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.
- 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)
InvestingModern 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 ...
Financial AdvisorAchieve analytical efficiency by applying your evaluation to a key set of stocks.
InvestingFinancial statement analysis is the process of reviewing a company’s statements to gain an understanding of its financial health.
InvestingMarket efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
InvestingFInancial advisors and wealth management firms use a variety of tools based in Modern portfolio theory to quantify investment risk.
Personal FinanceDiscover the duties and responsibilities of a portfolio manager, along with education, training and skills requirements, and salary expectations.
InvestingRatio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
InvestingLearn how the writings of John Burr Williams and Harry Markowitz led to the creation of the investment portfolio.
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Managing WealthSee why investors today still follow this old set of principles that reduce risk and increase returns through diversification.