CFA Notes - Portfolio

Note

I. Portfolio Management

（1）Asset Allocation

i. Definition

Asset allocation is the rigorous implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time horizon.

ii. Example

1. Equity;
2. Fixed-income security;
3. Real estate;
4. Cash and cash equivalent;
5. Commodity

iii. Differences between mutual funds and hedge funds

1. Regulation;
2. Financing;
3. Information disclosure;
4. Leverage;
5. Size;
6. Pay

iv. Type of Cash Equivalent

1. Bank deposits（银行存款）;
2. Bank notes（银行票据）;
3. Short term debt insturment

v. Characteristic of Cash Equivalent

1. Short holding period;
2. high liquidity;
3. 易于变化为已知金额的现金；
4. 价值变动风险很小

（2）Diversification

i. Definition

Diversification is the strategy of investing in a variety of securitites in order to lower the risk involved with putting money into few investments.

（3）Security Selection

i. Definition

Security selection is an attempt to generate higher returns than the asset class benchmark by selecting securities with a higher expected return.

（4）The Investment Clock

II. Risk Management

The process of identifying the level of risk an entity wants, measuring the level of risk the entity currently has, taking actions that bring the acutal level of risk to the desired level of risk, and monitoring the new actual level of risk so that it continues to be aligned with the desired level of risk.

（1）Risk Tolerance

（a）Definition

The amount of risk an investor is willing and able to bear to achieve an investment goal.

（2）Risk Exposure

（a）Definition

Risk exposure is the extent to which the underlying environment or market result in actual risk borne by a business or investor who has assets or liabilities that are sensitive to those risks.

（3）Risk Modification

（a）Definition

（b）Methods of Risk Modification

1. Risk prevention and avoidance;
2. Risk acceptance;
3. Risk shifting;
4. Risk transfer

III. Risk Aversion

（1）Risk-Averse

Risk-Averse investors seek to minimize risk for a given return.

（2）Risk-Natural

Risk neutrality means that the investor cases only about return and not about risk, so higher return investments are more desirable without considering risks.

（3）Risk-Seeking

Investors prefer higher risk given certain expected return.

（4）Indifference Curve

An indifference curve plots the combination of risk-return pairs that an investor would accept to maintain a given level of . In difference curves are thus defined in terms of a trade-off between expected rate of return and variance of the rate of return. Because an infinte number of combinations of risk and return can generate the same utility for the same investor, indifference curves are continuous at all points.

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