Instructor Guide
Investment Planning
© 2003–2013, College for Financial Planning, all rights reserved.
This publication may not be duplicated in any way without the express written consent of the
publisher. The information contained herein is for the personal use of the reader and may not be
incorporated in any commercial programs, other books, databases, or any kind of software or any
kind of electronic media including, but not limited to, any type of digital storage mechanism
without written consent of the publisher or authors. Making copies of this material or any portion
for any purpose other than your own is a violation of United States copyright laws.
The College for Financial Planning does not certify individuals to use the CFP, CERTIFIED
™
®
®
FINANCIAL PLANNER , and CFP (with flame logo) marks. CFP certification is granted solely by
Certified Financial Planner Board of Standards, Inc. to individuals who, in addition to completing
an educational requirement such as this CFP Board-Registered Program, have met its ethics,
experience, and examination requirements. Certified Financial Planner Board of Standards, Inc.
™
owns the certification marks CFP, CERTIFIED FINANCIAL PLANNER , and federally registered CFP
®
(with flame logo) , which it awards to individuals who successfully complete initial and ongoing
certification requirements.
At the College’s discretion, news, updates, and information regarding changes/updates to courses
or programs may be posted to the College’s website at www.cffp.edu, or you may call the Student
Services Center at 1-800-237-9990.
Printed in the United States of America.
Table of Contents
Introduction ..................................................................... 1
Suggested Class Schedule for Investment Planning .... 2
Module Topics ................................................................... 3
Course Materials ............................................................... 4
Administrative Overview for Instructors...................... 5
Lesson 1 .......................................................................... 10
Discussion Points ............................................................ 10
Content ............................................................................. 11
Lesson 2 .......................................................................... 16
Sources of Risk ................................................................ 17
Investment Risk............................................................... 17
Beta.................................................................................... 19
Lesson 3 .......................................................................... 20
Portfolio Theory .............................................................. 20
Arbitrage Pricing Theory ............................................... 21
Efficient Market Hypothesis.......................................... 21
Behavioral Finance.......................................................... 21
Lesson 4 .......................................................................... 22
Dividends ......................................................................... 22
Stock Valuation Models ................................................. 22
Portfolio Performance .................................................... 24
Lesson 5 .......................................................................... 26
Geometric Returns .......................................................... 26
Time-Weighted Returns ................................................. 26
Unequal Cash Flows ....................................................... 27
Fundamental and Technical Analysis .......................... 27
Financial Ratios ............................................................... 28
Technical Analysis .......................................................... 28
Lesson 6 ........................................................................... 29
Features of Fixed-income Securities ............................. 29
Features of Preferred Stock............................................ 30
Yield Curves .................................................................... 30
Lesson 7 ........................................................................... 31
Bond Valuation and Yields ............................................ 31
Duration ........................................................................... 32
Bond Volatility ................................................................ 34
Convertible Bonds .......................................................... 34
Lesson 8 ........................................................................... 35
Terminology .................................................................... 35
Lesson 9 ........................................................................... 37
Tangible Assets ............................................................... 37
Gold .................................................................................. 37
Natural Resources ........................................................... 38
Real Estate ........................................................................ 38
Foreign Investments ....................................................... 39
Lesson 10 ......................................................................... 40
Mutual Funds .................................................................. 40
Introduction
Although the Certified Financial Planner or CFP Certification Professional
Education Program offered by the College for Financial Planning (College), a
subsidiary of the Apollo Group, Inc., is designed for completion by self-study, it
also is offered through classes taught by independent class providers.
Participating in classes offers students several advantages: it encourages them to
be more disciplined in studying; it allows them to reap the benefits of an
instructor who is able to offer practical applications based on personal
experiences and to explain difficult concepts; and it allows them to interact with
other professionals in the financial planning field.
®
This Instructor Guide provides administrative information as well as practical
suggestions and aids for teaching the financial planning program materials. Its
structure recognizes the wide variety of effective teaching styles exhibited by
instructors, presenting information to facilitate teaching the course rather than
supplying lesson plans prescribing how the course should be taught. The
College strongly recommends that instructors carefully read the Administrative
Overview for Instructors and communicate pertinent information to students.
The teaching aids incorporated as a part of this Instructor Guide include (1) a
syllabus for 8, 10, 12, and 15 sessions; (2) true/false questions and answers; and
(3) Microsoft PowerPoint slides that can be converted to overheads, if desired. If
the instructor has access to the appropriate computer and AV equipment, they
can be presented electronically in a PowerPoint color presentation. Many of the
overhead masters focus on key terminology and the characteristics of product
choices and techniques, which are a significant part of this course. PowerPoint
slides are also available from the publisher of the Mayo textbook.
Learning objectives are the central focus of study materials developed by the
College and are the link that unites reading materials and supplements to
review questions and the self-study examination. Review questions and
problems in each module are keyed to the learning objectives and designed to
Introduction

1
direct and reinforce learning. Emphasize to your students that they will obtain
the greatest benefit from the review questions if they take the time to write
down answers in their own words prior to reading the given answers. The selfstudy exam is used to test mastery of the general body of knowledge important
in financial planning.
This Instructor Guide is furnished to assist independent class providers in
providing high-quality education to students enrolled in the CFP Certification
Professional Education Program. Instructors’ suggestions for additional
teaching support materials or services are invited and will be appreciated.
Please contact:
®
Michael B. Cates, CFP
Senior Director of Certification Programs
College for Financial Planning
Administrative Offices
8000 East Maplewood Avenue, Suite 200
Greenwood Village, CO 80111-4766
Suggested Class Schedule for Investment
Planning
Syllabus
Teachers and students alike have found a syllabus to be highly beneficial in
organizing and preparing for classes in which they are involved.
Enclosed is a syllabus for 8-, 10-, 12-, and 15-week sessions. The College
recommends that classes be held for at least 30 contact hours in preparation for
the examinations. Because the modules vary in length and difficulty, some
require more class time than others.
These materials may be used as presented or adapted to specific needs. Many
instructors find it useful to provide the syllabus as a handout to each student in
the class.
2

Investment Planning
Suggested class assignments for 8-, 10-, 12-, or 15-session schedules are outlined
in the following table.
Session
Number
15-Session
Schedule
12-Session
Schedule
10-Session
Schedule
8-Session
Schedule
1
Module 1
Module 1
Module 1
Modules 1 & 2
2
Modules 1 & 2
Module 2
Module 2
Modules 2 & 3
3
Module 2
Modules 2 & 3
Modules 2 & 3
Modules 3 & 4
4
Modules 2 & 3
Module 3
Module 4
Modules 4 & 5
5
Module 3
Module 4
Module 5
Modules 6 & 7
6
Module 4
Module 5
Modules 6 & 7
Modules 8 & 9
7
Modules 4 & 5
Modules 5 & 6
Module 7
Module 10
8
Module 5
Module 7
Modules 8 & 9
Review
9
Module 6
Module 8
Module 10
10
Module 7
Module 9
Review
11
Module 7
Module 10
12
Module 8
Review
13
Module 9
14
Module10
15
Review
Module Topics
The content of this course is divided into 10 modules, which cover the following
topics:
Security Markets & the Economic Environment
Investment Risk & Return
Modern Portfolio Theory & Behavioral Finance
Common Stock Valuation & Performance Measurement
Introduction

