Let us conquer PM!

What are the main concepts to get a hold of in portfolio management? I’ll start off…feel free to add/correct/illuminate. 1. Know how to find mean return and variance of a portfolio - not too hard, only two formulas. 2. Know the CML/CAPM graph, with Rf on the Y-axis with straight line tangent to the efficient frontier curve… how to interpret the slope and Sharp ratio out of that graph, etc. 3. Know the CAPM formula: E(Rp) = Rf + Bp (E(Rm) - Rf). 4. Know that Bi = COV(Ri,Rm)/SIGMA^2 (market). 5. Whether to add an asset to the portfolio, by checking that its Sharp ratio is larger than he Sharp ratio of the portfolio times correlation of (asset, portfolio). 6. Know adjusted beta: 0.33 + 0.67 * (historical beta). 7. Know the two formulas for macroeconomic and fundamental factor models - note that the intercept is not Rf. 8. Know APT, whose intercept is Rf. 9. Know how given some stock returns with factor sensitivities of each stock to decide whether there is arbitrage or not. 10. Know what a factor portfolio is: Basically you create a portfolio out of some stocks so that the resulting portfolio is sensitive to only one factor (i.e., interest rate). Find the weights that make the sum of the sensitivities adds up to the required amount (e.g., =1.0). 11. A tracking portfolio is similiar to above, but here you find the wights that result in your tracking portfolio having same sensitivities as the index you are tracking. You can also tilt it by making your portfolio’s sensitivities differ a little from those of the index. 12. Get at least a feel of what TB does (it’s complex and took me a while to know the formulas)…basically, you find mispriced securities and add them to a passive portfolio, so you need to know the wight of each stock you will add. 13. Then you get into the messy international asset pricing section.

Here’s a similar list of things you should know. Basically, know everything. :slight_smile: http://www.analystforum.com/phorums/read.php?12,739958,page=1

The main trouble is that even knowing these things you still find that the questions they ask are a bit off…they don’t seem to test these concepts directly. I did all the EOC problems and they weren’t too bad, but when I hit real problems they seem to reach out for deeper understanding. Ouch!