The document discusses various aspects of portfolio management including the phases, approaches, traditional and modern theories. It describes the steps in traditional approach as analyzing constraints, determining objectives, selecting portfolio, assessing risk and return, and evaluation/diversification. The modern approach focuses on asset allocation based on calculated risk and return. Key modern portfolio theories discussed are Markowitz theory, Sharpe's single index model, and Capital Asset Pricing Model (CAPM). It also covers portfolio revision, constraints, and strategies like passive and active management, as well as formula plans.
This document provides an overview of the Capital Asset Pricing Model (CAPM). It was developed by Sharpe and Linter based on Markowitz's portfolio theory. CAPM assumes investors will create a portfolio using risky assets and risk-free assets, such as treasury bills. It can be used to analyze the risk and return of individual securities. The model relates the expected return of securities to market risk using the security market line formula.
This document discusses the concepts of risk and return in investments. It defines risk as the uncertainty of expected returns, which can be caused by factors both related and unrelated to the investment. Systematic risk refers to uncertainty from broader market factors that affect all investments, while unsystematic risk is specific to a particular investment. Standard deviation and beta are introduced as quantitative measures of risk. Standard deviation measures how much returns vary from the average, while beta measures the volatility of a security compared to the overall market. The security market line equation is presented to demonstrate how beta is used to determine the required rate of return based on the risk-free rate and market risk premium.
The document discusses portfolio management and Markowitz portfolio theory. It defines a portfolio as a combination of securities like stocks and bonds that are blended together to achieve optimal returns with minimum risk. Portfolio management aims to maximize returns and minimize risk through activities like monitoring performance, evaluating investments, and revising the portfolio. Markowitz portfolio theory introduced diversification to reduce unsystematic risk and developed algorithms to minimize portfolio risk by measuring the standard deviation of returns and considering the expected returns and covariances between securities. The theory assumes investors are risk-averse and can reduce risk by adding diversified investments to their portfolio.
The Capital Asset Pricing Model (CAPM) uses beta to measure the non-diversifiable risk of a security and determine its expected return. CAPM assumes investors want to maximize returns and only consider systematic risk. It models expected return as the risk-free rate plus a risk premium based on the security's beta. The Security Market Line graphs this relationship between beta and expected return. Some researchers like Fama and French have expanded CAPM with additional size and value factors.
The document provides information about mutual funds in India, including their history and structure. It discusses how a mutual fund is a trust that pools money from investors and invests it in securities like stocks and bonds. It then summarizes the five phases of growth of the mutual fund industry in India from 1963 to 2003 and how regulations evolved. It also outlines the key constituents of mutual funds in India - sponsors, trustees, asset management companies and custodians - and their roles. Finally, it categorizes mutual fund types by structure, nature and investment objective.
noorulhadi Lecturer at Govt College of Management Sciences, noorulhadi99@yahoo.com
i have prepared these slides and still using in mylectures, Reference: Portfolio management by S kevin and online sources
Modern portfolio theory provides a framework for constructing portfolios to maximize expected return based on a given level of risk. Harry Markowitz pioneered this theory and was later awarded a Nobel Prize. Modern portfolio theory evaluates how each investment affects overall portfolio risk and return, and shows investors can optimize risk-adjusted returns by holding multiple assets. While useful for building diversified portfolios, modern portfolio theory is criticized for focusing only on variance rather than downside risk.
1. The document discusses portfolio selection using the Markowitz model.
2. The Markowitz model aims to find the optimal portfolio, which provides the highest return and lowest risk. It does this by analyzing different combinations of securities to identify efficient portfolios.
3. The document provides details on the tools and steps used in the Markowitz model for portfolio selection, including analyzing expected returns, variance, standard deviation, and coefficients of correlation between securities.
This document provides an overview of the Capital Asset Pricing Model (CAPM). It was developed by Sharpe and Linter based on Markowitz's portfolio theory. CAPM assumes investors will create a portfolio using risky assets and risk-free assets, such as treasury bills. It can be used to analyze the risk and return of individual securities. The model relates the expected return of securities to market risk using the security market line formula.
