Page 7 - FINAL CFA SLIDES DECEMBER 2018 DAY 12
P. 7
LOS 41.b: Describe characteristics of Session Unit 12:
the major asset classes that investors 41. Portfolio Risk and Return: Part 1
consider in forming portfolios., p.128
Higher the risk,
the higher the returns!
Beware of over
tanties
simplification around
expected return and
variance, though: WHY?
Returns do not always follow a normal distribution -sometimes negatively skewed, with greater kurtosis (fatter
tails);
• Negative skew reflects a tendency towards large downside deviations;
• Positive excess kurtosis reflects frequent extreme deviations on both the upside and downside.
• These non-normal characteristics of skewness (≠ 0) and kurtosis (≠ 3) should be taken into account when
analyzing investments. Also consider liquidity because it can affect the price and, therefore, the expected
return, especially in emerging markets and for securities that trade infrequently,
such as low-quality corporate bonds
