CFA Level III Portfolio Management Cheat Sheet: Case Checks
Review case-reading checks, duration and spread calculations, active-risk measures and liquidity boundaries for Portfolio Management item sets.
Use this short reference to check your method after attempting a case. Apply the case’s units, tax assumptions, return convention and dates; a memorized formula cannot choose those inputs for you.
Start with the required decision
| Question to ask | Error it prevents |
|---|---|
| Is the objective absolute return, relative return or funded status? | Ranking a portfolio on the wrong outcome. |
| Are constraints on capital weights, economic exposure or risk contribution? | Treating the same percentage as interchangeable across measures. |
| Which flows settle before the obligation? | Counting later receipts, gated assets or an overlay’s notional as cash. |
| Does one question replace an assumption? | Applying a local stress change to every question in the case. |
| Is a fee constant or uncertain? | Adding a constant return deduction to tracking-error volatility. |
Return and risk checks
For a small parallel yield change, a duration-convexity approximation is:
\[ \frac{\Delta P}{P}\approx-D\Delta y+\frac12 C(\Delta y)^2. \]Use decimal yield changes: 50 basis points is 0.005. Match the supplied duration and convexity definitions. Parallel convexity alone does not provide every second-order effect of a curve twist.
For a first-order nonparallel shock, use the corresponding key-rate exposures:
\[ R_P-R_B\approx-\sum_i(D_{P,i}-D_{B,i})\Delta y_i. \]Do not add a separate total-duration effect for the same move. Equal aggregate duration can leave significant active curve exposures. Dollar sensitivity also depends on market value.
For a spread-only shock with benchmark rates held fixed:
\[ \frac{\Delta P}{P}\approx-D_s\Delta s. \]A floating-rate note can have low benchmark-rate duration and material spread duration. Keep spread repricing separate from default losses unless the specified return model combines them without duplication.
Performance and implementation
The information ratio compares expected active return with tracking error. Use the required gross or net return basis and the same period for both. A constant fee lowers average active return without changing its standard deviation under a constant-deduction convention.
A buy order’s decision-based shortfall includes execution-price differences, explicit costs and the decision-to-evaluation movement on unfilled shares. Reverse the economic price sign for a sale. State whether the denominator is original ordered notional or executed notional before reporting basis points.
A futures hedge or exposure overlay changes economic sensitivity. Initial margin remains an asset but is encumbered; an adverse variation-margin payment consumes cash. A favorable derivative valuation due after a spending deadline cannot fund that deadline.
Make the recommendation feasible
Check the complete set of binding limits before choosing the highest return or lowest cost. Distinguish an owner’s allocation decision from manager implementation, permitted trading from spending authority, and disclosure of a conflict from the separate need for a reasonable research basis.
This is an educational case-solving reference, not personal investment, tax or legal advice.
Turn the calculation into a written decision
State the portfolio action, identify the binding mandate constraint and support it with the relevant case evidence. Keep a risk calculation separate from the liquidity or implementation condition that makes the action feasible. Use the Essay bank to practise this unaided before comparing the suggested response.