Portfolio Construction: CFA® Level I

It is 8-12% of the 2027 Level I exam. 34 learning outcomes across 6 learning modules.

360+ practice questions and 34 formula cards on this topic in the app.

Portfolio Risk and Return: Part I

• Work out the expected return on a portfolio of two assets
• Work out the variance of a portfolio made up of two assets
• Explain why, as more assets are added, covariance becomes the main driver of portfolio risk
• Explain risk aversion and what indifference curves show
• Explain how correlation between assets changes the risk of a portfolio
• Set out what the minimum-variance frontier and the efficient frontier are
• Set out how the main asset classes have performed historically in terms of risk and return

Portfolio Risk and Return: Part II

• Explain what adding a risk-free asset does, and the capital allocation line
• Explain the market portfolio and the idea of two-fund separation
• Work out a required return with the capital asset pricing model
• Tell apart systematic risk and nonsystematic risk
• Work out beta and explain what it means
• Apply the security market line to spot assets that are mispriced
• Explain where the capital asset pricing model falls short
• Work out Jensen's alpha, M², the Treynor ratio and the Sharpe ratio and explain what each shows
• Explain models that generate returns, the market model among them

Portfolio Management: An Overview

• Explain what a portfolio perspective means
• Set out the kinds of investor and the particular needs of each
• Set out the stages of the process for managing a portfolio
• Explain how defined benefit and defined contribution pension plans work
• Explain mutual funds and how they differ from other pooled investment vehicles

Basics of Portfolio Planning and Construction

• Set out the parts that make up an investment policy statement
• Tell apart an investor's return objectives and their tolerance for risk
• Set out the constraints that an investment policy statement records
• Explain strategic asset allocation and how a portfolio is rebalanced
• Tell apart how much risk an investor wants to take and how much they can afford to take
• Set out ways to build ESG considerations into planning and constructing a portfolio

The Behavioral Biases of Individuals

• Set out the behavioural biases that investors commonly show
• Tell apart emotional biases and cognitive errors
• Explain the disposition effect and loss aversion
• Explain herding and how it links to market anomalies

Introduction to Risk Management

• Explain what a risk management framework involves and how risk is governed
• Explain what risk tolerance and risk budgeting mean
• Set out ways to change a portfolio's exposure to risk