2025 CFA© Program Curriculum Level 3 Core Volume 2 - PORTFOLIO CONSTRUCTION

How to Use the CFA Program Curriculum
	CFA Institute Learning Ecosystem (LES)
		Designing Your Personal Study Program
		Errata
		Other Feedback
Portfolio Construction
	Learning Module 1	Overview of Equity Portfolio Management
		Introduction
		The Roles of Equities in a Portfolio
			Capital Appreciation
			Dividend Income
			Diversification with Other Asset Classes
			Hedge against Inflation
			Client Considerations for Equities in a Portfolio
		Equity Investment Universe
			Segmentation by Size and Style
			Segmentation by Geography
			Segmentation by Economic Activity
			Segmentation of Equity Indexes and Benchmarks
		Income Associated with Owning and Managing an Equity Portfolio
			Dividend Income
			Securities Lending Income
			Ancillary Investment Strategies
		Costs Associated with Owning and Managing an Equity Portfolio
			Management Fees
			Performance Fees
			Administration Fees
			Marketing and Distribution Costs
			Trading Costs
			Investment Approaches and Effects on Costs
		Shareholder Engagement
			Benefits of Shareholder Engagement
			Disadvantages of Shareholder Engagement
			The Role of an Equity Manager in Shareholder Engagement
		Equity Investment across the Active Management Spectrum
			Confidence to Outperform
			Client Preference
			Suitable Benchmark
			Client-Specific Mandates
			Risks/Costs of Active Management
			Taxes
			Advantages of Index-Based Equity Strategies
		Benchmark Selection
			Indexes for Index-Based Strategies
			Considerations When Choosing a Benchmark Index
			Index Construction Methodologies
		Summary
		References
		Practice Problems
		Solutions
	Learning Module 2	Overview of Fixed-Income Portfolio Management
		Introduction
		Roles of Fixed-Income Securities in Portfolios
			Diversification Benefits
			Benefits of Regular Cash Flows
			Inflation-Hedging Potential
			Classifying Fixed-Income Mandates
			Liability-Based Mandates
			Total Return Mandates
			Fixed-Income Mandates with ESG Considerations
		Fixed-Income Portfolio Measures
			Portfolio Measures of Risk and Return
			Correlations between Fixed-Income Sectors
			Use of Measures of Risk and Return in Portfolio Management
		Bond Market Liquidity
			Liquidity among Bond Market Sub-Sectors
			The Effects of Liquidity on Fixed-Income Portfolio Management
		A Model for Fixed-Income Returns
			Decomposing Expected Returns
			Estimation of the Inputs
			Limitations of the Expected Return Decomposition
		Leverage
			Using Leverage
			Methods for Leveraging Fixed-Income Portfolios
			Risks of Leverage
		Fixed-Income Portfolio Taxation
			Principles of Fixed-Income Taxation
			Investment Vehicles and Taxes
		Liability-Driven Investing 
			Liability-Driven Investing vs. Asset-Driven Liabilities 
			Types of Liabilities 
		Managing the Interest Rate Risk of Multiple Liabilities 
			Cash Flow Matching 
		Laddered Portfolios 
			Benefits of Using Laddered Portfolios 
			Using ETFs to Build Laddered Portfolios 
		Summary 
		References
		Practice Problems
		Solutions
	Learning Module 3	Asset Allocation to Alternative Investments
		Introduction
			The Role of Alternative Investments in a Multi-Asset Portfolio
		Diversifying Equity Risk
			Volatility Reduction over the Short Time Horizon
			Risk of Not Meeting the Investment Goals over the Long Time Horizon
		Traditional Approaches to Asset Classification
			Traditional Approaches to Asset Classification
		Risk-Based Approaches to Asset Classification
			Illustration: Asset Allocation and Risk-Based Approaches
			Comparing Risk-Based and Traditional Approaches
		Risk Considerations, Return Expectations, and Investment Vehicle
			Risk Considerations
			Return Expectations
			Investment Vehicle
		Liquidity
			Liquidity Risks Associated with the Investment Vehicle
			Liquidity Risks Associated with the Underlying Investments
		Fees and Expenses, Tax Considerations, and Other Considerations
			Tax Considerations
			Other Considerations
		Suitability Considerations
			Investment Horizon
			Expertise
			Governance
			Transparency
		Asset Allocation Approaches and Statistical Properties and Challenges
			Statistical Properties and Challenges of Asset Returns
		Monte Carlo Simulation
			Simulating Skewed and Fat-Tailed Financial Variables
			Simulation for Long-Term Horizon Risk Assessment
		Portfolio Optimization
			Mean–Variance Optimization without and with Constraints
			Mean–CVaR Optimization
		Risk Factor-Based Optimization
		Liquidity Planning
			Achieving and Maintaining the Strategic Asset Allocation
		Preparing for the Unexpected
			Preparing for the Unexpected
		Monitoring the Investment Program
			Overall Investment Program Monitoring
			Performance Evaluation
			Monitoring the Firm and the Investment Process
		Summary
		References
		Practice Problems
		Solutions
