The Investment Advisor Body of Knowledge + Test Bank

CHAPTER 15 Portfolio Theories and Models

While there is no consensus among investment advisors and consultants on a single blueprint for building and managing optimal portfolios, there is value in understanding the core theories and models from which so many different investment strategies are built.

This chapter will explore several foundational portfolio theories and models that have been developed over time. It is important to remember that these investment theories are just that, “theories.” Consequently, they should not be considered “law” in a scientific sense. The results of these models are not always consistent or predictable, and past performance is no guarantee of future results. They do however play an important role in creating a framework from which investors may think about the relationship between risk and return and how to build more efficient portfolios.

Modern Portfolio Theory (MPT), the Capital Allocation Line (CAL), the Efficient Market Hypothesis (EMH), the Capital Asset Pricing Model (CAPM), the Security Market Line (SML), the Arbitrage Pricing Theory (APT), and various studies and models that are now considered Post-MPT (post Modern Portfolio Theory) are all reviewed in depth.

Part I The New Science of Asset Allocation: A Brief History of Asset Allocation

Learning Objectives

• Explain the concept of asset allocation and briefly describe its history.
• Describe and differentiate between strategic, tactical, and dynamic asset allocation strategies.
• Describe ...