money market funds
selection
○ Bond mutual funds
● Considers the trade-off between risk and
○ Stock mutual funds
return
○ Hybrid equity funds

4/28/23
EXCHANGE TRADED FUND (ETF): is traded just like
a stock.
Each investor has a different degree of risk aversion.
The relationship between the degree of risk aversion
and the degree of required return per level of risk is
generally positive. In other words, investors who are
more risk-averse will typically require a higher rate of
return to compensate them for taking on any given
level of risk, while investors who are less risk-averse
may be willing to accept a lower rate of return for the
same level of risk.
Things to consider when looking at asset class:
● Return
● Risk
● Correlation
● The more it rains, the more umbrellas are sold.
● The more educated you are, the less likely that
you would be unemployed.
Investing in low risk results in smaller returns.
Investing in high risk results in bigger (better) returns.
more volatile returns = more uncertain future = riskier asset class
CORRELATION indicates VOLATILITY.
STANDARD DEVIATION indicates RISK.
MIX AND MATCH: figuring out what securities do well
together.

Risk Profiles How do you decrease portfolio STDEV?

1. CONSERVATIVE: risk averse
2. AGGRESSIVE: risk seeking
3. MODERATELY AGGRESSIVE: risk neutral
Understanding Risk
RISK: a choice rather than fate.
● Early Italian word risicare (to dare)
● All about probabilities
● Put more weight on securities with lower
STDEV.
● Combine two securities that have a correlation
of less than 1.00
The benefit of diversification occurs when you
combine securities that do not move in the same
direction. Diversification only works when markets are
operating in normal conditions.

Types The Asset Class Universe

1. SYSTEMATIC RISK: affects the entire
financial market. Traditional Alternative

a. Cannot be diversified away ● Stocks ● Commodities

2. NON-SYSTEMATIC RISK: affects a certain ● Bonds ● Real estate
● Derivatives
company or industry. ● Private equity
a. Can be reduced by diversification ● Collectibles
● Foreign currency
● Hedge funds
STANDARD DEVIATION: can be used as a measure ● Other exotic assets
of risk.
● Variability of a group of variables around a
central value

𝑛 2
∑ 𝑥1−𝑥
𝑖=1
( )
𝑠= 𝑛−1

n = number of observation
𝑥 = average (arithmetic mean)
x = variable

CORRELATION: extent to which to securities move

together
● Has a value from -1.00 to 1.00
● The magic variable to portfolio creation.
● Does not imply causation.
● Not constant.
5/8/23
Correlation is everywhere.
Delegate 10% for liquid assets. Examples of liquid ignoring inflation
assets include time deposits and T-bills. risk

The lower the STDEV, the lesser the risk.

Factors Affecting Risk Capacity

1. Time horizon of investment objectives

Time horizon Risk capacity Recommended assets

Short-term low Liquid assets

Long-term high Liquid and risky assets

Developing an investment policy. 2. Net worth

● Create a portfolio strategy unique to the
investor’s needs and circumstances.
● Portfolio manager gathers info from investor
regarding financial status and behaviour.
Developing capital market expectations.
● Analysts develops forecasts about capital
market expectations.
Portfolio construction and management.
● Portfolio manager orders traders to execute
trades.
Assets - liabilities = net worth
3. Stability and level of income
More stable income and more disposable
income = higher risk capacity
Efficient Market Hypothesis
● Impossible to beat the market.
● The best estimate of the asset’s value is its
market price.
Levels of Market Efficiency

Portfolio evaluation.
● Portfolio manager monitors portfolio for any
changes in economic and investor-related
factors.
● Portfolio manager evaluates whether investor
objectives have been obtained.

Investor-Related Factors (Factor to Asset Class

Allocation)
1. RISK ATTITUDE: willingness to take risks.
2. RISK CAPACITY: ability to absorb investment
losses.

CAPACITY + ATTITUDE = RISK TOLERANCE

Risk Attitude

Low High

Risk Low Low risk tolerance Educate investor on

Capacity excessive risk
taking

High Educate investor on High risk tolerance