9. Portfolio Management 9.1. Different Types of Investors & Investment Products 9.1.1. 重要知识点 9.1.1.1. Portfolio overview

9.
Portfolio Management
9.1. Different Types of Investors & Investment Products
9.1.1. 重要知识点
9.1.1.1. Portfolio overview

➢ Portfolio approach: From the perspective of risk and returns, evaluate
individual securities in relation to their contribution to the investment
characteristics of the whole portfolio.
➢ Diversification provides an investor with a way to reduce the risk without
necessarily decreasing their expected rate of return.
◼ During times of severe market turmoil, correlations among assets tend to
increase, which makes the diversification less effective.
9.1.1.2. Mutual funds and other forms of pooled investments
➢ Mutual funds: open-end funds and closed-end funds, money market funds,
bond funds, stock funds.
➢ Exchange-traded funds (ETFs)
➢ Separately managed account
➢ Hedge funds
➢ Buyout funds (private equity funds)
➢ Venture capital funds
➢ The key to a DC plan is that the employee accepts the investment risk and is
responsible for ensuring that there are enough funds in the plan to meet his or
her needs upon retirement.
9.1.1.3. Comparison among pooled investments
➢ An investor investing in an index mutual fund buys the fund shares directly from
the fund and all investments are settled at the net asset value. In the case of an
ETF, however, investors buy the shares from other investors just as if they were
buying or selling shares of stock.
➢ Expenses are lower for ETFs but, unlike mutual funds, investors do incur
brokerage costs.
➢ All purchases and redemptions in a mutual fund take place at the same price at
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the close of business. ETFs are constantly traded throughout the business day,
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and as such each purchase or sale takes place at the prevailing market price at
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that time.
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➢ For ETFs, dividends are paid out to the shareholders, whereas index mutual
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funds usually reinvest the dividends. Hence, there is a direct cash flow from the
ETF that is not there with the index mutual fund. Depending on the investor,
this cash flow may or may not be desirable.
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此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
➢ The minimum required investment in an ETF is usually smaller. Investors can
purchase as little as one share in an ETF, which is usually not the case with an
index mutual fund.
➢ ETFs are often cited as having tax advantages over index mutual funds.
➢ The main disadvantage of an SMA is that the required minimum investment is
usually much higher than is the case with a mutual fund.
➢ Hedge fund strategies generally involve a significant amount of risk, driven in
large measure by the liberal use of leverage and complexity. More recently, it
has also involved the extensive use of derivatives.
➢ A key difference between hedge funds and mutual funds is that the vast
majority of hedge funds are exempt from many of the reporting requirements
for the typical public investment company.
9.1.1.4. Characteristics of different types of investors:
Investor Time Horizon Risk Tolerance Liquidity Needs Income Needs

Varies by Varies by Varies by Varies by
Individuals
individual individual individual individual
High for mature
DB plan Long High Quite low funds; Low for
growing funds
Pay interest and
Banks Short Quite low High operational
expenses
Endowments
Meet spending
and Very long High Quite low
commitments
Foundations
Long – life
Insurance Quite low High Low
Short - P&C
Mutual
Varies by fund Varies by fund High Varies by fund
funds
Sovereign
Varies by fund Varies by fund Varies by fund Varies by fund
wealth funds
9.1.1.5. Asset Management Industry
:
➢ Asset management firms are referred to as buy-side firms, in contrast with sell-
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side firms such as broker-dealers and investment banks.

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➢ Active management attempts to outperform a chosen benchmark through

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manager skill; Passive managers attempt to replicate the returns of a chosen

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market index.
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➢ Traditional asset managers focus on equities and fixed-income securities；
Alternative asset managers focus on asset classes such as private equity, hedge
funds, real estate, or commodities.
➢ Asset Management Industry Trends:
◼ The market share for passive management has been growing over time;
◼ The amount of data available to asset managers has grown exponentially in
recent years;
◼ Robo-Advisers are a technology that can offer investors advice and
recommendations based on their investment requirements and constraints,
using a computer algorithm.
9.1.2. 基础题
Q-1. Which of following type of investors have the highest risk tolerance? (2012 考题回顾自编
A. Companies only with DB plans
B. Banks
C. Insurance companies
Q-2. With respect to the formation of portfolios, which of the following statements is most
accurate?（原版书课后题）
A. Portfolios affect risk less than returns.
B. Portfolios affect risk more than returns.
C. Portfolios affect risk and returns equally.
Q-3. Which of the following institutions will on average have the greatest need for liquidity?
A. Banks. （2020 原版书）
B. Investment companies.
C. Non-life insurance companies.
Q-4. A defined benefit plan with a large number of retirees is likely to have a high need for
A. income. (2020 原版书)
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B. liquidity.
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C. insurance.
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Q-5. With respect to mutual funds, which of the following statements is least accurate?
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A. If it is an open-end fund, it will accept new investment money and issue additional shares at
a value equal to the net asset value of the fund at the time of investment.
B. If it is a closed-end fund, no new investment money is accepted into the fund. New investors
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invest by buying existing shares, and investors in the fund liquidate by selling their shares to
other investors.
C. Unlike closed-end funds in which new shares are created and sold at the current net asset
value per share, open-end funds can sell for a premium or discount to net asset value
depending on the demand for the shares.
Q-6. Which of the following financial products is least likely to have a capital gain distribution?
A. Exchange traded funds.
B. Open-end mutual funds.
C. Closed-end mutual funds.
9.2. Portfolio Management Process
9.2.1.1. Planning step

➢ Analysis of the investor’s risk tolerance, return objectives, time horizon, tax
exposure, liquidity needs, income needs, unique circumstances;
➢ Develop an IPS: describes the investor’s investment objectives and constraints;
state an objective benchmark; reviewed and updated regularly.
9.2.1.2. Execution step
➢ Asset allocation; top-down analysis & bottom-up
➢ Security analysis;
➢ Portfolio construction.
9.2.1.3. Feedback step
➢ Monitor and rebalance the portfolio;
➢ Measure portfolio performance.
9.2.2. 基础题
Q-7. With respect to the portfolio management process, the asset allocation is determined in
the: (2020 原版书)
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A. planning step.
B. feedback step.
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C. execution step.
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9.3. Expected Return and Expected Standard Deviation
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常考计算：
9.3.1.1. Time-Weighted Return and Money-Weighted Return

➢ 1 + TWRR =(1+HPR1) × (1+HPR2) × … × (1+HPR365), HPRt is daily holding period return;
1 + TWRR =[(1+r1) × (1+r2) × … × (1+rN)]1/n, ri is the time-weighted return of year i.
➢ MWRR 概念：The internal rate of return is called the money-weighted rate of return,
in investment management applications, because it accounts for the timing and

amount of all cash flows into and out of the portfolio.
◼ Only appropriate for the investment when manager can control the timing and
direction of CF.
➢ MWRR 计算步骤及公式
◼ Firstly, determine the timing of each cash flow;

◼ Then, using the calculator to compute IRR, or using geometric mean.
➢ TWRR and MWRR:
◼ TWRR: Not be influenced by the timing and direction of CF, so it’s an objective
indicator of investment managers’ performance.
◼ MWRR: However, if can control the timing and direction, MWRR is the best
indicator to measure the return.
9.3.1.2. An individual investment:
n
➢ Expected Return E ( R ) =  PR
i i = P1 R1 + P2 R 2 + + Pn Rn
i =1
1 T
➢ Variance of Return Var =  2 =  ( Rt −  )2
T i =1
➢ Standard Deviation of Return
1 T 1 T
=  ( Rt −  )2 ( population)
T i =1
s=  ( Rt − R)2 (sample)
T − 1 t =1
9.3.1.3. A Portfolio:
n
➢ Expected Return E ( R ) =  wi Ri
i =1
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n n n
➢ Standard deviation sP = sP2 =  wi2 si2 +  wi w jCovi, j
i =1 i =1 j =1
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n
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➢ Covariance Cov1,2 =  Pi [ Ri ,1 - E ( R1 )][Ri ,2 - E ( R2 )]

i =1
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➢ Covariance (given equal weights, variance and covariance)
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s 2 N -1
sP2 = + Cov
N N
Cov1,2
➢ Correlation 1,2 =
 1 2
➢ Variance of returns for a portfolio of two risky assets:
 p2 = w12 12 + w22 22 + 2w1 w2 1  2 1, 2
9.3.2. 基础题
Q-8. At the beginning of Year 1, a fund has $10 million under management; it earns a return
of 14% for the year. The fund attracts another $100 million at the start of Year 2 and
earns a return of 8% for that year. The money-weighted rate of return is most likely:
A. less than the time-weighted rate of return.
B. the same as the time-weighted rate of return.
C. greater than the time-weighted rate of return.
Q-8. Which of the following statements most likely represents a characteristic of the money-
weighted rate of return?（疑似改写题）
A. It removes the effects of timing and amount of withdrawals and addition to the portfolio.
B. It reflects the compound rate of growth of one unit of currency invested over a stated
measurement period.
C. It is the internal rate of return on a portfolio, taking account of all cash flows.
Q-9. If the correlation between assets in a portfolio increases during a market turmoil, given
other conditions unchanged, the portfolio risk is most likely to:
A. Increase. （18 年原版书后题 R41-31）
B. Unchange.
C. Decrease.
Q-10. A portfolio includes two assets. The portfolio’s standard deviation equals to the weighted
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average mean of the two assets’ standard deviation. The correlation of these two assets
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is closest to:（疑似改写题）
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A. -1.
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B. 0.
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C. 1.
Q-11. A portfolio manager creates a portfolio and the correlation coefficient between two
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securities equals to zero. Comparing the weighted average of two securities’ standard
deviation, the portfolio’s standard deviation is:
A. lower.
B. higher.
C. no difference.
Q-12. A correlation matrix of the returns for securities A, B, and C is reported below:
Security A B C
A 1
B 0.7 1
C 0 –0.3 1
Assuming that the expected return and the standard deviation of each security are the
same, a portfolio consisting of an equal allocation of which two securities will be most
effective for portfolio diversification?
A. Securities A and B.
B. Securities A and C.
C. Securities B and C.
9.4. Markowitz’s Theory
9.4.1.1. Assumptions
➢ Returns distribution: Each investment can be measured by a probability
distribution of expected returns over a given horizon.
➢ Utility maximization: Investor intends to maximize their expected utility over time
horizon.
➢ Risk is variability: Risk is measured in terms of variance (standard deviation) of
expected returns.
➢ Risk/return: Investors make their decision based on expected returns and risk.
➢ Risk aversion: Investors prefer the portfolio with less risk given the same returns.
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9.4.1.2. Minimum-variance frontier

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➢ Minimum-variance portfolio is the portfolio available that has the lowest standard
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deviation with a given expected return.

