CFP

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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)

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