Introduction Portfolio is a combination of securities such as bonds stocks and other instruments. For example if I have purchased 100 shares of reliance, one lot of gold and one lot of silver along with few bonds and debentures, all the above securities comprise my portfolio.
Portfolio construction The process of blendingtogether the broad assets classes so as to obtain optimum return with minimum risk called portfolio construction. There are two approaches of portfolio • Traditional approach construction • Modern approach
Traditional approach The traditional • Determining the objectives of portfolio approach • Selection of securities to deals with be included in portfolio. basically two major decisions.
Normally • Investors constraints are analyzed this is • On their basis securities are selected • Risk and return of securities is studied carried • Try to minimize the risk with more out in return • Compromise with the risk factor four to • Selection of securities with their weight in portfoliosix steps.
Analysis of constraints(I)Income needs(a)Need for current income(b)Need for constant income(ii) Liquidity(iii) Safety(iv) Time horizon(v) Tax consideration(vi) Temprament
Determination of objectiveCurrent incomeGrowth incomeCapital appreciationPreservation of capital
Selection of portfolio(i) Objectives and asset mix(ii) Growth of income and asset mix(iii) Capital appreciation and asset mix(iv) Safety of principal and asset mix(v) Risk and return analysis(vi) Diversification
Modern approach An example of modern approach is Markowitz approach. It does not takes individual needs into consideration but risk and return analysis is done to minimize the risk and maximize the profit or return. We will discuss it in the next chapter.