All you need to know about Portfolio Management in CFA Level 1


Ok, so as always lets first understand what Portfolio Management is all about 🙂

Portfolio management primarily deals with the art of allocating funds to several financial opportunities so as to maximize profit with minimal possible risk. Now there can be so many financial opportunities that an adhoc way of allocating funds to these financial instruments would lead you nowhere and leave your returns to mere chance. Hence in order to add method to this madness, portfolio management serves as a guiding light to all these fund managers such that there is some sanity in the allocation and there is decent visibility on the expected risk and return.

At the heart of Portfolio Management lies the concept of diversification. Diversification is a simple technique of ensuring that that the portfolio manager is not putting all its eggs in a single basket. What does it mean? Lets take a simple example 🙂

Say for example there is this  portfolio manager ‘A’ and he has bought three stocks – ONGC, Reliance, and OIL.  Now imagine the current scenario where the oil prices are tanking every day. Now the revenues of each of these companies will take a hit and will royally screw our portfolio manager.


Now lets consider another portfolio manager, ‘B’ who has bought the following three stocks – ONGC, Maruti Suzuki and OIL. Now every time the oil prices goes down both ONGC and OIL will go down but people will buy more cars and hence Maruti Suzuki will go up. Net net ‘B’ has reduced its risk by investing in negatively related securities. This at a broad level is exactly what is diversification.

Hence in a nutshell Portfolio management primarily deals with concepts which can assist a portfolio manager make more rational choices while creating a portfolio. A lot of equity analyst and portfolio management job profiles which are on offer post your completing the CFA certification would primarily require these concepts.

With a good 5% weightage this section will offer close to 12 questions in your final exam. From the exam perspective the concepts on Capital Allocation Line (CAL) and Capital Market Line (CML) is something which a candidate is expected to know. Also basic calculation of beta would come in handy for 2-3 questions. But I would personally want you to approach this section more from your career perspective. A lot of jobs like GSAM (Goldman Sach Asset Management) and other equity / portfolio management profiles will expect you to have strong portfolio management fundamentals and you would recall this section once you are sitting in any of the interviews for these profiles 🙂

That’s it on Portfolio Management. I hope this blog must have answered quite a few of your queries on this topic. In case you have any queries do feel free to comment or contact us on the contact id / phone number given on our website. In the next blog I will deep-dive in Equity Investments module of CFA L1