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<p>Preface xi</p> <p>Acknowledgments xiii</p> <p>About the CFA Institute Investment Series xv</p> <p><b>Chapter 1 Overview of Equity Securities 1</b></p> <p>Learning Outcomes 1</p> <p>1. Introduction 1</p> <p>2. Equity Securities in Global Financial Markets 2</p> <p>3. Types and Characteristics of Equity Securities 6</p> <p>3.1. Common Shares 7</p> <p>3.2. Preference Shares 10</p> <p>4. Private versus Public Equity Securities 12</p> <p>5. Investing in Non-Domestic Equity Securities 15</p> <p>5.1. Direct Investing 17</p> <p>5.2. Depository Receipts 17</p> <p>6. Risk and Return Characteristics of Equity Securities 20</p> <p>6.1. Return Characteristics of Equity Securities 20</p> <p>5.2. Risk of Equity Securities 22</p> <p>7. Equity Securities and Company Value 23</p> <p>7.1. Accounting Return on Equity 23</p> <p>7.2. The Cost of Equity and Investors’ Required Rates of Return 28</p> <p>Summary 29</p> <p>References 31</p> <p>Practice Problems 31</p> <p><b>Chapter 2 Market Efficiency 35</b></p> <p>Learning Outcomes 35</p> <p>1. Introduction 35</p> <p>2. The Concept of Market Efficiency 37</p> <p>2.1. The Description of Efficient Markets 37</p> <p>2.2. Market Value versus Intrinsic Value 39</p> <p>2.4. Transaction Costs and Information-Acquisition Costs 43</p> <p>3. Forms of Market Efficiency 44</p> <p>3.1. Weak Form 44</p> <p>3.2. Semi-Strong Form 45</p> <p>3.3. Strong Form 48</p> <p>3.4. Implications of the Efficient Market Hypothesis 48</p> <p>4. Market Pricing Anomalies 50</p> <p>4.1. Time-Series Anomalies 51</p> <p>4.2. Cross-Sectional Anomalies 53</p> <p>4.3. Other Anomalies 54</p> <p>4.4. Implications for Investment Strategies 56</p> <p>5. Behavioral Finance 57</p> <p>5.1. Loss Aversion 57</p> <p>5.2. Herding 58</p> <p>5.3. Overconfidence 58</p> <p>5.4. Information Cascades 58</p> <p>5.5. Other Behavioral Biases 59</p> <p>5.6. Behavioral Finance and Investors 60</p> <p>5.7. Behavioral Finance and Efficient Markets 60</p> <p>Summary 60</p> <p>References 61</p> <p>Practice Problems 63</p> <p><b>Chapter 3 Overview of Equity Portfolio Management 67</b></p> <p>Learning Outcomes 67</p> <p>1. Introduction 67</p> <p>2. The Roles of Equities in a Portfolio 68</p> <p>2.1. Capital Appreciation 68</p> <p>2.2. Dividend Income 69</p> <p>2.3. Diversification with Other Asset Classes 70</p> <p>2.4. Hedge Against Inflation 71</p> <p>2.5. Client Considerations for Equities in a Portfolio 71</p> <p>3. Equity Investment Universe 73</p> <p>3.1. Segmentation by Size and Style 73</p> <p>3.2. Segmentation by Geography 75</p> <p>3.3. Segmentation by Economic Activity 77</p> <p>3.4. Segmentation of Equity Indexes and Benchmarks 78</p> <p>4. Income and Costs in an Equity Portfolio 79</p> <p>4.1. Dividend Income 79</p> <p>4.2. Securities Lending Income 80</p> <p>4.3. Ancillary Investment Strategies 80</p> <p>4.4. Management Fees 81</p> <p>4.5. Performance Fees 81</p> <p>4.6. Administration Fees 82</p> <p>4.7. Marketing and Distribution Costs 82</p> <p>4.8. Trading Costs 83</p> <p>4.9. Investment Approaches and Effects on Costs 83</p> <p>5. Shareholder Engagement 84</p> <p>5.1. Benefits of Shareholder Engagement 84</p> <p>5.2. Disadvantages of Shareholder Engagement 85</p> <p>5.3. The Role of an Equity Manager in Shareholder Engagement 85</p> <p>6. Equity Investment across the Passive–Active Spectrum 87</p> <p>6.1. Confidence to Outperform 87</p> <p>6.2. Client Preference 88</p> <p>6.3. Suitable Benchmark 89</p> <p>6.4. Client-Specific Mandates 89</p> <p>6.5. Risks/Costs of Active Management 89</p> <p>6.6. Taxes 89</p> <p>Summary 90</p> <p>References 91</p> <p>Practice Problems 92</p> <p><b>Chapter 4 Passive Equity Investing 95</b></p> <p>Learning Outcomes 95</p> <p>1. Introduction 95</p> <p>2. Choosing a Benchmark 97</p> <p>2.1. Indexes as a Basis for Investment 97</p> <p>2.2. Considerations When Choosing a Benchmark Index 98</p> <p>2.3. Index Construction Methodologies 100</p> <p>2.4. Factor-Based Strategies 106</p> <p>3. Approaches