Introduction to the Portfolio Approach

Chapter 15 introduces the portfolio perspective that drives the rest of Exam 2. It moves from single-security thinking to portfolio-level risk and return, diversification, and the broad styles used by portfolio managers.

Students should pay attention to what changes when assets are held together. The exam often tests whether a position that looks risky on its own can still improve a portfolio because of correlation, diversification, or style fit.

Exam Focus

• Distinguish total risk, systematic risk, and diversification effects in a portfolio setting.
• Explain why expected return must be assessed together with volatility, correlation, and portfolio role.
• Compare manager styles such as active and passive, top-down and bottom-up, and growth and value.

In this section

• Risk and Return in Portfolio Theory
  The risk-return trade-off, major investment risks, with investor profile shapes suitable portfolio choices.
• Risk and Return Relationships in a Portfolio
  Diversification, correlation, systematic and unsystematic risk, CAPM, beta, alpha, and risk-adjusted portfolio performance.
• Portfolio Management Styles
  Comparison of active and passive management, major equity and fixed-income styles, and the importance of mandate consistency.