The topical coverage corresponds with the following CFA Institute assigned reading:
49. The Asset Allocation Decision
The candidate should be able to:
a. describe the steps in the portfolio management process and explain the reasons for a policy statement, (page 104)
b. explain why investment objectives should be expressed in terms of risk and return and list the factors that may affect an investor's risk tolerance, (page 105)
c. describe the return objectives of capital preservation, capital appreciation, current income, and total return, (page 105)
d. describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique needs and preferences, (page 106)
e. describe the importance of asset allocation, in terms of the percentage of a portfolio's return that can be explained by the target asset allocation, and explain how political and economic factors result in differing asset allocations by investors in various countries, (page 107)
The topical coverage corresponds with the following CFA Institute assigned reading:
50. An Introduction to Portfolio Management
The candidate should be able to:
a. define risk aversion and discuss evidence that suggests that individuals are generally risk averse, (page 111)
b. list the assumptions about investor behavior underlying the Markowitz model, (page 112)
c. compute and interpret the expected return, variance, and standard deviation for an individual investment and the expected return and standard deviation for a portfolio, (page 113)
d. compute and interpret the covariance of rates of return and show how it is related to the correlation coefficient, (page 115)
e. list the components of the portfolio standard deviation formula, (page 118)
f. describe the efficient frontier and explain the implications for incremental returns as an investor assumes more risk, (page 122)
g. explain the concept of an optimal portfolio and show how each investor may have a different optimal portfolio, (page 123)
The topical coverage corresponds with the following CFA Institute assigned reading:
51. An Introduction to Asset Pricing Models
The candidate should be able to:
a. explain the capital market theory, including its underlying assumptions, and explain the effect on expected returns, the standard deviation of returns, and possible risk-return combinations when a risk-free asset is combined with a portfolio of risky assets, (page 130)
b. identify the market portfolio and describe the role of the market portfolio in the formation of the capital market line (CML). (page 133)
c. define systematic and unsystematic risk and explain why an investor should not expect to receive additional return for assuming unsystematic risk, (page 133)
d. explain the capital asset pricing model, including the security market line (SML) and beta and describe the effects of relaxing its underlying assumptions.
(page 135)
e. calculate, using the SML, the expected return on a security and evaluate whether the security is overvalued, undervalued, or properly valued, (page l4l)
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