This document discusses the concepts of risk and return in investments. It defines risk as the uncertainty of expected returns, which can be caused by factors both related and unrelated to the investment. Systematic risk refers to uncertainty from broader market factors that affect all investments, while unsystematic risk is specific to a particular investment. Standard deviation and beta are introduced as quantitative measures of risk. Standard deviation measures how much returns vary from the average, while beta measures the volatility of a security compared to the overall market. The security market line equation is presented to demonstrate how beta is used to determine the required rate of return based on the risk-free rate and market risk premium.
The document discusses portfolio management and Markowitz portfolio theory. It defines a portfolio as a combination of securities like stocks and bonds that are blended together to achieve optimal returns with minimum risk. Portfolio management aims to maximize returns and minimize risk through activities like monitoring performance, evaluating investments, and revising the portfolio. Markowitz portfolio theory introduced diversification to reduce unsystematic risk and developed algorithms to minimize portfolio risk by measuring the standard deviation of returns and considering the expected returns and covariances between securities. The theory assumes investors are risk-averse and can reduce risk by adding diversified investments to their portfolio.
The Capital Asset Pricing Model (CAPM) uses beta to measure the non-diversifiable risk of a security and determine its expected return. CAPM assumes investors want to maximize returns and only consider systematic risk. It models expected return as the risk-free rate plus a risk premium based on the security's beta. The Security Market Line graphs this relationship between beta and expected return. Some researchers like Fama and French have expanded CAPM with additional size and value factors.
The document provides information about mutual funds in India, including their history and structure. It discusses how a mutual fund is a trust that pools money from investors and invests it in securities like stocks and bonds. It then summarizes the five phases of growth of the mutual fund industry in India from 1963 to 2003 and how regulations evolved. It also outlines the key constituents of mutual funds in India - sponsors, trustees, asset management companies and custodians - and their roles. Finally, it categorizes mutual fund types by structure, nature and investment objective.
noorulhadi Lecturer at Govt College of Management Sciences, noorulhadi99@yahoo.com
i have prepared these slides and still using in mylectures, Reference: Portfolio management by S kevin and online sources
Modern portfolio theory provides a framework for constructing portfolios to maximize expected return based on a given level of risk. Harry Markowitz pioneered this theory and was later awarded a Nobel Prize. Modern portfolio theory evaluates how each investment affects overall portfolio risk and return, and shows investors can optimize risk-adjusted returns by holding multiple assets. While useful for building diversified portfolios, modern portfolio theory is criticized for focusing only on variance rather than downside risk.
1. The document discusses portfolio selection using the Markowitz model.
2. The Markowitz model aims to find the optimal portfolio, which provides the highest return and lowest risk. It does this by analyzing different combinations of securities to identify efficient portfolios.
3. The document provides details on the tools and steps used in the Markowitz model for portfolio selection, including analyzing expected returns, variance, standard deviation, and coefficients of correlation between securities.
1) Portfolio construction involves blending different asset classes like stocks, bonds, and cash to obtain returns while minimizing risk through diversification.
2) There are two main approaches - the traditional approach selects securities to meet an investor's needs, while the Markowitz efficient frontier approach constructs portfolios that maximize expected return for a given level of risk.
3) The Markowitz model helps investors reduce risk by choosing securities whose returns do not move together, identifying the efficient frontier of portfolio options, and allowing investors to select the portfolio with the highest return for a given risk level.
The document summarizes the growth of the venture capital industry in India over four phases:
Phase 1 (1972-1988) saw the establishment of early venture capital funds but the industry remained underdeveloped due to a lack of private sector involvement and policy support.
Phase 2 (1988-1995) saw increased foreign investment and the establishment of regulations, but growth was still slow.
Phase 3 (1995-2003) saw more successful India-focused venture capital firms emerge but investment declined after the dot-com crash until renewed in 2004.
