This module covers modern portfolio theory, including the efficient frontier, capital asset pricing model, and the efficient market hypothesis. Behavioral finance, a challenge to the efficient market hypothesis, is also covered. Equity valuation using the dividend discount model and ratio analysis is also addressed, along with widely used performance evaluation measurements-Jensen (alpha), Sharpe, and Treynor.

2–1 Explain terminology related to modern portfolio theory (MPT) and the Markowitz efficient frontier model, and relate the concepts of risk and return to modern portfolio theory.
2–2 Evaluate the capital asset pricing model (CAPM) as it relates to the efficient frontier, and the creation of the security market line (SML).
2–3 Evaluate investment alternatives to select investment portfolios based on modern portfolio theory principles.
2–4 Explain the three forms of the efficient market hypothesis and distinguish among arguments supporting and opposing the EMH.
2–5 Evaluate and explain stock market anomalies.
2–6 Appraise efficient market hypothesis concepts as they relate to other investment theories and behavioral finance.
2–7 Calculate the intrinsic value of a stock using various stock valuation techniques or calculate the expected return of a stock.
2–8 Evaluate the appropriateness of investment decisions based on stock valuation models.
2–9 Explain the various components of the investment policy statement (IPS).
2–10 Calculate one or more stock performance measurement indexes for given portfolio returns and risk.

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