Chapter 9: Portfolio Construction, Risk Measurement, and Performance

In this section

• Portfolio Risk and Return Measurement
  Learn how to effectively measure portfolio risk and return in the context of the CFA Level II curriculum, including weighted average returns, portfolio variance, systematic risk, CAPM, Sharpe ratio, and more.
• Active Portfolio Management Strategies
  Explore the core principles of active portfolio management, including the search for alpha, fundamental law of active management, and best practices for strategy implementation.
• Performance Evaluation and Attribution
  Comprehensive guide to Performance Evaluation and Attribution including the Brinson model, factor-based attribution, and best practices for measuring manager skill.
• Risk Management and Asset Allocation
  Explore strategic vs. tactical asset allocation, liability-driven investing, multi-asset strategies, and risk budgeting to develop robust, goal-aligned portfolios.
• Multifactor Models and APT
  In-depth coverage of Arbitrage Pricing Theory and multifactor modeling, exploring macroeconomic, fundamental, and statistical factors, factor loadings, risk premiums, and real-world portfolio applications.
• Measuring and Managing Market Risk (VaR and Beyond)
  Discover the essentials of measuring and managing market risk in your portfolio, from core Value at Risk (VaR) concepts to tail-risk considerations and beyond. Learn how to apply parametric, historical simulation, and Monte Carlo VaR approaches, stress testing, scenario analysis, and risk budgeting best practices.
• Backtesting, Simulation, and Strategy Validation
  Explore how to design, test, and validate investment strategies with historical data, simulations, and scenario analysis—mitigating biases and ensuring robust portfolio performance.
• Exchange-Traded Funds (ETFs) and Practical Applications
  Explore the creation/redemption mechanism of ETFs, the role of authorized participants, key sources of tracking error, and the practical ways ETFs are used in portfolio construction, sector rotation, and factor tilts. Understand specialized structures like leveraged and inverse ETFs, and learn how market liquidity impacts ETF premiums and discounts.