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➢ Minimum-variance frontier is the entire collection of minimum-variance portfolios.

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9.4.1.3. Global minimum-variance portfolio

➢ The left-most point on the minimum-variance frontier is the portfolio with the
minimum variance among all portfolios of risky assets.
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9.4.1.4. Efficient frontier
➢ The curve that lies above and to the right of the global minimum-variance portfolio
is referred to as the Markowitz efficient frontier.
➢ Those portfolios that have the greatest expected return with a given level of risk
make up the efficient frontier.
➢ All portfolios of risky assets that rational, risk-averse investors will choose.
➢ Efficient portfolio: well-diversified or fully-diversified.
9.4.1.5. Utility Theory
➢ Assumptions
◼ Investors are risk averse.
◼ They always prefer more to less (greater return to lesser return).
◼ They are able to rank different portfolios in the order of their preference.
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➢ Utility function U = E (r ) − A 2
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◼ U: the utility of an investment
◼ E(r): the expected return
◼ σ2: the variance of the investment
◼ A: a measure of risk aversion, which is measured as the marginal reward that
an investor requires to accept additional risk.
◆ A is higher for more risk-averse individuals.
◆ Risk-aversion: A>0
◆ Risk-neutral: A=0
◆ Risk-seeking: A<0
9.4.1.6. 投资者分类
➢ Risk-aversion
◼ Refers to the fact that individuals prefer less risk to more risk
◼ Risk-averse investors:
◆ Prefer lower to higher risk for a given level of expected returns
◆ Will only accept a riskier investment if they are compensated in the form
of greater expected return
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➢ Risk-neutral
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◼ an investor is indifferent about the gamble or the guaranteed outcome

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◼ Risk neutrality investor cares only about return and not about risk, so higher
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return investments are more desirable even if they come with higher risk.
➢ Risk-seeking
◼ Refers to the fact that investor is said to be risk loving or risk seeking.
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◼ Risk seeking investors:
◆ Prefer higher risk to lower risk for a given level of expected returns
◆ Will accept less expected return because of the extra utility from the risk
◆ The gamble has an uncertain outcome, but with the same expected value
as the guaranteed outcome. Thus, an investor choosing the gamble means
that the investor gets extra "utility" from the uncertainty associated with
the gamble.
9.4.1.7. Indifference curve
➢ Plots combinations of risk(standard deviation) and expected return among which
an investor is indifferent.
9.4.2. 基础题
Q-13. Which of the following is not an assumption of the Markowitz model? Investors:
A. have homogeneous expectations.
B. maximize one-period expected utility.
C. base decisions solely on expected return and risk.
Q-14. With respect to the utility theory, which of the following statements is most accurate?
A. The risk aversion coefficient, A, is less than zero for a risk-averse investor.
B. The risk-averse investor’s indifference curve exhibits a negative slope, implying that they are
happy to substitute risk for return.
C. The risk-averse investor has an indifference curve with a positive slope. As volatility increases,
this investor demands increasingly higher returns to compensate for risk.
Q-15. Risk-averse investors who invest in risk-free assets will have a numerical utility that is:
A. same as risk-seeking investors. （18 年原版书后题 R41-18）
B. higher than risk-averse investors.
C. higher than risk-neutral investors.
Q-16. As one moves to the right along an investor's efficient frontier, a set increase in risk is
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most likely to lead to:（16、18B 年 mock 题）

A. sequentially larger increases in expected return.
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B. consistent increases in expected return.

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C. sequentially smaller increases in expected return.

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Q-17. When considering a portfolio that is optimal for one investor, a second investor with a
higher risk aversion would most likely: （17 年 mock 题）
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A. expect a higher variance for the portfolio.
B. derive a lower utility from the portfolio.
C. have a lower return expectation for the portfolio.
9.5. Capital Market Theory
9.5.1.1. CAL
➢ Given the risk-free rate and the risk and return of a portfolio of risky assets, the
line of possible portfolio risk and return combinations is referred as capital
allocation line.
➢ Two-fund separation theorem
◼ All investors will hold a combination of two portfolios or funds: a risk-free asset
and an optimal portfolio of risky assets.
9.5.1.2. CML
➢ CAL v.s. CML
◼ The CML is a special case of the CAL, where the risky portfolio is the market
portfolio
➢ Market portfolio
◼ Is the tangent point where the CML touches the Markowitz efficient frontier
◼ Consists of every risky assets
◼ The weights on each asset are equal to the percentage of the market value of
the asset to the market value of the entire market portfolio.
➢ CML formula
◼ under the assumption of homogeneous expectations, given the risk-free rate
and the risk and return of market portfolio of all risky assets, the risk and return
combination is referred as capital market line
◼ E ( RM ) − RF
E ( RP ) = RF + P
M
➢ CML 的作用
:
◼ Investment using CML follow a passive investment strategy (i.e., invest in an

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index of risky assets that serves as a proxy for the market portfolio and allocate
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a portion of their investable assets to a risk-free asset.)

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➢ Lending and borrowing portfolio: 在 CML 线上，如果投资组合要获得比市场组

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合更高的收益，应使用杠杆，使用无风险利率借款投资市场组合。
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9.5.2. 基础题
Q-18. With respect to capital market theory, which of the following assumptions allows for the
existence of the market portfolio? All investors: (2020 原版书)
A. are price takers.
B. have homogeneous expectations.
C. plan for the same, single holding period.
Q-19. Two individual investors with different levels of risk aversion will have optimal portfolios
that are:
A. below the capital allocation line.
B. on the capital allocation line.
C. above the capital allocation line.
Q-20. Which of the following statements is least accurate? An investor may construct a
portfolio located on the capital market line (CML) by:
A. investing a portion of his capital in the risk-free asset and the balance in a fully diversified
portfolio of all equities.
B. investing a portion of his capital in the risk-free asset and the balance in a fully diversified
portfolio of all risky assets.
C. borrowing capital at the risk-free rate and investing all his capital plus all borrowed capital in
a fully diversified portfolio of all risky assets.
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Q-21. If investors borrow at a rate that exceeds the risk-free lending rate, the resulting
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borrowing portfolios will:

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A. plot on a flatter line.

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B. plot on a steeper line.

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C. no longer plot on a straight line.
Q-22. A portfolio with equal parts invested in a risk-free asset and a risky portfolio will most
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likely lie on:
A. the efficient frontier.
B. the security market line.
C. a capital allocation line.
Q-23. Relative to an investor with a steeper indifference curve, the optimal portfolio for an
investor with a flatter indifference curve will most likely have:
A. a lower level of risk and return.
B. a higher level of risk and return.
C. the same level of risk and return.
9.6. SML
9.6.1.1. Systematic risk and unsystematic risk

➢ Systematic risk: the risk that cannot be eliminated by diversification, which is
measured by beta.
➢ Unsystematic risk: the risk that is eliminated by diversification.
➢ Since unsystematic risk can be eliminated through diversification, only systematic
risk is compensated.
9.6.1.2. Beta
➢ Defination: the sensitivity of an asset’s return to the return on the market index in
the market model. A standardized measure of systematic risk.
Covi ,mkt i
➢ Formula: i = =( )  i ,mkt
 2
mkt  mkt
9.6.1.3. Return generate model: multifactor models
E(Ri) - Rf = βi1 × E(factor1) + βi2 × E(factor2) + βi3 × E(factor3) + ... + βij × E(factorj)
➢ Macroeconomic factors: GDP growth, interest rate, inflation rate, productivity,
employment or consumer confidence.
➢ Fundamental factors: earnings, earnings growth, firm size, and research
:
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expenditures.
➢ Statistical factors: no obvious economic interpretations with asset returns.
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➢ Single factor Model

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◼ Market model: Ri =𝛼i + 𝛽i 𝑅𝑚 + 𝑒i

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◼ Single-index model: Ri − Rf=𝛼i + 𝛽i (𝑅𝑚 − 𝑅𝑓) + 𝑒i

9.6.1.4. Assumptions of the CAPM
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➢ Investors are risk-averse, utility-maximizing, rational individuals.
➢ Markets are frictionless, including no transaction costs and no taxes.
➢ Investors plan for the same single holding period.
➢ Investors have homogeneous expectations or beliefs.
➢ All investments are infinitely divisible.
➢ Investors are price takers.
9.6.1.5. CAPM equation
E ( Ri ) = R f + i [ E ( Rm ) − R f ]
9.6.1.6. Security market line (SML)
➢ A graphical representation of the CAPM with beta, reflecting systematic risk, on
the x-axis and expected return on the y-axis.
9.6.1.7. SML 曲线应用
➢ Undervalued
◼ Estimated return > Required return from the SML, price undervalued.
◼ Investors should buy.
➢ Overvalued
◼ Estimated return < Required return from the SML, price overvalued.
◼ Investors should sell.
➢ Properly valued
◼ Estimated return = Required return from the SML, price fair valued.
◼ Investors are indifferent between buying or selling.
9.6.1.8. SML & CML
SML CML
Measure Uses systematic risk (non- Uses standard deviation (total
of risk diversifiable risk) risk)
Tool used to determine the
Tool used to determine the
appropriate asset allocation
appropriate expected
Application (percentages allocated to the
(benchmark) returns for
:
risk-free asset and to the market

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securities
portfolio) for the investor
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Graph of the capital asset pricing

