Portfolio Construction: CFA® Level III
It is 15–20% of the 2027 Level III exam. 51 learning outcomes across 7 learning modules.
Overview of Equity Portfolio Management
- Explain what equities contribute to a client's total portfolio
- Set out the ways an equity manager can divide up the universe of investable shares
- Identify the sources of income and the costs that arise when holding and running an equity portfolio, and explain how each affects performance
- Explain what shareholder engagement can achieve and the part an equity manager may take in it
- Explain why an investor might choose each approach along the range from passive to highly active equity management
- Weigh the factors that matter when selecting a benchmark for an equity mandate
Overview of Fixed-Income Portfolio Management
- Explain why portfolios hold fixed income and the ways fixed-income mandates can be categorised
- Set out the measures used to gauge risk and return in a bond portfolio and how bonds co-move with other assets
- Explain how liquidity varies across the bond market and its sub-sectors, and discuss how it affects the running of a bond portfolio
- Break down and interpret a model that decomposes the return on a bond portfolio
- Discuss why bond managers use leverage, the instruments that create it, and the dangers it brings
- Contrast how bond portfolios are run for investors who pay tax and for those who do not
- Explain the approach known as liability-driven investing
- Explain how cash flow matching is used to fund a set of liabilities
- Explain how a bond ladder is built, what it offers and where it falls short, and describe its risk and return profile
Asset Allocation to Alternative Investments
- Explain what alternative investments contribute within a portfolio spanning several asset classes
- Contrast alternative assets with bonds as ways to reduce the risk of holding equities
- Contrast defining the opportunity set by traditional asset classes with defining it by risk factors, when alternatives are included
- Discuss what investors should assess when allocating to each kind of alternative investment
- Discuss how to judge whether alternative investments suit a given investor
- Discuss the methods available for setting the weight of alternatives in an asset allocation
- Explain why planning for liquidity is central when committing money to alternatives
- Discuss what to watch when overseeing an alternatives programme after it is in place
An Overview of Private Wealth Management
- Discuss the forms that personal wealth takes and how it is built up and shared across the world
- Evaluate how a person's financial choices respond as their economic net worth, and its split between human and financial capital, changes through life's financial stages
- Justify the ties between a person's human and financial capital and their return and risk targets, objectives and constraints
- Evaluate the effect of different taxes on individuals and of inflation on their investment decisions
- Discuss how private clients differ from institutional ones and draft a suitable investment policy statement for a private client
Portfolio Management for Institutional Investors
- Discuss the features that institutional investors typically share
- Discuss the investment policy approaches adopted by institutional investors
- Discuss for each type of institutional investor who has a stake in the portfolio, what it owes, how long it can invest and how much liquidity it needs
- Explain what the legal, regulatory and tax constraints on each type of institutional investor concentrate on
- Evaluate a private DB plan's risk profile in light of five factors: how well funded it is, the sponsor's financial strength, how the sponsor's business interacts with plan assets, plan design and the characteristics of the workforce
- Evaluate an institutional investor's investment policy statement
- Evaluate the portfolios held by a private DB pension plan, a sovereign wealth fund, a university endowment and a private foundation
- Explain what shapes how banks and insurance companies manage their balance sheets
Trading Costs and Electronic Markets
- Explain what makes up the cost of executing a trade, both visible and hidden
- Compute effective spreads and VWAP-based estimates of transaction cost, and explain what they show
- Explain how implementation shortfall measures the cost of trading
- Explain the forces that pushed markets toward electronic trading
- Explain what market fragmentation is and why it matters
- Name the main kinds of electronic trader and set out how they differ
- Explain what electronic trading systems look like and what they are used for
- Explain the edge that low-latency traders hold over slower market participants
- Explain the dangers electronic trading creates and the tools regulators use to contain them
- Explain the manipulative trading practices that live market monitoring can uncover
Case Study in Portfolio Management: Institutional (SWF)
- Discuss the financial risks created by an institutional investor's chosen portfolio strategy
- Discuss the environmental and social risks that follow from an institutional investor's portfolio strategy
- Analyse and judge the financial and non-financial risks in an institutional investor's portfolio strategy
- Discuss the ways to control the risks of holding long-term direct investments
- Evaluate what an enterprise risk management framework does well and badly, and propose ways to strengthen it
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