Capital Market Theory, Portfolio Strategy and Tax Considerations
This topic combines investment theory, allocation, style, diversification, options techniques, leverage, volatility management, and tax-aware advice.
How to study the Series 66
Treat the Series 66 as a dual-capacity exam: know the product, profile the client, then identify whether the person is acting as agent, adviser, or IAR.
Core concepts
Concept 1
CAPM, MPT, and efficient market concepts connect risk, beta, expected return, diversification, and market information.
Exam cue: Match the strategy to the client's objective, taxes, and constraints.
Concept 2
Strategic and tactical allocation, growth, value, income, active, passive, diversification, sector rotation, dollar-cost averaging, puts, calls, leverage, and volatility management serve different objectives.
Exam cue: Use diversification to reduce unsystematic risk, not all risk.
Concept 3
Tax considerations include capital gains, qualified dividends, basis, marginal bracket, AMT, government benefits, entities, trusts, pass-throughs, estate tax, and gift tax.
Exam cue: Identify taxable event and account type before selecting the tax answer.
Risk pitfalls and guardrails
Promising diversification removes market risk.
Guardrail: Avoid answers that blur capacity, skip disclosure, ignore custody, or give unlimited administrator power.
Using leverage for a preservation objective.
Guardrail: Avoid answers that blur capacity, skip disclosure, ignore custody, or give unlimited administrator power.
Ignoring after-tax return when tax facts drive the recommendation.
Guardrail: Avoid answers that blur capacity, skip disclosure, ignore custody, or give unlimited administrator power.
Memory anchors
CAPM
CAPM links expected return to systematic risk measured by beta.
MPT
Modern portfolio theory emphasizes portfolio risk and return rather than each holding alone.
Efficient Market
Efficient market theory says prices reflect available information.
Strategic Allocation
Strategic allocation sets long-term target weights.
Tactical Allocation
Tactical allocation makes shorter-term shifts from targets.
Diversification
Diversification reduces unsystematic risk across holdings.
Dollar-Cost Averaging
Dollar-cost averaging invests fixed amounts over time.
Tax Basis
Tax basis is generally the amount used to calculate gain or loss.
Capital Gain
Capital gain occurs when a capital asset is sold above basis.
AMT
Alternative minimum tax can change the tax result of certain items.
Checkpoint rule
Do the check-up only after you can summarize each concept in one sentence and identify one dangerous pitfall from memory.
Knowledge Check (after reading)
Short check-up to confirm understanding of this module.
Check-up Questions
A client asks what the capital asset pricing model (CAPM) links to expected return. Which statement is accurate?
A client asks what modern portfolio theory (MPT) emphasizes. Which statement is accurate?
Answer all questions to submit.
Next step personalized recommendations
Continue learning
Move forward only after this module is stable.
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