3
Security Analysis
Features of Fixed-Income Securities
Valuation & Analysis of Fixed-Income Investments
Derivatives
Real Assets & Foreign Investments
Mutual Funds & Other Investments
Each module is divided into several sections that cover key topic areas and
correspond to the course learning objectives. The learning objectives are listed as
a group at the beginning of each module. Then, as a student progresses through
a section, each learning objective is repeated as it introduces the relevant
discussion.
Course Materials
Core Materials

College for Financial Planning, Investment Planning, Self-Study Examination.

College for Financial Planning, Investment Planning, Module 1, Security
Markets & The Economic Environment.

College for Financial Planning, Investment Planning, Module 2, Investment
Risk & Return.

College for Financial Planning, Investment Planning, Module 3, Modern
Portfolio Theory &Behavioral Finance.

College for Financial Planning, Investment Planning, Module 4, Common
Stock Valuation & Performance Measurement.

College for Financial Planning, Investment Planning, Module 5, Security
Analysis.
4

Investment Planning

College for Financial Planning, Investment Planning, Module 6, Features of
Fixed-Income Securities.

College for Financial Planning, Investment Planning, Module 7, Valuation &
Analysis of Fixed-Income Investments.

College for Financial Planning, Investment Planning, Module 8, Derivatives.

College for Financial Planning, Investment Planning, Module 9, Real Assets &
Foreign Investments.

College for Financial Planning, Investment Planning, Module 10, Mutual
Funds & Other Investments.
Textbooks and Readings

No supplemental text is required.
Administrative Overview for Instructors
Independent class provider application and agreement. All prospective
instructors are required to submit to the College for Financial Planning an
application for independent class provider status, a signed agreement, and a
copy of their transcripts (indicating that the minimum of a baccalaureate degree
has been earned). After an individual’s application has been approved, the new
faculty member must submit a request for instructor’s materials at least four
weeks before the proposed class begins.
Independent class provider status is valid for only the program course or
courses for which an applicant has been approved, i.e., an instructor who has
been approved to instruct this course will not be considered an approved
faculty member for any other course within the CFP Certification Professional
Education Program. A separate independent class provider application is
required for each course.
Introduction

5
Independent class provider status. The College for Financial Planning has two
status categories for independent class providers. Independent class providers
are considered active if they have taught at least once during a 12-month period.
Independent class providers are considered retired if they have not taught
within a 12-month period. To become an active independent class provider
again after being retired, an individual must complete a new independent class
provider application and agreement, must submit new transcripts, and must
teach a class.
Instructor materials. Each instructor who is approved to teach will be provided
with the student study materials, the textbooks, the Self-Study Exam and the
Instructor Guide that are appropriate for a particular course. Instructor’s materials
are designed to be used by the independent class provider only, but they contain
materials that are appropriate for reproduction and distribution to students.
Communications. Instructors are encouraged to communicate with the
Academic Affairs department at the College concerning classes, mailings, live
review classes, and all other non-content issues regarding the independent class
provider program. All suggestions or comments regarding instructor’s materials
should be directed to the Academic Affairs department.
Location of classes. Instructors should establish a regular location for classroom
sessions. An instructor may use his or her office if it contains appropriate
facilities. The location and time of the sessions must be indicated on the request
for instructor’s materials. Instructors should select a location that has adequate
space, is well lighted, and is equipped with table or desk space for each student.
Class schedule. The College for Financial Planning recommends that classes be
held for at least 30 contact hours in preparation for each course examination. For
example, this can be accomplished in 10 three-hour sessions or 12 sessions of
two and one-half hours. Modules generally should be taught in numerical
sequence. Suggested class assignments for 8-, 10-, 12- or 15-session schedules are
included in the suggested class schedule. The affiliate/independent class
provider group will determine the class schedule.
6

Investment Planning
Class enrollment. Each student enrolled in a class offered by an independent class
provider must be officially registered with the College for Financial Planning and
must have his or her own study materials. After the second week of classes, the
instructor must forward a final class roster to the Academic Affairs department.
Examinations. Final examinations for all courses are offered via the Internet and
are administered at specific testing sites located throughout the United States. A
student may take a final exam 30 days after receiving the materials for a course.
The student needs to take their financial function calculator to the exam. Any
calculator that is programmable, however, may not be taken into the exam.
Evaluations. Independent class providers are requested to submit their written
evaluations of the instructor’s materials when the class is completed. Forms for
students to evaluate independent class providers will be mailed to each
instructor. Evaluations should be returned to the Academic Affairs department.
The College strongly encourages faculty members to submit any suggestions
they might have for improving the program.
Ethics. Instructors should act in accordance with generally accepted
educational, professional, and ethical standards. Instructors are requested to
cover all material provided in this instructor guide, but an instructor should not
attempt to “teach the examination.” When conducting a class, an instructor is
asked to speak in generic terms concerning products. Instructors should also
refrain from proselytizing for employment purposes, personal promotion, or
sales promotion; and instructors should discourage students and guests from
doing the same.
At the back of each module are open-ended review questions. Emphasize to the
students that they should write their answers to them before looking at the
answers given. This is effective because it shows what knowledge the students
are lacking; that is, what they did not get right or did not write down. Simply
reading the answers, although easier, is not nearly as helpful in mastering the
material.
Introduction

7
Point out to students that there are quite a few calculations on the test, and that
they should expect at least one calculation question on each of the following:

standard deviation and mean return of a single asset

coefficient of variation

weighted average

standard deviation of a portfolio

correlation coefficient (R)

coefficient of determination (R-squared)

required return (CAPM)

beta

constant growth dividend discount model (DDM)

non-constant growth DDM

alpha (Jensen)

Sharpe

internal rate of return (IRR)

geometric average rate of return

holding period return (HPR)

growth rate for “g” (g = roe x rr)

yield-to-maturity or yield-to-call

intrinsic value of a bond

taxable equivalent yield

preferred stock valuation (constant dividend)
8

Investment Planning

conversion value of a convertible bond

net operating income (NOI)

property valuation using NOI

average cost per share

exchange rates
Note: These 25 calculations would then represent 25 of the 85 questions on the
final test. They will not get as many calculations on the CFP Board final, but
they will get conceptual questions that the students cannot answer unless they
are comfortable with the formulas, and the formula sheet. Spend the time
necessary to help students get over any anxiety they may have in this area.
I hope you enjoy your teaching experience!
Introduction