to Passive Equity Investing 109</p> <p>3.1. Pooled Investments 110</p> <p>3.2. Derivatives-Based Approaches 113</p> <p>3.3. Separately Managed Equity Index-Based Portfolios 140</p> <p>4. Portfolio Construction 119</p> <p>4.1. Full Replication 119</p> <p>4.2. Stratified Sampling 121</p> <p>4.3. Optimization 122</p> <p>4.4. Blended Approach 123</p> <p>5. Tracking Error Management 123</p> <p>5.1. Tracking Error and Excess Return 124</p> <p>5.2. Potential Causes of Tracking Error and Excess Return 125</p> <p>5.3. Controlling Tracking Error 126</p> <p>6. Sources of Return and Risk in Passive Equity Portfolios 126</p> <p>6.1. Attribution Analysis 127</p> <p>6.2. Securities Lending 129</p> <p>6.3. Investor Activism and Engagement by Passive Managers 131</p> <p>Summary 132</p> <p>References 133</p> <p>Practice Problems 135</p> <p><b>Chapter 5 Analysis of Active Portfolio Management 141</b></p> <p>Learning Outcomes 141</p> <p>1. Introduction 141</p> <p>2. Active Management and Value Added 142</p> <p>2.1. Choice of Benchmark 143</p> <p>2.2. Measuring Value Added 143</p> <p>2.3. Decomposition of Value Added 145</p> <p>3. Comparing Risk and Return 147</p> <p>3.1. The Sharpe Ratio 147</p> <p>3.2. The Information Ratio 150</p> <p>3.3. Constructing Optimal Portfolios 153</p> <p>4. The Fundamental Law of Active Management 158</p> <p>4.1. Active Security Returns 158</p> <p>4.2. The Basic Fundamental Law 163</p> <p>4.3. The Expanded Fundamental Law 164</p> <p>4.4. <i>Ex Post </i>Performance Measurement 167</p> <p>5. Applications of the Fundamental Law 169</p> <p>5.1. Global Equity Strategy 169</p> <p>5.2. Fixed-Income Strategies 177</p> <p>6. Practical Limitations 183</p> <p>6.1. <i>Ex Ante </i>Measurement of Skill 183</p> <p>6.2. Independence of Investment Decisions 184</p> <p>Summary 185</p> <p>References 187</p> <p>Practice Problems 187</p> <p><b>Chapter 6 Active Equity Investing: Strategies 197</b></p> <p>Learning Outcomes 197</p> <p>1. Introduction 197</p> <p>2. Approaches to Active Management 198</p> <p>2.1. Differences in the Nature of the Information Used 200</p> <p>2.2. Differences in the Focus of the Analysis 201</p> <p>2.3. Difference in Orientation to the Data: Forecasting the Future vs. Analyzing the Past 202</p> <p>2.4. Differences in Portfolio Construction: Judgment vs. Optimization 202</p> <p>3. Types of Active Management Strategies 204</p> <p>3.1. Bottom-Up Strategies 204</p> <p>3.2. Top-Down Strategies 211</p> <p>3.3. Factor-Based Strategies 214</p> <p>3.4. Activist Strategies 228</p> <p>3.5. Other Strategies 235</p> <p>4. Creating a Fundamental Active Investment Strategy 239</p> <p>4.1. The Fundamental Active Investment Process 239</p> <p>4.2. Pitfalls in Fundamental Investing 241</p> <p>5. Creating a Quantitative Active Investment Strategy 246</p> <p>5.1. Creating a Quantitative Investment Process 246</p> <p>5.2. Pitfalls in Quantitative Investment Processes 249</p> <p>6. Equity Investment Style Classification 253</p> <p>6.1. Different Approaches to Style Classification 253</p> <p>6.2. Strengths and Limitations of Style Analysis 260</p> <p>Summary 262</p> <p>References 263</p> <p>Practice Problems 264</p> <p><b>Chapter 7 Active Equity Investing: Portfolio Construction 271</b></p> <p>Learning Outcomes 271</p> <p>1. Introduction 271</p> <p>2. Building Blocks of Active Equity Portfolio Construction 272</p> <p>2.1. Fundamentals of Portfolio Construction 273</p> <p>2.2. Building Blocks Used in Portfolio Construction 275</p> <p>3. Approaches to Portfolio Construction 284</p> <p>3.1. The Implementation Process: The Choice of Portfolio Management Approaches 285</p> <p>3.2. The Implementation Process: The Objectives and Constraints 296</p> <p>4. Allocating the Risk Budget 301</p> <p>4.1. Absolute vs. Relative Measures of Risk 302</p> <p>4.2. Determining the Appropriate Level of Risk 307</p> <p>4.3. Allocating the Risk Budget 310</p> <p>5. Additional Risk Measures Used in Portfolio Construction and Monitoring 314</p> <p>5.1. Heuristic Constraints 