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Cfa1 10 Portfolio Management And Wealth Planning Notes

Finance Notes > CFA Level 1 Notes

This is an extract of our Cfa1 10 Portfolio Management And Wealth Planning document, which we sell as part of our CFA Level 1 Notes collection written by the top tier of University Of London (examined By LSE) students.

The following is a more accessble plain text extract of the PDF sample above, taken from our CFA Level 1 Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

CFA Level 1

Portfolio Management and Wealth Planning

Asset Allocation
Preliminary Investment Plans
Various types of insurance
Cash reserve
Life Cycle Net Worth and Investment Strategies
Accumulation Phase
Early to middle years of career
Small net worth
High risk investment
Consolidation Phase
After the midpoint of career
High net worth
Moderate risk investment
Spending Phase and Gifting Phase
After retirement
No income
Low risk investment
Life Cycle Investment Goals
Near-term & High-priority Goals
Shorter-term necessary financial objectives (e.g. housing)
High-risk investment is not recommended
Long-term & High-priority Goals
Longer-term important financial objectives (e.g. early retirement)
Higher-risk investment is recommended
Lower-priority Goals
Financial objectives are unimportant
Highest-risk investment is recommended
Portfolio Management Process
Policy Statement 1 CFA Level 1

Portfolio Management and Wealth Planning

Focus on investor's short- and long-term needs
Learn about his investment history and expectation
Examination of Conditions
Examine current and project financial / economic / political / social conditions
Focus on short- and long-term expected conditions for constructing the portfolio
Construction of Portfolio
Construct the portfolio based on the conditions and the investor's objectives and
Meet the investor's needs at minimum risk levels
Continual Monitoring
Monitor and update investor's needs and environmental conditions
Evaluate portfolio performance
Advantages of Policy Statement
Understand and articulate realistic investment goals
Set standards for evaluating portfolio performance
Protect investors from inappropriate investments of the portfolio manager
Prevent costly delays in case of change in portfolio personnel
Content of Policy Statement
Investment Objective (Risk and Return)
Capital preservation
Capital appreciation
Current income
Total return
Investment Constraints
Time horizon (near-term / long-term / high-priority)
Tax concern
Marginal Tax Rate (MTR)
Part of each additional dollar in income that is paid as tax
MTR = Total Tax Payment / Taxable Income
Average Tax Rate
= Total Tax Payment / Taxable Income 2 CFA Level 1

Portfolio Management and Wealth Planning

After-tax Income Return
= Pre-tax Income Return  (1 - Marginal Tax Rate)
Equivalent Taxable Yield (ETY)
Yield needed on a taxable investment to match the tax-free return offered on a municipal bond
ETY = Municipal Bond Yield / (1 - MTR)
Portfolio Management
Assumptions of Markowitz Portfolio Theory

1. Returns Distribution
Investors look at each investment opportunity as a probability distribution of expected returns over a given investment horizon

2. Utility maximization
Investors maximize their expected utility over a given investment horizon and their indifference curves exhibit diminishing marginal utility

3. Risk as Variance
Investors measure risk as variance (standard deviation) of expected returns

4. Risk / Return
Investors make all investment decisions by considering only the risk and return of an investment opportunity

5. Risk Aversion
For a given risk level, investors prefer higher returns to lower returns; for a given level of expected return, investors prefer less risk to more risk
Efficient Portfolio
Portfolio is considered to be efficient if no other portfolio offers higher expected return with the same or lower risk.
Rate of Return on Individual Stock
Price under Event 1 (P2)
Price under Event 2 (P1)
Price under Event N (PN)
Rate of Return under Event A (R1)

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