This module covers risk and return modern portfolio concepts used in constructing portfolios. Risk and return analysis includes standard deviation of a single asset and a portfolio, beta and the capital asset pricing model, and the importance of correlations when diversifying portfolios.

1–1 Differentiate among the various sources of risk in investments, both systematic and unsystematic.
1–2 Calculate a weighted average return. Also calculate the standard deviation and mean return of a single asset, and understand how the range of returns is calculated within one, two, and three standard deviations.
1–3 Calculate coefficient of variation, and understand its application.
1–4 Identify covariance and correlation coefficient, know how to calculate one given the other, and understand their application and relevance when calculating the standard deviation of a portfolio.
1–5 Identify the coefficient of determination, know how to calculate and understand its applications.
1–6 Calculate the beta coefficient, and understand its use and limitations.
1–7 Calculate required return using the capital asset pricing model (CAPM), and understand its application.
1–8 Evaluate the implications of risk and return measurement concepts for portfolio construction.

Author: Jim Pasztor, MS, CFP®

Jim Pasztor, vice president of Academic Affairs at the College for Financial Planning is also involved with several of the College’s investment courses and the white paper series. He is a CFPM® practitioner, and has an MS degree in personal financial planning and an MSF degree in financial analysis, both from the College for Financial Planning. Jim was the recipient of the Edward D. Baker III Journal Award from IMCA in 2014 for his article Endogenous Risk and Dangers to Market Stability. You can reach Jim at jim.pasztor@cffp.edu.

Complexity Level: Advanced