PMT — CSI Portfolio Management Techniques ( ®) Quick Reference
Compact PMT quick reference for Canadian Securities Institute Portfolio Management Techniques candidates: portfolio theory, IPS, asset allocation, risk, fixed income, derivatives, and performance.
Exam Identity and Study Target
| Item | Reference |
|---|---|
| Provider | Canadian Securities Institute |
| Official exam title | CSI Portfolio Management Techniques (PMT®) |
| Official exam code | PMT |
| Page purpose | Independent quick reference for final-stage review and practice support |
Use this page to connect formulas, portfolio decisions, client constraints, and applied scenario logic. PMT questions often test whether you can choose the appropriate portfolio technique, not just define the term.
High-Yield Portfolio Management Flow
| Step | What to decide | Exam focus |
|---|---|---|
| 1. Define client profile | Objectives, constraints, risk tolerance, time horizon, liquidity, tax, legal, unique needs | Do not skip constraints when recommending a portfolio |
| 2. Build IPS | Return objective, risk objective, asset mix, benchmarks, rebalancing rules, restrictions | IPS is the control document |
| 3. Set asset allocation | Strategic, tactical, dynamic, insured, liability-driven | Asset allocation usually dominates long-term portfolio risk |
| 4. Select securities/managers | Passive, active, factor, style, sector, credit, duration, derivatives | Match method to objective and constraint |
| 5. Implement | Trading, execution cost, tax impact, liquidity, currency exposure | A theoretically optimal portfolio may fail implementation tests |
| 6. Monitor and rebalance | Drift, client changes, market changes, performance attribution | Rebalancing is discipline, not return chasing |
| 7. Report and evaluate | Time-weighted return, money-weighted return, benchmark-relative metrics | Match metric to the question |
IPS Quick Reference
| IPS element | Ask | Common exam trap |
|---|---|---|
| Return objective | Required return? Desired return? Real or nominal? | Treating an aspirational return as feasible |
| Risk objective | Ability and willingness to take risk? Shortfall risk? Volatility tolerance? | Ignoring low ability to take risk when willingness is high |
| Time horizon | Single-stage or multi-stage? Near-term cash need? | Long horizon does not eliminate liquidity needs |
| Liquidity | Planned withdrawals, emergency reserves, spending commitments | Recommending illiquid assets to a liquidity-constrained client |
| Taxes | Account type, income character, turnover, tax-loss use | Comparing pre-tax returns for taxable investors |
| Legal/regulatory | Mandates, trust restrictions, investment policy restrictions | Assuming all clients can use leverage or derivatives |
| Unique circumstances | Ethical screens, concentrated holdings, employer stock, currency needs | Treating unique constraints as preferences only |
| Benchmark | Appropriate to mandate, investable, measurable, specified in advance | Using a broad index for a specialized mandate |
Core Return and Risk Formulas
Return Measures
Holding-period return:
\[ HPR=\frac{Ending\ Value-Beginning\ Value+Income}{Beginning\ Value} \]Arithmetic mean return:
\[ \bar{R}_{arith}=\frac{R_1+R_2+\cdots+R_n}{n} \]Geometric mean return:
\[ \bar{R}_{geo}=\left[(1+R_1)(1+R_2)\cdots(1+R_n)\right]^{1/n}-1 \]Expected return:
\[ E(R)=\sum p_iR_i \]Real return approximation:
\[ Real\ Return \approx Nominal\ Return-Inflation \]Exact real return:
\[ Real\ Return=\frac{1+Nominal\ Return}{1+Inflation}-1 \]| Measure | Use when | Watch for |
|---|---|---|
| Holding-period return | One-period realized return | Include income |
| Arithmetic mean | Estimating expected one-period return | Usually higher than geometric mean when returns vary |
| Geometric mean | Multi-period compound growth | Best for actual long-run growth |
| Money-weighted return | Investor controls external cash flows | Sensitive to timing and size of cash flows |
| Time-weighted return | Evaluating manager skill | Neutralizes external cash-flow timing |
Risk, Covariance, and Portfolio Variance
Variance:
\[ \sigma^2=\sum p_i(R_i-E(R))^2 \]Standard deviation:
\[ \sigma=\sqrt{\sigma^2} \]Covariance:
\[ Cov_{A,B}=\rho_{A,B}\sigma_A\sigma_B \]Two-asset portfolio expected return:
\[ E(R_p)=w_AE(R_A)+w_BE(R_B) \]Two-asset portfolio variance:
\[ \sigma_p^2=w_A^2\sigma_A^2+w_B^2\sigma_B^2+2w_Aw_BCov_{A,B} \]| Concept | Interpretation | Exam point |
|---|---|---|
| Standard deviation | Total volatility | Includes systematic and unsystematic risk |
| Covariance | Directional co-movement in return units | Hard to interpret alone |
| Correlation | Standardized co-movement from -1 to +1 | Lower correlation improves diversification |
| Positive correlation | Assets tend to move together | Less diversification benefit |
| Zero correlation | No linear relationship | Some diversification benefit |
| Negative correlation | Assets tend to move opposite | Strongest diversification benefit |
| Perfect positive correlation | Correlation = +1 | No risk reduction from combining assets |
| Perfect negative correlation | Correlation = -1 | Potential to eliminate portfolio variance in a two-asset case |
Modern Portfolio Theory and CAPM
Beta, CAPM, and Security Market Line
Beta:
\[ \beta_i=\frac{Cov_{i,m}}{\sigma_m^2} \]CAPM expected return:
\[ E(R_i)=R_f+\beta_i[E(R_m)-R_f] \]Alpha:
\[ \alpha_i=R_i-\left(R_f+\beta_i(R_m-R_f)\right) \]| Term | Meaning | Exam use |
|---|---|---|
| Beta below 1 | Less systematic risk than market | Defensive relative to market |
| Beta equal 1 | Market-level systematic risk | Moves with market, in theory |
| Beta above 1 | More systematic risk than market | Aggressive relative to market |
| SML | Expected return vs beta | Used for individual securities or portfolios |
| CML | Expected return vs total risk | Applies to efficient portfolios combining risk-free asset and market portfolio |
| Alpha | Return above or below CAPM-required return | Positive alpha suggests outperformance after beta adjustment |
| Market risk premium | Expected market return minus risk-free rate | Compensation for systematic risk |
Efficient Frontier Decision Rules
| Situation | Correct reasoning |
|---|---|
| Same expected return, lower risk | Choose lower-risk portfolio |
| Same risk, higher expected return | Choose higher-return portfolio |
| Portfolio below efficient frontier | Inefficient; another portfolio offers better risk-return tradeoff |
| Investor adds risk-free asset | Moves along capital allocation line |
| Investor borrows at risk-free rate | Levered position beyond market portfolio, if permitted and suitable |
| Investor is highly risk averse | Higher allocation to risk-free or lower-risk assets |
| Investor is less risk averse | Higher allocation to risky assets |
Performance Ratios and Manager Evaluation
Sharpe ratio:
\[ Sharpe=\frac{R_p-R_f}{\sigma_p} \]Treynor ratio:
\[ Treynor=\frac{R_p-R_f}{\beta_p} \]Jensen’s alpha:
\[ \alpha_p=R_p-\left[R_f+\beta_p(R_m-R_f)\right] \]Information ratio:
\[ IR=\frac{R_p-R_b}{Tracking\ Error} \]Tracking error:
\[ Tracking\ Error=\sigma(R_p-R_b) \]M-squared:
\[ M^2=Sharpe_p \times \sigma_m + R_f \]| Metric | Denominator | Best used when | Trap |
|---|---|---|---|
| Sharpe ratio | Total risk | Portfolio is not well diversified or investor holds only this portfolio | Penalizes upside and downside volatility alike |
| Treynor ratio | Beta | Portfolio is well diversified | Misleading if unsystematic risk is material |
| Jensen’s alpha | CAPM-required return | Testing beta-adjusted excess return | Depends on chosen market benchmark |
| Information ratio | Active risk | Active manager vs benchmark | High return with huge tracking error may score poorly |
| Tracking error | Volatility of active return | Benchmark-relative mandates | Low tracking error does not mean strong performance |
| M-squared | Market-standardized risk | Comparing to market return directly | Derived from Sharpe logic |
Time-Weighted vs Money-Weighted Returns
| Feature | Time-weighted return | Money-weighted return |
|---|---|---|
| Also known as | TWRR | MWRR, IRR-style return |
| Cash-flow effect | Removes impact of external cash-flow timing | Includes impact of external cash-flow timing |
| Best for | Manager performance evaluation | Client’s actual investment experience |
