Portfolio Management on the CMT Exam
Portfolio management carries 25% weight on CMT Level 3 — the highest-weighted topic on the capstone exam. It tests your ability to apply technical analysis to real investment decisions.
Full Level 3 details are in the CMT exam guide 2026.
Strategic vs. Tactical Asset Allocation
Strategic Allocation
Long-term target weights based on client objectives, risk tolerance, and time horizon. Example: 60% stocks / 40% bonds.
Tactical Allocation
Short-to-medium term adjustments based on technical signals:
- Moving average trend signals
- Relative strength between asset classes
- Volatility regime assessment
Rebalancing Strategies
| Method | Trigger | Pros | Cons |
|---|---|---|---|
| Calendar | Fixed schedule (quarterly) | Simple, disciplined | May miss signals |
| Threshold | Drift exceeds ±5% | Responsive | Higher turnover |
| Tactical | Technical signals | Adaptive | Requires skill |
Performance Measurement
Sharpe Ratio
Sharpe = (Rₚ − Rᶠ) / σₚ Risk-adjusted return per unit of total risk.
Sortino Ratio
Uses downside deviation instead of total standard deviation — penalizes only harmful volatility.
Information Ratio
IR = (Rₚ − Rᵦ) / Tracking Error Measures active return per unit of active risk.
Maximum Drawdown
The largest peak-to-trough decline. Critical metric per risk management frameworks.
Technical Overlay Approach
CMT charterholders add value by applying technical analysis as an overlay:
- Use trend identification for timing allocation shifts
- Apply chart patterns for entry/exit timing
- Monitor market breadth for regime assessment
- Use volatility measures for position sizing
Practice with Level 3 questions and the full guide.
Sample Tactical Asset Allocation — CMT-Driven Portfolio
Allocation adjusted based on technical signals and market regime
Rebalancing Impact — Annual vs. Tactical Rebalancing
Tactical (technical-driven) rebalancing outperforms fixed annual rebalancing