knowledge topics
Investment Objectives and Constraints
KNOWLEDGE EXPECTED OF: Both CFP® Professionals and QAFPTM Professionals
- Explain investment objectives, such as:
- Preservation of nominal capital
- Liquidity of capital
- Income stream
- Growth of capital
- Preservation of purchasing power
- Compare preservation of nominal capital and preservation of purchasing power.
- Explain investment constraints, such as:
- Time
- Liquidity
- Legal and regulatory
- Tax
- Personal attitudes
- Unique circumstances
- Define time horizon.
- Explain that an individual may have multiple time horizons.
- Identify the time horizon(s) until an investment needs to be liquidated and/or used for income.
- Explain the elements that impact an individual's investment risk profile.
- Risk Tolerance
- Willingness to accept risk (personal attitudes towards fluctuations in investment value)
- Risk Capacity
- Ability to accept risk (financial capacity to sustain fluctuations in investment value)
- Need for risk (minimum amount of risk that must be incurred to earn the expected return which will achieve goal)
- Explain the variables that may affect risk tolerance and risk capacity, such as:
- Time horizon
- Investment objective
- Importance of investment to achievement of goal
- Personal attitudes
- Tolerance for downside volatility
- Net worth
- Amount of income
- Stability of income
- Explain the elements that impact investment suitability
- client’s previous investment experience,
- level of financial knowledge; and
- prior investment behaviour
- Explain that an individual has a single risk tolerance.
- Explain that an individual may have different risk capacities for different goals
Glossary of Verbs (mouse over to see definition)
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Define
To state exactly the meaning of
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Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
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Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
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Compare
To note the similarities and differences between two or more things
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Estimate
To determine an approximate value for
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Calculate
To find the value using mathematics
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Convert
To change from one form or purpose to another
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Evaluate
To reach a conclusion or make a judgement through careful study
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Interpret
To give the meaning of / to construe or understand / to translate orally
Read more about the Taxonomy used in the FP-BoK