| Calculation logic | Break into subperiods and chain-link returns | Discount rate that equates cash inflows/outflows |
| High-yield distinction | Manager should not be rewarded or punished for client deposits/withdrawals | Investor experience depends on when money was added or removed |
Time-weighted chain-linking:
\[ TWRR=(1+r_1)(1+r_2)\cdots(1+r_n)-1 \]Asset Allocation Techniques
| Technique | Description | Choose when | Watch for |
|---|---|---|---|
| Strategic asset allocation | Long-term target weights based on objectives and constraints | Stable IPS, long-term policy mix | Requires periodic rebalancing |
| Tactical asset allocation | Short-term deviations from policy weights | Manager has market views and mandate permits active tilts | Can increase tracking error and turnover |
| Dynamic asset allocation | Adjusts asset mix as market conditions or portfolio values change | Rules-based risk control or changing opportunity set | Not the same as ad hoc market timing |
| Constant mix | Rebalance back to fixed weights | Buy low/sell high in mean-reverting markets | Can underperform in strong trending markets |
| Buy-and-hold | Initial allocation allowed to drift | Lower turnover, simple implementation | Risk profile can drift significantly |
| Constant proportion portfolio insurance | Increase risky exposure as cushion rises; reduce as cushion falls | Downside protection with upside participation | Gap risk and trading discipline matter |
| Liability-driven investing | Asset strategy tied to liabilities | Pension, insurance, or goal-based liability matching | Focus is surplus/shortfall risk, not just asset volatility |
| Core-satellite | Passive core plus active satellite mandates | Cost control with selective active risk | Satellite risk must not overwhelm policy risk |
Rebalancing Decision Table
| Rebalancing method | How it works | Advantage | Disadvantage |
|---|---|---|---|
| Calendar-based | Rebalance at set intervals | Simple and disciplined | May trade when drift is immaterial |
| Percentage-of-portfolio | Rebalance when weights breach tolerance bands | Responds to actual drift | Requires monitoring |
| Constant proportion | Maintains fixed risky/safe ratio | Controls risk exposure | Can generate transaction costs |
| Cash-flow rebalancing | Direct contributions/withdrawals to underweight/overweight assets | Tax- and cost-efficient | May be insufficient for large drift |
| Tax-aware rebalancing | Incorporates tax impact in taxable accounts | Improves after-tax outcome | May tolerate wider drift |
Risk Types and Controls
| Risk | Meaning | Common controls |
|---|---|---|
| Market risk | Broad price movements | Diversification, hedging, asset allocation |
| Systematic risk | Non-diversifiable market risk | Beta management, asset allocation, hedging |
| Unsystematic risk | Security- or sector-specific risk | Diversification, position limits |
| Interest rate risk | Bond price sensitivity to rate changes | Duration management, laddering, immunization |
| Reinvestment risk | Future cash flows reinvested at lower rates | Matching, zero-coupon bonds, immunization |
| Credit risk | Issuer downgrade or default | Credit analysis, diversification, quality limits |
| Liquidity risk | Cannot trade quickly at fair price | Liquid reserves, position sizing |
| Inflation risk | Purchasing power erosion | Real assets, inflation-linked securities, equities |
| Currency risk | Foreign exchange movements | Currency hedging, matching currency liabilities |
| Concentration risk | Excess exposure to one issuer/sector/factor | Diversification and exposure limits |
| Model risk | Assumptions produce misleading results | Stress testing, scenario analysis |
| Operational risk | Process, system, or human failure | Controls, oversight, documentation |
| Shortfall risk | Failing to meet a required objective | Goal-based asset allocation, downside analysis |
Fixed Income Portfolio Techniques
Bond Price and Yield Logic
| If market yields… | Existing bond prices… | Long-duration bonds… |
|---|---|---|
| Rise | Fall | Fall more |
| Fall | Rise | Rise more |
Current yield:
