Note: this cheat sheet is updated for the latest 2025’s curriculum.
It is probably no surprise that portfolio management is the most popular career current CFA candidates are interested in exploring further.
Portfolio management is the heart of the CFA program – and they start you light and gentle in Level 1 with a broad strokes introduction, gradually increasing in difficulty and topic weight as you advance to Level 3.
Hence, building a solid foundation in CFA Level 1 Portfolio Management is crucial to getting your CFA charter. That’s why we decided to create our 300 Hours Cheat Sheet series of articles, which focuses on one specific topic area for one specific CFA Level. ☕
More Cheat Sheets will be published in the coming weeks, sign up to our member’s list to be notified first.
By referring to the CFA curriculum’s Learning Outcome Statements (LOS), we prioritize and highlight the absolute key concepts and formula you need to know for each topic. With some tips at the end too!
Use the Cheat Sheets during your practice sessions to refresh your memory on important concepts.
Let’s go! Don’t forget to bookmark this page and (re)visit often! 🙂
Portfolio management is really the end game for the CFA program.
However, this topic’s weighting in Level 1 is deceptively light. Portfolio Management will become exponentially more important as you advance in the CFA program, especially in Level 3 if you go for the Portfolio Management pathway.
2025’s CFA Level 1 Portfolio Management’s topic weighting is 8-12%, which means 14-22 questions of the 180 questions of CFA Level 1 exam are centered around this topic.
It is covered in 2025’s Topic 9 with 8 Learning Modules (LMs).
Here’s a summary of Level 1 Portfolio Management chapter readings:
| Learning Module # | Sub-topic | Description |
|---|---|---|
| 1 | Portfolio Management: An Overview | What is portfolio investing, how is it done, who invests, pension plans and mutual funds. |
| 2 | Portfolio Risk and Return: Part I | How to measure the performance (returns) of a portfolio, calculate and understand risk metrics (mean, variance, covariance, standard deviation). |
| 3 | Portfolio Risk and Return: Part II | Learn about the capital allocation line (CAL), capital market line (CML), systematic and nonsystematic risk, beta, capital asset pricing model (CAPM), security market line (SML). |
| 4 | Basics of Portfolio Planning and Construction | An introduction to what will be explored in great detail in CFA Level III. You’ll learn about: – investment policy statements (IPS), which is sort of a ‘strategy document’ of how each individual investors have decided to invest, – how different investors can have different abilities and willingness to take on risk, and – other aspects of portfolio planning, such as investment constraints (liquidity, timelines, tax, regulation), asset classes and asset allocation. |
| 5 | The Behavioural Biases of Individuals | Learn about types of behavioural biases and how it affects financial decision making. |
| 6 | Introduction to Risk Management | All about risk management – what it is, risk management frameworks, how to identify different types of risks and how to manage them. |
| 7 | Technical Analysis | An introduction to technical analysis principles, types of charts and how to interpret them. |
| 8 | Fintech in Investment Management | A descriptive chapter on what fintech, big data, artificial intelligence, machine learning, distributed ledger technology are. |
Once you’ve learnt to value individual securities, evaluating them as a combined portfolio is essential to your capability as an asset or wealth manager. Not only that, but knowing how to tailor the combination of securities to suit different clients’ risk profiles is important to being a good financial advisor.
In short, the CFA Level 1 Portfolio Management readings teaches you:
– How investing via building a portfolio works;
– How to measure how well you’re doing;
– How to be aware of the scale and type of risks your’e taking;
– How to adapt portfolio investment strategies to different types of investor profiles.
| Client | Investment horizon | Risk tolerance | Income needs | Liquidity needs |
|---|---|---|---|---|
| Individual investor | Varies by individual | Depends on the ability and willingness to take risk | Depends on investment rationale | Varies by individual. |
| Defined benefit (DB) pension plans | Usually long term | High for longer investment horizon | High for mature funds (payouts soon), low for growing funds. | Varies by plan maturity |
| Endowments & foundations | Very long term | Typically high | To meet spending commitments | Quite low |
| Banks | Short term | Low | Pay interest on deposits and operational expenses | High, to meet daily withdrawals |
| Insurance companies | Short term for property & casualty (P&C), long term for life insurance | Low | Low | High to meet claims |
| Investment companies | Varies by fund | Varies by fund | Varies by fund | High to meet redemptions |
| Sovereign wealth funds | Varies by fund | Varies by fund | Varies by fund | Varies by fund |
CAL overcomes the shortfall of efficient frontier by showing a line representing possible combinations of risk-free assets and optimal risky asset portfolio.
