knowledge topics
Measurement of Risk-Adjusted Return
KNOWLEDGE EXPECTED OF: Both CFP® Professionals and QAFPTM Professionals
- Explain the expected risk-adjusted return for an investment using the Capital Asset Pricing Model.
- Calculate the expected risk-adjusted return for an investment using the Capital Asset Pricing Model.
- Interpret the expected risk-adjusted return for an investment using the Capital Asset Pricing Model.
- Define measurements of risk-adjusted return, such as:
- Sharpe Ratio
- Treynor Ratio
- Jensen Index
- Identify when the use of each measurement of risk-adjusted return is appropriate.
- Explain each of the measurements of risk-adjusted return.
- Interpret each of the measurements of risk-adjusted return.
- Define a benchmark.
- Identify characteristics of a benchmark, such as:
- Same risk as the portfolio.
- Specified in advance
- Objectively constructed
- Easily measureable
- Identify benchmarks that realized returns may be compared with in assessing performance, such as:
- Market indices
- Other similarly constructed investments
- Required rate of return to meet goal
- Compare the risk-adjusted return of an investment to the risk-adjusted return of its benchmark.
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