9
Lesson 1
Discussion Points
During the first session, stress the following points to students:
1. This is a course on investment theory. It is not a course that is designed to
teach students how to choose specific investments for their clients’
portfolios. The principles that students learn in this course will help them
better understand the concepts that underlie their daily investment planning
practices, but the principal purpose of this course is to provide students with
®
the theoretical concepts that they need to master in order to pass the CFP
Certification Examination.
2. Because this course teaches investment theory, students who have passed
the Series 7 and other licensing exams will find little similarity between this
material and the material they studied to obtain those licenses. Many
students with investment licenses and many years of experience have failed
to pass the final exam for this course. Those students assumed that their
years of practical experience and their previous completion of a licensing
exam meant that they either did not have to study at all or could simply do a
quick review of the material in order to pass the exam.
3. This course requires a thorough familiarity with investment theory
formulas. A formula sheet is provided in Module 2 and in the Self-Study
Examination. Students do not have to memorize these formulas. They will
be able to print out the formula sheet for reference when they take their
course exam. However, students must be thoroughly familiar with the
formulas. This familiarity can only be achieved by working the problems in
the review questions that relate to the formulas.
10

Investment Planning
4. This course also requires students to use a financial calculator. They should
have learned basic calculator keystrokes in the first course of the CFP
Certification Professional Education Program, Financial Planning Process
and Insurance. In Module 5, they will learn an additional calculator-related
concept—how to compute internal rates of return for unequal cash flows.
The HP-10BII and HP-12C calculators are the only calculators for which
keystrokes are given. You must have one of these two calculators and all
students should be required to buy one of them so that you do not have to
waste class time helping those with other calculators. If students cannot find
a 10BII or 12C in a local store, they can order one from the HP website, at
www.shopping.hp.com; or from the College’s website, www.cffp.edu,
®
®
selecting the CFP from the color bar/College Programs/CFP /Additional
Study Tools. Typically, these calculators can be found in office supply stores
as well.
5. As discussed before, about 30% of the final exam questions will require a
student to use a calculator and the formulas provided to solve
computational problems. Students should assume that they will be tested on
every calculation listed in the “New for 2011—Important” section of this
guide.
6. Many students who fail the Investment Planning final exam do so because
they do not have a good grasp of the material from Module 2 through
Module 7. Spend most of your time on those modules and encourage
students to spend most of their time there also.
Content
Most of the material in the Security Markets section of this module involves
definitions (LOs 1-1 through 1-5). Students should not have much difficulty
with the material in this module since it primarily involves memorization.
Lesson 1

11
The Economic Environment (LOs 1-6 through 1-8) covers macroeconomics,
including the gross domestic product (GDP), supply and demand, the business
cycle, monetary and fiscal policy, and international economics. You will notice
that the module does not cover any of these topics in depth. Space limitations do
not allow economics to be covered in any detail. It is assumed that the student
has had an introductory economics course during his or her college career. This
is only a brief review of a portion of what the student has previously learned.
Therefore, you will notice that all the learning objectives for the Economic
Environment are at the highest levels. We want to refresh students’ knowledge
to a limited extent and engage them in some critical thinking about how
economic issues impact securities prices. This is an important section, especially
the section that covers the Fed and its tools and techniques for managing the
money supply.
Before you dismiss students from this class, inform them that modules 2
through 4 are the most difficult and the most important modules in the course.
Tell them that it is important for them to be well prepared for those classes.
Security Creation and Security Markets
You might want to bring in several prospectuses of recent new offerings so that
students can identify in the prospectuses some of the terms they must
memorize. You might also search the websites of the stock exchanges
(www.nyse.com and www.nasdaq.com) for information that you can use to
supplement that found in the modules. Encourage students to use the Web often
to find information that can help them better understand what they read in the
course materials. Each week before you dismiss students, ask them to do the
applications for the material to be covered in the next modules.
You should spend time on the margin problem and inform students that the
CFP Certification Examination does expect them to know how to compute
margin calls.
12

Investment Planning
Short-Term Securities
You might consider bringing some money market mutual fund security listings
to the class to show students the many different types of instruments that
money market funds have in their portfolios. However, you also might mention
that for the test, students will only have to know the definitions of those
instruments listed in the course materials.
Regulation
Students need to know the specific functions of each security law mentioned in
the module. They must also be familiar with the role of the SEC and FINRA in
regulation of investment professionals. The rules recently changed on Form
ADV Part 2, and students need to know these new rules. The rules for money
markets also changed in 2010. In addition, students should be familiar with
Regulation FD, the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform
and Consumer Protection Act.
FDIC insurance has become more important than ever since the monetary crisis.
Make sure students know the limits, and know how to calculate a coverage
amount based upon the various “ownership categories.”
Taxation and Securities
The Investment Planning course does not include much testing of taxation
concepts. Students will get this in the next course, Income Tax Planning. Stress
the capital gains taxation rules and discuss the recent lowering of the tax rate on
dividend income.
Supply and Demand
Students should be given practice with the supply/demand graphs as shown in
the module. Give students a number of scenarios. In each scenario, have them
draw the initial graph; then ask them to show how the graph changes when an
economic factor (e.g., demand) changes.
Lesson 1

13
International Economics
The only topic covered in this section is the balance of payments system. You
can use debits and credits, or T accounts, to go through a simplified example of
how a typical series of transactions could be recorded.
For example, assume that the United States imports $1,000 worth of foreign cars
from Japan and exports $500 worth of farm products to Japan. The Japanese
now have $500 of extra cash after these two transactions are completed. Assume
that the Japanese send $300 of their excess U.S. currency to the United States to
purchase Treasury bills. The transactions would be recorded on the U.S. books
as follows:
Debit
Current account
$1,000
Capital account
Reserve account
Credit
$500
$300
$500
$300
$1,000
This series of transactions results in a net credit of $200 to the reserve account,
which, in effect, reduces U.S. currency reserves by $200.
The Business Cycle
It is easy to get lost in the detail of what happens in each phase of the business
cycle. Try to reduce these details for students by drawing the business cycle
graph in class and then having students fill in the general characteristics of each
major phase of the “theoretical” cycle. Focus on what “should” happen in each
phase. If students try to relate current economic information to the theoretical
cycle, they may get confused because it frequently happens that not everything
occurs as it “should.” If students copy down what you put on the graph in class,
the picture will be easier for them to grasp than memorizing the material in the
module.
14

