What percentage of the overall curriculum (Levels 1,2 & 3), would you say is allocated towards Modern Portfolio Theory? I called the CFAi to inquire, but they said they didn’t have that statistic on hand and would have to submit an email for them to answer my question. I know there’s a good chunk. I’m at L2, and I know that L3 is primarily composed of portfolio management, which has its roots in MPT. So overall, what would you say the % is?
ahhh yes…that would be 32.98% my good man, cheers
5% at level 1 5% at level 2 Probably 40% at level 3, depending on where you draw the dividing line between MPT and other stuff.
49% of all statistics are made up. 64% of people know that.
^ Can you be 110% sure?
What is Modern Portfolio Theory?
Perhaps coincidentally: I just filled out the CBOK survey from CFAI, wherein they walk through every LOS and ask you if it’s important to the new charterholder. In the survey they mention “the demise of Modern Portfolio Theory” – a phrase I’ve not seen before, especially from the CFAI. Did I miss something? Has CFAI written off MPT?
I doubt it. MTP is basically the approach to portfolio management pioneered by Markowitz. The idea that you estimate expected returns and that you measure risk by standard deviations, and the key advancement is the importance of asset correlation in portfolio construction. It basically changed the idea that portfolios aren’t just a collection of the best individual assets you can get, but also need to take advantage of correlation. Now there is a question of where “modern portfolio theory” ends and “postmodern portfolio theory” begins. Most likely, that’s the behavioral finance stuff. Things like factor modeling, CAPM, APT, Black-Litterman, Efficient Frontiers, Sharpe Ratios, Treynor Ratios and the like… pretty much anything that uses a statistical approach to computing portfolio expected returns and/or histories counts as MPT, I’d say. If you read Benjamin Graham’s “The Intelligent Investor,” you get a sense of what pre-MPT portfolio thinking was like. The stuff on value investing is great, and not that different than stuff that shows up in the CFA exam, but the way Graham talks about portfolio construction is very very simplified, compared to most anything you see in the PM section of the exam. It’s still an intelligent approach, but you can tell what the difference is between that and the stuff that has come out of MPT.
What did Graham have to say about portfolio construction? I thought the value investor approach was to select each stock on individual merit i.e. buy a dollar for 50 cents sort of thing.
I like that definition of MPT bchad, but I would clarify it as “MPT is a set of quantitative tools that an investor can use to construct, hedge, or evaluate a portfolio of securities.” On that basis, it makes no sense to me to say MPT is wrong. You could say a tool is wrong to use in a certain case, but not that the whole set of tools is wrong.
Muddahudda Wrote: ------------------------------------------------------- > What did Graham have to say about portfolio > construction? I thought the value investor > approach was to select each stock on individual > merit i.e. buy a dollar for 50 cents sort of > thing. IIRC, it was just 60/40 stocks and bonds, and that you wanted to have some diversification across industries. Even if he wasn’t looking at correlation of returns, he was aware that regulatory risk and other macroeconomic events could have more devastating effects if your portfolio was concentrated in the vulnerable industry. So, simplistically, the key contribution of MPT is to redefine diversification in terms of returns correlation, rather than the more simplified “don’t put all eggs in one basket.” The other contribution is to look at assets in terms of the statistical distributions of their returns rather than their more traditional fundamentals like their financial statements, industry growth, etc… (There are ways to blend the two approaches, and APT is one of the ways to do that.)
BTW, I had to laugh at “Safado” as a user name. Bem legal! 
bchadwick Wrote: > > IIRC, it was just 60/40 stocks and bonds, and that > you wanted to have some diversification across > industries. Even if he wasn’t looking at > correlation of returns, he was aware that > regulatory risk and other macroeconomic events > could have more devastating effects if your > portfolio was concentrated in the vulnerable > industry. > > So, simplistically, the key contribution of MPT is > to redefine diversification in terms of returns > correlation, rather than the more simplified > “don’t put all eggs in one basket.” The other > contribution is to look at assets in terms of the > statistical distributions of their returns rather > than their more traditional fundamentals like > their financial statements, industry growth, etc… > (There are ways to blend the two approaches, and > APT is one of the ways to do that.) With the benefit of hindsight, data & innovation, it does look highly simplistic. Yet I bet this was ahead of the curve in terms of thinking from a portfolio perspective. I just learned a new word in Portugese, thanks i’ll use that on my Brazilian friend (she’s lovely!). In return here’s a nugget of useless information - Benjamin Graham was English, born in London (Wiki).
Muddahudda, two points: 1) I wasn’t criticizing Benjamin Graham for being simpleminded about portfolio construction. Actually I think he put in quite a bit of thought into it, and when you look at it, it is probably one of the most sensible approaches to portfolio diversification that you can get to without actually doing the statistical calculations. And it probably works reasonably well. I seem to recall the CFA readings noting that equally weighted portfolios are often not all that different from optimized portfolios. It’s just that reading Graham after doing CFA studies gives you some insight into what’s “modern” about “modern portfolio theory.” 2) Be *very* careful with using “safado/safada” on your Brazilian friend. I googled it and saw it translated at “dirty minded,” but it’s one of those words that can also mean (and often does mean) “a**hole,” as in “you a**hole,” depending how you say it. Also can mean “creep,” as in “creepy person.” Just be sure that you are using a very playful, friendly intonation when you use it, or she may take it as an insult. Think of it a bit like the word “pervert” in English… you might tease your friend about being such a perv, or you can use it to denounce someone as a real creep. I should add that the way those syllables roll off the tongue is very satisfying when you need to curse someone out.
Sorry bchad, that wasn’t meant as a retort to you or even a response to you - more an observation of how it could be looked at today given what we all know about portfolio theory now. Was supposed to be a backhanded compliment to B Graham! Probably more cackhanded now I reread it… I will bear in mind your words of wisdom though she falls a long way into the camp of playfulness. Think i’ll be alright on that one
No need to apologize. We’re basically in agreement, and it’s just a discussion anyway, right?