Definition Graph of the efficient frontier
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model
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Slope Market risk premium Market portfolio Sharpe ratio
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9.6.2. 基础题
Q-24. With respect to the capital asset pricing model, which of the following values of beta for
an asset is most likely to have an expected return for the asset that is less than the risk-
free rate?
A. -0.5
B. 0.0
C. 0.5
Q-25. Factors such as changes in industrial production contribute to: 2010mock

A. systematic risk.
B. Nonsystematic risk.
C. both systematic and unsystematic risk.
Q-26. An analyst uses a multifactor model to estimate the expected returns of various
securities. The model analyzes historical and cross-sectional return data to identify
factors that explain the variance or covariance in the securities’ observed returns. This
model is most likely a: (mock 126)
A. statistical factor model.
B. macroeconomic factor model.
C. fundamental factor model.
Q-27. An analyst gathers the following information:

Expected Annual Expected Standard Correlation between
Security
Return (%) Deviation (%) Security and the Market
Security 1 12 26 0.7
Market 11 16 1.0
Which security has the least amount of market risk?（18 年原版书后题 R42-18）
:
A. Security 1
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B. Security 2
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C. Security 3
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Q-28. With respect to the capital market theory, investors are most likely compensate for::
A. unexpected negative political events.
B. recent development of a new drug of a pharmaceutical company.
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C. CEO’s retirement of a public company.
Q-29. An analyst gathered the following information about the stock of UG and the market.
Expected Return of UG’s stock E(RUG) 15%
Expected Return of market RM 10%
Standard deviation of market return σM 12%
Covariance between UG’s stock and market Cov (UG,M) 0.03
If the risk-free rate is 4%, is UG’s stock overvalued?（疑似回顾题）
A. Yes.
B. No, it is fairly valued.
C. No, it is undervalued.
Q-30. Following its decision to divest its non-core assets, analysts expect HCL Corp's standard
deviation of returns to rise to 25% and its correlation with the market portfolio to remain
unchanged at 0.8. The risk-free rate and the market risk premium are expected to remain
unchanged at 4% and 8%, respectively. However, the market portfolio's standard
deviation of returns is expected to decrease to 15%. The firm's expected return after the
restructure is closest to:（16、17、18C 年 mock 题）
A. 12.00%.
B. 14.64%.
C. 9.32%.
Q-31. Stock X and Stock Y have the same level of total risk. Stock X has twice the systematic
risk of Stock Y and half its non-systematic risk. Stock X's expected return will most likely
be: （17 年 mock 题）
A. lower than the expected return of Stock Y.
B. the same as the expected return of Stock Y.
C. higher than the expected return of Stock Y.
Q-32. An investor with $20,000 decides to borrow an additional $10,000 at the risk-free rate
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and invest all the available funds in the market portfolio. This investor's portfolio beta is
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closest to:（1706、18B mock 题）

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A. 0.5.
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B. 1.5.
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C. 1.0.
Q-33. With respect to return-generating models, the intercept term and slope of the market
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model is the asset’s estimated:
A. Beta and alpha respectively.
B. Alpha and beta respectively.
C. Variance and correlation respectively.
Q-34. If an investor hold a portfolio with a long investment horizon, the main return is
measured by:
A. beta.
B. alpha.
C. security selection.
9.7. Performance Measures
9.7.1.1. Performance evaluation

𝑅𝑝 −𝑅𝑓
➢ Sharpe ratio =
𝜎𝑝
𝑅𝑝 −𝑅𝑓
➢ Treynor measure = 𝛽𝑝
𝜎
➢ M − squared alpha: 𝑀2 𝑎𝑙𝑝ℎ𝑎 = (𝑅𝑝 − 𝑅𝑓 ) 𝜎𝑚 − (𝑅𝑀 − 𝑅𝑓 )
𝑝
➢ Jensen′ s α: 𝛼𝑝 = 𝑅𝑃 − {𝑅𝑓 + 𝛽𝑝 [𝑅𝑚 − 𝑅𝑓 ]}

9.7.1.2. Comparison of four measures
➢ Jensen’s alpha 和 M-squared alpha 是可以根据大小来判断投资业绩
◼ We are not only able to determine the rank of a portfolio but also which, if any,
of our portfolios beat the market on a risk-adjusted basis.
➢ Sharpe ratio 和 Treynor measure 需要再和其他的组合的指标进行比较
◼ To rank portfolios, the Sharpe ratio or Treynor ratio of one portfolio must be
compared with the Sharpe ratio or Treynor ratio of another portfolio.
➢ For non-diversified portfolio, Sharpe ratio and M-squared alpha are appropriate.
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➢ For fully diversified portfolio, Jensen Alpha and Treynor are appropriate.
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9.7.2. 基础题
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Q-35. Which of the following performance measures is most appropriate for an investor who
is not fully diversified?
A. M-squared alpha.
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B. Treynor ratio.
C. Jensen's alpha.
Q-36. An portfolio manager gathered the following information about a fund.

Fund’s rate of return 15%
Market rate of return 8%
Risk-free rate 3%
Beta of the fund 1.5
The Jensen’s alpha for the fund is closest to:（疑似改写题）
A. 4.5%
B. 7.1%
C. 10.3%
Q-37. With respect to portfolio performance appraisal measures, which of the following
statements is most accurate about Jensen’s Alpha?
A. The difference between the actual portfolio return and the calculated risk-adjusted return is
a measure of the portfolio’s performance relative to the market portfolio.
B. Jensen’s Alpha is a commonly used measure of performance, which is defined as the
portfolio’s risk premium divided by its systematic risk.
C. Jensen’s Alpha is defined as the portfolio’s risk premium divided by its total risk.
9.8. Portfolio Planning and Construction
9.8.1.1. Component of IPS

➢ Introduction. This section describes the client.
➢ Statement of Purpose. This section states the purpose of the IPS.
➢ Statement of Duties and Responsibilities. This section details the duties and
responsibilities of the client, the custodian of the client's assets, and the
investment managers.
➢ Procedures. This section explains the steps to take to keep the IPS current and the
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procedures followed able to respond to various contingencies.

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➢ Investment Objectives. This section explains the client's objectives in investing.

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➢ Investment Constraints. This section presents the factors that constrain the client
in seeking to achieve the investment objectives.
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➢ Investment Guidelines. This section provides information about how policy should
be executed (e.g., on the permissible use of leverage and derivatives) and specific
types of assets excluded from investment, if any.
➢ Evaluation and Review. This section provides guidance on obtaining feedback on
investment results.
➢ Appendices: (A) Strategic Asset Allocation, (B) Rebalancing Policy. Many investors
specify a strategic asset allocation (SAA), also known as the policy portfolio, which
is the baseline allocation of portfolio assets to asset classes in view of the
investor's investment objectives and the investor's policy with respect to
rebalancing asset class weights.
9.8.1.2. Strategic asset allocation
➢ the set of exposures to IPS-permissible asset classes that is expected to achieve the
client’s long-term objectives given the client’s investment constrains.
➢ Correlations within the class is higher than correlations between asset classes.
9.8.1.3. Active portfolio management
➢ Tactical asset allocation: is the decision to deliberately deviate from the policy
exposures to systematic risk factors with the intent to add value based on forecasts
of the near-term returns of those asset classes.
◼ The manager’s ability to identify shot-term opportunities in specific asset
classes;
◼ The existence of such short-term opportunities.
➢ Security selection: is an attempt to generate higher returns than the asset class
benchmark by selecting securities with a higher expected return.
◼ The manager’s skill
◼ The opportunities with in a particular asset class.
9.8.2. 基础题
Q-38. Which of the following is least likely to be placed in the appendices to an investment
policy statement (IPS)?（原版书课后题）
:
A. Rebalancing policy.
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B. Strategic asset allocation.

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C. Statement of duties and responsibilities.

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Q-39. In a strategic asset allocation, assets within a specific asset class are least likely to have:
A. low paired correlations.
B. low correlations with other asset classes.
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C. similar risk and return expectations.
9.9. Investment Objectives and Constraints
9.9.1.1. Risk objective

➢ The risk objective limits how high the investor can set the return objective
➢ Risk measurement
◼ Absolute: variance or standard deviation
◼ Relative: relate risk relative to one or more benchmarks perceived to represent
appropriate risk standards (tracking risk)
◼ Downside risk: VaR
◆ Value at risk (VaR) is a measure of the size of the tail of the distribution of
profits on a portfolio or for an entity, which
◆ e.g. A VaR of $100 at 1% for one day means it is expected to lose a
minimum of $100 in one day 1% of the time.
➢ Risk tolerance: willingness and ability
9.9.1.2. Return objectives: absolute or relative basis
➢ Return measurement
◼ Absolute basis
◆ percentage rate of return: total return (balance between capital gains and
income), inflation-adjusted return (real)
◼ Relative
◆ Relative to a benchmark return: Some institutions also set their return
objective relative to a peer group or universe of managers
 when limited information is known about the investment strategies
 or the returns calculation methodology being used by peers,
 the impossibility of all institutions being "above average."
 Furthermore, a good benchmark should be investable
➢ Stated return desire vs. required return
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➢ Consistent with risk objective

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9.9.1.3. Investment constraints

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➢ Liquidity — for cash spending needs (anticipated or unexpected)

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➢ Time horizon — the time between making an investment and needing the funds
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➢ Tax concerns — the tax treatments of various accounts, and the investor’s
marginal tax bracket
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➢ Legal and regulatory factors — restrictions on investments in retirement, personal,
and trust accounts
➢ Unique needs and preferences — constraints because of investor preferences or
other factors not already considered
9.9.1.4. ESG considerations
➢ Negative screening — excluding specific companies or industries
➢ Positive screening or best-in-class —invest in companies that have positive ESG
practices
➢ Thematic investing —investing in sectors or companies in order to promote
specific ESG-related goals
➢ Engagement/active ownership investing —using share ownership as a platform to
promote improved ESG practices at a company
9.9.2. 基础题
Q-40. An individual investor’s ability to take risk is higher than average level. His willingness to
take risk is lower than average level. How about his risk tolerance, comparing with the
average level? （2012 年 12 月考题回顾）
A. Higher than average level.
B. Lower than average level.
C. Same with the average level.
Q-41. Risk assessment questionnaires for investment management clients are most useful in
measuring: (2020 原版书)
A. value at risk.
B. ability to take risk.
C. willingness to take risk.
Q-42. Which of the following impact(s) one's ability to take risk?