Phase 4 (2004-2009) saw global firms and private equity actively investing across sectors in India, with most deals in later growth stages, as the venture capital industry mature
The Markowitz Model assists investors in selecting efficient portfolios by analyzing possible combinations of securities. It helps reduce risk through diversification by choosing securities whose price movements are not perfectly correlated. The model determines the efficient set of portfolios and allows investors to select the optimal portfolio based on their preferred risk-return tradeoff. Markowitz introduced diversification and showed holding multiple lower-risk securities can reduce overall portfolio risk compared to a single higher-risk security. The model calculates expected returns, variances, and correlations between securities to determine the minimum risk portfolio for a given level of return.
Security Analysis and Portfolio Management - Investment-and_Riskumaganesh
Investment involves allocating funds to assets with the goal of earning income or capital appreciation over time. Speculation aims to profit from short-term price fluctuations by taking on high business risk. Investors typically have a longer time horizon, consider fundamentals, and accept moderate risk for returns, while speculators have a very short horizon, rely on market behavior, and use leverage to seek high returns for high risk. Risks include systematic market, interest rate, and inflation risks that affect all investments, as well as unsystematic business and financial risks that are specific to individual firms.
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The document discusses portfolio management and various approaches to constructing portfolios. It defines a portfolio as a combination of different asset classes like stocks, bonds, and money market instruments. The traditional approach to portfolio construction evaluates an individual's overall financial plan and objectives to determine suitable securities. The modern approach uses the Markowitz model to maximize expected return for a given level of risk. This models constructs portfolios along the "efficient frontier" where higher returns are achieved for the same level of risk. Factors like diversification, correlation between assets, and an individual's risk tolerance further influence portfolio selection.
Capital Market Line graphically represents all portfolios with an optimal combination of risk and return.
https://efinancemanagement.com/investment-decisions/capital-market-line
Difference between systematic and unsystematic riskSOJIBSABBIR
Systematic risk, also known as market risk, is uncertainty inherent to the entire market and consists of day-to-day stock price fluctuations. It includes interest, market, and inflation risks and is uncontrollable, arising from macroeconomic factors that affect many securities. Unsystematic risk is uncertainty from a specific company or industry and includes business and financial risks, which can be reduced through diversification. It is controllable and arises from micro-economic factors affecting individual securities.
Portfolio management is a process that aims to optimize investment returns while reducing risk. It involves five phases: security analysis, portfolio analysis, portfolio selection, portfolio revision, and portfolio evaluation. The security analysis phase involves classifying and examining individual securities. Portfolio analysis identifies possible portfolio combinations and assesses their risks and returns. The optimal portfolio is then selected during the portfolio selection phase. Portfolio revision makes changes due to funds or risk adjustments. Finally, portfolio evaluation compares objectives and performance to improve the process.
The document discusses the Arbitrage Pricing Theory (APT). APT assumes an asset's return depends on various macroeconomic, market, and security-specific factors. It uses a linear regression formula to model the relationship between an asset's expected return and its sensitivity to different risk factors. While more flexible than other models, APT requires accurately identifying risk sources and examining assets individually. It generates a lot of data but does not guarantee profitable outcomes.
The document discusses the Arbitrage Pricing Theory (APT), which assumes an asset's return depends on various macroeconomic, market, and security-specific factors. The APT model estimates the expected return of an asset based on its sensitivity to common risk factors like inflation, interest rates, and market indices. It was developed by Stephen Ross in 1976 as an alternative to the Capital Asset Pricing Model. The APT formula predicts an asset's return based on factor risk premiums and the asset's sensitivity to each factor.
Formula Plan in Securities Analysis and Port folio ManagementSuryadipta Dutta
This document discusses different types of formula plans for portfolio management. It introduces constant ratio plans, variable ratio plans, and constant rupee value plans. Constant ratio plans maintain a fixed ratio between aggressive and defensive portfolios. Variable ratio plans adjust the ratio based on market price fluctuations. Constant rupee value plans force selling when prices rise and buying when they fall to maintain a constant rupee value of the aggressive portfolio. Formula plans provide rules for buying and selling securities and help investors make better use of market fluctuations.
