Chapter 3: Portfolio Risk and Return – Part II

In this section

• Combining Risk-Free Assets with Risky Portfolios
  Combining Risk-Free Assets with Risky Portfolios (CFA Level 1): Risk-Free Asset, Building a Complete Portfolio, and Expected Return of a Blended Portfolio. Key definitions, formulas, and exam tips.
• The Capital Market Line (CML) and the Separation Principle
  The Capital Market Line (CML) and the Separation Principle (CFA Level 1): Capital Market Line at a Glance, Formula for the CML, and Visualizing the CML. Key definitions, formulas, and exam tips.
• Systematic Versus Nonsystematic Risk
  Systematic Versus Nonsystematic Risk (CFA Level 1): Understanding the Risk Framework, Total Risk: The Two Key Components, and Systematic Risk. Key definitions, formulas, and exam tips.
• The Capital Asset Pricing Model (CAPM) and Beta
  The Capital Asset Pricing Model (CAPM) and Beta (CFA Level 1): CAPM: The Basics, Interpreting Beta, and Key Assumptions. Key definitions, formulas, and exam tips.
• Security Market Line (SML) and Applications
  Security Market Line (SML) and Applications (CFA Level 1): Understanding the Security Market Line, Slope and Intercept: The Core of the SML, and Identifying Overpriced vs. Underpriced Securities. Key definitions, formulas, and exam tips.
• Performance Measures (Sharpe, Treynor, Jensen’s Alpha, M²)
  Performance Measures (Sharpe, Treynor, Jensen’s Alpha, M²) (CFA Level 1): Fundamentals of Risk-Adjusted Performance Measures and Sharpe Ratio: Evaluating Rewards per Unit of Total. Key definitions, formulas, and exam tips.
• Empirical Testing of CAPM in Different Markets
  Empirical Testing of CAPM in Different Markets (CFA Level 1): Early Empirical Evidence, Notable Anomalies and Their Influence, and Small-Cap Effect. Key definitions, formulas, and exam tips.
• Extensions of the CAPM and Multi-Factor Models
  Extensions of the CAPM and Multi-Factor Models (CFA Level 1): From CAPM to Multiple Factors, Fama-French 3-Factor Model, and Behavioral and Risk-Based Explanations. Key definitions, formulas, and exam tips.
• Practical Challenges in Beta Estimation
  Practical Challenges in Beta Estimation (CFA Level 1): Traditional Regression Approach, Non-Stationary Beta: The Challenge of Beta Drift, and Visualizing Beta Drift. Key definitions, formulas, and exam tips.
• Portfolio Performance Attribution Techniques
  Portfolio Performance Attribution Techniques (CFA Level 1): Why Performance Attribution Matters, Brinson Model, and Allocation Effect. Key definitions, formulas, and exam tips.
• Jensen’s Alpha in Active Management
  Jensen’s Alpha in Active Management (CFA Level 1): Linking Jensen’s Alpha to Portfolio Performance, Active Management Context, and Quick Look at the Calculation. Key definitions, formulas, and exam tips.
• Incorporating Transaction Costs in Performance Analytics
  Incorporating Transaction Costs in Performance Analytics (CFA Level 1): Fundamentals of Transaction Costs, Explicit Costs, and Implicit Costs. Key definitions, formulas, and exam tips.
• Residual Risk and Factor Tilts
  Residual Risk and Factor Tilts (CFA Level 1): Understanding Residual Risk, Factor Tilts, and Personal Perspective. Key definitions, formulas, and exam tips.
• Risk-Adjusted Portfolio Selection Approaches
  Risk-Adjusted Portfolio Selection Approaches (CFA Level 1): Mean–Variance Optimization Foundation and Key Equations in MVO. Key definitions, formulas, and exam tips.
• Hedging Systematic Risk with Derivatives
  Hedging Systematic Risk with Derivatives (CFA Level 1): Basic Concepts of Systematic Risk, Derivative Tools for Systematic Hedging, and Index Futures. Key definitions, formulas, and exam tips.
• Limitations of Performance Measures in Extreme Markets
  Limitations of Performance Measures in Extreme Markets (CFA Level 1): Normal Distribution Trap, Fat Tails, and Extreme Market Conditions and Performance Metrics. Key definitions, formulas, and exam tips.