A. investment time horizon
B. financial situation
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C. both A and B.
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Q-43. Frank Johnson is investing for retirement and has a 20-year horizon. He has an average
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risk tolerance. Which investment is likely to be the least suitable for a major allocation in
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Johnson’s portfolio? (mock 125)

A. Listed equities.
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B. Private equity.
C. US Treasury bills.
Q-44. Which of the following constraints would most likely appear in the unique needs and
preferences section of a trusts Investment policy statement? The portfolio is:
A. subject to the prudent-man standard.
B. subject to income taxes of 35%.
C. prohibited from investing in tobacco companies.
9.10. Behavioral Biases of Individuals
9.10.1. 重要知识点
9.10.1.1. Cognitive Errors arise from processing information into rational decisions with a lack of
capacity or information, e.g., proper statistical analysis techniques or sufficient data. It is
easily to correct.
➢ Belief perseverance biases is the tendency to cling to one’s previously held beliefs.
◼ Conservatism bias: Occurs when people maintain their prior views or forecasts
by inadequately incorporating new, conflicting information. 由于没有充足分
析新的信息，人倾向于保持原有观点。
◆ 修正：properly analyzing and weighting new information
◼ Confirmation bias: Refers to the tendency to look for and notice what confirms
prior beliefs and to ignore or undervalue whatever contradicts them.倾向于寻
找能够证明自己观点的迹象，忽略与自己观点相冲突的迹象。
◆ 修正：Develop screening criteria, actively seeking out information that
challenges your beliefs.
◼ Representativeness bias: Refers to the tendency to classify new information
based on past experiences and classifications, e.g., halo effect. 基于过去的经
验和分类对新信息进行简单归类，分为两种情况：1）base rate neglect，忽
略基本概率；2）sample-size neglect，忽略样本规模，即样本量过小。
◆ 修正：Ask yourself a series of questions.（例如，同等规模的基金表现
如何？）
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◼ Illusion of control bias: Refers when people tend to believe that they can
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control or influence outcomes when, in fact, they cannot. 人倾向于相信他们

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能够控制结果，但实际上并不能。
◆ 修正：Seek contrary viewpoints and keep record.
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◼ Hindsight bias: Refers to believing past events as having been predictable and
reasonable to expect. 人们看过去的事情，好像自己曾经预测过。
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◆ 修正：Carefully record and examine their investment decisions.
➢ Information-processing biases describe how information may be processed and
used illogically or irrationally in financial decision making.
◼ Anchoring & adjustment: refers to relying on an initial piece of information to
make subsequent estimates, judgments, and decisions. 依靠初始信息进行后
续估计、判断和决策。
◆ 修正：提问自己一系列的问题（Am I holding onto this stock based on
rational analysis, or am I trying to attain a price that I am anchored to, such
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as the purchase price or a high water mark?）
◼ Mental accounting bias: refers to mentally dividing money into “accounts” that
influence decisions, even though money is fungible. 同样的钱，不同的对待
（分层构建投资组合）
◆ 修正：Focus on total return.
◼ Framing bias: Occurs when person answers a question differently based on the
way in which it is asked or framed. 不同的表述方法，带来的感受和决策结
果也不同。
、
◆ 修正：Ask yourself a series of questions.（例如，是否只关注 gain 或
loss？应该关注投资品未来的前景）。
◼ Availability bias: occurs when people estimate the probability of an outcome
or the importance of a phenomenon based on how easily information is
recalled. 根据回忆信息的容易程度，估计某事件发生的概率。
◆ 修正：Carefully research and analyze investment decisions before making
them, and focus on long-term results.
9.10.1.2. Emotional Biases arise from impulse or intuition and affect how processing information
and decision making. It is harder to correct.
➢ Loss aversion bias: refers to the tendency to strongly prefer avoiding losses to
achieving gains. 相对于获得收益来说，人更倾向避免损失。
◼ 修正：A disciplined approach to investment based on fundamental analysis.
➢ Overconfidence bias: refers to people demonstrate unwarranted faith in their own
abilities. 人们对自己的直觉推理表现出毫无根据的信心。
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◼ 修正：Should review their trading records，检查自己的交易记录，如果发现

历史业绩不佳，就不会这么自信了。
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➢ Self-control bias: occurs when people fail to act in pursuit of their long-term,
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overarching goals in favor of short-term satisfaction. 由于缺乏纪律性，无法追求

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长期目标。
◼ 修正：Should ensure that a proper investment plan is in place and should have
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a personal budget.
➢ Status quo bias: occurs when people choose to do nothing (i.e., maintain the
“status quo”) instead of making a change, even when change is warranted. 即使
改变是必要的，人们选择什么都不做（即维持“现状”）而不是做出改变。
◼ 修正：Should quantify the risk-reducing and return enhancing advantages of
diversification and proper asset allocation.
➢ Endowment bias: refers to people value an asset more when they own it than
when they do not or people attributing additional, unwarranted value to things
they possess versus things they do not. 人们一旦拥有一项资产时，就会觉得其
价值更高。
◼ 修正：问自己这个标的资产现在让我买，我还愿意买吗？
➢ Regret-aversion bias: refers to people tend to avoid making decisions out of fear
that the decision will turn out poorly. 指人们倾向于避免做出决策，因为害怕决
策结果会很糟糕，未来会后悔。
◼ 修正：Should quantify the risk-reducing and return-enhancing advantages of
diversification and proper asset allocation.
9.10.2. 基础题
Q-45. Which of the following would most likely be classified as an emotional bias? (Notes, 2022)
A. The investor has difficulty interpreting complex new information.
B. The investor only partially adjusts forecasts when he receives new information.
C. The investor has a tendency to value the same assets higher if he owns them than if he does
not own them.
Q-46. Abby Lane has investments scattered across many different accounts from bank savings
to before-and after-tax retirement accounts to taxable nonretirement accounts. She has
multiple investing goals ranging from important short-term goals to longer-term" wish
list” goals. She looks at her financial assets and views each holding as designed to meet
specific goals. Lane has been very successful in her investment decisions for several
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decades and believes she can continue to achieve reasonable results. Lane most likely
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exhibits: (Notes, 2022)

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A. framing bias.
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B. mental accounting.
C. overconfidence bias.
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Q-47. Twenty years ago, Jane set up her initial asset allocation in her defined contribution plan
by placing an equal amount in each asset class and never changed it. Over time, she
increased her contribution by 1% per year until she reached the maximum amount
allowed by law. Due to her steadfastness and good fortune, coupled with matching funds
from her employer, she now finds herself in her early 40s with a million-dollar retirement
account. Which of the following biases does Ivy most likely exhibit? (Notes, 2022)
A. Representativeness.
B. Status quo bias.
C. Availability bias.
Q-48. The halo effect suggests that investors tend to overvalue stocks: (Notes, 2022)
A. from their own country or region.
B. with which the investors are most familiar.
C. that have experienced rapid growth and price appreciation.
9.11. Risk Management
9.11.1. 重要知识点
9.11.1.1. Risk terminologies

➢ Risk: Exposure to uncertainty
➢ Risk exposure: The extent to which an entity’s value may be affected through
sensitivity to underlying risks.
➢ Risk management
◼ Risk management is the process by which an organization or individual defines
the level of risk to be taken, measures the level of risk being taken, and adjusts
the latter toward the former: with the goal of maximizing the company’s or
portfolio’s value or the individual’s overall satisfaction, or utility.
◼ It comprises all the decisions and actions needed to best achieve organizational
or personal objectives while bearing a tolerable level of risk.
◼ Not about minimizing risk.
9.11.1.2. Risk management framework
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➢ It is the infrastructure, process, and analytics needed to support effective risk

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management in an organization.
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➢ Integrate the risk and return aspects of the enterprise into decisions.
➢
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Not a “one size fits all” solution: it is best achieved through a custom solution.
➢ Key factors:
◼ Risk governance
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◼ Risk identification and measurement
◼ Risk infrastructure
◼ Defined policies and processes
◼ Risk monitoring, mitigation, and management
◼ Communications
◼ Strategic analysis or integration
9.11.1.3. Key factors of risk management framework
➢ Risk governance
◼ The top-down process foundation for risk management activities, including risk
oversight and setting risk tolerance for the organization.
➢ Risk identification and measurement
◼ The quantitative and qualitative assessment of all potential sources of risk and
the organization’s risk exposures.
➢ Risk infrastructure
◼ Comprises the resources and systems required to track and assess the
organization’s risk profile.
➢ Defined policies and processes
◼ Management’s complement to risk governance at the operating level
➢ Risk monitoring, mitigation, and management
➢ Communications
◼ Includes risk reporting and active feedback loops so that the process improves
decision making.
➢ Strategic analysis or integration
◼ Using these risk tools to rigorously sort out the factors that are and are not
adding value as well as incorporating this analysis into the management
decision process with the intent of improving outcomes.
9.11.1.4. Risk governance
➢ The top-down process and guidance that direct risk management activities to align
with and support the overall enterprise.
➢ Risk governance refers to senior management’s determination of the risk tolerance
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of the organization, the elements of its optimal risk exposure strategy, and the
framework for oversight of the risk management function.
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➢ Elements of effective risk governance

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◼ It determines the organization’s goals, direction and priorities

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◼ Spells out risk appetite or tolerance

◼ Provide a sense of the worst losses that could be tolerated in various scenarios
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◼ Decisions about risk budgeting
9.11.1.5. Risk tolerance
➢ A key element of good risk governance, delineates which risks are acceptable,
which are unacceptable, and how much risk the overall organization can be
exposed to.
➢ Identifies the extent to which the entity is willing to experience losses or
opportunity costs and to fail in meeting its objectives.
➢ Should be chosen and communicated before a crisis.
➢ The ability of a company to respond dynamically to adverse events may allow for a
higher risk tolerance
9.11.1.6. Risk budgeting
➢ Risk budgeting is any means of allocating investments or assets by their risk
characteristics.
9.11.1.7. Financial risks and non-financial risks
➢ Financial risks refer to the risks that arise from events occurring in the financial
markets. 3 main types:
◼ Market risk
◆ Arises from movements in stock prices, interest rates, exchange rates and
commodity prices
◼ Credit risk
◆ The risk that a counterparty will not pay any amount owed
◼ Liquidity risk
◆ The risk that, as a result of degradation in market conditions or the lack of
market participants, one will be unable to sell an asset without lowering
the price less than the fundamental value
◆ Liquidity risk could also be called transaction cost risk and is most
associated with a widening bid-ask spread.
➢ Non-financial risks consist of a variety of risks, including settlement risk, operational
risk, legal risk, regulatory risk, accounting risk, tax risk, model risk, tail risk, and
sovereign or political risk.
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◼ Operational risk is the risk that arises from the operations of an organization
and includes both human and system or process errors.
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◼ Solvency risk is that an entity does not survive or succeed because it runs out
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of cash to meet its financial obligations.