The document summarizes William Sharpe's single index model from 1963, which simplified Harry Markowitz's earlier portfolio selection model. The single index model assumes that only one macroeconomic factor, represented by a market index like the S&P 500, influences the systematic risk of stock returns. It expresses the return of a security as the sum of its expected excess return, its sensitivity to market movements, and random error. This allows estimating portfolio variance and minimum variance portfolios based only on market risk rather than the full covariance matrix.
The Capital Asset Pricing Model (CAPM) was developed in the 1960s as a way to determine the expected return of an asset based on its risk. CAPM assumes that investors will be compensated only based on an asset's systematic or non-diversifiable risk as measured by its beta. The model builds on Markowitz's portfolio theory and introduces the security market line, which plots the expected return of an asset against its beta. According to CAPM, the expected return of an asset is equal to the risk-free rate plus a risk premium that is proportional to the asset's beta.
1. The document discusses the growth and development of derivatives markets in India, including key milestones like SEBI permitting derivatives trading on Indian stock exchanges in 2000 and the introduction of various derivatives products over subsequent years.
2. It provides background on regulations governing derivatives trading in India and the objectives of regulation, including protecting investors and market integrity.
3. The document outlines the objectives of the study, which include understanding the Indian derivatives market scenario, analyzing whether derivatives have achieved their purpose, and suggesting methods based on observations. It discusses the scope and limitations of the study.
1. The document discusses risk on portfolios and individual securities, as well as measures of risk like average absolute deviation and standard deviation.
2. It then explains the Capital Asset Pricing Model (CAPM), which relates expected return and systematic risk for assets. CAPM was developed by William Sharpe and considers both systematic and unsystematic risk factors.
3. The key elements of CAPM are outlined, including the capital market line, security market line, beta as a measure of individual asset risk compared to the market portfolio, and the CAPM formula.
Derivatives are the financial instruments whosevalue is derived from the underlying assets.
•
It is called derivatives as its value is derived fromother assets called underlying asset.
•
It is a contract that derives its value from changes inthe price of the underlying asset.
Example1:
The value of a gold futures contract is derived fromthe value of the underlying asset i.e. Gold.
Calculation of premium in life insurance by Dr. Amitabh MishraAmitabh Mishra
An insurance premium is the amount paid by a policyholder to an insurance company in exchange for coverage. Premiums are determined by insurance companies based on statistics and calculations regarding mortality rates, expenses, and expected investment returns. Premiums can be paid as a single payment or in installments, and the amount may differ between companies. Net premium only considers mortality and interest, while gross premium also includes expenses and profit loading. Insurance premiums are calculated using factors such as mortality tables, expected expenses, and anticipated investment yields in order to determine a consistent level premium amount.
This document summarizes the efficient market hypothesis (EMH) in three sentences:
The EMH states that market prices fully reflect all available public information and adjust instantly to new information. It has three forms - weak, semi-strong, and strong - with each form incorporating more types of information. Most research supports the weak and semi-strong forms, finding that historical data and public information are reflected in prices, but the strong form is not supported as non-public information can be used to earn excess returns.
A Study on Empirical Testing of Capital Asset Pricing ModelProjects Kart
A Study on Empirical Testing of Capital Asset Pricing Model is compared with many blue chip companies with the help of detailed questionnaire to understand the problem statement. Visit http://www.projectskart.com/p/contact-us.html for more information.
1) Portfolio construction involves blending different asset classes like stocks, bonds, and cash to obtain returns while minimizing risk through diversification.
2) There are two main approaches - the traditional approach selects securities to meet an investor's needs, while the Markowitz efficient frontier approach constructs portfolios that maximize expected return for a given level of risk.
3) The Markowitz model helps investors reduce risk by choosing securities whose returns do not move together, identifying the efficient frontier of portfolio options, and allowing investors to select the portfolio with the highest return for a given risk level.
The document summarizes the growth of the venture capital industry in India over four phases:
Phase 1 (1972-1988) saw the establishment of early venture capital funds but the industry remained underdeveloped due to a lack of private sector involvement and policy support.
Phase 2 (1988-1995) saw increased foreign investment and the establishment of regulations, but growth was still slow.
Phase 3 (1995-2003) saw more successful India-focused venture capital firms emerge but investment declined after the dot-com crash until renewed in 2004.