Investment Planning
Fiscal and Monetary Policy
Spend only a small amount of time on fiscal policy. Students should know the
three primary fiscal policy tools that the government uses and how those tools
can change economic conditions. However, a substantial amount of time should
be spent on the Fed and monetary policy. The CFP Certification Examination
tests monetary policy quite heavily. Historically, the most important Fed policy
tool has been its open market operations. Since the monetary crisis in 2008, the
role of the Fed has been greatly expanded, and some time should be spent
discussing additional actions the Fed has taken because of this crisis. Students
must be very knowledgeable about how the Fed uses open market operations to
change the money supply, and what steps are taken to carry out either an
expansionary or contractionary policy. You might want to contact the Fed
before your class begins (Publications Services, Division of Support Services,
Federal Reserve System, Washington D.C., 20551) and order enough copies of
The Federal Reserve System: Purposes and Functions for your students. It is an
excellent supplemental booklet that gives details about how the Fed’s policy
decisions work.
Lesson 1

15
Lesson 2
Modules 2 through 4 are the most important modules in the course. The
essential elements of modern portfolio theory are set forth in these modules.
Without a good understanding of these modules, students will have a difficult
time with other modules.
Students must carefully study this material prior to attending class. Those who
do not will be lost. Emphasize in the classroom session prior to this one the
importance of being prepared. This material is best approached by doing a little
bit at a time—giving it time to then “sink in.” Cramming does not work well
with this material, so advise students to set aside some time each day to work
through the material.
You should frequently use the figure and overhead on Investment Risk/Return
Relationships in this session and in some future sessions. Using this figure often
will help students understand the relationships between many of the formulas
they will learn about in this and subsequent modules.
Students will get some practical application experience by using Morningstar
reports to answer several of the review questions for this module. You should
bring some additional Morningstar reports to class and use them as overheads
and handouts to further demonstrate the practical application of some of the
concepts learned in this module.
In this module, students will begin using formulas. Refer them to the exam
formula sheet in the module.
16

Investment Planning
Sources of Risk
This is a very important section in this module. At its core, investing is
balancing risk and return, yet far too many investors concentrate on the return
side and give much less consideration to the risk side. It seems that students
often do not have a good understanding of the specific types of investment risk.
Of significance concerning the problems we have recently experienced in the
marketplace, is the fact that certain risks were being taken by companies, and
investors were not aware of those risks. Remind students to memorize the
specific types of systematic and unsystematic risk and to know the difference.
This will form a basis for other material they will study in this module and in
future modules. You might want to provide them with some examples of
various investments and portfolio combinations and then ask them to identify
the specific types of systematic and unsystematic risk present in each
investment or portfolio. Given the recent monetary crisis, a discussion of
endogenous risk would also be helpful.
Investment Risk
The major focus of this module is to introduce the risk element into the
investment equation.
The combination of systematic and unsystematic risk is total risk, which is
represented by standard deviation. Systematic risk only is represented by beta.
We teach that a portfolio that has from 10 to 15 securities in different industries
will be virtually free of unsystematic risk.
Computing the standard deviation of a single asset is important. Use the
standard deviation figure to show that the computation requires only a series of
returns and the calculation of an average of those returns. Refer to examples in
the module that show how to calculate standard deviation and mean return.
Your students should learn these computations using the function keys of their
Lesson 2

17
financial calculators. Note also that the same numbers are used to compute a
covariance when we have two assets and want to know how those two assets
move with respect to each other.
Spend some time on covariance, correlation coefficient, and coefficient of
determination. The only way to construct diversified portfolios is to make sure
that the assets do not move together. Covariance tells us how much assets move
together or apart, but it is difficult to understand exactly what the number
means. Correlation coefficient standardizes covariance for us, placing it between
-1 and +1, making it a much easier number to work with. If we square the
correlation coefficient, we arrive at the coefficient of determination. This tells us
the amount of systematic risk and the percentage amount of change of an
investment that may be explained by the benchmark of comparison. Make sure
students know how to calculate the coefficient of determination if they know the
correlation coefficient, and vice versa. Examples are provided in the module.
Correlations get to the heart of diversification, so spend some time discussing
correlations and how they change over time. Examples are provided in the
module that can serve as a good foundation for this discussion.
The next important concept that students must master is the importance of
correlation when measuring the risk (standard deviation) of a portfolio. Our
portfolio is composed of only two assets, but this drives home the concept that
students need to know—the lower the correlation between the two assets, the
lower the risk as measured by standard deviation. In other words, as the
covariance (correlation) goes down, so does standard deviation. Start with a
weighted average standard deviation (which works only if the two assets are
perfectly positively correlated) and then show how standard deviation goes
down as correlation goes down. There are examples of this in the module.
By the time they finish this module, students must understand the importance
of covariance in reducing portfolio risk. They must also be competent in the use
of the formulas to solve problems, including calculating the standard deviation
of a portfolio. Be sure to break the formula down into manageable pieces, as
18

Investment Planning
demonstrated in the book. If students do not understand how the formulas
work, they will have a difficult time passing the Investment Planning exam and
the final CFP Board exam.
Beta
Make sure that students understand the importance of correlation coefficient in
the computation of beta. An asset can have a negative beta, but that fact means
that the asset is probably being measured against an incorrect index. You can
show students a Morningstar report for a gold fund to illustrate how beta is not
2
meaningful when you have a low correlation coefficient (and, therefore, a low R ).
Students are required to calculate a portfolio’s weighted beta. It might be a good
idea to point out that they can use the weighted average approach to compute a
portfolio’s beta and a portfolio’s weighted return, but they cannot use this
approach to compute a portfolio’s standard deviation. The only exception to this
is when the correlation coefficient is a perfect +1. Have them compute the
portfolio standard deviation for portfolios of two stocks using a correlation
coefficient of +1, –1, and 0 to see how correlation impacts the equation.
Students must understand that beta is a relative measure; it tells us how volatile
a particular asset is compared with a benchmark. In order for beta to be a
helpful and “good” number, there has to be high correlation between the asset
and the benchmark to which it is being compared. For our purposes (and the
CFP Board’s) tell students to look for R-squareds of 70 or higher. R-squared
(coefficient of determination) tells us the level of systematic risk. This will be
brought up again and reviewed in Module 4.
Lesson 2

19
Lesson 3
This module covers these important concepts:
1. Modern portfolio theory,
2. Arbitrage pricing theory,
3. The efficient market hypothesis (EMH),
4. Stock market anomalies, and
5. Behavioral finance.
Portfolio Theory
This material can be very difficult for many students. Tell them they should try
not to overanalyze the concepts. For example, no one can draw an indifference
curve for a client. They only have to understand how this theoretical concept is
used to find the most efficient portfolio; they will never do it this way in practice.
In this section, students need to know under what circumstances a portfolio is
inefficient, or not feasible, or most efficient, given an investor’s indifference
curve. They also need to know

how the Sharpe model modified the Markowitz model,

that the capital market line uses standard deviation on the X-axis, and

that the security market line uses beta on the X-axis.
Perhaps the most important part of this section is the CAPM formula. This
formula computes the required return, which can then be inserted into formulas
in Module 4 for the dividend growth model and the Jensen index. Students
should have a good understanding of the CAPM computation and how it is used.
You can refer to the Investment Risk/Return Relationships figure to show how
this formula relates to both the dividend growth model and to the Jensen index.
20

