Certified Financial Planner (CFP) Investment Planning Syllabus

Investment Planning syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Investment Planning in Certified Financial Planner (CFP), not a summary of it.

1. 1

   Investment Vehicles and Markets

   4 topics

   • Equity Securities
     • Common and preferred stock
     • ADRs and REITs
   • Fixed Income Securities
     • Treasury, municipal, and corporate bonds
     • Bond features, ratings, and yields
   • Pooled Investments
     • Mutual funds and ETFs
     • Closed-end funds and UITs
   • Alternative Investments and Derivatives
     • Options and futures
     • Private equity, hedge funds, and commodities
2. 2

   Risk, Return, and Portfolio Theory

   4 topics

   • Measures of Investment Risk
     • Standard deviation, beta, and covariance
     • Systematic vs. unsystematic risk
   • Return Measures
     • Holding period, time-weighted, and dollar-weighted returns
     • Real vs. nominal and after-tax returns
   • Modern Portfolio Theory and Diversification
     • Efficient frontier and capital market line
     • Correlation and asset allocation
   • Asset Pricing Models
     • Capital Asset Pricing Model (CAPM)
     • Efficient Market Hypothesis
3. 3

   Portfolio Construction and Management

   4 topics

   • Asset Allocation and Rebalancing Strategies
   • Investment Policy Statement Development
   • Active vs. Passive Management
   • Performance Evaluation
     • Sharpe, Treynor, and Jensen's alpha
     • Benchmarking and attribution
4. 4

   Investment Strategies and Analysis

   4 topics

   • Fundamental and Technical Analysis
     • Financial ratios and valuation models
     • Dividend discount model
   • Bond Portfolio Strategies
     • Duration and convexity
     • Laddering, barbell, and immunization
   • Tax-Efficient Investing and Asset Location
   • Behavioral Influences on Investing

Investment Planning flashcards for Certified Financial Planner (CFP)

20 of 61 cards from the Investment Planning deck — real questions with worked answers.

1. What are the two primary sources of return for an investor holding equity securities (common stock)?

   Capital appreciation (price gains) and dividend income. Total return combines both.

2. Distinguish common stock from preferred stock in terms of voting rights, dividends, and claim priority.

   Common stock: voting rights, variable/discretionary dividends, lowest (residual) claim. Preferred stock: typically no voting rights, fixed stated dividend, and a higher claim than common but below all debt in liquidation.

3. State the constant-growth (Gordon) dividend discount model formula for the value of a stock.

   $$V_0 = \frac{D_1}{r - g}$$ where $D_1$ is next year's dividend, $r$ is the required return, and $g$ is the constant dividend growth rate ($r > g$).

4. In the Gordon Growth Model, how is the next-period dividend $D_1$ derived from the current dividend $D_0$?

   $D_1 = D_0(1+g)$, where $g$ is the constant growth rate.

5. How is the price-to-earnings (P/E) ratio calculated, and what does it represent?

   $$\text{P/E} = \frac{\text{Price per share}}{\text{Earnings per share}}$$ It represents the price investors pay per dollar of earnings, a common relative valuation multiple.

6. Define an American Depositary Receipt (ADR).

   A negotiable certificate issued by a U.S. bank representing shares of a foreign company, traded on U.S. exchanges in U.S. dollars, allowing domestic investors foreign equity exposure without direct foreign-market transactions.

7. What is the formula relating a bond's current yield to its annual coupon and price?

   $$\text{Current Yield} = \frac{\text{Annual Coupon Payment}}{\text{Current Market Price}}$$

8. Explain the inverse relationship between bond prices and interest rates.

   When market interest rates rise, the prices of existing fixed-coupon bonds fall (their fixed payments become less attractive); when rates fall, existing bond prices rise.

9. Define Macaulay duration and what it measures.

   Macaulay duration is the weighted-average time (in years) to receive a bond's cash flows, with weights equal to each cash flow's present value as a fraction of price. It measures interest-rate sensitivity and the bond's effective time horizon.

10. Give the formula for the approximate percentage change in a bond's price using modified duration.

    $$\frac{\Delta P}{P} \approx -D_{mod} \times \Delta y$$ where $D_{mod}$ is modified duration and $\Delta y$ is the change in yield.

11. How does modified duration relate to Macaulay duration?

    $$D_{mod} = \frac{D_{Mac}}{1 + \frac{y}{k}}$$ where $y$ is the yield and $k$ is the number of compounding periods per year.

12. What does convexity capture that duration alone does not?

    Convexity captures the curvature of the price-yield relationship — the second-order effect. It corrects the linear duration estimate, showing prices rise more for a rate drop than they fall for an equal rate rise.

13. List the credit-rating boundary between investment grade and speculative (junk) bonds for S&P and Moody's.

    Investment grade: S&P BBB- and above / Moody's Baa3 and above. Speculative (junk): S&P BB+ and below / Moody's Ba1 and below.

14. Define yield to maturity (YTM).

    YTM is the single discount rate that equates the present value of a bond's future coupon and principal cash flows to its current market price — the total return earned if held to maturity, assuming coupons are reinvested at the YTM.

15. Compare an open-end mutual fund and a closed-end fund in terms of share creation and pricing.

    Open-end fund: continuously issues/redeems shares at net asset value (NAV). Closed-end fund: fixed number of shares trade on an exchange at a market price that may be at a premium or discount to NAV.

16. How is a mutual fund's net asset value (NAV) per share calculated?

    $$\text{NAV} = \frac{\text{Total Assets} - \text{Total Liabilities}}{\text{Shares Outstanding}}$$

17. What is the key structural advantage of an ETF over a traditional mutual fund regarding intraday trading and taxes?

    ETFs trade intraday on exchanges like stocks (with bid/ask and limit orders) and use an in-kind creation/redemption process that generally makes them more tax-efficient (fewer capital gains distributions) than mutual funds.

18. Define a unit investment trust (UIT).

    A UIT is a registered investment company holding a fixed, unmanaged portfolio of securities for a set termination date, issuing redeemable units; it is not actively traded and has a finite life.

19. Name three common categories of alternative investments.

    Examples include hedge funds, private equity, venture capital, real estate (including REITs), commodities, and managed futures.

20. What rights and obligations does a call option versus a put option confer to the buyer?

    A call gives the buyer the right (not obligation) to buy the underlying at the strike price; a put gives the right to sell at the strike. The buyer pays a premium for this right.

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