Chartered Institute for Securities & Investment (CISI) Qualifications Investment Analysis, Risk and Portfolio Management Syllabus

Investment Analysis, Risk and Portfolio Management syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Investment Analysis, Risk and Portfolio Management in Chartered Institute for Securities & Investment (CISI) Qualifications, not a summary of it.

1. 1

   Risk and Return Fundamentals

   3 topics

   • Measuring return
     • Nominal vs real return
     • Total return, income and capital growth
   • Measuring risk
     • Standard deviation and variance
     • Beta and systematic vs unsystematic risk
   • Risk-adjusted performance: Sharpe and information ratios
2. 2

   Portfolio Construction and Theory

   4 topics

   • Modern portfolio theory
     • Diversification and correlation
     • The efficient frontier
   • Capital Asset Pricing Model (CAPM)
   • Asset allocation
     • Strategic vs tactical allocation
     • Rebalancing and drift
   • Active vs passive management
3. 3

   Investment Selection and Valuation

   3 topics

   • Equity valuation
     • Price/earnings, dividend yield and dividend discount model
     • Fundamental vs technical analysis
   • Fund and manager selection
   • Benchmarking and tracking error
4. 4

   Performance Measurement and Reporting

   3 topics

   • Time-weighted vs money-weighted returns
   • Attribution analysis
   • GIPS standards and reporting integrity

Investment Analysis, Risk and Portfolio Management flashcards for Chartered Institute for Securities & Investment (CISI) Qualifications

20 of 51 cards from the Investment Analysis, Risk and Portfolio Management deck — real questions with worked answers.

1. What is the formula for the holding period return (HPR) of an investment over a single period?

   $$HPR = \frac{(P_{1} - P_{0}) + D_{1}}{P_{0}}$$ where $P_{0}$ is the starting price, $P_{1}$ the ending price and $D_{1}$ the income (e.g. dividend) received.

2. How do you convert a single holding period return into an annualised (geometric) return over $n$ years?

   $$R_{ann} = (1 + HPR)^{\frac{1}{n}} - 1$$

3. What distinguishes the arithmetic mean return from the geometric mean return?

   The arithmetic mean is the simple average of periodic returns ($\frac{1}{n}\sum R_{i}$) and is best for estimating a single future period. The geometric mean, $\left(\prod_{i=1}^{n}(1+R_{i})\right)^{\frac{1}{n}} - 1$, compounds returns and gives the true realised growth rate over multiple periods. The geometric mean is always $\leq$ the arithmetic mean.

4. What is the difference between a nominal return and a real return, and how are they linked (Fisher equation)?

   Nominal return includes inflation; real return strips it out. The exact relationship is $$1 + r_{real} = \frac{1 + r_{nominal}}{1 + i}$$ where $i$ is the inflation rate. The approximation is $r_{real} \approx r_{nominal} - i$.

5. In statistics of returns, what does variance measure and how is it defined for a sample of returns?

   Variance measures the dispersion of returns around the mean. For a sample: $$\sigma^{2} = \frac{1}{n-1}\sum_{i=1}^{n}(R_{i} - \bar{R})^{2}$$

6. How is standard deviation related to variance, and why is it the more common risk measure?

   Standard deviation is the square root of variance, $\sigma = \sqrt{\sigma^{2}}$. It is preferred because it is expressed in the same units as the returns (percentage), making it directly interpretable as the typical deviation from the mean.

7. What does the covariance between two assets' returns measure, and what is its formula?

   Covariance measures how two assets' returns move together. $$Cov(A,B) = \frac{1}{n-1}\sum_{i=1}^{n}(R_{A,i} - \bar{R}_{A})(R_{B,i} - \bar{R}_{B})$$ A positive value means they tend to move in the same direction.

8. How is the correlation coefficient derived from covariance, and what range can it take?

   $$\rho_{A,B} = \frac{Cov(A,B)}{\sigma_{A}\,\sigma_{B}}$$ It is bounded by $-1 \leq \rho \leq +1$, where $+1$ is perfect positive correlation, $-1$ perfect negative, and $0$ no linear relationship.

