knowledge topics
Measurement of Investment Risk
KNOWLEDGE EXPECTED OF: Both CFP® Professionals and QAFPTM Professionals
- 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 the measures of investment risk may be used to measure the sensitivity of an investment to changes in the market.
- Interpret the calculation of standard deviation for an investment.
- Interpret the calculation of Beta for an investment.
- Define other measures of investment risk,†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
† Measurements can be over any time period that is appropriate. One such time period may equate to the expected time horizon over which the investment will be held.
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
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