Investment Planning
Arbitrage Pricing Theory
The formula for the APT will not be tested on the final exam. What students
must remember about APT is that

it is a multi-factor theory, as opposed to a single-factor (beta) theory;

there are systematic influences and sector influences (and what they are);
and

there are four major factors that influence stock price movements; and
students need to know these four factors.
Efficient Market Hypothesis
Spend some time discussing efficient markets and inefficient markets, giving
examples of each and what may make one inefficient and the other efficient. For
example, compare how efficient large-cap U.S. stocks may be, as compared to
emerging market stocks, or how efficient the stock market may be when compared
with the bond market. Distinguish the strong, semi-strong, and weak forms of the
efficient market hypothesis (EMH), and make sure students are comfortable with
the three forms. The weak form does open the door to fundamental analysis, and
the major stock market anomalies are important—spend some time on them. If you
can, find some real-life examples of each type of anomaly, bring the information to
class; or better yet, have the students find anomalies.
Behavioral Finance
Finally, behavioral finance helps advisors to work with clients by enabling
advisors to recognize some of the more common investing mistakes. This can
also be an interesting area of discussion for class. The EMH assumes that
investors are rationale and always act in their best interests. Behavioral finance
recognizes that this is not always the case, and knowledge about some of the
common behavioral finance terms and concepts can be of great help to advisors.
It is easy to confuse many of these terms, so spend some time in class discussing
terminology and the various differences. Also compare and contrast, and
discuss the strengths and weaknesses, of both the EMH and behavioral finance.
Lesson 3

21
Lesson 4
Dividends
Most of the material on dividends is pretty straightforward. For the most part,
students just have to read and memorize. However, students often have trouble
with the record date, the ex-dividend date, etc. Spend some time going over
how the stock clearing timetable works until the students clearly understand it.
Also make sure students know the difference between a cash dividend and a
stock dividend. These terms should not be used interchangeably.
It is important that students understand dividend reinvestment plans. You
might want to incorporate some supplemental information from the Web at
www.dripinvestor.com and/or www.netstockdirect.com.
Stock Valuation Models
This is the most important information in the module for students to
understand.
The focus of stock valuation models is on the constant dividend growth model.
This formula is on the formula sheet, and students will have to know how to use
the formula and how to interpret the results in relation to the current market
value of a stock.
A major assumption of the model is that dividends paid (the payout ratio) are a
constant percentage of the earnings of a business. If that is so, then the
percentage increase in dividends is also the percentage increase in earnings.
And the final link is that the increase in earnings and dividends is reflected by a
similar increase in the intrinsic value of the company’s stock. Once students
understand the underlying assumptions, then you can go on to the formula.
22

Investment Planning
Stress that the critical factor is the denominator of the equation. As the
denominator increases, the stock value decreases; as the denominator decreases,
the stock value increases. Students should run scenarios on their computers to
see how a stock’s intrinsic value can vary dramatically, depending on the
numbers used for r and g. This could be a good classroom discussion topic.
Spend time showing how “g” is computed using the earnings retention and the
ROE. Some exam questions revolve around this concept.
Students can also be asked to do some research on a favorite company at the
library and then attempt to compute an intrinsic value based on the company’s
dividend growth. They will see how difficult this is to do in a real situation, and
it will provide an opportunity to discuss how the assumptions used are key to
use of the model.
The Board tests the non-constant dividend growth model. Be sure the students
know how to calculate the value of stock that grows at a supernormal rate for
several years, followed by a lower growth rate that is expected to last for an
infinite period.
Use of the dividend growth model requires that a company pay a dividend.
Many stock analysts use free cash flow per share in addition to, or instead of,
dividends. This approach is not covered in this course. If a company does not
pay dividends, students should not be told to revert to cash flow; students
should be told that they cannot use this model and that they must use the
price/earnings model instead.
Several other approaches to stock valuation are presented in the module;
students should be familiar with alternative approaches, and they should
understand that the use of only one model could be dangerous. Valuation
should be computed using as many models as possible to determine if each of
the different approaches confirms the others.
Give students plenty of exercises on computing the intrinsic value of a stock
using the dividend growth model. They should then be asked to compare the
Lesson 4

23
intrinsic value of the stock to its current market price in order to determine if the
stock is undervalued or overvalued.
After doing several problems, students should be able to see the relationship
between a stock being overvalued and having an expected return that is less
than the required return. The inverse is also true. When a stock is undervalued,
its expected return is greater than its required return. Knowing this will save
time for students, since they only need to compute either a stock’s expected
return or its intrinsic value to know what the other equation will tell them.
Knowing how to use P/E ratios is also important. Fortunately, using P/E ratios
is also much easier. You might show students some of the stock reports from
major business magazines and point out how the P/E ratio is used as a
valuation measure in those reports.
Portfolio Performance
Students really must understand these indexes. Refer again to the Investment
Risk/Return Relationships figure first referenced in Module 2 and presented
again in this module. Relate how both the Jensen and Treynor indexes rely on
beta. Therefore, if beta is not valid because it is not measured against the correct
market index, then the investor must use the Sharpe index.
All three formulas are on the formula sheet, so students do not need to
memorize the formulas. However, they do need to know what each input factor
represents.
You can bring in, or have students bring in, Morningstar reports for a variety of
funds in different asset classes. Using the Other Measures section of the reports,
students can then see how funds differ and begin to understand how to make
fund selections. The Treynor index is not used in Morningstar reports (and is
viewed by some as not being a very practical indicator), but students must
know how to compute it for the exam.
24

Investment Planning
The last section of the module covers benchmarking. Spend some time going
over the various benchmarks highlighted in the module and discuss the
computation of a portfolio’s weighted-average return. Point out to students that
a portfolio diversified across many different asset classes should not be
compared to the S&P 500 index, but rather, to an index computed by weighting
the indexes for each asset class.
You will find some Morningstar statistics and analysis at the end of the module
that you should cover and discuss with students. It provides a good review of
what has been covered, and how the various measures come up in the “real
world.”
Lesson 4

