Measurement of Investment Risk

KNOWLEDGE EXPECTED OF: QAFP® Professionals

Highest Knowledge Level: Understanding

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.

  • Explain the relationship between expected return and risk. 
  • Explain types of risks that may affect an investment, such as: 
    • Systematic risk
    • Non-systematic risk
    • Inflation rate risk
    • Political risk
    • Sovereign risk
    • Liquidity risk
    • Marketability risk
    • Interest rate risk
    • Reinvestment risk
    • Foreign exchange risk
    • Default risk
    • Credit risk
    • Timing or call risk
    • Volatility risk
    • Event risk
    • Counterparty risk 
  • Define volatility.   
  • Explain how the types of risk may affect volatility.  
  • Explain possible approaches to reducing the types of risk.  
  • Define measures of investment risk, such as: 
    • Standard Deviation
    • Beta 
  • Identify that given two investments with the same level of risk, an investor will choose the investment with the higher return; identify that given two investments with the same level of return, an investor will choose the investment with the lower risk.  
  • Explain how measures of investment risk may be used to measure the sensitivity of an investment to changes in the market.  
  • Define other measures of investment risk1, such as:
    • Range of returns
    • Best and worst periods
    • Number of periods of negative returns 
    • Average drop in value between peak and valley of returns
    • Largest drop in value between peak and valley of returns
    • Average length of time between subsequent peaks of returns
    • Maximum length of time between subsequent peaks of return

REFERENCES

1 Measurements can be over any time period that is appropriate. For example, investment returns could be measured over the expected holding period for the investment.  

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Evaluation

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.

  • Explain the relationship between expected return and risk. 
  • Explain types of risks that may affect an investment, such as: 
    • Systematic risk
    • Non-systematic risk
    • Inflation rate risk
    • Political risk
    • Sovereign risk
    • Liquidity risk
    • Marketability risk
    • Interest rate risk
    • Reinvestment risk
    • Foreign exchange risk
    • Default risk
    • Credit risk
    • Timing or call risk
    • Volatility risk
    • Event risk
    • Counterparty risk 
  • Define volatility.   
  • Explain how the types of risk may affect volatility.  
  • Explain possible approaches to reducing the types of risk.  
  • Define measures of investment risk, such as: 
    • Standard Deviation
    • Beta 
  • Identify that given two investments with the same level of risk, an investor will choose the investment with the higher return; identify that given two investments with the same level of return, an investor will choose the investment with the lower risk.  
  • Explain how measures of investment risk may be used to measure the sensitivity of an investment to changes in the market.   
  • Define other measures of investment risk1, such as:
    • Range of returns
    • Best and worst periods
    • Number of periods of negative returns 
    • Average drop in value between peak and valley of returns
    • Largest drop in value between peak and valley of returns
    • Average length of time between subsequent peaks of returns
    • Maximum length of time between subsequent peaks of returns

 
Additional Knowledge Expected of CFP Professionals
  • Interpret the calculation of standard deviation for an investment. 
  • Interpret the calculation of Beta for an investment.

REFERENCES

1 Measurements can be over any time period that is appropriate. For example, investment returns could be measured over the expected holding period for the investment. 
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