Portfolio Management Flashcards
Process of portfolio
Or
phases of portfolio
Or
Success of pf depends upon
Success of pf depends upon the efficiency in carrying these processes
1: security analysis
.Intial phase
.Examination of rist return and correlation between the security
. Strategy is buy underprice security and sell over priced
. Fundamentals and technical analysis
2: pf analysis
.next step
. Pf has own specific risk and return
3: pf selection
Identify the effecient pf
4: pf revision
.Constant monitoring
.lead to additional or selling
5: pf evaluation
Assessing the performance over a periods
Factors affecting investment decision in portfolio management
1: objective of investment portfolio
.many objectives like risk and return there are many like provident fund fd or aggressive investment
2: selection of investment
.tpes of security
. proportion
. Industries
. company
3: timing of purchase
.At what price shares to be purchased depends on timing descision
.Buy cheat sell high
Objective of portfolio management
1: captial appreciation
2: safety or security of investment
3: income by way of dividend and interest
4: marketability
5: liquidity
6: tax planning
7: diversification
Types of risk
Systematic and unsystematic
Systematic
1: market risk
Share price moves up or down by other shares in the market
2: interest rate risk
Int rate has a inverse relationship with the price of the security
3: purchasing Power risk
Also know ar inflation risk
The return expected by the investor will change due to change in the real value of return
Unsystematic risk
1: buisness risk
Inept and incompetent management
2: Financial risk
Method of financing adopted by the company
Debt to equity
Advantages and limitations of CAPM
Advantages
1: risk adjusted return
It can be used as risk adjusted discount rate in capital budgeting
2: no dividend company
Useful in computing the cost of equity of a company which doesn’t declared dividend
Disadvantage
1: reliability of vera
Not be possible to determine the ke of all the firm using CAPM
2: other assets
Emphasis on systematic risk only
Assets allocation strategies
SIIT
1: strategic asset allocation
2: integrated asset allocation
3: tactical asset allocation
4: insured asset allocation
Factors affecting investment decision in fixed income securities
Yeild to maturity
Risk
Tax shield
Liquidity
Assumption in markowitz model or modern portfolio theory
1 investor are rational
2: free access to information
3: risk averse
4: prefer higher return for a given level of risk
Portfolio evaluation measure
Sharpe ratio
Treynor ratio
Jenson alpha
Portfolio Rebalancing Theories
1: buy and hold strategy
‘do nothing policy as under this strategy no balancing is required
Under this strategy
investors set a limit. (floor) below which he does not wish the value
of portfolio should go. Therefore, he invests an amount equal to floor value in non-fluctuating assets (Bonds)
Constant mix policy
‘do something policy
strategy involves
periodic rebalancing to required (desired) proportion by purchasing and selling stocks as and when their prices goes down and up respectively
3:Constant proportion portfolio insurance policy
Under this strategy
investor sets a floor below which he does not wish his asset to fall called floor, which is invested in some non-fluctuating assets
value of portfolio under this strategy shall not fall below this specified floor under normal market conditions.
strategy performs well especially in bull market as the value of shares purchased as cushion increases. In contrast in bearish market losses are avoided by sale of shares.
Active and passive Portfolio startegy
Active pf
Superior return under adjusted risk
Startegy are:
Use SMS
1) use of specialised investment concept
2) sector rotation
3) market timing
4) security selection
B) passive startegy
It also known as index fund
Well Diversified with limited risk
Process involves in fixed income portfolio
1)Settings up of objective
2) drafting guide line
3) selection of active or passive startegy
4) selection of securities
5) evaluation of performance with benchmark
Fixed income portfolio management startegy
A) active startegy
B) passive startegy
Active startegy
.) Forecasting int rate and return
Startegy for forecasting return
1) bullet strategy
2) barbell startegy
3) ladder strategy
Interest rate
1) inflation
2) past trend
3) multi factor
.) Bond swaps
IT SIp
International spread swap
Tax swap
Substitution swap
Internet rate swap
Pure yeild pick-up swap
Passive startegy
BIIM
Buy ane hold
Indexation
Immunization
Matching cash flow