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9.11.1.8. Other risk issues

➢ Interaction between risks:
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◼ Risks are not necessarily independent because many risks arise as a result of
other risks: risk interactions can be extremely non-linear and harmful.
➢ Risk drivers are the fundamental global and domestic, macroeconomic and
industry factors that create risk.
➢ Common measures of risk include:
◼ Standard deviation or volatility:
◼ Asset-specific measures, such as beta or duration:
◼ Derivative measures, such as delta, gamma, vega, and rho:
◼ And tail measures such as value at risk, cvar and expected loss given default.
➢ Methods of risk modification:
◼ Risk prevention and avoidance
◼ Risk acceptance: self-insurance and diversification
◼ Risk transfer (insurance)
◼ Risk shifting (derivatives)
➢ The determinants of which method is best for modifying risk are the benefits
weighed against the costs, with consideration for his overall final risk profile and
adherence to risk governance objectives.
9.11.2. 基础题
Q-49. Risk management in the case of individuals is best described as concerned with:
A. hedging risk exposures.
B. maximizing utility while bearing a tolerable level of risk.
C. maximizing utility while avoiding exposure to undesirable risks.
Q-50. An example of risk transfer combined with self-insurance is most likely: (mock 125)
A. a bond portfolio hedged with an interest rate option.
B. an insurance policy with a deductible.
C. a bank that establishes a loan loss reserve fund.
Q-51. A major benefit of employing a risk budgeting process is that it most likely: (mock 125)
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A. allows the organization to determine its enterprise risk tolerance.

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B. forces risk tradeoffs across the organization.

C. eliminates the need for hedging within the organization.
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Q-52. An example of a non-financial risk is:

A. market risk.
B. liquidity risk.
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C. settlement risk.
Q-53. Which of the following statements about risk assessment is incorrect?

A. Normally, the VaR loss exceeds conditional VaR. (1906 考题回顾自编)
B. The VaR measure indicates the probability of a loss of at least a certain level in a time period.
C. Both the Sortino ratio and the value-at-risk can measure downside risks.
Q-54. An analyst wanting to assess the downside risk of an alternative investment is least likely
to use the investment’s:
A. Sortino ratio.
B. value at risk (VaR).
C. Sharpe ratio.
Q-55. An investment policy statement's risk objective states that over a 10-month period, with
a probability of 96%, the client's portfolio must not lose more than 4% of its value. This
statement is most likely a(n):（16、18B 年 mock 题）
A. relative risk objective.
B. total risk objective.
C. absolute risk objective.
Q-56. Risk budgeting:

A. is to establish the organization’s risk appetite.
B. aligns risk management activities with the goals of the overall enterprise and allocates
investments or assets by their risk characteristics.
C. identifies the extent to which the entity is willing to experience losses or opportunity costs
and to fail in meeting its objectives.
9.12. The fundamentals of technical analysis
9.12.1. 重要知识点
9.12.1.1. Underlying logic

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➢ Supply and demand determine prices.

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➢ Changes in supply and demand—both in price level and volume—cause changes

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in prices.
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➢ Past price action can be used to anticipate and project potential future prices with
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charts and other technical tools.

9.12.1.2. Principles & Assumptions
➢ The market discounts everything. (Price already reflects all known factors
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impacting a financial instrument.)
➢ Prices move in trends and countertrends. (A trend in motion will continue until it
reverses.)
➢ Price action creates certain patterns that tend to reoccur and may be cyclical. (The
repetition of price movements, according to technical analysts, is due to market
psychology.)
9.12.1.3. Advantages and disadvantages of technical analysis
Technicians Fundamentalist
Projection Trading value Long-term (intrinsic) value
Assessment Actual price & volume Financial statements
Data character Objective & no fraud Subjective & with fraud
Focus Supply & demand value
Price reaction Slow Quick
Unrelated to cash flow Based on cash flow &
Application
& underway market moves predictive analytical methods
Market
Yes No
manipulation
➢ Advantages of technical analysis
◼ Actual price and volume data is easy to access
◼ Technical analysis is objective ( although require subjective judgment ), while
much of the data used in fundamental analysis is subject to assumptions or
restatements.
◼ It can be applied to the prices of assets that do not produce future cash
flows, such as commodities.
◼ Fundamental analysis may have the risk of financial statement fraud, while
technical analysis doesn’t have.
➢ Disadvantage of technical analysis
◼ In markets that are subject to large outside manipulation, the application of
technical analysis is limited.
◼ Technical analysis is also limited in illiquid markets, where even modestly
sized trades can have an inordinate impact on prices.
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9.12.2. 基础题
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Q-57. Why is technical analysis especially useful in the analysis of commodities and currencies?
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A. Valuation models cannot be used to determine fundamental intrinsic value for these
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securities.
B. Government regulators are more likely to intervene in these markets.
C. These types of securities display clearer trends than equities and bonds do.
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Q-58. For the following, which one is not the assumption of technical analysis?（疑似改写题）
A. The historical information can affect the current analysis.
B. Supply and demand does not determine the prices.
C. Prices can be projected with charts and other technical tools.
Q-59. In analyzing a price chart, increasing price and decreasing volume most likely indicate
which of the following?
A. Confirms a rising or declining trend in prices.
B. Predicts that a trendless period will follow.
C. Inconclusive result.
9.13. Types of Charts
9.13.1. 重要知识点
9.13.1.1. 掌握理解各类 technical analysis charts：
➢ Line Charts are a simple graphic display of price trends over time. Line charts are
typically drawn with closing prices as the data points.
➢ Bar charts have four bits of data in each entry—the high and low price
encountered during the time interval plus the opening and closing prices.
➢ Candlestick charts provides four prices per data point entry: the opening and
closing prices and the high and low prices during the period.
◼ Box clear 表示股票涨了。
◼ Box filled 表示股票跌了。
➢ Volume: As an important characteristic included at the bottom of many charts,
volume is used to assess the strength/conviction of buyers and sellers in
determining a security’s price.
➢ Distinction among line charts, bar charts, and candlestick charts：line chart 只
包含收盘价，bar chart 包含收盘价、开盘价、最高价、最低价，candlestick

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chart 不仅包括 4 个价格，本身的形状颜色还代表了一段时间的涨跌。

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➢ Scales:
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◼ Linear scale/arithmetic scale

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◆ Equal vertical distances = an equal unit change.

◆ It is better suited for shorter-term price charts.
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◆ For example, a narrower ranges (e.g., prices from $35 to $50).
◼ Logarithmic scale
◆ Equal vertical distances = an equal percentage change.
◆ It is appropriate for longer time frames.
◆ For instance, the data move through a range of values representing
several orders of magnitude (e.g., from $10 to $10,000).
➢ 注意 chart 的时间区间，可以是日、周，也可以是月、年。
9.13.2. 基础题
Q-60. A candlestick chart is similar to a bar chart except that the candlestick chart:
A. represents upward movements in price with X’s. (ecosystem 202202 wh0)
B. also graphically shows the range of the period’s highs and lows.
C. has a body that is light or dark depending on whether the security closed higher or lower than
its open.
Q-61. A daily bar chart provides: (ecosystem 202202 wh0)

A. a logarithmically scaled horizontal axis.
B. a horizontal axis that represents changes in price.
C. high and low prices during the day and the day’s opening and closing prices.
9.14. Common Chart Patterns
9.14.1. 重要知识点
9.14.1.1. Trend and patterns

➢ A trend is a long-term pattern of movement in a particular direction.
◼ Uptrend: An uptrend for a security is when the price goes to higher highs
and higher lows. (Demand>Supply)
◼ Downtrend is when a security makes lower lows and lower highs.
(Demand<Supply)
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➢ When a security is not trending, it is considered to be in a consolidation.

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➢ Trend line: Can help to identify whether a trend is continuing or reversing.

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➢ Support level: a low price range in which buying activity is sufficient to stop the
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decline in price.
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➢ Resistance level: a price range in which selling is sufficient to stop the rise in price.
➢ Change in polarity: 突破 resistance level 后，

resistance level 极性变化为 support
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level。也就是我们平时说的阻力位一旦突破后就会成为支撑位。
9.14.1.2. Reversal patterns（反转图形，改变原趋势）
➢ For uptrend: head-and-shoulder, double top, triple top.

