CIFA Advanced Level
Advanced Portfolio Management cheat sheet
Every chapter's key points, formulas and definitions on one page, for the last week before the exam. Each heading links to the chapter that explains it.
Capital market forecasts
- Capital market expectations sit between the client and the portfolio: the investment policy statement says what the client needs, the forecast says what each asset class is likely to deliver, and strategic asset allocation is where the two meet.
- Forecasting is hard for structural reasons, such as short or poor-quality data, regime change, non-stationarity, forecaster bias and model uncertainty, and exogenous shocks cannot be predicted at all, so allocations should be built to be robust to them.
- Long-run trend growth anchors the long-horizon forecast and the business cycle drives the short horizon; treating a cyclical downturn as a change in trend growth produces a permanently pessimistic forecast.
- A fixed-income forecast is built from components, not averaged: yield to maturity plus rolldown, less modified duration times the forecast change in yield, less the expected credit loss (probability of default times loss given default).
- A forecast only matters once it moves portfolio weights, and the reasoning should be recorded so a later review can tell a wrong forecast from an allocation that failed to follow it.
Formulas
- Expected fixed-income return, built from its components
- E(R) = YTM + rolldown return - (D x change in yield) - (PD x LGD)
Key terms
- Historical statistics approach
- Uses long-run historical average returns, risk and correlation directly as the forecast, simple but assumes the future resembles the past, an assumption that can fail badly at turning points.
- Economic (fundamental) approach
- Builds the forecast up from underlying economic drivers, for equities, the Grinold-Kroner-style decomposition already introduced in CIFA Equity Investments Analysis, under equity market equilibrium; for bonds, the yield-plus-roll-and-default-loss building blocks of the term structure covered in CIFA Fixed Income Investments Analysis.
- Survey and panel approach
- Aggregates the forecasts of a panel of economists or market participants, useful for capturing current market sentiment but subject to herding and behavioural bias (see behavioural finance in CIFA Portfolio Management).
- Shrinkage estimation
- Blends a sample (historical) estimate with a more stable, structured target (such as the cross-sectional average across asset classes), reducing the estimation error that makes purely historical inputs unstable (the source of the minimum-variance frontier's instability).
The rest of the sheet covers
- Managing individual and institutional investor portfolios
- Asset allocation
- Fixed income portfolio management
- International and emerging market fixed income strategies
- Equity portfolio management
- Alternative investments portfolio management
- Currency portfolio management
- Execution of portfolio decisions
- Portfolio monitoring and rebalancing
- Evaluating portfolio performance
- Performance standards
- Exam technique and revision
- Glossary