This chapter covers the portfolio management and performance measurement portions of the Client Investment Recommendations and Strategies (30%) section of the Series 66 exam.
What You'll Learn
| Unit | Topic | Key Concepts |
|---|---|---|
| 21 | Capital Market Theory | Capital asset pricing model (CAPM), Modern Portfolio Theory, Efficient Market Hypothesis |
| 22 | Portfolio Management | Strategic and tactical asset allocation, active/passive/growth/value/income/capital appreciation styles, diversification, sector rotation, dollar-cost averaging, options, leveraging, volatility management, inverse strategies, high frequency trading |
| 23 | Portfolio Performance Measures | Returns (risk-adjusted, time-weighted, dollar-weighted, annualized, total, holding period, IRR, expected, inflation-adjusted, after-tax), current yield, relevant benchmarks |
| 24 | Trading Securities | Terminology (bids, offers, market/limit/stop orders, short sales, cash/margin accounts, principal/agency trades, payment for order flow), role of broker-dealers/custodians/market makers/exchanges, costs (commissions, markups, spreads), best execution |
Why This Chapter Matters
Building and managing portfolios is where investment knowledge meets client needs. The exam tests whether you understand how diversification reduces risk, how to construct portfolios aligned with client objectives, and how to measure whether a portfolio is performing well.
These four units connect theory (CAPM, MPT, EMH) to practice (portfolio construction, trading execution, performance measurement).
Exam Strategy
Focus on:
- CAPM formula: Expected return = risk-free rate + beta x (market return - risk-free rate)
- Diversification: Systematic vs. unsystematic risk, correlation, efficient frontier
- Active vs. passive management: When each is appropriate
- Performance metrics: Know the difference between time-weighted and dollar-weighted returns
- Benchmarks: S&P 500, Russell indices, and appropriate benchmark selection