Investment Planning

# CFP — Investment Planning Exam: CFP Board Certification Exam — Domain D: Investment Planning (17% of exam — second-highest weighted domain) Exam Format: 170 questions total | [Source: CFP Board, cfp.net, live-fetched 2026-06-29] Last Updated: June 2026 --- ## Investment Concepts ### Return Measures Holding Period Return (HPR): `` HPR = (Ending Value − Beginning Value + Distributions) / Beginning Value ` Arithmetic Mean Return: Simple average of periodic returns. Overstates long-run performance for volatile investments. Geometric Mean Return (Time-Weighted Return): Compounded average. Better for evaluating investment manager performance. ` Geometric Mean = [(1+r1)(1+r2)...(1+rn)]^(1/n) − 1 ` Dollar-Weighted Return (IRR): Accounts for timing and size of cash flows. Better for evaluating the impact of the investor's own decisions. --- ## Risk Measures Standard deviation (σ): Measures total variability of returns. Includes both systematic and unsystematic risk. Beta (β): Measures sensitivity of an investment to market movements (systematic risk only). - β = 1: Moves with market - β > 1: More volatile than market - β < 1: Less volatile - β < 0: Moves opposite market (rare; gold sometimes) Coefficient of Variation (CV): ` CV = Standard Deviation / Mean Return `` Lower CV = better risk-adjusted return per unit of risk. --- ## Portfolio Theory ### Modern Portfolio Theory (Markowitz) Efficient frontier: Set of portfolios offering the highest expected return for a given level of risk. Diversification: Combining assets with low (or negative) correlation reduces portfolio risk without sacrificing expected return. Correlation coefficient (r): -1 to +1…