\[ Current\ Yield=\frac{Annual\ Coupon}{Market\ Price} \]Approximate percentage price change using modified duration:
\[ \%\Delta P \approx -Modified\ Duration \times \Delta y \]Duration with convexity adjustment:
\[ \%\Delta P \approx -D_{mod}\Delta y+\frac{1}{2}Convexity(\Delta y)^2 \]| Measure | Meaning | Exam point |
|---|---|---|
| Macaulay duration | Weighted average time to receive cash flows | Often linked to immunization horizon |
| Modified duration | Price sensitivity to yield change | Directly estimates percentage price change |
| Dollar duration | Dollar price change for yield change | Useful for hedging and portfolio-level exposure |
| Convexity | Curvature of price-yield relationship | Positive convexity helps when yields move significantly |
| Yield to maturity | Discount rate equating price to promised cash flows | Assumes holding to maturity and reinvestment at YTM |
| Yield spread | Extra yield over benchmark | Compensation for credit, liquidity, optionality, and other risks |
Fixed Income Strategy Matrix
| Strategy | Objective | Best fit | Main risk |
|---|---|---|---|
| Ladder | Spread maturities over time | Income needs and reinvestment diversification | May not maximize view-based return |
| Barbell | Short and long maturities, fewer intermediates | Yield-curve view, liquidity plus duration | More convexity but may carry reinvestment risk |
| Bullet | Concentrated around one maturity | Known future liability | Less diversification across maturity dates |
| Immunization | Match asset duration to liability horizon | Funding a future obligation | Requires rebalancing as duration changes |
| Cash-flow matching | Match cash inflows to liability payments | High certainty required | Can be costly or hard to construct |
| Active duration | Extend duration if rates expected to fall; shorten if rates expected to rise | Interest-rate view | Wrong rate call hurts performance |
| Credit strategy | Adjust credit quality and spread exposure | Spread or economic cycle view | Downgrade/default risk |
| Yield-curve strategy | Position for steepening, flattening, twists | Yield-curve views | Curve may move differently than expected |
Equity Portfolio Management
| Approach | Description | When appropriate | Key risk |
|---|---|---|---|
| Top-down | Economy, market, sector, then securities | Macro or sector rotation process | Macro forecast error |
| Bottom-up | Security fundamentals first | Stock selection mandate | Portfolio may develop unintended factor or sector exposures |
| Value | Seeks underpriced securities vs fundamentals | Mean reversion or valuation discipline | Value traps |
| Growth | Seeks high expected earnings/revenue growth | Expanding companies or sectors | Overpaying for growth |
| Quality | Strong balance sheets, profitability, stability | Defensive equity tilt | Crowded trades and valuation risk |
| Momentum | Buys recent winners/sells laggards | Trend persistence | Sharp reversals |
| Low volatility | Lower-volatility equity exposure | Risk-controlled equity mandate | May lag in strong bull markets |
| Passive indexing | Replicates benchmark | Low cost, benchmark exposure | No downside avoidance beyond index |
| Enhanced indexing | Small active tilts around index | Modest active return target | Tracking error and implementation risk |
| Active concentrated | Fewer high-conviction names | High alpha objective | High unsystematic risk |
Derivatives for Portfolio Management
| Instrument | Core use | Portfolio application | Trap |
|---|---|---|---|
| Forward | Customized agreement to buy/sell later | Currency or asset exposure hedge | Counterparty risk and illiquidity |
| Futures | Exchange-traded standardized contract | Equity index, bond, rate, or commodity exposure | Basis risk and margin discipline |
| Call option | Right to buy | Upside exposure, covered call writing | Premium cost or capped upside if written |
| Put option | Right to sell | Downside protection, protective put | Premium reduces net return |
| Swap | Exchange cash-flow streams | Interest rate or currency exposure management | Counterparty and valuation risk |
| Collar | Long put plus short call | Downside protection with reduced net cost | Upside is capped |
