Series 65 Portfolio Management Summary
- April 1, 2025
- Posted by: 'FINRA Exam Mastery'
- Category: Finance
🧾 Series 65 Portfolio Management Summary
📘 Key Concepts, Strategies, and Formulas You Must Know
The Series 65 exam places strong emphasis on portfolio management — one of the most tested domains for aspiring investment adviser representatives (IARs). Understanding how to construct, monitor, and adjust client portfolios in alignment with their risk profile, time horizon, and objectives is essential.
Here’s a focused summary to help you master portfolio management for the Series 65 exam.
🎯 1. Portfolio Theory Basics
Modern Portfolio Theory (MPT)
- Developed by Harry Markowitz
- Emphasizes diversification to optimize return for a given level of risk
- Core goal: create an efficient frontier — portfolios with maximum expected return for a given risk
Efficient Frontier
- A curve showing optimal portfolios
- Portfolios below the curve = inefficient
- Portfolios on the curve = optimal
- Portfolios above = not possible
Capital Asset Pricing Model (CAPM)
Expected Return=Rf+β×(Rm−Rf)\text{Expected Return} = R_f + \beta \times (R_m – R_f)
Where:
- RfR_f = Risk-free rate
- β\beta = Beta (systematic risk)
- RmR_m = Expected market return
- Measures required return based on risk
🎯 2. Risk Types
| Risk Type | Description |
|---|---|
| Systematic Risk | Affects all securities (market risk, inflation) |
| Unsystematic Risk | Company- or industry-specific |
| Interest Rate Risk | Bond prices fall as interest rates rise |
| Reinvestment Risk | Future cash flows reinvested at lower rates |
| Purchasing Power Risk | Inflation reduces real returns |
| Liquidity Risk | Difficulty selling an asset at fair value |
✅ Only systematic risk is rewarded in a diversified portfolio — unsystematic risk can be eliminated through diversification.
🎯 3. Asset Allocation
Strategic Asset Allocation
- Long-term target allocation (e.g., 60% stocks, 40% bonds)
- Rebalanced periodically
Tactical Asset Allocation
- Short-term adjustments to capture market opportunities
- More active
Core-Satellite
- Core: Passive/index investments
- Satellite: Active, higher-risk strategies around the core
🎯 4. Time Horizon & Investor Profile
| Investor Type | Recommended Allocation |
|---|---|
| Young, long-term | More equities, less bonds |
| Nearing retirement | Conservative, more fixed income |
| High-risk tolerance | Growth-oriented (equities, alternatives) |
| Low-risk tolerance | Income-focused (bonds, cash equivalents) |
🎯 5. Key Formulas & Ratios
Sharpe Ratio
Sharpe=Rp−Rfσp\text{Sharpe} = \frac{R_p – R_f}{\sigma_p}
- RpR_p: Portfolio return
- RfR_f: Risk-free rate
- σp\sigma_p: Standard deviation of portfolio
✅ Measures risk-adjusted return
Alpha
- Measures performance above or below expectations (based on beta)
Beta
- Measures volatility relative to the market
- Beta = 1 → same volatility as market
- Beta > 1 → more volatile
- Beta < 1 → less volatile
Standard Deviation
- Measures total volatility of returns
🎯 6. Rebalancing and Tax Efficiency
- Rebalancing restores asset classes to target allocation
- May trigger capital gains taxes in taxable accounts
- Tax-loss harvesting can be used to offset gains
🎯 7. Monte Carlo Simulation
- Uses random variables to simulate many potential outcomes
- Helps evaluate portfolio sustainability under different market conditions
🚀 Summary for the Exam
✅ Know MPT, CAPM, risk types, and diversification
✅ Understand strategic vs. tactical asset allocation
✅ Be able to calculate and interpret Sharpe ratio, beta, and alpha
✅ Recognize the impact of time horizon and risk tolerance on portfolio design
🎓 Want more Series 65 prep modules and practice questions?
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Stay focused. Manage risk. Pass with confidence.