We are very pleased to see the positive responses flooding in for this series. We thank each and every one of you for making the Commandments and Sins of the CFA Program Level – I Exam a success.
Now, so far, we have covered the topics weighing 50% of your actual exam i.e. Corporate Finance, Economics, Fixed Income and Financial Reporting and Analysis.
In this session we will look at the Six Commandments and Sins to Master the Portfolio Management Section which weighs 5% in your exam.
- Don’t get confused between the different market lines! The CML uses Total Risk on the X-axis and SML uses Systematic Risk on the X-axis.
- Remember that a risk free asset has a Beta of 0 and the market has a Beta of 1.
- Don’t get confused between Market Risk Premium (Rm-Rf) and Equity Risk Premium which is Beta* (Rm-Rf)
- If you were to decide which fund is performing better, the result using M-Squared and Sharpe Ratio will be exactly the same. They use the same risk factor – Total Risk
- If you were to decide which fund is performing better, the result using Jensen’s Alpha and Treynor’s ratio will be exactly the same. They use the same risk factor – Systematic Risk (Beta)
- Remember that investors are NEVER compensated for taking on unsystematic risk, the reason being is that they can be diversified away.
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