Behavioral finance is introduced in the first study session on portfolio management because all market participants, regardless of expertise or experience, may be subject to behavioral biases. Behavioral finance provides insight into how emotional biases and cognitive errors may influence individuals’ perceptions and investment decisions. As a consequence, knowledge of behavioral biases may help in understanding client goals, in constructing investment portfolios, and in identifying inconsistencies in investment decision making. Behavioral finance also provides insights into issues such as market anomalies. The readings propose that integration of behavioral and traditional finance may lead to a better outcome than either approach used in isolation.

This study session provides a conceptual framework for understanding asset allocation considerations and key implementation approaches. Consideration of an investor’s overall financial context using an economic balance sheet to incorporate all relevant investor assets and liabilities is presented. Three major approaches to asset allocation are described: asset only, liability relative, and goals-based. Concepts underlying active and passive implementation and strategic rebalancing are also introduced.

This study session addresses the process of private wealth management and the construction of an investment policy statement (IPS) for the individual investor. The IPS is a blueprint for investing client assets. The IPS identifies the needs, goals, and risk tolerance of the investor, as well as constraints under which the investment portfolio must operate. The adviser then formulates an investment strategy to tax-efficiently reconcile these potentially conflicting requirements.

This study session examines the considerations and risks associated with concentrated single asset positions. Strategies for managing concentrated positions in publicly traded common shares, privately held businesses, and real estate are presented. Coverage on the dynamics of human and financial capital and the challenge of meeting financial goals throughout an investor’s lifetime follows. The discussion specifically addresses investment strategies and financial products structured to mitigate the risk of not achieving these goals.

This study session provides a conceptual, yet practical, framework for understanding institutional portfolio management. Concepts and practices important in determining the investment policy statement (IPS) are presented for different types of institutional investors.

The investment process is not complete until securities are bought or sold, and so the quality of trade execution is an important determinant of investment results. The first reading examines how portfolio managers need to work closely with traders to determine the most appropriate trading strategy given their motivation for trading, risk aversion, trade urgency, and other factors such as order characteristics and market conditions. Portfolio manager motivations to trade, inputs to trade strategy selection, and the range of trade implementation choices, trading algorithms, and a comparison of various markets are discussed. Guidance is provided on evaluating a firm’s trading procedures for good governance practices, measuring trade costs, and evaluating success in trade execution.

This study session provides two cases that integrate material across Level III study sessions. Each case provides a stylized scenario involving several issues that are used to illustrate how to evaluate the needs of a client and synthesize techniques to provide appropriate solutions.