E[R_p]=R_f+\Big(\frac{E[R_i]-R_f}{\sigma_i}\Big)\sigma_pOptimal investor portfolio is the point where an investor’s indifference curve is tangential to the optimal CAL.
If all investors have the same expectations, the capital market line (CML) becomes a special case of optimal CAL, where the tangent portfolio is the market portfolio.
CML is a special case of CAL whereby
E[R_p]=R_f+\Big(\frac{E[R_m]-R_f}{\sigma_m}\Big)\sigma_pSlope of CML line is the market price of risk, i.e. Sharpe ratio.
Beta is a measure of an asset’s systematic (market) risk, relative to the risk of the overall market.
\beta=\frac{Cov(R_i,R_m)}{\sigma^2_m}=\frac{\rho_{i,m}\sigma_i\sigma_m}{\sigma^2_m}=\frac{\rho_{i,m}\sigma_i}{\sigma_m}CAPM is used to calculate an asset’s required return given its beta.
E[R_i]=R_f+ \beta_i [{E(R_m)-R_f}]CAPM assumptions:
CAPM limitations:
SML is a graphical representation of CAPM, which applies to all securities, whether they are efficient or not.
Slope of the SML is market risk premium, E(Rm) – Rf
If an asset’s expected return forecast is higher (lower) than its CAPM required return, the asset is undervalued (overvalued).
Sharpe \thickspace ratio=\frac{R_p-R_f}{\sigma_p}M \thickspace squared=(R_p=R_f)\Big(\frac{\sigma_m}{\sigma_p}\Big)-(R_m-R_f)Treynor \thickspace ratio=\frac{R_p-R_f}{\beta_p}Jensen's \thickspace alpha = R_p-[R_f+\beta_p(R_m-R_f)]
IPS is a written document detailing the portfolio construction process designed to satisfy a client’s investment objectives.
Major components of an IPS are:
| Investment constraints | Description |
|---|---|
| Time horizon | The longer the time horizon, the greater the ability to take risk and the lower the liquidity needs. |
| Taxes | Consider individual tax status, investment jurisdiction and tax treatment of various types of investment accounts. |
| Liquidity | Cash requirements varies by client and need to consider having a portion of assets in liquid investments. |
| Legal / regulatory | Consider if there are legal restrictions on investments or max percentage allocation on certain assets. |
| Unique circumstances | Usually individual constraints are present, such as avoid certain class of security or industry, or ethical preferences etc. |
Check out this useful forum post about how to tackle IPS questions too, as we discuss the acronym “RRTTLLU” to remember the investor objectives and constraints.
Note that IPS may also include a policy regarding responsible investing which takes into account Environmental, Social and Governance (ESG) factors.
The 6 main ESG investment approaches are:
| Negative screening | Excludes certain practices, sectors or companies from a fund/portfolio based on a specific ESG criteria. |
| Positive screening | Includes certain practices, sectors or companies in a fund/portfolio based on a specific ESG criteria. |
| ESG integration | Refers to the practice of including material ESG factors in the investment process. |
| Thematic investing | Picks investment based on a single factor or theme, such as energy efficiency. |
| Engagement / active ownership | Achieving ESG objectives with financial returns using shareholder power to influence corporate behaviour. |
| Impact investing | Investments made with the intention of generating positive, measurement ESG impact along with financial return. |
| Conservatism bias | Fail to incorporate new information that conflicts with their opinion. Slow to react as a consequence. |
| Confirmation bias | Look for data that supports their view, ignore those that contradicts. |
| Representativeness bias | Incorrectly classify new information based on past experiences. |
| Illusion of control bias | People overestimate their ability to control or predict events. |
| Hindsight bias | People believe past events would have been predictable. |
| Anchoring & adjustment bias | An information processing bias where people relied too much on initial data, closely related to conservatism bias. In conservatism bias, people overweight past information vs. new information, whilst anchoring & adjustment bias overweights on an anchored value. |
| Mental accounting bias | People treat one sum of money differently from the other, i.e. “mental buckets”, when money is fundamental fungible. |
| Framing bias | People answer questions differently depending on how it is framed. |
| Availability bias | People perceive outcomes that are more easily remembered are more likely. |
| Loss aversion bias | Strongly prefer avoiding losses than achieving gains. |
| Overconfidence bias | Overestimate own abilities. |
| Self control bias | Lack discipline to act or make decisions for long term goals. |
| Status quo bias | Rather do nothing than make a change. |
| Endowment bias | Value assets more when they hold rights to it than when they don’t. |