314</p> <p>5.2. Formal Constraints 315</p> <p>5.3. The Risks of Being Wrong 318</p> <p>6. Implicit Cost-Related Considerations in Portfolio Construction 321</p> <p>6.1. Implicit Costs—Market Impact and the Relevance of Position Size, Assets under Management, and Turnover 321</p> <p>6.2. Estimating the Cost of Slippage 324</p> <p>7. The Well-Constructed Portfolio 328</p> <p>8. Long/Short, Long Extension, and Market-Neutral Portfolio Construction 332</p> <p>8.1. The Merits of Long-Only Investing 333</p> <p>8.2. Long/Short Portfolio Construction 335</p> <p>8.3. Long Extension Portfolio Construction 336</p> <p>8.4. Market-Neutral Portfolio Construction 337</p> <p>8.5. Benefits and Drawbacks of Long/Short Strategies 338</p> <p>Summary 342</p> <p>References 345</p> <p>Practice Problems 346</p> <p><b>Chapter 8 Technical Analysis 351</b></p> <p>Learning Outcomes 351</p> <p>1. Introduction 351</p> <p>2. Technical Analysis: Principles, Assumptions, and Links to Investment Analysis 352</p> <p>2.1. Principles and Assumptions 353</p> <p>2.2. Technical Analysis and Behavioral Finance 354</p> <p>2.3. Technical Analysis and Fundamental Analysis 356</p> <p>2.4. The Differences in Conducting/Interpreting Technical Analysis in Various Types of Markets 358</p> <p>3. Charting 360</p> <p>3.1. Types of Technical Analysis Charts 361</p> <p>3.2. Trend, Support, and Resistance 372</p> <p>3.3. Common Chart Patterns 375</p> <p>4. Technical Indicators 397</p> <p>4.1. Technical Indicators 398</p> <p>5. Applications to Portfolio Management 417</p> <p>5.1. Principles of Intermarket Analysis 418</p> <p>5.2. Technical Analysis Applications to Portfolio Management 421</p> <p>Summary 435</p> <p>Practice Problems 438</p> <p>Glossary 445</p> <p>About the Authors 451</p> <p>About the CFA Program 453</p> <p>Index 455</p>

<p><b>CFA Institute</b> is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors' interests come first, markets function at their best, and economies grow. CFA Institute has more than 155,000 members in 165 countries and territories, including 150,000 CFA® charterholders, and 148 member societies. For more information, visit www.cfainstitute.org.</p>

<p>As part of the CFA Institute Investment Series, <i>Portfolio Management in Practice</i> has been designed as a three-volume series that meets the needs of a wide range of individuals, from graduate-level students focused on finance to practicing investment professionals. Blending theory with practice, the contributors skillfully outline the flow of the portfolio management process, detailing the most important issues surrounding this multifaceted topic. Throughout the texts, special attention is paid to ensure the evenness of subject matter, consistency of mathematical notation, and continuity of topic coverage that is so critical to the learning process. <p><i>Equity Portfolio Management,</i> the third volume in the <i>Portfolio Management in Practice series</i>, offers a fuller treatment of active versus passive equity investment strategies. Building on content in the <i>Investment Management</i> and <i>Equity Valuation</i> volumes in the CFA Institute Investment Series, <i>Equity Portfolio Management</i> serves as an in-depth technical examination on building and evaluating active equity methods. <p>This volume explores: <ul> <li>An overview of passive versus active equity strategies</li> <li>Market efficiency underpinnings of passive equity strategies</li> <li>Active equity strategies and constructing portfolios to reflect active strategies</li> <li>Technical analysis as an additional consideration in executing active equity strategies</li> </ul> <p>To further enhance readers' understanding of the tools and techniques explored here, don't forget to pick up the <i>Portfolio Management in Practice, Volume 3: Equity Portfolio Management Workbook</i>, the companion study guide containing Learning Outcomes, Summary Overview sections, challenging practice questions, and solutions.

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