Investment Planning: Portfolio Theory, Vehicles and Performance Measurement
What this domain tests
Risk profiling, asset allocation, diversification maths, CAPM and risk-adjusted performance measures, plus Malaysian vehicles: unit trusts, ETFs, REITs, sukuk, PRS and EPF withdrawals for investment.
Core rules
- Portfolio expected return is the weighted average of component returns; portfolio standard deviation is not, because it also depends on correlation. With correlation below 1, portfolio risk falls below the weighted-average standard deviation.
- Beta measures systematic risk only. CAPM: E(R) = Rf + β × (E(Rm) − Rf). Sharpe = (Rp − Rf) / σp uses total risk; Treynor uses beta. Use Sharpe for a client's whole undiversified portfolio, beta-based measures for a slice within a diversified fund.
- Time-weighted return measures manager skill; money-weighted return (IRR) reflects the client's actual experience with cash-flow timing.
- Rebalancing restores policy weights; letting winners drift upward quietly raises portfolio risk beyond the IPS limit.
Worked example
A 60/40 portfolio: equities expected 10% with σ 18%, bonds expected 4% with σ 6%, correlation 0.2.
- Expected return = 0.6(10) + 0.4(4) = 7.6%.
- Variance = 0.36(324) + 0.16(36) + 2(0.6)(0.4)(0.2)(18)(6) = 116.64 + 5.76 + 10.37 = 132.77 → σ ≈ 11.5%.
- The weighted-average σ would be 13.2%, so diversification removes about 1.7 percentage points of risk purely through the 0.2 correlation.
Traps that cost marks
- Quoting raw fund returns without adjusting for risk or for sales charges and expense ratios.
- Using beta when the client holds an undiversified, single-asset portfolio.
- Comparing a fund's arithmetic average with a client's geometric experience.
- Ignoring liquidity, tax treatment and Shariah screening when the client mandates a Shariah-compliant portfolio.