Introduction
Portfolio management refers to managing money of an individual under the expert guidance of portfolio managers. In a layman’s language, the art of managing an individual’s investment is called as portfolio management.
Need for Portfolio Management -
Portfolio management presents the best investment plan to the individuals as per their income, budget, age and ability to undertake risks. It minimizes the risks involved in investing and also increases the chance of making profits. Portfolio managers understand the client’s financial needs and suggest the best and unique investment policy for them with minimum risks involved. Portfolio management enables the portfolio managers to provide customized investment solutions to clients as
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• Sometimes portfolio managers are temporarily allowed to deviate from the strategic asset allocation based insights related to perceived asset mispricing. These temporary deviations are called Tactical Asset Allocations (TAA).
3. Feedback
• Analyze returns through performance measurement.
• Determine the sources of returns through performance attribution.
• Use the results of the portfolio measurement and performance attribution to make a performance appraisal of the portfolio manager. This appraisal determines if the portfolio manager should be retained or fired.
• Over time the portfolio needs to monitor the investor’s changes and the capital market expectation changes to rebalance the portfolio as appropriate.
Personal Portfolio Management
A personal portfolio management comprises of the management of all the investments and securities held by an investor. The procedure of managing all the securities and assets is very complicated and thus, many big investors take the services of portfolio managers that assist in managing their portfolios. The personal portfolio managers utilize their skills and market knowledge and take help of portfolio management softwares for managing the investor’s
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The risks and rewards are in essence interrelated to each other where tolerance of the risks tends to influence or even dictate the rewards. An investor whose goal is to maintain his/her current assets instead of growing them, he/she will keep only safe and secure investments in the portfolio.
Diversification of the portfolio: The diversification of the portfolio is required to minimize the risks and maximizes the returns in the long term. It is preferred to diversify your portfolio however; one should take care to avoid over-diversifying. The diversified portfolio led to smoothing of peak-and-valley pricing effects caused by the fluctuations in the normal market and in surviving long term market downturns. The over diversification can become counterproductive so it needs to be avoided.
Avoiding the gambling: As an investor, one should avoid portfolio that relies on high-risk, high-return investments. It is because; the higher speculative investment can lead to conditions where investor may require selling his holdings prematurely at a loss due to liquidity crisis and expected returns won’t materialize.
Portfolio Management
As stated earlier, managers are constantly faced with uncertainty, which is something many economic models do not account for. In microeconomics for instance, theory assumes that the competitive firm knows the price at which it will sell the product it produces. However, from the decision to produce, to the time of production and to the actual sale there might be a delay. Therefore the price of the product at the time of selling might differ substantially from what was expected (Markowitz. , 1991). According to Markowitz, this uncertainty cannot be dismissed, simply because if managers and investors could predict the future, they would place all their money on one investment – the one with the highest return. With this in mind, Markowitz developed portfolio theory, in which he proves the value of diversification as it reduces uncertainty.
Investing in stocks involves owning part of a company’s equity which effectively enables the shareholder to receive a portion of the company’s earnings and assets in form of dividends. Stocks are generally categorized as either common stocks or preferred stocks whereby common stock allow investors to vote on key issues but do not guarantee of dividends (Markowitz 78). Preferred stocks on the other hand do not provide voting rights but assure stockholders of dividend payments. Investing in stocks offers investors comparatively high returns relative to treasury securities but the investments also have high inherent risk. Stocks are purchased through licensed stockbrokers who range from the discounted order-taking online brokers, to the pricey full-service brokers and money managers (Sourd 112). Despite the type of broker an investor opts for, the stock market has the potential to generate high returns through an investment strategy. One of the main strategies employed is diversification which involves the purchasing of different stocks with varied performance and rates of returns in order to spread out the risk of the individuals stocks across a portfolio. Investing in stocks is therefore one of the most profitable alternatives of personal financial planning, and should be considered as one of the investment vehicles that generates an additional income stream.
...r investments that can support the other weight and balance their portfolio and therefore alleviate some of the risk they face.
