Investment Theory and Portfolio Development - Introduction

The discussion on investment theory forms the basis for much of the portfolio management and investment analysis techniques that planners use with their clients, including security and portfolio valuation. Market efficiency and behavioral finance represent two schools of thought regarding investor conduct. Both disciplines would seem to have merit, though one should expect the academic debate to continue for some time. Behavioral finance was, at one time, deemed heretical by the academic community and now has a loyal following. Candidates should focus on the key concepts, rather than spend an undue amount of time on the minutiae of the mathematics involved in supporting the basis for modern portfolio theory.

An understanding of the different analytical tools is critical to the process of portfolio development and analysis. Inputs for portfolio selection include an appraisal of a company under consideration from the perspective of its financial statements. This entails a macroeconomic analysis of the economy, interest rates and markets and an overview of the company's operations, strategy and management. Measurement of liquidity, profitability and indebtedness is accomplished through ratio analysis.

Learning Objectives

  • Define and discuss modern portfolio theory.
  • Discuss the Capital Market Line, mean variance optimization and the efficient frontier.
  • Discuss the security market line.
  • Discuss the weak, semi-strong and strong forms of the efficient market hypothesis.
  • Discuss the major types of market anomalies.
  • Discuss the tenets of behavioral finance.
  • Discuss the benefits, as well as limitations, of fundamental analysis including both top-down and bottom-up analysis and ratio analysis.
  • Discuss the fundamentals of double-entry bookkeeping and financial statement analysis.
  • Compute basic measures of profitability, liquidity and indebtedness.
  • Define and discuss technical analysis including its purpose and limitations.
  • Be conversant in the basic tools and techniques of technical analysis and their significance.
  • Define and discuss the investment policy statement including its purpose and construction.
  • Define and discuss benchmarks and their use in performance measurement.
  • Define, discuss and give examples of appropriate usage of probability analysis.
  • Discuss the various measures of tax efficiency and their relevance to the portfolio construction process.
  • Discuss the critical elements of performance measurement including critical ratios, their composition and significance.
Modern Portfolio Theory (MPT)


Related Articles
  1. Professionals

    Introduction

    Introduction
  2. Professionals

    Introduction

    Introduction
  3. Professionals

    Introduction

    Introduction
  4. Trading Strategies

    Technical Analysis: Fundamental Vs. Technical Analysis

    By Cory Janssen, Chad Langager and Casey MurphyTechnical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis ...
  5. Professionals

    Introduction

    CFA Level 1 - Section 8 Assets. Briefly describes the asset side of a balance sheet and what section 8 will be covering.
  6. Investing Basics

    Modern Portfolio Theory vs. Behavioral Finance

    Modern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ...
  7. Professionals

    Management Discussion and Analysis & Financial Statement Footnotes

    CFA Level 1 - Management Discussion and Analysis & Financial Statement Footnotes. Explains the Management Discussion and Analysis section that is required to be included with financial statements.
  8. Professionals

    The Workings Of Equity Portfolio Management

    Achieve analytical efficiency by applying your evaluation to a key set of stocks.
  9. Professionals

    Efficient Market Hypothesis (EMH)

    Efficient Market Hypothesis (EMH)
  10. Professionals

    Portfolio Management Theories

    CFA Level 1 - Portfolio Management Theories. Learn the main theories behind portfolio management. Includes information on risk aversion, Markowitz theory and the efficient frontier.
RELATED TERMS
  1. Discussion Memorandum

    Published by the Financial Accounting Standards Board (FASB), ...
  2. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  3. Efficient Frontier

    A set of optimal portfolios that offers the highest expected ...
  4. Management Discussion and Analysis ...

    A section of a company's annual report in which management discusses ...
  5. World Economic Forum

    A discussion forum for discussing the major issues concerning ...
  6. Stock Analysis

    Stock analysis is a term that refers to the evaluation of a particular ...
RELATED FAQS
  1. What are the differences between weak, strong and semi-strong versions of the Efficient ...

    Discover how the efficient market theory is broken down into three versions, the hallmarks of each and the anomalies that ... Read Answer >>
  2. What are the advantages of portfolio planning with the efficient frontier?

    Learn about modern portfolio theory and the efficient frontier. Understand the advantages of portfolio planning with the ... Read Answer >>
  3. How have portfolios from within the efficient frontier performed historically?

    Explore how the efficient frontier is used in selecting investment portfolios. Find out how risks and returns are used to ... Read Answer >>
  4. Is it better to use fundamental analysis, technical analysis or quantitative analysis ...

    Understand the difference between fundamental, technical and quantitative analysis, and how each measurement helps investors ... Read Answer >>
  5. Which financial statements are most important when performing ratio analysis?

    Learn which financial statements are used for ratio analysis. Find out what financial data is needed to conduct fundamental ... Read Answer >>
  6. How is portfolio variance reduced in Modern Portfolio Theory?

    Learn about modern portfolio theory, specifically what it asserts about asset allocation and managing portfolio risk through ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center