Phase 4 (2004-2009) saw global firms and private equity actively investing across sectors in India, with most deals in later growth stages, as the venture capital industry mature
The Markowitz Model assists investors in selecting efficient portfolios by analyzing possible combinations of securities. It helps reduce risk through diversification by choosing securities whose price movements are not perfectly correlated. The model determines the efficient set of portfolios and allows investors to select the optimal portfolio based on their preferred risk-return tradeoff. Markowitz introduced diversification and showed holding multiple lower-risk securities can reduce overall portfolio risk compared to a single higher-risk security. The model calculates expected returns, variances, and correlations between securities to determine the minimum risk portfolio for a given level of return.
Security Analysis and Portfolio Management - Investment-and_Riskumaganesh
Investment involves allocating funds to assets with the goal of earning income or capital appreciation over time. Speculation aims to profit from short-term price fluctuations by taking on high business risk. Investors typically have a longer time horizon, consider fundamentals, and accept moderate risk for returns, while speculators have a very short horizon, rely on market behavior, and use leverage to seek high returns for high risk. Risks include systematic market, interest rate, and inflation risks that affect all investments, as well as unsystematic business and financial risks that are specific to individual firms.
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I1
σp
The document discusses portfolio management and various approaches to constructing portfolios. It defines a portfolio as a combination of different asset classes like stocks, bonds, and money market instruments. The traditional approach to portfolio construction evaluates an individual's overall financial plan and objectives to determine suitable securities. The modern approach uses the Markowitz model to maximize expected return for a given level of risk. This models constructs portfolios along the "efficient frontier" where higher returns are achieved for the same level of risk. Factors like diversification, correlation between assets, and an individual's risk tolerance further influence portfolio selection.
Capital Market Line graphically represents all portfolios with an optimal combination of risk and return.
https://efinancemanagement.com/investment-decisions/capital-market-line
Difference between systematic and unsystematic riskSOJIBSABBIR
Systematic risk, also known as market risk, is uncertainty inherent to the entire market and consists of day-to-day stock price fluctuations. It includes interest, market, and inflation risks and is uncontrollable, arising from macroeconomic factors that affect many securities. Unsystematic risk is uncertainty from a specific company or industry and includes business and financial risks, which can be reduced through diversification. It is controllable and arises from micro-economic factors affecting individual securities.
Portfolio management is a process that aims to optimize investment returns while reducing risk. It involves five phases: security analysis, portfolio analysis, portfolio selection, portfolio revision, and portfolio evaluation. The security analysis phase involves classifying and examining individual securities. Portfolio analysis identifies possible portfolio combinations and assesses their risks and returns. The optimal portfolio is then selected during the portfolio selection phase. Portfolio revision makes changes due to funds or risk adjustments. Finally, portfolio evaluation compares objectives and performance to improve the process.
The document discusses the Arbitrage Pricing Theory (APT). APT assumes an asset's return depends on various macroeconomic, market, and security-specific factors. It uses a linear regression formula to model the relationship between an asset's expected return and its sensitivity to different risk factors. While more flexible than other models, APT requires accurately identifying risk sources and examining assets individually. It generates a lot of data but does not guarantee profitable outcomes.
The document discusses the Arbitrage Pricing Theory (APT), which assumes an asset's return depends on various macroeconomic, market, and security-specific factors. The APT model estimates the expected return of an asset based on its sensitivity to common risk factors like inflation, interest rates, and market indices. It was developed by Stephen Ross in 1976 as an alternative to the Capital Asset Pricing Model. The APT formula predicts an asset's return based on factor risk premiums and the asset's sensitivity to each factor.
Formula Plan in Securities Analysis and Port folio ManagementSuryadipta Dutta
This document discusses different types of formula plans for portfolio management. It introduces constant ratio plans, variable ratio plans, and constant rupee value plans. Constant ratio plans maintain a fixed ratio between aggressive and defensive portfolios. Variable ratio plans adjust the ratio based on market price fluctuations. Constant rupee value plans force selling when prices rise and buying when they fall to maintain a constant rupee value of the aggressive portfolio. Formula plans provide rules for buying and selling securities and help investors make better use of market fluctuations.