25
Lesson 5
This module involves numerous calculations, many of which are associated
with computing IRR with unequal cash flows.
Review with students the material on how to compute an nth root. Students
seem to have a great deal of difficulty remembering how to do this particular
computation.
Geometric Returns
Students must know how to compute a geometric average in order to compute a
time-weighted return. It is especially important to know how to enter a negative
return in the equation. There are two approaches to doing this calculation:

one uses time value of money concepts, and

the other one uses the nth root.
Students can choose which approach they like. Go over several geometric return
calculations in class.
Time-Weighted Returns
Students have more difficulty with the concepts of dollar-weighted and timeweighted returns and the related review questions 18 and 19 for the module
than with any other type of problem covered in this module. Spend plenty of
time discussing why time-weighted returns are important and how they are
computed. Make sure that students work the review questions before they come
to class so that they can see how difficult the concept is to understand.
Students will not be asked to work similar problems on the exam, but they
should work through the computations so that they can better understand the
26

Investment Planning
difference between the two returns. In practice, they will be asked many times
to compute dollar-weighted returns for their clients, and they will be exposed to
time-weighted returns because all investment managers and mutual funds are
required to report time-weighted returns to their clients. It is important for them
to understand why a client’s dollar-weighted return on a fund may be
substantially lower than the fund’s reported time-weighted return and then to
be able to explain that difference to the client.
Unequal Cash Flows
This use of a calculator seems to cause many problems for students. Take some
time in class to help students understand when to use the cash flow keys on
their calculators and how to use those keys. It is especially important to know
when to use a negative sign (cash flowing out), when to use a positive sign (cash
flowing in), how to enter a single entry for multiple periods (the Nj function),
and that income that is not withdrawn is not accounted for by a keystroke (as in
dividends that are reinvested in a mutual fund).
Fundamental and Technical Analysis
This module also covers some of the basics of both fundamental and technical
analysis. It is not a “heavy” module in terms of concepts, so you can move
through it fairly quickly. Students should be able to pick up most of what they
need to know by thoroughly reading and studying the material.
Spend more time on fundamental analysis than on technical analysis. What
students need to know about technical analysis for the exam, they can get by
reading the module. Fundamental analysis is much more important.
In the past, we have not tested on specific financial ratios, other than ROE. The
®
CFP Certification Examination recently has included questions on financial
ratios, so students should not ignore this section just because most of the ratios
will not appear in the Investment Planning exam. These ratios may be tested in
Lesson 5

27
®
the future if a trend develops in the CFP Certification Examination to test them
more extensively.
Spend some time on the review questions relating to LO 5–5. Go over how
various economic cycles might impact interest rates and security prices.
Understanding these relationships is important, as is being able to answer these
types of critical thinking questions.
Financial Ratios
Spend some time going over most of the ratios, especially how they are
categorized. The most significant financial ratio is the ROE, in particular, how it
is affected by leverage. Spend most of your ratio analysis time on this topic.
You might bring to the class, or have the students find and bring to class,
security analyst reports on companies that might be of particular interest. These
reports will contain all ratios covered in this module.
Cash flow analysis has become very important in company analysis. Spend
some time on this, but do not overdo it because it is not a big issue for testing
purposes.
Technical Analysis
Just emphasize to students that they should memorize the features, etc., of the
different technical indicators. You might bring in some charts to demonstrate
support and resistance, moving averages, etc.
28

Investment Planning
Lesson 6
This module covers the basic characteristics of fixed-income securities. Students
must memorize many definitions in this module.
The major concepts you should focus on are:

how corporate, U.S. government, and municipal securities differ;

preferred stocks and how they differ from long-term bonds;

understanding yield curves, how they can vary and change over time; and

theories behind how the term structure of interest rates is determined.
Features of Fixed-income Securities
Unlike equity, which essentially takes one form, there are numerous types of
debt, and various ways that it can be structured. Start your discussion with the
main participants in the bond market:

the federal government and its agencies,

municipal governments,

domestic and foreign corporations, and

foreign governments.
Discuss the basic terminology used with bonds, how bond ratings work, and the
various risks associated with investing in bonds.
The U.S. debt market should then be covered. Series EE savings bonds have
gone through several changes over the years. Students should know the basics
of how Series EE and Series I Savings Bonds work; the Board has consistently
tested this area. Students should also know how Treasury bills, notes and bonds
work, including TIPS, which have become a very popular investment. Spend
some time going over how they work, and their potential benefits and risks.
Lesson 6

29
Mortgage-backed securities are difficult for some students. Sometimes it helps
students to understand if you explain the concept from the homeowner’s side of
the equation. Most students own a home and understand the concept of paying
principal and interest. They can pick it up from the investor side if they think
through what happens when they make their payments, when they make
additional monthly principal payments, and when they sell their homes and pay
off their mortgages. If you need additional information to hand out, you can get
plenty of it from www.ginniemae.gov.
Don’t get too involved on CMOs. They can get quite complex, but we don’t expect
students to know all of the finer details. But students should know that the ‘A”
tranche is paid off first, and the “Z” tranche last. If they know the general
concepts, they will be well-prepared to answer any test questions on the topic.
Features of Preferred Stock
Spend some time covering the basics of preferred stock, including how it is
similar and different from debt. Don’t confuse traditional preferred stock with
the new hybrid trust “preferreds” that are really debt. The differences between
the two are covered in the module. Tell students when they get a question about
preferred stock it is the traditional preferred that is being referenced, not the
newer trust preferreds. Finally, compare and contrast preferred stock with
bonds, looking at how they are similar and different.
Yield Curves
It is very important that students understand yield curves. In addition to
constructing the yield curve of Review Question 1, you might give students a
practical exercise by having them construct a yield curve using the current day’s
Treasury bond quotes in The Wall Street Journal or from an Internet source, such
as bloomberg.com.
Try to tie in how economic conditions and policies, especially the Fed’s
monetary policy, can affect the shape of a yield curve. Also, start to focus on
investment strategies that might apply at different stages in the economic cycle,
with an emphasis on how a yield curve might change during an economic cycle.
30

Investment Planning
Lesson 7
Bond Valuation and Yields
This module also contains a good amount of bond math. Duration is especially
important here, and students need to know how to use duration as a fixedincome risk-management tool.
Start with making sure students understand how to calculate taxable equivalent
yield, current yield, yield-to-call, and yield-to-maturity. Students should also be
able to calculate the present value of a bond, based on current interest rates.
Emphasize that we always convert the coupon into a payment, and reserve the
“I” function for current interest rates (yield-to-maturity). Taxable equivalent
yield is another calculation that students need to know, it is simple but is bound
to come up at some point on the CFP Board exam.
This module provides students with a great opportunity to learn bond portfolio
management strategies. As students learn the concepts in this module, you can
throw lots of possible client situations and economic scenarios at them to see
how they respond. Doing so will help them to better understand the material in
the module and make it more realistic.
Remind students that bond calculations require using the five keys on the top
row of their calculators: PV, FV, PMT, i, and n. Also, make sure they understand
the coupon rate of a bond relates to the PMT, not to be confused with the bond’s
yield-to-maturity (i). Instead of reading a problem and simultaneously inputting
data into their calculators, advise them to write the figures for those five factors
on a piece of paper before entering data into the calculator. It may take more
time initially, but less time will be consumed in the long run because it will be
easier for them to find mistakes when they have a written trail to follow. Also
remind them to double-check their answers to all problems. When a test
question is written that involves a computation, each problem is also calculated
in the three ways that students are most likely to incorrectly work the problem.
Lesson 7