...al portfolio based on risk preferences, personal constraints and investment objectives following the Mean-Variance Theory. We have applied a CPPI strategy to allocate assets dynamically over-time and highlighted its superiority compared to the Market and Benchmark Portfolios. We have used both classical (e.g. Sharpe Ratio) and advanced performance measures (e.g. T2, Omega Ratio). We have identified that much of the portfolio’s performance can be attributed to the Selection Effect. The significant MoM indicates the presence of Momentum Effect in the portfolio’s returns. We have highlighted the contribution of Omega Ratio in modern portfolio management because of its ability to capture Higher Moments. Overall, we conclude that insurance strategies, such as CPPI, can be quite useful when investors seek insurance against rapid falls in the market and crash in equities.
Portfolio Theory is not only used for budgeting, but is also used in investment strategies. Financial advisors create portfolios optimized to provide a certain rate of return at a certain level of risk. These portfolios can be comprised of a variety of financial instruments, like stocks, bonds, or mutual funds. In essence, the theory allows a client to build something to their specifications depending on how ag...
3 Your risk tolerance (attitude to risk and reward): Risk tolerance can be defined as the extent to which the investor is willing to lose a part or whole of his original investment in consideration of higher returns. Balancing the risk one is willing to accept with the investment returns he want will help determine his asset allocation
In portfolio optimisation, investors should keep in mind that diversification is key to balance risk and return. Malkiel (2010), reminded investors that the best investment is a well-diversified portfolio, being re-balanced appropriately while adopting a buy-and-hold strategy. A reduction in portfolio volatility can be achieved by diversifying in several securities. However, even with a large number of assets, risk cannot be reduced to zero since portfolios are affected by macroeconomic factors which influence the market (Bodie et Al., 2004). In addition, portfolio returns can never be guaranteed as the future is unpredictable. A famous quote by a Chinese philosopher sums this up:
The concept of portfolio management is a lucrative sword as not only it offers not only returns but the investor also have to face risk associated with it. If the Investor is willing to earn higher return he has to associate higher return with higher risk. For an investor to diversify away the risk he can follow diversification rule. Under diversification, investor can include the assets which are not correlated to each other and thus by including these asset classes he can diversify away the risk. However, in terms of the risk there are two kinds of risk i.e Unsystematic Risk and Systematic Risk and an investor can diversify only unsystematic risk by following diversification rule including the asset classes that are not correlated with other and the risk left will be systematic risk, which is not possible to diversify even if the investor includes all the securities available in the investment universe.
From my perspective, the usefulness of CAPM is directed towards efficient investment decision making and strategic management. Moosa (2013) remarks CAPM to be a supportive model in ‘evaluating the performance of managed portfolios and for investment purposes’.
According to Investopedia (Asset Allocation Definition, 2013), asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. There are three main asset classes: equities, fixed-income, cash and cash equivalents; but they all have different levels of risk and return. A prudent investor should be careful in allocating each asset class to his portfolio. Proper asset allocation is a highly debatable subject and is not designed equally for everybody, but is rather based on the desires and needs of the individual investor. This paper discusses the importance of asset allocation, the differences and the proper diversification within the portfolio.
The financial objectives of the investor determines what types of assets to be used. In this paper a quantitative approach of choosing the portfolio will be discussed.
trends may be used to inform new investing decisions. The plans of the asset manager goes around his
But normally people invest in more than one asset. Suppose an investor invests in n asset where n= 1,2,3...,n . His total budget is X0. We form a portfolio using this information. This can be done by associating a weight for each asset such that the sum of weights is 1, i.e,
In your response, build upon extant portfolio theory and make sure to talk about different types of risks that investors might face and how they go about managing such risks. This means you need to consider topics such as efficient frontier and optimal portfolios; as well their relevance to investment theory. Furthermore, given the nature of the assignment, avoid bringing the brokerage industry into your discussion. In other words, assume you can invest directly in the stock market and do not need any financial intermediaries like brokerage houses.
Using the Modern Portfolio Theory, overtime risk assets will provide a higher expected rate of return, as compensation to the investors for accepting a high risk. The high risk will eventually lower collecting asset classes to the portfolio, thus reducing the volatile risk, and increasing the expected rates of return. Furthermore the purpose of this theory is to develop the most optimal investments portfolio which would yield the highest rate of return while ascertaining the risk for the individual or corporate investor.