Modern Portfolio Theory & Behavioral Finance begins with the creation of MPT by Harry Markowitz, the efficient frontier and optimized portfolios, and how diversification and correlation relate to the construction of such portfolios. The assessment and explanation of risk tolerance (and measurement) and corresponding asset allocation strategies is explored before moving on to the efficient market hypothesis and its challenge by behavioral finance and its components.

3–1 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.
3–2 Evaluate the capital asset pricing model (CAPM) as it relates to the efficient frontier, and the creation of the security market line (SML).
3–3 Explain the multi-factor components of the arbitrage pricing theory (APT).
3–4 Evaluate investment alternatives to select investment portfolios based on modern portfolio theory principles.
3–5 Explain the three forms of the efficient market hypothesis and distinguish among arguments supporting and opposing the EMH.
3–6 Evaluate and explain stock market anomalies.
3–7 Appraise efficient market hypothesis concepts as they relate to other investment theories and behavioral finance.

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: Intermediate