◼ Head and shoulders pattern is the most widely recognized reversal pattern
◼ Volume is an important indicator. A clear trend should exist before the
formation of the pattern. Shoulders should be symmetrical.
◼ Head and shoulders pattern: Price target= neckline-(head-neckline).
➢ For downtrend: Inverse head-and shoulders pattern, Double bottom, and triple
bottom
◼ Inverse head-and shoulders pattern: Price target = neckline+(neckline–head)
➢ Triple tops and bottoms: three peaks or troughs at roughly the same price level.
9.14.1.3. Continuation patterns（盘整图形，突破后保持原趋势）
➢ Triangle:
◼ Ascending triangle（上面为水平线，下降得越来越小，最后突破向上）；
◼ Descending triangle（下面是水平线，上升得越来越小，最后突破向下）；
◼ symmetrical triangle（bullish 和 bearish 寻找 consensus，突破后方向与突
破前一致）
➢ Rectangle: 上下水平线，分别为支撑线和阻力线
➢ Flags and Pennants are similar to rectangles and triangles in shape, but they are
not horizontal.（旗形和楔形一般出现在短期，突破后趋势不变）
9.14.2. 基础题
Q-62. A price range in which selling is sufficient to stop the rise in price is best described as:
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A. change in polarity. （18Mock MS Q25）

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B. resistance.
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C. support.
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Q-63. Which of the following strategy is most likely to have a good performance during a
consolidation period?
A. Explore the opportunities the reversal pattern.
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B. Explore the opportunities the continuation pattern.
C. Short option with short-term maturity.
9.15. Indicators
9.15.1. 重要知识点
9.15.1.1. Price-based indicators
➢ Moving average lines (移动平均线)：20, 60, 120 trading days
◼ Golden cross: a short-term MA line crosses from underneath a long-term

MA:
◼ Dead cross: a short-term MA line crosses from above a long-term MA.
➢ Bollinger bands：移动平均线加减几个标准差，短期突破无意义；长期突破，
价格走势高于布林带上方则视为超买指标。
9.15.1.2. Momentum oscillators:
➢ Rate of change: M=(V-Vx)×100, 如果与趋势同向且穿过 0，则为买卖信号；
◼ If the ROC oscillator crosses into positive territory during an uptrend, it is a

buy signal.
◼ If it enters into negative territory during a downtrend, it is considered a sell
signal.
➢ Relative strength index: RSI= 100-100/(1+RS), RS=价格上升总和除以下降总和。
一般为在 30-70 之间，过多则为 overbought，过小则为 oversell.
◼ A value above 70/80 represents an overbought situation.

◼ A value below 30 suggests the asset is oversold.
➢ Stochastic oscillator, KD 线：%K＝100(C-L14)/(H14-L14)。When %K moves from
below the %D line to above it, this move is considered a bullish short-term trading
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security and are considered bearish. And vise visa.

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◼ C = latest closing price

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◼ L14 = lowest price in past 14 days

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◼ H14 = highest price in past 14 days

◼ %D = average of the last three %K values calculated daily
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➢ MACD: 为两个指数移动平均的差，通常使用 12 天和 26 天的移动平均
➢ Signal line 为 MACD 的移动平均（通常使用 9 days）
➢ Strategy:
◼ Crossovers of the two lines may indicate a change in trend.
◼ to look for times when the MACD is outside its normal range for a given
security.
◼ to use trendlines on the MACD itself. When the MACD is trending in the same
direction as price, this pattern is in convergence, and when the two are
trending in opposite directions, the pattern is in divergence.
9.15.1.3. Sentiment indicators
➢ Put/call ratio: The put /call ratio is the volume of put options traded divided by
the volume of call option traded.
◼ A high put/ call ratio usually indicates bearish market
◆ Investors who buy put options on a security are presumably bearish,
and investors who buy call options are presumably bullish.
◼ At extreme highs in the put/call ratio, market sentiment is said to be so
extremely negative that an increase in price is likely.
➢ Volatility index: The VIX is a measure of near-term market volatility calculated by
the Chicago Board Options Exchange.
◼ The VIX rises when market participants become fearful of an impending
market decline. These participants then bid up the price of puts, and the
result is an increase in the VIX level.
◼ When other indicators suggest that the market is oversold and the VIX is at
an extreme high, this combination is considered bullish.
➢ Margin debt
◼ When stock margin debt is increasing, investors are aggressively buying and
stock prices will move higher because of increased demand, indicating a
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bullish market. Eventually, the margin traders use all of their available credit,
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so their buying power (and, therefore, demand) decreases, which fuels a

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price decline
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◼ Falling prices may trigger margin calls and forced selling, thereby driving
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prices even lower. If margin debt reaches its bottom and turns up, it is a sign
of bullish.
9.15.1.4. Application to Portfolio Management
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➢ Intermarket analysis is a field within technical analysis that combines analysis of
major categories of securities (namely, equities, bonds, currencies, and
commodities) to identify market trends and possible inflections in a trend.
➢ Relative strength analysis compares the performance of a particular asset with
that of benchmarks (E.g., a common stock, the FTSE 100). Typically, the analyst
prepares a line chart of the ratio of two prices.
➢ Technical analysis complements fundamental analysis
◼ Top-down approach: focuses on how the overall economy is affecting
different sectors or industries.
◼ Bottom-up approach: identifies investment opportunities that depend on
rules and conditions. The researcher starts with an opportunity set and tries
to pick stocks that meet the predefined criteria irrespective of country,
sector, or industry trends.
◆ Momentum and breakout strategies. Predefined Criteria or trading
rules for stock selection: 1.The breakout should take place above the
200-day exponential moving average (long-only strategy); 2.Price
should be in a low-volatility condition prior to the breakout; 3.The
breakout should take place from a well-defined classical chart pattern
between 3 and 24 months in duration; 4.Breakout confirmation should
be a weekly close above the chart pattern boundary.
9.15.2. 基础题
Q-64. Which of the following descriptions about ROC oscillator is incorrect?

A. When the ROC oscillator crosses zero in the same direction as the direction of the trend, this
movement is considered a buy or sell signal. （1906原版书原文改编）
B. If the ROC oscillator crosses into positive territory during an uptrend, it is a buy signal.
C. If the ROC oscillator enters into negative territory during a downtrend, it is considered a buy signal.
Q-65. Which of the following sentiment indicators is most likely to increase when investors
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forecast a bullish market?（疑似改写题）

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A. Put/Call ratio.
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B. Margin debt.
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C. CBOE Volatility Index.

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9.16. Fintech in Investment Management
9.16.1. 重要知识点
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9.16.1.1. Fintech in Investment Management
➢ The term “fintech” refers to technological innovation in the design and delivery
of financial services and products.
➢ Advancements include the use of Big Data, artificial intelligence, and machine
learning to evaluate investment opportunities, optimize portfolios, and mitigate
risks.
9.16.1.2. Big Data
➢ Big Data is characterized by the three Vs—volume, velocity, and variety—and
includes both traditional and non-traditional (or alternative) datasets.
➢ Among the main sources of alternative data are data generated by individuals,
business processes, and sensors.
9.16.1.3. Advanced analytical tools
➢ Artificial intelligence computer systems are capable of performing tasks that
traditionally required human intelligence at levels comparable (or superior) to
those of human beings: Machine learning seeks to extract knowledge from
large amounts of data by “learning” from known examples and then generating
structure or predictions.
➢ Types of machine learning:
◼ Supervised learning: Computers learn to model relationships based on
labeled training data.
◼ Unsupervised learning: Computers are not given labeled data but instead
are given only data from which the algorithm seeks to describe the data and
their structure.
➢ Challenges of machine learning
◼ Overfitting: make too much use of the data
◼ Underfitted: make too little use of the data
◼ ML techniques can appear to be opaque or “black box” approaches, which
arrive at outcomes that may not be entirely understood or explainable.
9.16.1.4. Distribute Ledger Technology
➢ In a distributed ledger, entries are recorded, stored, and distributed across a
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network of participants so that each participant has a matching copy of the

digital database.
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➢ The consensus mechanism is the process by which the computer entities ( or

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nodes ) in a network agree on a common state of the ledger.

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➢ Cryptography: an algorithmic process to encrypt data, making the data
unusable if received by unauthorized parties, which enables a high level of
network security and database integrity.
➢ DLT can take the form of permissionless and permissioned networks.
◼ Permissionless networks are open to any user who wishes to make a
transaction.
◼ In permissioned network, network members may be restricted from
participating in certain network activities.
➢ Blockchain: a type of digital ledger in which information, such as changes in
ownership, is recorded sequentially within blocks that are then linked or
“chained” together and secured using cryptographic methods.
➢ Tokenization: through tokenization, the process of representing ownership
rights to physical assets on a blockchain or distributed ledger, DLT has the
potential to streamline this process by creating a single, digital record of
ownership with which to verify ownership title and authenticity, including all
historical activity.
9.16.2. 基础题
Q-66. Which of following data is given to computers in unsupervised learning? (2012 考题回
A. Labeled training data. 顾自编
B. Structured data.
C. data from which the algorithm seeks to describe the data and their structure.
Q-67. Text Analytics is appropriate for application to:

A. economic trend analysis.
B. large, structured datasets.
C. public but not private information.
Q-68. Which of the following statements on fintech’s use of data as part of risk analysis is
correct?
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A. Stress testing requires precise inputs and excludes qualitative data.

