United States
Hong KongInvestment Planning: 17%, and the domain that rewards fluency
Seventeen per cent of the exam, about 29 of the 170 questions on our derived counts. It covers risk and return measures, portfolio theory, asset allocation and rebalancing, vehicles, strategies, performance measurement and investment taxation.
Second largest domain, and the one where candidates split most sharply by background.
Someone from an investment role finds much of this familiar and then over-prepares it. Someone from insurance or banking finds the statistics unfamiliar and under-prepares. Both errors cost marks in the same paper.
What is in it
- Risk and return: the types of risk, standard deviation, beta, correlation.
- Time value of money applications to investments.
- Asset classes and vehicles - equities, bonds, funds, alternatives.
- Portfolio theory, diversification and the efficient frontier.
- Asset allocation and rebalancing.
- Investment strategies and styles.
- Performance measurement - Sharpe, Treynor, alpha, information ratio.
- Taxation of investment vehicles.
The formulas worth knowing
| Measure | What it tells you |
|---|---|
| Standard deviation | Total risk, both systematic and unsystematic |
| Beta | Systematic risk relative to the market |
| Correlation | How two assets move together, from minus one to one |
| R-squared | How much of a portfolio's movement is explained by the market |
| CAPM | Required return given beta |
| Sharpe ratio | Excess return per unit of total risk |
| Treynor ratio | Excess return per unit of systematic risk |
| Jensen's alpha | Return above what CAPM predicted |
Eight measures, and the examinable skill is knowing which applies rather than computing each from scratch.
Beta and Treynor are only meaningful for a well-diversified portfolio. Where R-squared is low, use standard deviation and Sharpe instead. A question supplying R-squared is telling you which measure to pick.
Where the judgment questions are
Recommending an allocation for a described client. Risk tolerance, time horizon, liquidity needs, tax position and existing holdings all feed in, and the answer is a defensible allocation rather than a calculation.
That is where investment specialists sometimes go wrong, by optimizing when the question wanted suitability.
The integration points
Asset location is a tax question. A concentrated employer stock position is a risk question. An annuity holding equities is an insurance and tax question. Required return in retirement is a retirement question.
Case studies use all four, which is why this domain is worth learning as planning rather than as finance.
Dollar limits and rate thresholds here are indexed annually. Confirm the current figure before relying on it, and expect the exam to test the rule rather than the number.
Common questions
How much of the CFP exam is investment planning?
Seventeen per cent, about 29 of the 170 questions on our derived counts. It is the second largest domain after retirement.
Do investment professionals find it easy?
Partly, and they tend to over-prepare it while under-preparing estate and tax. The exam also asks for suitability judgments rather than optimization, which is a different habit.
When do you use Sharpe rather than Treynor?
When the portfolio is not well diversified. Beta and Treynor assume diversification, so a low R-squared points you to standard deviation and the Sharpe ratio instead.
What formulas do you need?
Standard deviation, beta, correlation, R-squared, CAPM, Sharpe, Treynor and Jensen's alpha. Knowing which applies matters more than computing each from first principles.
How does this domain integrate with others?
Asset location is tax, concentrated stock is risk management, equities inside an annuity is insurance and tax, and required return in retirement is retirement planning.