31
Just because a student sees his computed answer on the list of options does not
mean he has the correct answer; he may see an answer that was computed in
anticipation of his incorrect attempt.
Run through a number of scenarios in which bonds sell at premiums and
discounts and in which bonds have call provisions, so that students can
understand when yield-to-call will be greater/less than yield-to-maturity, etc.
Students should get to a point where they intuitively understand how these
relationships work. After working a review question problem using a calculator,
the students should input the data and then change variables. This will help
them to better understand the relationship between bond variables.
During class, you might use the problems in the module as a starting point; then
change one or more variables and have the students calculate the answer with
the new data. After they have done so, ask them if they can deduce, from the
changes made, some general rules about the relationships of price, yield, etc.
Duration
Duration can be a difficult concept for students. Start with the fact that bond
price volatility is directly related to a bond’s duration. Explain how duration
gives us the approximate percentage price change in a bond given a 1% change
in interest rates. Students need to know how to compute duration; it has been
tested on the CFP Board final.
An alternate way of calculating duration, which many students find easier than
using the formula found on the formula sheet, is also provided. Go over this
alternate method to give students who are intimidated by the formula another
way to calculate duration. If the alternative method is used, you will come up
with a number lower than the solution you come up with the CFP Board formula.
Just tell students to take the next highest answer on the answer sheet from their
solution and they should be fine. Students may have to calculate duration on the
College test, and it is being consistently tested on the CFP Board final.
32

Investment Planning
Even if students do not have to actually calculate duration on the College test,
they must understand the concept and be prepared for questions dealing with it.
Discuss how duration is used to manage bond portfolios. Spend time on what
causes duration to increase and decrease. Students should be cognizant of what
happens when market interest rates change, what impact the coupon has on
duration, and what impact a bond’s maturity has on duration.
Another calculation that students need to know is how to calculate a change in
bond price using duration. This is covered in the module, and the formula is
provided on the formula sheet. Spend some time on this formula, and let
students get past any anxiety about it. Finally, make sure students understand
that duration is not linear, and we compensate for this by with convexity. No
calculation of convexity is needed for the CFP exam, but students do need to
understand what it is and why it is relevant.
Immunization is an important concept, and students often have trouble
understanding why they should match an individual’s time horizon to duration
and not maturity. Explain that institutions handling large sums of money, such
as pension plans and insurance companies, do match duration, and not
maturity, to time horizons. Explain that these institutions do need to take into
account reinvesting interest and principal, and immunization offsets interest
rate risk and reinvestment rate risk.
Investing for individuals is somewhat different; it would be difficult explaining
to a client why you are not buying a 10-year maturity bond for a goal with a 10year time frame, but are instead purchasing a bond with an 18-year maturity
and a duration of 10. Advise students to just go with it, as if they were a pension
fund manager, and match duration to time frame. One way this is often done is
with zero coupon bonds, since maturity and duration are the same.
Run through various economic scenarios and ask students how they might
change a bond portfolio to minimize risk or maximize return during a particular
economic phase. What students should be doing is changing the average
duration of a portfolio, depending on whether they anticipate interest rates to
rise or fall.
Lesson 7

33
Bond Volatility
Knowing how bond characteristics affect the volatility of a bond’s price is very
important. Clients do not like surprises, especially with bonds, which many
assume to be conservative, low-risk investments. Advisors must know what
characteristics make one bond more volatile than another. While many review
questions cover this topic, you can add to knowledge of this area by running
computer scenarios before class. When you later present these scenarios during
class, ask the students to tell you what might happen to prices. However, ask
them to think through the problem first, instead of running calculations. This
will help prepare them for critical thinking questions on the final exam.
Convertible Bonds
The formula for computing the conversion value of a convertible bond is on the
formula sheet. Go over several problems that require use of the formula. Make
sure that students understand that when the par value of the bond is divided by
the conversion price, the answer is the number of shares of common stock into
which the bond is converted, a ratio known as the conversion ratio.
Make sure students also understand the downside risk of a convertible bond.
Downside risk is the current market price of the convertible bond minus the
investment value of the bond. The result is the amount that the bond could drop
in price if the underlying stock falls in price. Emphasize that the conversion
value of a bond is not relevant when calculating downside risk.
34

Investment Planning
Lesson 8
Options and commodities can be quite complex, with all the sophisticated
derivative products that have been developed over the past decade. However,
this course does not get into any sophisticated products or strategies that use
options or commodities. Focus on the basics. For options this means covering
buying puts and calls. For speculation, cover writing covered calls for income,
and using options to hedge. Also go over the basics of futures and focus
primarily on using futures for either speculation or hedging.
Terminology
Students must know the definitions, and there are many of them in this module.
Don’t spend a lot of class time on the definitions unless a term ties into
something that may be more difficult to understand.
Students seem to have difficulty understanding when a call has intrinsic value
and when a put has intrinsic value. Spend some time on this concept, and cover
in-, at-, and out-of-the-money. One way to get across which way the purchaser
of an option is betting on the market going is to suggest what could be the lyrics
of a country song: “you call me up, just to put me down.” Options are tough,
especially for students who have never been exposed to them before. Assure
students that there tend to be few options questions on the CFP Board final, and
they tend to revolve around protecting a position (“protective put”) and
hedging.
When discussing call options, relate the purchase of a call by a speculator to the
selling of a call by the income-oriented investor. If the two are tied together in
the same discussion, students may be able to better understand call writing.
There are three main option strategies that are often tested; which are the three
strategies that are covered in the most detail in the module. These three
strategies are:
Lesson 8

35

buying options for speculation,

writing covered calls for income, and

hedging by buying protective puts.
Spend most of your time with options on these strategies, and then just briefly
cover other strategies, such as writing naked options.
Briefly mention the Black/Scholes valuation model. All students need to know
about Black/Scholes is how the variables affect the price of an option. They are
not expected to get into any depth on this topic.
Discuss the potential strategies available for low-basis concentrated securities,
which include collars. Discussing collars will give you a good opportunity to
review how options work and combining two of the main strategies already
discussed—writing covered calls and buying protective puts.
Warrants are call options issued by corporations. Discuss how these differ from
call options, which are sold by individuals and institutions.
Spend some time discussing the futures market, and how it differs from the
options market. Many students are not aware of the vast amount of various
futures contracts that are available, and the importance to hedgers of this
marketplace. Make sure they are comfortable with hedging, and understand
what type of hedge to use in a given scenario, either a short hedge or a long
hedge. There are examples provided in the module.
Knowing how to hedge using either options or futures contracts is an important
concept that students need to grasp. Make sure you spend sufficient time on
hedging—especially hedging that uses puts, index puts, and shorting futures.
Students will see hedging questions on both the College’s educational exam and
®
on the CFP Certification Examination.
36

