This study session begins by examining portfolio management as a process, including
its three steps (planning, execution, feedback) and related investment objectives and
constraints. Multifactor models including the arbitrage pricing theory (APT) and
Carhart (4 factor) model are introduced as alternatives to the capital asset pricing
model (CAPM). Considerations and applications of the three multifactor model types
(macroeconomic, fundamental, statistical) are presented. The session ends with a
discussion on value at risk (VaR) and its use in measuring and managing market risk.
The three VaR approaches (parametric, historical simulation, Monte Carlo) along with
the advantages and limitations of each are examined.
Reading 46 The Portfolio Management Process and the Investment Policy Statement
Reading 47 An Introduction to Multifactor Models
Reading 48 Measuring and Managing Market Risk
STUDY SESSION 16 Portfolio Management (2)
This study session begins by identifying and explaining the ties between the real
economy and financial markets, including effects on asset values. The “fundamental
pricing equation” is presented as a basic pricing framework for financial instruments.
The asset prices of risk-free debt, risky debt, public equities, and real estate are shown
to be affected via the business cycle’s impact on risk-free rates, the yield curve, inflation,
and risk premiums. Analysis of active portfolio management follows, including a dis-
cussion of active risk and active return (Sharpe, information ratios). The fundamental
law of active management is presented along with several investment applications.
The session concludes with an overview of algorithmic and high-frequency trading.
The two main types (execution, high-frequency trading) along with examples, key
drivers, benefits, and dangers are considered.
Reading 49 Economics and Investment Markets
Reading 50 Analysis of Active Portfolio Management
Reading 51 Algorithmic Trading and High-Frequency Trading