Articles Posted in the " CFA Level 3 " Category

  • Fixed income: Risk consideration

    Bond Characteristics to Consider It is important to consider several characteristics of the individual bonds that are used to construct an immunized portfolio. – Credit rating – Embedded option – Liquidity Immunization against Non-parallel shifts Equating the duration of the portfolio with the duration of the liability does not guarantee immunization. Immunization risk can be […]


  • Fixed Income Portfolios: Aligning risk exposure

    1. Selecting a bond index Regardless of the strategy employed, the manager should be judged against a benchmark, and the benchmark should match the characteristics of the portfolio. There are four primary considerations when selecting a benchmark: – Market value risk varies directly with maturity, the greater the risk aversion, the lower the acceptable market […]


  • Approaches for asset allocation

    1. The Mean – Variance Optimization (MVO) approach A significant drawback to generating an efficient frontier through traditional mean-variance optimization methods is the sensitivity of the frontier to changes in the inputs. The input themselves (e.g., expected return, covariance) are estimates. Reliance on an efficient frontier developed through a traditional, single mean-variance optimization is questionable. […]


  • Reading 18: Asset allocation

    1. Specifying risk and return objectives – The return objective for an individual’s or institution’s portfolio is based upon the size of the portfolio, long-term spending (liquidity) needs, the time horizon, and the maintenance of the principal. – Investors can be placed into numerical categories of risk aversion using a rough approximation or through answers […]


  • Evaluating Portfolio Performance

      1. Explain the following components of portfolio evaluation: Performance measurement, performance attribution and performance appraisal – The return performance of the account over the period: This is addressed through performance measurement, which involves calculating rates of return based on changes in the account’s value over specified time periods. – How the manages attained the […]


  • Execution of Portfolio Decisions

      1. Compare market orders with limit orders, including the price and execution uncertainty of each. – A market order is an order to execute the trade immediately at the best possible price. If the order can not be completely filled in one trade which offers the best price. It is filled by other trades […]


  • Risk management application of option strategies

      1. Option strategies: Bull spread, bear spread, butterfly spread, collar, straddle, box spread. – A bull spread consists of a long call and a short call. The short call has a higher exercise price and its premium subsidizes the long call. It offers gains if the underlying asset’s price goes up, but the upside […]


  • Risk management applications of forward and futures strategies

      1. Adjusting the portfolio beta: Demonstrate the use of equity futures contracts to achieve a target beta for a stock portfolio and calculate, interpret the number of futures contracts required. – To modify the beta of an equity portfolio with futures on an equity index, we need to know the beta of the equity […]


  • Stress testing.

    1. Stress testing: – Stress testing is often employed as a complement to VAR, stress testing is just an extreme scenario. – Scenario analysis is used to measure the effect on the portfolio of simultaneous movements in one or several factors. There are various form of scenario analysis: Stylized scenario, actual extreme events, hypothetical events. […]


  • Value at risk (VAR)

    Risk management: Value at risk (VAR) 1. Calculate and interpret value at risk (VAR) and explain its role in measuring overall and individual position market risk. – VAR states at some probability ( often 1% to 5%) the expected loss during a specified time period. The loss can be stated as a percentage of value […]