The document summarizes William Sharpe's single index model from 1963, which simplified Harry Markowitz's earlier portfolio selection model. The single index model assumes that only one macroeconomic factor, represented by a market index like the S&P 500, influences the systematic risk of stock returns. It expresses the return of a security as the sum of its expected excess return, its sensitivity to market movements, and random error. This allows estimating portfolio variance and minimum variance portfolios based only on market risk rather than the full covariance matrix.
The Capital Asset Pricing Model (CAPM) was developed in the 1960s as a way to determine the expected return of an asset based on its risk. CAPM assumes that investors will be compensated only based on an asset's systematic or non-diversifiable risk as measured by its beta. The model builds on Markowitz's portfolio theory and introduces the security market line, which plots the expected return of an asset against its beta. According to CAPM, the expected return of an asset is equal to the risk-free rate plus a risk premium that is proportional to the asset's beta.
1. The document discusses the growth and development of derivatives markets in India, including key milestones like SEBI permitting derivatives trading on Indian stock exchanges in 2000 and the introduction of various derivatives products over subsequent years.
2. It provides background on regulations governing derivatives trading in India and the objectives of regulation, including protecting investors and market integrity.
3. The document outlines the objectives of the study, which include understanding the Indian derivatives market scenario, analyzing whether derivatives have achieved their purpose, and suggesting methods based on observations. It discusses the scope and limitations of the study.
1. The document discusses risk on portfolios and individual securities, as well as measures of risk like average absolute deviation and standard deviation.
2. It then explains the Capital Asset Pricing Model (CAPM), which relates expected return and systematic risk for assets. CAPM was developed by William Sharpe and considers both systematic and unsystematic risk factors.
3. The key elements of CAPM are outlined, including the capital market line, security market line, beta as a measure of individual asset risk compared to the market portfolio, and the CAPM formula.
Derivatives are the financial instruments whosevalue is derived from the underlying assets.
•
It is called derivatives as its value is derived fromother assets called underlying asset.
•
It is a contract that derives its value from changes inthe price of the underlying asset.
Example1:
The value of a gold futures contract is derived fromthe value of the underlying asset i.e. Gold.
Calculation of premium in life insurance by Dr. Amitabh MishraAmitabh Mishra
An insurance premium is the amount paid by a policyholder to an insurance company in exchange for coverage. Premiums are determined by insurance companies based on statistics and calculations regarding mortality rates, expenses, and expected investment returns. Premiums can be paid as a single payment or in installments, and the amount may differ between companies. Net premium only considers mortality and interest, while gross premium also includes expenses and profit loading. Insurance premiums are calculated using factors such as mortality tables, expected expenses, and anticipated investment yields in order to determine a consistent level premium amount.
This document summarizes the efficient market hypothesis (EMH) in three sentences:
The EMH states that market prices fully reflect all available public information and adjust instantly to new information. It has three forms - weak, semi-strong, and strong - with each form incorporating more types of information. Most research supports the weak and semi-strong forms, finding that historical data and public information are reflected in prices, but the strong form is not supported as non-public information can be used to earn excess returns.
A Study on Empirical Testing of Capital Asset Pricing ModelProjects Kart
A Study on Empirical Testing of Capital Asset Pricing Model is compared with many blue chip companies with the help of detailed questionnaire to understand the problem statement. Visit http://www.projectskart.com/p/contact-us.html for more information.
Here are the performance evaluations of funds A, B, C and D using Sharpe, Treynor and Jensen techniques:
Sharpe Ratio:
A = (12%-4%)/20 = 0.4
B = (12%-4%)/18 = 0.44
C = (8%-4%)/22 = 0.18
D = (9%-4%)/24 = 0.17
Treynor Ratio:
A = (12%-4%)/0.97 = 0.8
B = (12%-4%)/1.17 = 0.8
C = (8%-4%)/1.22 = 0.4
D = (
This document defines key concepts related to portfolio management including portfolio, portfolio analysis, construction, and evaluation. A portfolio is a combination of different financial securities like stocks, bonds, and cash held by investors. Portfolio management involves identifying objectives, developing strategies, monitoring performance, and evaluating results. Portfolio analysis assesses the risks of an entity's business areas. Construction requires determining objectives and formulating investment strategies. Evaluation models like Sharpe ratio, Treynor ratio, and Jensen measure are used to assess risk-adjusted performance.
