# CFP

## Risk and Return Measures - Introduction

Quantitative concepts are essential in the evaluation of investment opportunities. An understanding of return distributions, explanatory statistics and volatility measures is required of candidates who can expect questions on fundamental concepts as well as more advanced applications of them.

Also critical to the evaluation of an investment opportunity is the ability to calculate its return and understand the basis for such calculation. In so doing, the planner can then make use of the results to determine the merits of including the investment as part of the client's strategy. Return calculations are always tested to some degree, making proficiency in their computation an essential skill for the candidate.

Asset valuation is a critical piece of the portfolio management process. The CFP® examination tests candidates on the rudiments of valuation, rather than on its more arcane points.

Learning Objectives
• Be able to define and discuss the occurrence of different types of return distributions.
• Be able to define and discuss the correlation coefficient, coefficient of determination (R2) and examples of its application, and the coefficient of variation and its use.
• Be able to discuss standard deviation, its definition and applicability to the investment management process including other measures of risk.
• Be able to discuss the concept of beta and its use in investment management.
• Be able to define and discuss covariance and semivariance.
• Be able to calculate, discuss and compare and contrast simple and compound return, geometric and arithmetic averages, and time-weighted vs. dollar-weighted return.
• Be able to calculate, define and discuss real and nominal return, total return, risk-adjusted return, holding period return, internal rate of return (IRR), yield-to-maturity (YTM), yield-to-call (YTC), current yield (CY), taxable equivalent yield (TEY), tax-adjusted yield and weighted average return.
• Be able to describe and discuss the concepts of duration and convexity and their importance in the evaluation of fixed income instruments.
• Be able to discuss the concept of capitalized earnings and its application to equity and real estate valuation.
• Be able to define and discuss the dividend growth model and compare, as well as differentiate, the different types of models.
• Be able to define, discuss the merits and demerits of and apply the various ratios used in performing a company valuation.