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B. Machine learning ensures that traditional and alternative data are fully segregated.
C. For real-time risk monitoring, data may be aggregated for reporting and used as model inputs.
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Q-69. If noises in a data base are treated as true parameters, the machine learning model is
most likely:
A. overfitted.
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B. underfitted.
C. precisely analysed.
Q-70. A factor associated with the widespread adoption of algorithmic trading is increased:
A. market efficiency.
B. average trade sizes.
C. trading destinations.
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Solutions
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9. Portfolio Management
9.16.3. 基础题
Q-1. Solution: A.
DB plan have high risk tolerance than banks and insurance companies.
Q-2. Solution: B.
As illustrated in the reading, portfolios reduce risk more than they increase returns.
Q-3. Solution: A.
The excess reserves invested by banks need to be relatively liquid.
Although investment companies and non-life insurance companies have high liquidity needs, the
liquidity need for banks is on average the greatest.
Q-4. Solution: A.
Income is necessary to meet the cash flow obligation to retirees.
Although defined benefit plans have a need for income, the need for liquidity typically is quite low.
A retiree may need life insurance; however, a defined benefit plan does not need insurance.
Q-5. Solution: C.
Unlike open-end funds in which new shares are created and sold at the current net asset value per
share, closed-end funds can sell for a premium or discount to net asset value depending on the
demand for the shares.
Q-6. Solution: A.
Exchange traded funds do not have capital gain distributions. If an investor sells shares of an
ETF (or open-end mutual fund or closed-end mutual fund), the investor may have a capital
gain or loss on the shares sold; however, the gain (or loss) from the sale is not a distribution.
Q-7. Solution: C.
The client’s objectives and constraints are established in the investment policy statement and are
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used to determine the client’s target asset allocation, which occurs in the execution step of the
portfolio management process.
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Q-8. Solution: A.
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Computation of the money-weighted return, r, requires finding the discount rate that sums the
present value of cash flows to zero. Because most of the investment came during Year 2, the
measure will be biased toward the performance of Year 2. The cash flows are as follows:
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CF0 = -10
CF1 = -100
CF2 = +120.31 [(10 × 1.14 × 1.08) + (100 × 1.08)]
results in a value of r = 8.53%
The time-weighted return of the fund is = (1.14*1.08)^0.5-1 = 10.96%.
Q-9. Solution: C.
The money-weighted rate of return is the IRR of an investment’s net cash flows.
Q-10. Solution: A.
Higher correlations will weaken diversification effects if other components of the portfolio
standard deviation do not change (i.e., the weights and variance of the individual assets). This
means that the risk of the whole portfolio will increase.
Q-11. Solution: C.
 p = w12 12 + w22 22 + 2w1w2 1 2 1,2
When the correlation = 1,
 p = w1212 + w22 22 + 2w1w21 2 = (w11 + w2 2 )2 = w11 + w2 2
Q-12. Solution: A.
Method one:
When the portfolio’s standard deviation equals to the weighted average mean of the two assets’
standard deviation, the correlation of these two assets is closest to one:
ρ1,2=1
σp =w1σ1+w2σ2
σp²=(w1σ1+w2σ2)2 =w12σ12+w22σ22+2w1w2σ1σ2ρ1,2=w12σ12+w22σ22+2w1w2σ1σ2
When portfolio’s correlation coefficient between two securities equals to zero:
ρ'1,2=0
σ’p²=w12σ12+w22σ22+2w1w2σ1σ2ρ’1,2=w12σ12+w22σ22
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Then, we have:
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σp²=w12σ12+w22σ22+2w1w2σ1σ2>σ'p²=w12σ12+w22σ22
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σp>σ'p
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Method two:
σp²=(w1σ1+w2σ2)2 =w12σ12+w22σ22+2w1w2σ1σ2ρ1,2
ρ1,2↓(from 1 to 0) → σp↓
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Q-13. Solution: C.
The negative correlation of –0.3 between investment securities B and C is the lowest and thus is
the most effective for portfolio diversification.
Q-14. Solution: A.
Homogeneous expectation is not an assumption of the Markowitz model, it is an assumption of
the Capital Asset Pricing Model (CAPM).
Q-15. Solution: C.
The risk aversion coefficient, A, is greater than zero for a risk-averse investor.
The risk-loving investor’s indifference curve exhibits a negative slope, implying that they are happy
to substitute risk for return.
Q-16. Solution: A.
A risk-free asset has a variance of zero and result in same numerical utility for all types of investors.
1
According to the utility function U = E ( r ) − A 2 , where A is the measure of risk aversion, the sign
2
of A is irrelevant if the variance is zero (like that of a risk-free asset).
Q-17. Solution: C.
The increase in return with every unit increase in risk keeps decreasing as one moves from left to
right because the slope of the efficient frontier continues to decrease. Thus, investors obtain
decreasing increases in returns as they assume more risk.
Q-18. Solution: B.
Utility has two terms: the expected return and a negative term based on the portfolio risk weighted
by risk aversion. For an identical portfolio, the investor with a higher risk aversion (A) would
calculate a lower utility (U).
Q-19. Solution: B.
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The homogeneous expectations assumption means that all investors analyze securities in the same
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way and are rational. That is, they use the same probability distributions, use the same inputs for
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future cash flows, and arrive at the same valuations. Because their valuation of all assets is identical,
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they will generate the same optimal risky portfolio, which is the market portfolio.
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Q-20. Solution: B.
The CAL represents the set of all feasible investments. Each investor's indifference curve
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determines the optimal combination of the risk–free asset and the portfolio of all risky assets,
which must lie on the CAL. 、
Q-21. Solution: A.
Portfolios located on the CML may be constructed by: 1) investing a portion of an investor’s capital
in the risk-free asset and the balance in the market portfolio which consists of all risky assets, or 2)
borrowing capital at the risk-free rate and investing all of an investor’s capital plus all borrowed
capital in the market portfolio.
Q-22. Solution: A.
If investors borrow at a rate that exceeds the lending rate, the resulting borrowing portfolios will
not be as profitable as the case where borrowing and lending is carried out at the same risk-free
rate. The result is that borrowing portfolios will plot on a line with a flatter slope compared to
borrowing portfolios constructed from borrowing at the risk-free lending rate.
Q-23. Solution: C.
A capital allocation line shows possible combinations of a risky portfolio and the risk-free asset.
Q-24. Solution: B.
A less risk-averse investor’s highest utility, given the low slope of his indifference curve, is likely to
touch the capital allocation line at a point which would represent a portfolio with higher risk and
more expected return.
Q-25. Solution: A.
If an asset’s beta is negative, the required return will be less than the risk-free rate in the CAPM.
When combined with a positive market return, the asset reduces the risk of the overall portfolio,
which makes the asset very valuable. Insurance is an example of a negative beta asset.
Q-26. Solution: B.
Nonsystematic risk is the risk that pertains to a single company or industry.
Systematic (market-related) risk is caused by macroeconomic variables such as interest rate
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volatility.
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Q-27. Solution: A.
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Statistical factor models use historical and cross-sectional return data to identify factors that
explain the variance or covariance in the observed returns of securities.
Macroeconomic factor models use economic factors that are correlated with security returns, such
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as economic growth, the interest rate, the inflation rate, productivity, etc.
Fundamental factor models use the relationships between security returns and firms’ underlying
fundamentals, such as earnings, earnings growth, cash flow generation, investment in research,
etc.
Q-28. Solution: B.
𝜎𝑖
β𝑖 = 𝜌𝑖,𝑚
𝜎𝑚
Security 2 has the lowest beta value: 1.05 = 2,m   2 = 0.8  21%
m 16%
Compared to security 1 and 3 with beta values of 1.1375 and 1.3125, respectively.
Q-29. Solution: A.
One important conclusion of capital market theory is that equilibrium security returns depend on
a stock’s or a portfolio’s systematic risk, not its total risk as measured by standard deviation.
Changes that occur within a country's policies is a type of systematic risks which will ultimately
lead to higher expected returns.
A new drug and CEO’s retirement are types of non-systematic risks.
Q-30. Solution: A.
First: Calculate the beta of UG’s stock
Cov(UG , M ) 0.03
 = =  2.08
M
2
0.122
Then: Calculate the required rate of return of UG’s stock
E ( R) = R f +  ( Rm − R f ) = 4%+2.08×(10%-4%) = 16.48%
The expected return of UG is 15%, which is less than the required return of 16.48%, so the UG’s
stock is overvalued.
Q-31. Solution: B.
𝜌𝑖𝑚 𝜎𝑖 𝜎𝑚 0.8∗0.25
We first compute the firm’s beta: 𝛽 = 2 = = 1.33. The expected return is computed
𝜎𝑚 0.15
:
using: E(𝑅𝑖 ) = 𝑅𝑓 + 𝛽[𝐸(𝑅𝑚 − 𝑅𝑓 )] = 0.04 + 1.33 × 0.08 = 14.64%.

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Q-32. Solution: C.
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Because Stock X has a higher systematic risk level compared with Stock Y, its expected return will
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be higher than that of Stock Y.
Q-33. Solution: B.
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The weight in the market portfolio is 30,000/20,000 = 1.5 and the weight in the risk-free asset is –
10,000/20,000 = –0.5. Because the beta of the risk-free asset is 0 and the market portfolio's beta
is 1, the portfolio's beta is: βp = 0×(–0.5) + 1×(1.5) = 1.5.
Q-34. Solution: B.
In the market model, Ri = αi + βiRm + ei, the intercept, αi, and slope coefficient, βi, are estimated
using historical security and market returns.
Q-71. Solution: A.
A financial market compensates systematic risks which is measured by beta.
Q-35. Solution: A.
M-squared alpha adjusts for risk using standard deviation (i.e., total risk).
Q-36. Solution: A.
Using the Jensen’s alpha formula,
Jensen’s α=Rp-[Rf+Beta(Rm-Rf)]=15%-[3%+1.5×(8%-3%)]=4.5%
Q-37. Solution: A.
The difference between the actual portfolio return and the calculated risk-adjusted return is a
measure of the portfolio’s performance relative to the market portfolio and is called Jensen’s alpha.
Q-38. Solution: C.
Strategic Asset Allocation (also known as the policy portfolio) and Rebalancing Policy are often
included as appendices to the IPS. The Statement of Duties and Responsibilities, however, is an
integral part of the IPS and is unlikely to be placed in an appendix.
Q-39. Solution: A.
In a strategic asset allocation, assets within a specific asset class have high paired correlations
and low correlations with other asset classes.
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Q-40. Solution: B.
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When assigning an overall risk tolerance, the prudent approach is to use the lower of ability to take
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risk and willingness to take risk.

