Analytical Methods
Exam Weight: ~4 questions (3.1% of exam)
Investment advisers need quantitative tools to evaluate securities, measure risk, and assess portfolio performance. This unit covers the mathematical foundations that underpin all investment analysis, from basic time value calculations to sophisticated risk metrics.
Why are these analytical methods critical? As an investment adviser representative, recommendations require support from objective, quantitative analysis rather than subjective impressions like "this stock looks good" or "this bond seems safe." These tools provide the mathematical foundation for making defensible investment decisions.
Analytical methods serve four key purposes for investment advisers:
| Purpose | Tools Used | Key Question Answered |
|---|---|---|
| Investment Decisions | NPV, IRR | "Should I buy this security?" |
| Risk Assessment | Standard deviation, Beta | "How volatile is this investment?" |
| Performance Evaluation | Alpha, Sharpe ratio | "Did the manager add value?" |
| Valuation Analysis | P/E ratio, Book value | "Is this stock fairly priced?" |
What You'll Learn
Time Value of Money
- How present value and future value relate to investment decisions
- When to use NPV (dollars) vs IRR (percentage) for investment analysis
Descriptive Statistics
- The difference between mean, median, and mode
- What standard deviation tells you about total risk
- How correlation affects portfolio diversification
- How beta measures systematic risk and alpha measures manager performance
- Using Sharpe ratio to measure risk-adjusted returns
Financial Ratios
- Current and Quick ratios for evaluating liquidity
- Debt-to-Equity ratio for assessing financial leverage
Valuation Factors
- Price-to-Earnings (P/E) ratio for valuation analysis
- Price-to-Book (P/B) ratio for comparing market vs. book value