| Covered call | Long asset plus short call | Income generation on held asset | Upside beyond strike is given up |
| Protective put | Long asset plus long put | Portfolio insurance | Costly if repeated often |
Option Payoff Basics
Long call payoff at expiry:
\[ Payoff=\max(0,S_T-K) \]Long put payoff at expiry:
\[ Payoff=\max(0,K-S_T) \]Covered call position:
\[ Long\ Stock+Short\ Call \]Protective put position:
\[ Long\ Stock+Long\ Put \]| Market view | Possible strategy | Result |
|---|---|---|
| Bullish | Long call or long asset | Upside participation |
| Bearish | Long put or reduce exposure | Downside participation/protection |
| Neutral to mildly bullish | Covered call | Income, capped upside |
| Wants downside floor and accepts capped upside | Collar | Defined risk range |
| Wants temporary beta reduction | Short index futures or buy puts | Hedge market exposure |
| Wants foreign currency certainty | Forward currency hedge | Locks exchange rate |
Active vs Passive Decision Rules
| Factor | Passive favored | Active favored |
|---|---|---|
| Market efficiency | Highly efficient, liquid market | Less efficient or poorly covered market |
| Cost sensitivity | Very important | Alpha potential may justify fees |
| Tracking tolerance | Low tracking error desired | Tracking error acceptable |
| Tax sensitivity | Low turnover preferred | Active tax management possible if mandate supports it |
| Manager skill evidence | Not compelling | Repeatable process and risk controls |
| Client objective | Market exposure | Outperformance, downside control, ESG/ethical screen, income focus |
Alternative Investments in Portfolio Construction
| Asset class | Potential role | Key risks |
|---|---|---|
| Real estate | Income, inflation sensitivity, diversification | Illiquidity, valuation, leverage, property concentration |
| Infrastructure | Long-term cash flows, inflation linkage | Regulatory, political, liquidity, project risk |
| Commodities | Inflation hedge, crisis diversification | No inherent income, volatility, roll yield |
| Hedge funds | Absolute return, lower correlation, specialized strategies | Complexity, leverage, liquidity, manager risk |
| Private equity | Long-term capital growth | Illiquidity, valuation uncertainty, vintage-year risk |
| Private debt | Income and credit premium | Credit, liquidity, covenant, valuation risk |
Tax-Aware Portfolio Logic
| Return type or action | Portfolio implication |
|---|---|
| Interest income | Often less tax-efficient in taxable accounts than capital gains-oriented strategies |
| Dividends | Tax treatment depends on type and investor situation |
| Capital gains | Timing of realization can matter |
| High turnover | Can increase taxable distributions and transaction costs |
| Tax-loss selling | Can improve after-tax results if executed within applicable rules |
| Asset location | Place less tax-efficient assets in more tax-sheltered accounts when suitable |
| After-tax return | More relevant than pre-tax return for taxable investors |
Behavioural Finance Traps
| Bias | Type | Portfolio effect | Mitigation |
|---|---|---|---|
| Loss aversion | Emotional | Holds losers too long or avoids suitable risk | Predefined rebalancing and IPS discipline |
| Overconfidence | Emotional/cognitive | Excess trading, concentrated bets | Position limits and performance attribution |
| Anchoring | Cognitive | Fixates on purchase price or old forecast | Use current fundamentals |
| Confirmation bias | Cognitive | Seeks only supportive evidence | Formal challenge process |
| Recency bias | Cognitive | Extrapolates recent performance | Long-term capital market assumptions |
| Herding | Emotional/social | Buys crowded themes late | Independent valuation and risk review |
| Mental accounting | Cognitive | Treats money differently by source/account | Total portfolio view |
| Status quo bias | Emotional | Fails to rebalance or update IPS | Scheduled review cycle |
Benchmark and Attribution Reference
| Benchmark quality | Requirement |
|---|---|
| Appropriate | Matches mandate and asset class |
| Investable | Represents securities or exposures that could be held |