| Regret aversion bias | Avoid making decisions that could turn out badly. |
| Line chart | simple graphical display of price trends over time. |
| Bar chart | shows open, close, low and high prices for each data point. |
| Candlestick chart | also shows open, close, low and high prices for each data point. White body means closing price > opening price (i.e. market closed higher), dark body means closing price < opening price (i.e. market closed lower). |
| Uptrend | security prices are reaching higher highs and higher lows |
| Downtrend | security prices are reaching lower highs and lower lows |
| Support | a price level where there is sufficient buying pressure to stop a further decline in prices. |
| Resistance | a price level where there is sufficient selling pressure to stop a further increase in prices. |
| Change in polarity | once a support level is breached, it often becomes the new resistance level, and vice versa. |
Reversal patterns (signalling the end of a trend):
| Head and shoulders (H&S) pattern | consists of a left shoulder, head and right shoulder. This pattern indicates the end of an uptrend. Price target = neckline – (head – neckline) |
| Inverse head and shoulders pattern | this is a mirror image of the H&S pattern and indicates an upcoming uptrend following a preceding downtrend. Price target = neckline + (neckline – head) |
| Double/triple tops | prices hit the same resistance level twice/thrice before falling down, indicating the end of an uptrend. |
| Double/triple bottoms | prices bounces back from the same support level twice/thrice before going up, indicating the end of a downtrend. |
Continuation patterns (signals a temporary pause in the trend):
| Triangles | One trend line connects the highs, another trend line connects the lows. 3 types: – Ascending: Highs form a horizontal line, lows form uptrend. – Descending: Lows form a horizontal line, highs form downtrend. – Symmetrical: Highs from downtrend, lows form uptrend. |
| Rectangles | Highs and lows form horizontal lines. |
| Flags | Similar to rectangles, but parallel trend lines over a short period |
| Pennants | Converging trend lines over a short period. |
| Moving average | Average closing price over a specified number of periods. |
| Bollinger bands | Lines representing moving average and moving average +/- set number of standard deviation from average price. |
| Rate of change (ROC) oscillator | When ROC oscillator crosses 0 into the positive (negative) territory, it is considered bullish (bearish). |
| Relative strength index (RSI) | Graphically compares a security’s gains vs losses over a time period (typically 14 days). RSI value ranges between 0-100. Value >70 indicates overbought, value<30 indicates oversold. |
| Stochastic oscillator |
%K = 100 x (Last closing price – low in past 14 days)/ (high in past 14 days – low in past 14 days) When %K line moves from below to above %D line, this is considered bullish. Vice versa. |
| Moving average convergence/divergence oscillator (MACD) | Consists of the MACD line and signal line:
|
| Put/call ratio | Volume of puts traded divided by volume of calls traded. High ratio means market is bearish. |
| CBOE volatility index (VIX) | A measure of near-term market volatility calculated from S&P 500 stock options. High VIX indicates when investors are fearful of a market decline. |
| Margin debt | Loans taken out by investors to fund stock purchase. When margin debt is increasing, investors are buying aggressively and this will drive up stock prices. |
There are a wide range of definitions to be learnt in Portfolio Management.
Investment policy statement (IPS) objectives and constraints, risk types, asset classes – make sure you note and memorize them, as exam questions can baldly ask about any term.
The security market line (SML) and how it relates to capital asset pricing model (CAPM) calculations is a popular question topic, so make sure you’re very familiar with that.
Be sure to also know how to explain the capital allocation line (CAL) and the capital market line (CML), and how the SML is derived from the CML.
Portfolio management questions can contain calculation-heavy questions, usually centering around risk or return calculations.
Make sure you get lots of practice on calculating and comparing returns (such as expected return), as well as calculating risk metrics (such as variance, covariance, standard deviation, beta).
More Cheat Sheet articles will be published over the coming weeks. Get ahead of other CFA candidates by signing up to our member’s list to get notified.
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I need more information on CFA, Level 1.
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