Strategy entails using the investments suitable for the client in an appropriate manner to achieve his or her stated objective. The investment strategy is analogous to the various steps in a recipe that bring its ingredients, the investments, together in a way to produce richness and depth of flavor, here, the desired risk/return objective. Portfolio management involves the implementation of one or more strategies depending upon the goal sought. As with the investments that are a part of these strategies, they need to be selected with the suitability of the client as the most important consideration. Candidates should focus on the basic mechanics of each strategy, as well as its strengths and weaknesses and applicability to a given set of circumstances.

Learning Objectives

  • Discuss the basics of market timing, as well as its risk/reward tradeoff.
  • Argue the benefits and drawbacks of passive investing vs. the pursuit of an active approach, and articulate the reasons for a buy and hold strategy and its merits and demerits.
  • Discuss how portfolio immunization works and its benefits as a risk management tool.
  • Discuss swaps and collars, how they are constructed and used, and their benefits and drawbacks.
  • Discuss the mechanics of formula investing: dollar cost averaging, dividend reinvestment plans and fixed income strategies (ladders, bullets and barbells).
  • Discuss the advantages and disadvantages to the use of leverage in portfolio management.
  • Discuss the mechanics, strengths and weaknesses of short selling.
  • Discuss the most frequently used hedging strategies along with their strengths and weaknesses.
  • Discuss the basic principles of strategic asset allocation and what characterizes it, as well as the balance between strategic asset allocation and client risk tolerance.
  • Be conversant in measuring client risk tolerance and its application to the strategic asset allocation process.
  • Define and discuss asset class types and how they correlate.
  • Discuss the merits and demerits of rebalancing
  • Discuss tactical asset allocation and where it is most applicable.
  • Discuss how investors can manage risk within the framework of the asset allocation process.
  • Discuss the benefits and drawbacks of strategies for dealing with concentrated stock portfolios.
  • Discuss the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) including their inputs and application, and contrast each.
  • Be able to describe and discuss the Black-Scholes Option valuation model, including the factors that drive it.
  • Be able to define and discuss binomial option pricing along with examples of its application.


Basic Investment Strategies

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