Investment Planning
Lesson 9
Real assets (tangible assets and real estate) generally have low positive or
negative correlations with financial assets (stocks and bonds). Real assets are
covered briefly in this course, and students are not expected to have a thorough
knowledge of this area.
Tangible Assets
Stress the fact that tangible assets do have low correlations with financial assets
and, therefore, make good diversifiers for portfolios. Also stress that tangible
assets offer little or no current income and that they are held primarily for
capital appreciation. Also focus on the advantages and disadvantages of holding
tangible assets, as well as the risks and potential rewards of doing so.
Gold
Gold, along with other commodities, has been in a bull market for about ten
years, and it has more than quadrupled in price since 2000. Charts are provided
showing how gold has performed over the last decade. Prior to this, gold did
little for nearly 20 years. Discussions about whether gold should still be
considered for a portfolio (if so, how much) and the various ways to own gold
(including advantages and disadvantages of each) could be initiated. A great
discussion can revolve around this question: “Is it the price of gold that is going
up over time, or is it really the value of the currency it is priced in that is going
down over time?”
Lesson 9

37
Natural Resources
There are other natural resources that should be mentioned, such as oil. A chart
that marks the price of oil from the year 2000 is provided. Some time could be
spent discussing the price of oil and its impact on both the economy and other
investments.
Real Estate
More clients of financial planners are likely to invest in real estate than in
tangible assets. Therefore, spend more class time on real estate than on tangible
assets. The recent turmoil in the real estate market can provide the basis for
interesting discussions. Real estate prices, in general, were rising every year
until 2006, when the median home price peaked and starting decreasing. Real
estate is a good example of a sector in which investors became complacent,
expecting the same result year after year. This complacency, possible in other
sectors, can lead to bubbles that ultimately burst. The chart on home prices in
relation to other economic variables provides a good reference for this
discussion.
Spend some time in this section on the advantages and disadvantages of
investing in real estate, and the risks and potential rewards. Much of what the
students need to learn requires them to memorize these kinds of factors.
REITs are important investment to know, since this is the way many individual
investors invest in real estate. Understand the basics of REITs, and their special
requirements—having to invest at least 75% of total assets in real estate, and
having to distribute at least 90% of earnings. Know the differences between
equity, mortgage, and hybrid REITs, and the factors to consider in selecting
REITs.
The most difficult section of this module is the portion that covers the math
involved in real estate finance. Students must know how to calculate a
38

Investment Planning
property’s NOI and how to calculate the value of an investment property. Make
sure that you spend adequate time on the math so that students understand
how the formulas work. They will not have the formula for NOI provided on
the formula sheet for the educational exam, and they will not have any real
estate finance formulas on the certification exam formula sheet. They will have
to memorize these formulas, but they are simple and straightforward.
Foreign Investments
Although this section is relatively short, it is important. Because many clients of
financial planners are now investing in foreign funds, more questions on this
subject are being asked on the CFP Board Exam.
Understanding foreign exchange can be especially difficult, so expect students to
have difficulty with this. This is the additional risk imposed on investments in
overseas stocks. Students need to understand how currency exchange rates can
impact fund performance and how mutual fund managers manage currency risk.
Many students believe that ADRs are U.S. investments and that all the currency
exchange and foreign tax elements of investing in foreign securities have been
removed when an investor buys an ADR. Make sure that students understand
that this is not so.
Finally, the module ends with calculating exchange rates, in this case between
the U.S. dollar and the Euro. It is extremely easy to get turned around when
doing this! Go through the process methodically, and emphasize that, in order
to keep things straight, it is often easiest to look at the exchange rate from the
standpoint of the U.S. dollar (how much of a particular currency you get for one
U.S. dollar).
Lesson 9

39
Lesson 10
Mutual funds are the investment medium of choice for almost all financial
planners. Foreign mutual funds have attracted the money of a lot of planners’
clients over the last several years. Take time on this module to make sure that
students understand both topics thoroughly. You should add your own
experiences with fund investments to the formal topics covered in the readings
and review questions. You may also want to bring in additional Morningstar
reports to illustrate other points regarding mutual funds that were not covered
in the module.
Mutual Funds
A good portion of the material in this module must be memorized by the
student. You can add life to the material by bringing in fund prospectuses and
statements of additional information, annual reports, and reports from
Morningstar and other funds. Have students look through these supplemental
materials to find management fees, 12b-1 fees, yields, total returns, etc.
You might also want to have students do independent research at a library or
their offices on the different asset classes into which funds generally are
divided. They can present information on how each asset class differs from
other classes with respect to P/E ratios, yields, diversification standards, etc.
The current material reflects both the new asset classes established by
Morningstar and the traditional classification of mutual funds by income,
growth, growth and income, etc. You should help students understand both
approaches since many publications still use the traditional classification
system. However, since most practitioners now use the Morningstar asset
classes, a working knowledge of this approach is obviously quite important.
You can use the Morningstar reports in review questions 52 and 53 (and any
additional reports you or your students bring in) to wrap up much of what they
have studied in previous modules, especially if you concentrate on the Other
40

Investment Planning
Measures section. Several other review questions also use Morningstar reports;
you should use this final module as an opportunity to bring in other
Morningstar examples. If you have the Morningstar Principia Pro Plus software,
you can demonstrate many MPT statistics, including correlations between
individual funds, using the tools in the portfolio mode.
Internal rate of return problems that focus on mutual funds generally involve
the use of cash flow keys. Make sure that students understand that, as long as
no cash was withdrawn from a fund, they do not have to count income and
capital gain distributions as cash flows.
You can also use additional Morningstar reports to help students (1) understand
how to calculate risk-adjusted returns and (2) decide which factors are
important in selecting one fund over another, equally appealing, fund. This will
help them better understand critical thinking questions on the final exam and on
the certification exam that require their judgment.
Students also need to know the basics of closed-end funds, unit investment
trusts (UITs), exchange-traded funds (ETFs), and exchange-traded notes (ETNs);
and understand when their use is appropriate. In addition, there is a section on
the basics of hedge funds, which continue to grow in popularity and
prominence.
Finally, there is a chapter on selecting a mutual fund, which provides a good
opportunity to tie together many of concepts covered in these ten investment
planning modules. Be sure to congratulate the students on a job well done! This
is usually an eye-opening and challenging section of the CFP program. Also,
congratulations to you as an instructor—you really make a difference for many
students!
Lesson 10

41