9. Distinguish between systematic (market) risk and unsystematic (specific) risk.

   Systematic risk is market-wide risk that cannot be diversified away (e.g. interest rates, recession) and is rewarded by the market. Unsystematic risk is asset-specific (e.g. a strike, product failure) and can be eliminated through diversification.

10. What does beta ($\beta$) measure and what do values of $\beta = 1$, $\beta > 1$ and $\beta < 1$ indicate?

    Beta measures an asset's sensitivity to market movements (systematic risk). $\beta = 1$ moves in line with the market; $\beta > 1$ is more volatile/aggressive than the market; $\beta < 1$ is less volatile/defensive.

11. What is the formula for an asset's beta in terms of covariance and variance?

    $$\beta_{i} = \frac{Cov(R_{i}, R_{m})}{\sigma_{m}^{2}}$$ where $R_{m}$ is the market return and $\sigma_{m}^{2}$ the variance of the market.

12. What is the Sharpe ratio and what does it measure?

    The Sharpe ratio measures excess return per unit of total risk (standard deviation): $$S = \frac{R_{p} - R_{f}}{\sigma_{p}}$$ where $R_{p}$ is portfolio return, $R_{f}$ the risk-free rate and $\sigma_{p}$ the portfolio standard deviation. Higher is better.

13. What is the Treynor ratio and how does it differ from the Sharpe ratio?

    $$T = \frac{R_{p} - R_{f}}{\beta_{p}}$$ It measures excess return per unit of systematic risk (beta) rather than total risk. Treynor is appropriate for well-diversified portfolios where specific risk is already removed; Sharpe uses total risk and suits undiversified portfolios.

14. What is the information ratio and what does it assess?

    The information ratio assesses a manager's active return relative to the risk taken to achieve it: $$IR = \frac{R_{p} - R_{b}}{\sigma_{(R_{p}-R_{b})}} = \frac{\text{active return}}{\text{tracking error}}$$ where $R_{b}$ is the benchmark return. It measures consistency of outperformance per unit of tracking error.

15. Define Jensen's alpha and state its formula.

    Jensen's alpha is the portfolio's return in excess of that predicted by the CAPM: $$\alpha = R_{p} - [R_{f} + \beta_{p}(R_{m} - R_{f})]$$ A positive alpha indicates outperformance on a risk-adjusted basis.

16. In Modern Portfolio Theory, what assumptions does Markowitz make about investors?

    Investors are rational and risk-averse, they make decisions based solely on the expected return and standard deviation (mean-variance) of portfolios over a single period, prefer higher return for a given risk and lower risk for a given return, and markets are efficient/frictionless.

17. What is the expected return of a two-asset portfolio?

    $$E(R_{p}) = w_{A}E(R_{A}) + w_{B}E(R_{B})$$ where $w_{A}$ and $w_{B}$ are the portfolio weights summing to 1.

18. State the formula for the variance of a two-asset portfolio.

    $$\sigma_{p}^{2} = w_{A}^{2}\sigma_{A}^{2} + w_{B}^{2}\sigma_{B}^{2} + 2w_{A}w_{B}\,\rho_{A,B}\,\sigma_{A}\sigma_{B}$$

19. Why does correlation drive the diversification benefit in a portfolio?

    The lower (more negative) the correlation $\rho_{A,B}$, the smaller the portfolio variance, because the cross term $2w_{A}w_{B}\rho_{A,B}\sigma_{A}\sigma_{B}$ shrinks. Maximum diversification benefit occurs at $\rho = -1$; when $\rho = +1$ there is no risk reduction.

20. What is the efficient frontier in Modern Portfolio Theory?

    The efficient frontier is the set of optimal portfolios offering the maximum expected return for each level of risk (or minimum risk for each level of return). Rational investors choose only portfolios on this frontier; portfolios below it are sub-optimal.

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