CFA Level3 learning notes-CME-1
LOS-In the portfolio management process, the role of CME， the framework for CME.
CME is the abbreviation of capital market expection.
the role of CME:
play a crucial role in portfolio management, provide insight into the future behavior of financial markets, helping investors make informed decisions.Using a disciplined approach to set short- and longterm expectations leads to more effective security selection, asset allocation, and risk management.
the framework for CME:
1.specify the expections needed and time horizon
2.history research
3.methods and models to be used
4.determine the best sources of data
5.current environment is what
6.your expections
7.monitor outcomes and optimize the process
Cross-sectional consistency:
in the context of CFA refers to the expectation that the relationship between risk and return holds consistently across different securities at a given point in time. It implies that assets with higher levels of risk should offer higher expected returns compared to assets with lower levels of risk. This consistency allows for meaningful comparisons and evaluations of securities.
Suppose there are two stocks, Stock A and Stock B. Stock A has a higher beta, indicating higher systematic risk, while Stock B has a lower beta and lower systematic risk. According to cross-sectional consistency, Stock A should be expected to provide a higher return compared to Stock B, reflecting the higher risk associated with Stock A.
Intertemporal consistency:
on the other hand, refers to the expectation that the relationship between risk and return holds consistently over time for a particular security. It suggests that an asset’s risk and return characteristics should exhibit stability and predictability over different time periods. This consistency allows for reliable long-term investment decision making.
An investor analyzes the historical performance of a specific bond over different time periods, such as 1 year, 3 years, and 5 years. If the bond consistently exhibits higher returns for longer holding periods while maintaining a positive risk-return relationship, it demonstrates intertemporal consistency. This consistency provides confidence in the expected performance of the bond over time.
Consistency allows investors to make informed decisions and comparisons based on reliable relationships between risk and return. It provides a framework for evaluating securities and constructing portfolios. Consistency also helps to reduce uncertainty and enhances the predictability of investment outcomes, supporting long-term investment strategies.
Inconsistency across asset classes is likely to result in portfolios with poor risk–return characteristics over any horizon, whereas intertemporal inconsistency is likely to distort the connection between portfolio decisions and investment horizon.
25 Jun 2023 - by toptradeready.com