This module considers several concepts that constitute the very heart of the investment process. Investment risk is defined, along with tools to categorize client attitudes toward risk. Systematic and unsystematic risk are also defined. Betas are reviewed in terms of their ability to measure risk, both at the individual security level and at the portfolio level. The capital asset pricing model (CAPM) is introduced as a method of calculating risk-adjusted return.

Focusing next at the portfolio level, the concept of diversification is explained. Practical approaches to creating efficient client portfolios are then discussed. Time horizons are an important factor to be determined in the client assessment process. All of these aspects of the process serve to educate the client about the relationship between risk and return. In providing this education, the investment professional adds value to the client relationship. This module also demonstrates the use of indexes to account for the performance of investment professionals. Specifically, portfolio performance is compared using the Jensen, Treynor, and Sharpe indexes; these indexes allow for risk-adjusted comparisons to be made between portfolios.

Please note that for this course we expect students to be able to perform basic time value of money (TVM) calculations, as well as bond valuation and yield to maturity calculations. Students can access our Calculator Classes in the Course Videos tab on eCampus.

Author: Jennifer Coombs

Jennifer Coombs is an associate professor at the College for Financial Planning. Prior to joining the College, Jennifer spent a decade working in the financial services industry in New York City, with a special focus on equity research and analysis. She holds a Bachelor of Science degree in Finance and Political Science from Clarkson University. You can contact Jennifer at jennifer.coombs@cffp.edu.

Complexity Level: Intermediate