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Q-41. Solution: C.
Risk attitude is a subjective factor and measuring risk attitude is difficult. Oftentimes, investment
managers use psychometric questionnaires, such as those developed by Grable and Joo (2004), to
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assess a client’s willingness to take risk.
Q-42. Solution: C.
A long-investment time horizon and a good financial situation lead a higher risk tolerance which
also contributes to a greater willingness to take risk.
In addition, personality type is most likely to affect an individual's willingness to take risk.
Q-43. Solution: C.
With a 20-year horizon and average risk tolerance, Johnson can accept the additional risk of listed
equities and private equity compared with US Treasury bills.
Q-44. Solution: C.
Unique needs and preferences include the prohibition of certain investments. The investment
constraints of liquidity, tax concerns, and legal and regulatory factors adequately address the
portfolio’s other constraints.
Q-45. Solution: C.
This describes the endowment bias, where individuals place a higher value on assets they own
than if they did not own those same assets. The other two answer choices describe cognitive errors
that are due to the inability to analyze the information.
Q-46. Solution: B.
Viewing each asset in light of meeting a specific goal is mental accounting. There was no indication
of framing (the way data is provided overly affects the decision process). An investor with decades-
long success who expects to produce reasonable results is acting rationally and is not necessarily
overconfident.
Q-47. Solution: B.
Jane is exhibiting status quo bias, where investors leave their asset allocation alone and don't
change it according to changing market conditions or changes in their own circumstances. Her
actions do not suggest representativeness (placing something in a category and assuming it will
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have the characteristics associated with that category) or availability (putting undue emphasis on
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Q-48. Solution: C.
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The halo effect suggests investors will view a stock that has experienced rapid growth and price
appreciation as a good stock to own, which may result in these stocks being overvalued. Home bias
is the tendency for investors to favor stocks from their own country or region because they are
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more familiar with those stocks.
Q-49. Solution: B.
For individuals, risk management concerns maximizing utility while taking risk consistent with
individual’s level of risk tolerance.
Q-50. Solution: B.
Risk transfer is accomplished through an insurance policy. A deductible in an insurance policy
means the insured is bearing some of the risk of loss and thereby (partially) self-insuring. Hedging
with derivatives accomplishes risk shifting, not risk transfer. A bank loan loss reserve is a form of
self-insurance combined with diversification, but it does not include risk transfer.
Q-51. Solution: B.
Adding a risk budgeting process causes the organization to consider how its total risk tolerance will
be allocated across its subsidiaries.
Either the total current risks the subsidiaries are engaging in will exceed the risk tolerance and
subsidiaries will have to compete for risk by demonstrating highest returns per unit of risk or the
total current risks will be less than the risk tolerance and a search will be underway for the
subsidiaries that can best utilize the remaining risk budget.
The risk tolerance is determined and then sets the risk budget, rather than being determined by it.
Hedging can be a part of risk budgeting if hedging produces the superior risk adjusted returns.
Q-52. Solution: C.
Settlement risk is related to default risk, but deals with the timing of payments rather than the risk
of default.
Q-53. Solution: A.
Conditional VaR (CVaR) is the weighted average of all loss outcomes in the statistical distribution
that exceeds the VaR loss. CVaR can represent extreme losses in much more severe events and thus
has higher value than VaR.
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Q-54. Solution: C.
Downside risk measures focus on the left side of the return distribution curve, where losses occur.
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The Sharpe ratio assumes that returns are normally distributed. Many alternative investments do
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not exhibit close-to-normal distributions of returns, which is a crucial assumption for the validity
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of a Sharpe ratio as a comprehensive risk measure. Assuming normal probability distributions

when calculating these measures will lead to an underestimation of downside risk for a negatively
skewed distribution.
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Both the Sortino ratio and the VaR measure are measures of downside risk.
Q-55. Solution: C.
The statement is an absolute risk objective because it expresses a maximum loss in value with an
associated probability of loss.
Q-56. Solution: B.
Establishing the organization’s risk appetite is not risk budgeting.
Risk tolerance defines the qualitative assessment and evaluation of potential sources of risk in an
organization.
Q-57. Solution: A.
Commodities and currencies do not have underlying financial statements or an income stream;
thus, fundamental analysis is useless in determining theoretical values for them or whether they
are over or undervalued.
Q-58. Solution: B.
For the assumption of technical analysis, supply and demand determine the price.
Q-59. Solution: B.
If volume and price diverge—a stock’s price rises while its volume declines—the implication is that
fewer and fewer market participants are willing to buy that stock at the new price. In such a case,
it is predicted that a trendless period will follow.
If volume increases during a time frame in which price is also increasing, that combination is
considered positive and the two indicators are said to “confirm” each other.
Q-60. Solution: C.
Dark and light shading is a unique feature of candlestick charts.
Q-61. Solution: C.
The top and bottom of the bars indicate the highs and lows for the day; the line on the left indicates
:
the opening price and the line on the right indicates the closing price.
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教
Q-62. Solution: B.
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Resistance is defined as a price range in which selling activity is sufficient to stop the rise in price.
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Change in polarity refers to support, when breached, becomes resistance; resistance, when
breached, becomes support.
Support is defined as a low price range in which buying activity is sufficient to stop the decline in
50-52
price.
Q-63. Solution: C.
Every time the stock entered into a consolidation period, the volatility dropped to low levels. Low
volatility was an indication of a possible high-volatility period to come. In such a case, short
option with short-term maturity will produce an option premium.
When a security is not trending, it is considered to be in a consolidation.
Q-64. Solution: C.
When the ROC oscillator crosses zero in the same direction as the direction of the trend, this movement is
considered a buy or sell signal. For example, if the ROC oscillator crosses into positive territory during an
uptrend, it is a buy signal. If it enters into negative territory during a downtrend, it is considered a sell signal.
Q-65. Solution: B.
The put /call ratio is put option volume divided by call option volume. Increases in the put/call ratio
indicate a more negative outlook for the price of the asset.
VIX measures the volatility of options on the S&P 500 stock index. High levels of the VIX suggest investors
fear declines in the stock market, suggesting a bearish market.
When stock margin debt is increasing, investors are aggressively buying and stock prices will move higher
because of increased demand, indicating a bullish market.
Q-66. Solution: C.
When doing unsupervised learning, computers are not given labeled data but instead are given
only data from which the algorithm seeks to describe the data and their structure.
Q-67. Solution: A.
Through the Text Analytics application of natural language processing (NLP), models using NLP
analysis may incorporate non-traditional information to evaluate what people are saying—via their
preferences, opinions, likes, or dislikes—in the attempt to identify trends and short-term indicators
about a company, a stock, or an economic event that might have a bearing on future performance.
:
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Q-68. Solution: C.
There is increasing interest in monitoring risk in real-time. To do so, relevant data must be taken by
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a firm, mapped to known risks, and identified while moving within the firm. Data may be
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aggregated for reporting purposes or used as inputs to risk models.

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Q-69. Solution: A.
Overfitting occurs when the ML model learns the input and target dataset too precisely. In such
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cases, the model has been “over-trained” on the data and treats noise in the data as true
parameters.
Q-70. Solution: C.
Global financial markets have undergone substantial change as markets have fragmented into
multiple trading destinations consisting of electronic exchanges, alternative trading systems, and
so-called dark pools. In such an environment, when markets are continuously reflecting real-time
information and continuously changing conditions, algorithmic trading has been viewed as an
important tool.
:
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52-52

9. Portfolio Management 9.1. Different Types of Investors & Investment Products 9.1.1. 重要知识点 9.1.1.1. Portfolio overview

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9.

9.1.1.1. Portfolio overview

Investor Time Horizon Risk Tolerance Liquidity Needs Income Needs

side firms such as broker-dealers and investment banks.

➢ Active management attempts to outperform a chosen benchmark through

manager skill; Passive managers attempt to replicate the returns of a chosen

9.2. Portfolio Management Process

9.2.1.1. Planning step

9.3. Expected Return and Expected Standard Deviation

9.3.1.1. Time-Weighted Return and Money-Weighted Return

in investment management applications, because it accounts for the timing and

◼ Firstly, determine the timing of each cash flow;

➢ Covariance Cov1,2 =  Pi [ Ri ,1 - E ( R1 )][Ri ,2 - E ( R2 )]

➢ Covariance (given equal weights, variance and covariance)

 p2 = w12 12 + w22 22 + 2w1 w2 1  2 1, 2

9.4. Markowitz’s Theory

9.4.1.2. Minimum-variance frontier

deviation with a given expected return.

➢ Minimum-variance frontier is the entire collection of minimum-variance portfolios.

9.4.1.3. Global minimum-variance portfolio

◼ an investor is indifferent about the gamble or the guaranteed outcome

most likely to lead to:（16、18B 年 mock 题）

B. consistent increases in expected return.

C. sequentially smaller increases in expected return.

9.5. Capital Market Theory

◼ Investment using CML follow a passive investment strategy (i.e., invest in an

a portion of their investable assets to a risk-free asset.)

➢ Lending and borrowing portfolio: 在 CML 线上，如果投资组合要获得比市场组

borrowing portfolios will:

A. plot on a flatter line.

B. plot on a steeper line.

C. no longer plot on a straight line.

9.6.1.1. Systematic risk and unsystematic risk

➢ Single factor Model

◼ Market model: Ri =𝛼i + 𝛽i 𝑅𝑚 + 𝑒i

◼ Single-index model: Ri − Rf=𝛼i + 𝛽i (𝑅𝑚 − 𝑅𝑓) + 𝑒i

9.6.1.7. SML 曲线应用

risk-free asset and to the market

Graph of the capital asset pricing

Slope Market risk premium Market portfolio Sharpe ratio

Q-25. Factors such as changes in industrial production contribute to: 2010mock

Q-27. An analyst gathers the following information:

closest to:（1706、18B mock 题）

9.7. Performance Measures

9.7.1.1. Performance evaluation

➢ Jensen′ s α: 𝛼𝑝 = 𝑅𝑃 − {𝑅𝑓 + 𝛽𝑝 [𝑅𝑚 − 𝑅𝑓 ]}

➢ Jensen’s alpha 和 M-squared alpha 是可以根据大小来判断投资业绩

➢ Sharpe ratio 和 Treynor measure 需要再和其他的组合的指标进行比较

Q-36. An portfolio manager gathered the following information about a fund.

9.8. Portfolio Planning and Construction

9.8.1.1. Component of IPS

procedures followed able to respond to various contingencies.

➢ Investment Objectives. This section explains the client's objectives in investing.

B. Strategic asset allocation.

C. Statement of duties and responsibilities.

9.9. Investment Objectives and Constraints

9.9.1.1. Risk objective

➢ Consistent with risk objective

9.9.1.3. Investment constraints