Portfolio Development and Construction
Develop, implement, and manage an institutional investor portfolio, drawing from lessons learned in the CFA® curriculum and using advanced Excel skills.
Structure & duration
10–20 hours to complete
Online self-paced
Practical Skills Modules can be completed online at your own pace.
Prerequisites
We recommend candidates have:
- A thorough understanding of the principles of portfolio management or have completed the CFA Levels I and II Portfolio Management content.
- A basic familiarity with the principles behind financial modeling or have completed the CFA Level I Financial Statements Analysis content.
Available for Level III.
Overview of Portfolio Development and Construction
In Portfolio Development and Construction, you will explore the intricacies of creating and evaluating an Investment Policy Statement (IPS), assessing the impact of behavioral finance on investment decisions, and mastering portfolio optimization techniques including backtesting and sensitivity analysis. You will also develop skills in performance analysis, asset allocation, and managing currency risk to maintain robust investment strategies for endowment funds.
Asset allocation and performance evaluation are the twin pillars of savvy investment strategy, particularly vital for those managing portfolios with long-term objectives, such as endowments. The process of asset allocation is designed to position the portfolio across a diverse set of asset classes to optimize returns while mitigating risk. It is a balancing act that requires foresight and adaptability, ensuring that the portfolio meets its payout obligations today while securing its growth for tomorrow.
Performance evaluation acts as a powerful diagnostic tool, providing clear insights into the effectiveness of investment strategies. Rigorous portfolio analysis enables professionals to make data-driven decisions and pivot portfolio strategies when necessary. For those who manage endowment funds, this scrutiny is not just about outperforming benchmarks—it's about stewardship and the responsibility to preserve and grow the financial bedrock that supports educational and philanthropic missions. Engaging with these disciplines is not just about calculations; it is a proactive and intellectually stimulating part of investment management that ensures a portfolio's vitality and relevance in an ever-changing financial landscape.
Over the course of this module, you will be guided through a series of videos, illustrations, and knowledge check questions to quickly build up your asset allocation and performance evaluation skills. Upon completion of this module, you will be ready to apply your skills in practice.
Key Learning Objectives for Portfolio Development and Construction
- Create an Investment Policy Statement (IPS), examining its purpose, integrating investment constraints, and compiling essential information.
- Evaluate investment performance by establishing benchmark quality, apply Modern Portfolio Theory (MPT) statistics, utilize correlation and variance-covariance matrices, and construct the efficient frontier through diverse ETF portfolio combinations.
- Explore the relationship between MPT and diversification, utilize the Solver add-in in Excel for Mean-Variance Optimization (MVO), and apply constraints to solve optimization problems.
- Assess and optimize portfolio performance by analyzing CME, calculate portfolio variance using the CME correlation matrix, and apply SAA backtesting against historical data.
- Facilitate sensitivity analysis, including scenario-based evaluations and Monte Carlo simulations, apply historical data for Tactical Asset Allocation (TAA) decisions, and manage currency risk with futures contracts in international investments.
- Evaluate portfolio performance, ensure alignment with investment objectives, assess key financial metrics (returns, risk, Sharpe, and Sortino ratios), examine TAA impacts, mitigate currency risk through hedging, and convey performance insights to stakeholders.
Key learning objectives by unit
- Examine the purpose of an IPS.
- Detail the key aspects of an IPS, and how investment constraints are integrated into the IPS construction process.
- Acquire key information for the IPS.
- Prepare comprehensive information for the IPS from the received response.
- Create a baseline understanding of benchmark quality.
- Evaluate and compare benchmarks to various investments.
- Analyze and calculate Modern Portfolio Theory (MPT) statistics.
- Calculate and apply the correlation matrix.
- Calculate and apply the variance-covariance matrix.
- Create and visualize the efficient frontier by experimenting with various combinations of ETFs within a portfolio.
- Explain the link between MPT and diversification, and the risk-return tradeoff.
- Use the Solver add-in in Excel.
- Implement the process of optimization.
- Explain the Mean-Variance Optimization method and its relevance to the efficient frontier.
- Apply portfolio optimization constraints with the Solver add-in.
- Use Solver to solve a portfolio optimization problem.
- Examine the link between Modern Portfolio Theory and diversification, and the risk-return tradeoff.
- Explain the process of optimization.
- Explore the Mean Variance Optimization method and its relevance to the efficient frontier.
- Apply portfolio optimization constraints with Solver.
- Use Solver to solve a portfolio optimization problem.
- Explain the concept and importance of sensitivity analysis in portfolio management.
- Facilitate scenario-based sensitivity analysis and evaluate its results for proactive risk management.
- Explain Monte Carlo simulation, its methodology, and its application in sensitivity analysis and financial forecasting.
- Use historical macroeconomic data for scenario analysis and make informed decisions about Tactical Asset Allocation (TAA) adjustments.
- Manage currency risk using futures contracts, especially in the context of international investments.
- Explain the purpose and necessity of performance evaluation in portfolio management.
- Measure performance with respect to investment objectives and adherence to the investment process.
- Calculate and interpret key financial metrics: returns, risk, and the Sharpe ratio.
- Calculate the Sortino ratio, focusing on downside risk.
- Calculate performance impact of TAA deviation from SAA and assess TAA effectiveness.
- Explain currency risk and the role of currency hedging in international portfolios.
- Apply currency hedging strategies and evaluate their effectiveness in protecting returns.
- Construct an informative report that outlines performance in context for the investment committee.
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