Portfolio Management Pathway: CFA® Level III

It is 30–35% of the 2027 Level III exam. 64 learning outcomes across 8 learning modules.

84 practice questions and 3 formula cards on this topic in the app.

Index-Based Equity Strategies

• Contrast factor-tilted index strategies with plain market-cap-weighted indexing
• Contrast the alternative ways of designing an index-based equity strategy
• Contrast the vehicles through which an investor can gain index-based equity exposure
• Weigh full replication against stratified sampling and optimisation as ways to build an index-tracking equity portfolio
• Explain why an index portfolio can drift from its benchmark and how that tracking error is kept in check
• Identify where the returns and the risks of an index-tracking equity portfolio come from

Active Equity Investing: Strategies

• Contrast discretionary fundamental management with quantitative active management
• Analyse stock-level (bottom-up) active strategies, covering why they work and how they are run
• Analyse top-down active strategies, setting out their logic and how they are carried out
• Analyse active strategies built on factor exposures, including the reasoning behind them and the steps involved
• Analyse activist investing, including its logic and the way campaigns are run
• Explain active approaches that exploit statistical arbitrage and the workings of market microstructure
• Set out the steps by which a fundamental active equity strategy is built
• Set out the steps by which a quantitative active equity strategy is developed
• Explain how equity styles are classified and where the labels fall short

Active Equity Investing: Portfolio Construction

• Explain which features of a manager's philosophy drive the way the portfolio is assembled
• Explain the main ways active equity portfolios are put together
• Contrast Active Share with active risk and relate each measure to the strategy a manager follows
• Explain how risk budgeting is used when building a portfolio
• Explain the risk measures built into equity portfolio construction and how caps on them alter the portfolio
• Explain the effect of assets under management, holding size, trading liquidity and turnover on choices made in building equity portfolios
• Judge how efficiently a portfolio's structure serves its investment mandate
• Weigh the risks, costs and alpha potential of long-only, long extension, equitized market-neutral and long/short equity portfolio structures

Liability-Driven and Index-Based Strategies

• Assess ways of funding one future liability with a bond portfolio
• Contrast approaches to one liability with approaches to a schedule of liabilities, and the different ways each can be implemented
• Assess liability-driven strategies across a range of interest rate scenarios and choose the one that best meets the portfolio's goals
• Explain what can go wrong when a portfolio is managed against a set of liabilities
• Explain how bond indexes are built and why managing a portfolio to track one is hard
• Contrast the ways an investor can take on passive exposure to bond markets
• Set out what makes a sound benchmark and defend the choice of a particular benchmark

Yield Curve Strategies

• Explain what drives the return on a bond portfolio when benchmark yields change
• Build a positioning strategy from forward rates when the manager's rate outlook agrees with what the market implies
• Construct a positioning strategy from forward rates when the manager expects the curve's level, slope or shape to differ from market pricing
• Build a positioning strategy around an expected rise or fall in interest rate volatility
• Assess how a portfolio's rate sensitivity compares with its benchmark's using key rate durations
• Explain how yield curve positions are taken across more than one currency
• Assess the likely return from a yield curve strategy and the risks it carries

Fixed-Income Active Management: Credit Strategies

• Explain the risks a manager must weigh when running a portfolio whose returns hinge on credit spreads
• Weigh the strengths and weaknesses of the different spread measures used in credit portfolios, and show why the option-adjusted spread is the measure of choice
• Explain issuer-level (bottom-up) ways of running a credit strategy
• Explain credit strategies that start from macro and sector views (top-down)
• Explain how illiquidity shows up in credit markets and how a credit portfolio can limit the resulting risk
• Explain how tail risk in a credit portfolio is measured and controlled
• Explain how credit default swaps can be used in an actively managed fixed-income portfolio
• Explain the positioning choices a manager can use to act on a particular view about credit spreads
• Explain what must be considered when building and running credit portfolios that span several countries
• Explain how structured products can stand in for corporate bonds in a credit portfolio
• Set out the main inputs, outputs and cautions when using analytical tools to run fixed-income portfolios

Trade Strategy and Execution

• Explain why investors trade and how the reason shapes the trading approach
• Explain the factors that feed into choosing a trading strategy
• Contrast the reference prices used to judge trade execution
• Propose a trading strategy suited to given facts and defend the choice
• Explain what usually decides which class of trading algorithm is chosen
• Contrast trade implementation features across spot currency, OTC derivative, futures and options, fixed-income and equity markets
• Explain how the cost of a trade is measured and work out that cost
• Judge how well a trade was executed
• Assess whether a firm's trading processes, disclosures and records meet good governance standards

Case Study in Portfolio Management: Institutional (Endowment)

• Explain the tools available to manage liquidity risk in a portfolio
• Explain how an investor with a long horizon can harvest the illiquidity premium over time
• Analyse an asset allocation and its construction against the portfolio's return and risk targets and cash needs, and propose actions to close any gaps
• Apply the CFA Institute Code and Standards to the conduct of people who choose external managers
• Weigh derivatives against physical (cash market) trades as ways to set or change asset class and risk exposures, in terms of costs and benefits
• Show how derivatives overlays can implement tactical allocation shifts and portfolio rebalancing
• Explain how ESG factors enter the management of long-horizon institutional portfolios