CFA Level 1 Portfolio Management: The 6 Concepts That Appear on Every Exam

Portfolio Management carries a 12% weight at CFA Level 1 — 21 to 22 questions. Despite this significant weighting, many candidates underprepare for it, focusing instead on more conceptually familiar topics like Equity or Fixed Income.

The core framework: risk and return

The foundation of Level 1 Portfolio Management is the relationship between risk and return. You must understand expected return, variance, and standard deviation for both individual assets and portfolios. The correlation coefficient and covariance are essential — know how to calculate and interpret them.

CAPM is non-negotiable

The Capital Asset Pricing Model (CAPM) appears in some form on virtually every CFA Level 1 exam. Know the formula: E(R) = Rf + β × (E(Rm) − Rf). Understand what beta represents, how to calculate it, and what a beta above or below 1 implies about a security's systematic risk.

The efficient frontier and portfolio construction

Understand what the efficient frontier represents — the set of portfolios offering the highest expected return for a given level of risk. Know the difference between systematic (non-diversifiable) and unsystematic (diversifiable) risk. The key insight: investors are not compensated for taking on unsystematic risk, because it can be eliminated through diversification.

Performance measurement

The Sharpe ratio (excess return per unit of total risk) and Treynor ratio (excess return per unit of systematic risk) both appear regularly. Know when each is appropriate to use and how to calculate them.