Saturday, November 19, 2011

Portfolio Analysis construction Modeling Financial Engineering CFA L2

Portfolio Analysis construction Modeling Financial Engineering

Abstract: This article will lay the foundation for basics on Portfolio for the CFA and related exams.

There are some important different which related SML CML, and to start with you need to know what are un diversifiable and diversifiable risks which then lead to beta and efficient portfolio constructions. You need to know a little bit of covariance and intercept form of line, and that will be more than enough to understand this topic. There are various softwares like MATLAB, Visual Basics models, macros in Excel, SAP, etc where you can feed in the date and it will create the efficient frontier and compute all parameters.

Beta: This basically comes from regression but you can understand. For example in India Reliance based companies has 1.5 betas, whereas Oiling companies like BP has 0.5 near about. This can be observed and in coming sections we will talk on how to calculate it with regression by curve fitting.

Efficient portfolio construction: you need to know how to combine various variances.There may be some macros to do that, but it can also done in SAS, MATLAB and other software for analysis. These tools will help to see the action when it comes to real world.

Areas of interest: Sensitization in portfolio analysis

Questions on Portfolio CFA Level 2:
  1. Beta is there in factor model or not
  2. Shorting a part of efficient frontier
  3. More diversification than S & P
  4. Beta vs SD
  5. Foreign currency Risk Premium
  6. Average return concept in diversification
  7. APT Arbitrage pricing theory has beta or not?
  8. ICAPM
  9. Equilibrium pricing theory
  10. Exchange Rate effects
  11. Equally weighted portfolio

R (software language) is going to be an imp tool for portfolio management in industry as it is open source. You need to understand objects in R, Data handling (SAS type) which has merger, retrieving, etc. Preparing data is hence an imp step before the final analysis.

In Level 2 trenor black model is interesting, also FRM 1 also talks about Portfolio in a great deal which will be interesting to note.

Conclusion: Very easy but highly weighted area.

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