	Learning Module 4	An Overview of Private Wealth Management
		Introduction
		Wealth in a Global Context
			Defining Wealth
			Sources of Global Wealth
			Distribution of Global Wealth
		Life-Cycle View of Human Capital
			The Wealth Life Cycle
			The Economic Value of the Individual
		Individual Investors: Return, Risk, and Other Objectives and Constraints
			Nominal and Inflation-Adjusted Returns
			Risks
			Objectives
		The Impact of Taxation and Inflation
			Taxes on Investment Income
			The Impact of Accrual Taxes on Investment Returns
			The Impact of Deferral of Taxes on Investment Returns
			The Impact of Basis on Capital Gains
			Inflation
			The Impact of Different Tax Rates, Sources of Return, and Inflation
			Comparing Nominal and After-Tax Nominal with Real and After-Tax Real Returns
		Individual Investors and Investment Policy Statements
			Parts of an IPS
			Sample Investment Policy Statement
		Practice Problems
		Solutions
	Learning Module 5	Portfolio Management for Institutional Investors
		Institutional Investors: Types and Common Characteristics
			Institutional Investors: Common Characteristics
		Overview of Investment Policy
		Pension Funds: Types and Stakeholders
			Stakeholders
		Pension Funds: Liabilities, Investment Horizon, and Liquidity Needs
			Liabilities and Investment Horizon
			Liquidity Needs
		Pension Funds: External Constraints
			Legal and Regulatory Constraints
			Tax and Accounting Constraints
		Pension Funds: Risk Considerations
		Pension Funds: Investment Objectives and Asset Allocation
			Investment Objectives
			Asset Allocation by Pension Plans
		Sovereign Wealth Funds: Types and Stakeholders
			Stakeholders
		Sovereign Wealth Funds: Other Considerations
			Liabilities and Investment Horizons
			Liquidity Needs
			External Constraints Affecting Investment
		Sovereign Wealth Funds: Investment Objectives and Asset Allocation
			Investment Objectives
			Asset Allocation by Sovereign Wealth Funds
		University Endowments and Private Foundations
			External Constraints Affecting Investment
		University Endowments: Other Considerations
			University Endowments—Liabilities and Investment Horizon
			University Endowments—Liquidity Needs
		Private Foundations
			Private Foundations—Liabilities and Investment Horizon
			Private Foundations—Liquidity Needs
		University Endowments: Investment Objectives and Asset Allocation
			University Endowments
			Asset Allocation
		Private Foundations: Investment Objectives and Asset Allocation
			Private Foundations
		Banks and Insurers
			External Constraints Affecting Investment
		Banks: Other Considerations
			Banks—Liabilities and Investment Horizon
			Banks—Liquidity Needs
		Insurers
			Insurers—Liabilities and Investment Horizon
			Insurers—Liquidity Needs
		Banks and Insurers: Investment Objectives
			Banks
			Insurers
		Banks and Insurers: Balance Sheet Management and Investment Considerations
		Banks and Insurers: Investment Strategies and Asset and Liability Volatility
		Banks and Insurers: Implementation of Portfolio Decisions
		Summary
		References
		Practice Problems
		Solutions
	Learning Module 6	Trading Costs and Electronic Markets
		Costs of Trading
			Costs of Trading
		Effective Spreads and Volume-Weighted Cost Estimates
			Implementation Shortfall
			VWAP Transaction Cost Estimates
		Development of Electronic Markets
			Electronic Trading
			Advantages of Electronic Trading Systems
			Electronification of Bond Markets
			Market Fragmentation
			Effects on Transaction Costs
		Types of Electronic Traders
			The Major Types of Electronic Traders
		Electronic Trading System: Characteristics and Uses
			Why Speed Matters
			Fast Communications
			Fast Computations
			Advanced Orders, Tactics, and Algorithms
			Select Examples of How Electronic Trading Changed Trading Strategies
		Electronic Trading Risks
			The HFT Arms Race
			Systemic Risks of Electronic Trading
		Detecting Abusive Trading Practices
			Front running.
			Market manipulation.
		Summary
		Practice Problems
		Solutions
	Learning Module 7	Case Study in Portfolio Management: Institutional (SWF)
		Introduction
		Financial Risks Faced by Institutional Investors
			Long-Term Perspective
			Dimensions of Financial Risk Management
			Risk Considerations for Long-Term Investors
			Risks Associated with Illiquid Asset Classes
			Managing Liquidity Risk
			Enterprise Risk Management for Institutional Investors
		Environmental and Social Risks Faced by Institutional Investors
			Universal Ownership, Externalities, and Responsible Investing
			Material Environmental Issues for an Institutional Investor
			Material Social Issues for an Institutional Investor
		Case Study
			Case Study: Introduction
			Case Study: Background
			R-SWF’S Investments: 1.0
			Investment Committee Meeting 1.0
			R-SWF’S Investments: 2.0
			Investment Committee Meeting 2.0
			R-SWF’S Investments: 3.0
		References