GROUP-3

PRESENTED BY
Anoop Suresh Manikandan Prakash Rajasekar

Portfolio Management

Portfolio Definition
Portfolio means a collection or combination of financial assets (or securities) such as shares, debentures and government securities. In a more general sense the term portfolio may be used synonymously with the expression collection of assets, which can even include physical assets (gold, silver, real estate, etc.).

Portfolio Management Definition

The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk vs. performance.

Portfolio Pyramid

Phases of Portfolio Management

1. Specification of investment objectives and constraints 2. Choice of asset mix 3. Formulation of portfolio strategy 4. Selection of securities 5. Portfolio execution 6. Portfolio revision 7. Portfolio evaluation

Specification of Investment Objectives

The commonly stated investment goals are: income, growth and stability. Since income and growth represent two ways by which return is generated and stability implies containment of risk, investment objectives may be expressed more succinctly in terms of return and risk. Risk-Reward Concept Determining Your Risk Preference

Asset Allocation/ASSET MIX

Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as bonds, stocks, real estate, and cash.

Portfolio Strategies
Passive Passive strategies do not seek to outperform the market but simply to do as well as the market. Active Investors who do not accept the EMH, or have serious doubts, pursue active investment strategies believing that they can identify undervalued securities and that lags exist in the market's adjustment of these securities' prices to new (better) information.

Value Investing
In the case of value investing, bargains are often measured in terms of market prices that are below the estimated current economic value of tangible and intangible assets. They are characterized by maintaining a portfolio of market under-performers, equipment, or other financial holdings in subsidiaries or other companies, and real estate

Growth Investing
The strategy of growth investors is to identify the shares whose future returns are expected to grow at a fast rate.

Growth investment style identifies shares based on the growth potential of companies.

Performance Index
Portfolio performance evaluation is a component of the portfolio management process. Portfolio performance is evaluated over a specific time-period. The most often used risk adjusted portfolio performance measures are the: Sharpe's Portfolio Performance Measure; Treynor Portfolio Performance Measure Jensen Portfolio Performance Measure

Selection of Securities
Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and numerous other tradeoffs encountered in the attempt to maximize return at a given appetite for risk

Diversification
Diversification is a risk-management technique that mixes a wide variety of investments within a portfolio in order to minimize the impact that any one security will have on the overall performance of the portfolio. Diversification lowers the risk of your portfolio.

Diversification
There are three main practices that can help you ensure the best diversification: 1. Spread your portfolio among multiple investment vehicles 2. Vary the risk in your securities. 3. Vary your securities by industry. This will minimize the impact of industry-specific risks

Optimal Portfolio
The optimal portfolio concept falls under the modern portfolio theory. The theory assumes that investors fanatically try to minimize risk while striving for the highest return possible. The theory states that investors will act rationally, always making decisions aimed at maximizing their return for their acceptable level of risk.

Working of Optimal Portfolio

Rates of Return
The investor return is a measure of the growth in wealth resulting from that investment. This growth measure is expressed in percentage terms to make it comparable across large and small investors. For instance, the purchase of a share of stock at time t, represented as Pt will yield Pt+1 in one years time, assuming no dividends are paid.

Return Calculation
This return is calculated as: Rt = [Pt+1 Pt]/Pt. Notice that this is algebraically the same as: Rt= [Pt+1/Pt] 1. When dividends are paid, we adjust the calculation to include the intermediate dividend payment: Rt = [Pt+1 Pt + Dt]/Pt.

Expected Return on a Portfolio

The Expected Return on a Portfolio is simply the weighted average the expected returns of the individual securities in the given portfolio. RP = WA RA + WB RB + .... Wn Rn

Where RP W1
Ri n

= Expected Rate of Return in a Portfolio = Proportion of total investment invested in asset = Expected Rate of return as ith Security = number of securities in a given portfolio