Investment Risk and Return begins by defining various types of risk in the financial markets, and how they are both quantified and measured. The topics then move on to actual risk and return analysis, beginning with standard deviation and correlation and building up to beta, the capital asset pricing model, and building portfolios/selecting securities through quantitative analysis.

2–1 Explain terminology related to the analysis of risk and return in portfolio construction and management.
2–2 Differentiate among the various sources of risk in investments, both systematic and unsystematic.
2–3 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.
2–4 Calculate coefficient of variation, and understand its application.
2–5 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.
2–6 Identify the coefficient of determination, know how to calculate and understand its applications.
2–7 Calculate the beta coefficient, and understand its use and limitations.
2–8 Calculate required return using the capital asset pricing model (CAPM), and understand its application.
2–9 Evaluate the implications of risk and return measurement concepts for portfolio construction.

Author: Craig Kinnunen, MS, CFP®

Craig Kinnunen, MS, CFP® is an associate professor at the College for Financial Planning. Prior to joining the College, Craig enjoyed a long and successful career in personal financial planning and wealth management. Craig’s enthusiasm for financial planning extends beyond the classroom, as he also spends time providing pro bono financial education and individual financial counseling to members of the Colorado National Guard. Craig earned a bachelor of science degree in accounting from Northern Michigan University and followed that up with a master of science degree in finance from the University of Colorado in Denver. You can contact Craig at craig.kinnunen@cffp.edu.

Complexity Level: Advanced