| Measurable | Return can be calculated reliably |
| Unambiguous | Constituents and rules are clear |
| Specified in advance | Not chosen after results are known |
| Reflective of manager style | Avoids unfair style mismatch |
| Attribution item | What it explains |
|---|---|
| Allocation effect | Value added by overweighting or underweighting segments |
| Selection effect | Value added by securities chosen within segments |
| Interaction effect | Combined effect of allocation and selection decisions |
| Currency effect | Impact of exchange-rate movements |
| Yield-curve effect | Fixed income return from curve shifts |
| Credit effect | Fixed income return from spread or credit quality changes |
| Duration effect | Fixed income return from interest-rate sensitivity |
Scenario Decision Shortcuts
| Scenario clue | Likely decision |
|---|---|
| Client needs a known amount at a known date | Liability matching, immunization, or bullet structure |
| Client has low risk ability but high return desire | Do not simply increase risky assets; address feasibility |
| Portfolio has high unsystematic risk | Diversify or reduce concentration |
| Manager is judged against benchmark | Use active return, tracking error, information ratio, attribution |
| Portfolio is not diversified | Sharpe ratio is more relevant than Treynor ratio |
| Portfolio is well diversified | Treynor ratio and beta-based analysis can be useful |
| Interest rates expected to rise | Shorten duration, all else equal |
| Interest rates expected to fall | Lengthen duration, all else equal |
| Yield curve expected to steepen | Position based on relative short/long maturity impact |
| Taxable investor with high turnover strategy | Evaluate after-tax return and trading cost |
| Needs equity downside protection | Protective put, collar, or lower equity allocation |
| Wants income and accepts capped upside | Covered call |
| Wants market exposure with low cost | Passive index strategy |
| Wants benchmark-relative alpha | Active or enhanced indexing with tracking-risk control |
Common PMT Exam Traps
- Confusing risk tolerance with risk capacity. Capacity can be low even when willingness is high.
- Recommending the highest expected return without checking liquidity, tax, time horizon, and constraints.
- Using standard deviation when the question asks for benchmark-relative risk; use tracking error.
- Using Treynor for a poorly diversified portfolio; beta ignores unsystematic risk.
- Treating duration as maturity. Duration is sensitivity and weighted timing of cash flows.
- Forgetting that bond prices and yields move in opposite directions.
- Assuming a hedge eliminates all risk. Basis risk, counterparty risk, liquidity risk, and implementation risk can remain.
- Choosing active management without identifying why alpha is plausible after costs.
- Evaluating a manager using money-weighted return when cash flows were client-directed.
- Comparing portfolios on pre-tax returns when the investor is taxable.
- Ignoring IPS rebalancing rules during market stress.
- Treating alternative investments as automatically diversifying; correlation can rise in stressed markets.
Final Review Checklist
Before answering a PMT scenario, identify:
- Client objective: growth, income, preservation, liability funding, after-tax return, or benchmark-relative return.
- Constraint that dominates: liquidity, time horizon, tax, legal, unique, or risk capacity.
- Correct risk measure: standard deviation, beta, duration, tracking error, downside risk, or shortfall risk.
- Correct return measure: time-weighted, money-weighted, arithmetic, geometric, pre-tax, or after-tax.
- Correct implementation tool: asset allocation, security selection, duration adjustment, derivative hedge, rebalancing, or benchmark change.
- Trade-off created by the recommendation: cost, liquidity, tracking error, tax impact, capped upside, leverage, or model risk.
Practical Next Step
Use this Quick Reference as a checklist while working PMT practice questions: for every scenario, write the client constraint, the portfolio technique selected, the risk measure used, and the reason the alternatives are less suitable.