What CFA Level 1 Portfolio Management actually tests
Portfolio Management is 8-12% of the Level 1 exam:
| Area | What it covers |
|---|---|
| Overview | Types of investors, steps in portfolio management, pooled investments |
| Investment Policy Statement | Objectives (risk, return), constraints (liquidity, time horizon, tax, legal) |
| Portfolio Risk & Return | Variance, covariance, correlation, efficient frontier, Capital Allocation Line |
| CAPM | Systematic vs. unsystematic risk, beta, Security Market Line, alpha |
| Beyond CAPM | Arbitrage Pricing Theory, multifactor models, Fama-French |
| Behavioral Finance | Loss aversion, overconfidence, anchoring, herding, implications for market efficiency |
Recent context
Factor investing and smart-beta strategies — which take the "beyond CAPM" ideas taught here and turn them into real, investable products — have grown enough in the industry that CFA Institute added a dedicated Level 2 reading, "Using Multifactor Models," building directly on the single-factor CAPM foundation this Level 1 topic establishes.
Sample question: CAPM
Portfolio Management · Medium difficulty
The risk-free rate is 3%, the expected market return is 10%, and a stock has a beta of 1.4. Using CAPM, what is the stock's expected return?
A. 10.0%
B. 11.0%
C. 12.8%
D. 14.0%
The correct answer is C — 12.8%.
E(R) = Rf + β(Rm − Rf) = 3% + 1.4 × (10% − 3%) = 3% + 1.4 × 7% = 3% + 9.8% = 12.8%. With a beta above 1, this stock is expected to earn more than the market — but it's also expected to lose more than the market in a downturn, since beta cuts both ways.
E(R) = Rf + β(Rm − Rf) = 3% + 1.4 × (10% − 3%) = 3% + 1.4 × 7% = 3% + 9.8% = 12.8%. With a beta above 1, this stock is expected to earn more than the market — but it's also expected to lose more than the market in a downturn, since beta cuts both ways.