This chapter is part of Function 3 (73% of the exam) and covers investment analysis, portfolio theory, tax considerations, and the disclosure requirements that apply to customer communications.
What You'll Learn
| Unit | Topic | Key Concepts |
|---|---|---|
| 25 | Investment Risks and Returns | Systematic vs. nonsystematic risk, beta, types of returns, costs and fees, required transaction disclosures, financial exploitation of specified adults |
| 26 | Portfolio Theory and Asset Allocation | Modern portfolio theory, diversification, correlation, asset allocation strategies |
| 27 | Fundamental and Technical Analysis | Financial statements, ratios, chart patterns, support/resistance, moving averages |
| 28 | Tax Considerations and Estate Planning | AMT, gift/estate tax, transfer on death, stepped-up basis |
| 29 | Account Communications and Records | Confirmations, account statements, record retention requirements |
Why This Chapter Matters
Making suitable recommendations requires understanding how to analyze investments, construct portfolios, and consider tax implications. This chapter brings together the analytical tools and regulatory requirements that guide the recommendation process.
Exam Strategy
Focus on:
- Risk measures: Know what beta, alpha, standard deviation, and Sharpe ratio measure
- Diversification: How correlation affects portfolio risk
- Financial ratios: P/E, debt-to-equity, current ratio, and what they indicate
- Tax rules: Capital gains rates, wash sales, AMT, gift and estate tax exclusions
- Record retention: How long firms must keep different types of records (3, 4, or 6 years)