Portfolio Investment can be understood easily.Sonam704174
Portfolio Investment can be understood as a bunch of different financial securities (including assets, stocks, government bonds, corporate bonds, mutual funds, other money market instruments, cash and cash equivalents, cryptocurrencies, commodities, and bank certificates of deposit.), bought with an expectation to gain either in the form of return or increased value, or both.
The document summarizes research on building an optimal portfolio using the Markowitz Model of companies listed on the Nifty 50 index in India. It discusses the key assumptions of Markowitz's Modern Portfolio Theory and how it aims to maximize return for a given level of risk through diversification. The methodology section outlines using the Sharpe Index Model and secondary data from Yahoo Finance to evaluate risk and return of top BSE companies to identify stocks and their proportions in the optimal portfolio. Literature reviews of past research applying similar models in markets like Malaysia are also summarized.
The activities of large, internationally active financial institutions have grown increasingly
Complex and diverse in recent years.This increasing complexity has necessarily been accompanied by a process of innovation in how these institutions measure and monitor their exposure to different kinds of risk. One set of risk management techniques that has attracted a great deal of attention over the past several years, both among practitioners and regulators, is "stress testing", which can be loosely defined as the examination of the potential effects on a firm’s financial condition of a set of specified changes in risk factors, corresponding to exceptional but plausible events. A concept of security analysis and portfolio management services has been very famous and old among various institutions. This report represents practices application of portfolio management techniques in the portfolio section. Portfolio management is an integrated and exhaustive of fundamental and technical methods which are used for calculation of annul return and earnings per share for the portfolio. Modern portfolio theory suggests that the traditional approach to portfolio analysis, selection and management may yield less than optimum results. Hence a more scientific approach is required, based on estimates of risk and return of the portfolio and the attitudes of the investor toward a risk-return trade-off stemming from the analysis of the individual Securities.
The document discusses portfolio management and performance evaluation. It provides details on:
1) Portfolio managers continuously monitor performance and revise investments accordingly based on their analysis. Good managers can correctly perceive market trends and make accurate risk and return estimates.
2) Performance is evaluated using the Sharpe and Treynor measures, which consider both risk and return. The Sharpe ratio measures return relative to risk using standard deviation, while the Treynor ratio uses beta to measure volatility.
3) Portfolio revision strategies include active revision, involving frequent adjustments, or passive revision with less frequent changes. The appropriate strategy depends on objectives, skills, resources and time available.
TO STUDY THE OPTIMIZATION OF PORTFOLIO RISK AND RETURNPriyansh Kesarwani
Vijay Shankar Singh presented on optimizing portfolio risk and return. The presentation covered introducing portfolio theory, constructing three portfolios of public, private and foreign companies, evaluating their risk-adjusted returns over three years using Sharpe's and Treynor's measures. Portfolio III of foreign collaboration securities performed best with the highest three-year return of 52.57% and outperforming on risk-adjusted measures. The presentation recommended investing in portfolio III for long-run gains due to its diversification and correlation with the market index.
This document contains information about 6 students including their names and roll numbers. It also discusses concepts related to portfolio management such as determining strengths, weaknesses, opportunities, and threats to maximize returns given a risk appetite. Some benefits of project portfolio management are also listed such as higher returns, lower risks, and increased throughput. Key questions and recommendations for diversification and project management are provided. Modern portfolio theory and the capital asset pricing model are explained.
This document contains information about 6 students including their names and roll numbers. It also discusses concepts related to portfolio management such as determining strengths, weaknesses, opportunities, and threats to maximize returns given a risk appetite. Some benefits of project portfolio management are also listed such as higher returns, lower risks, and increased throughput. Key questions and steps for diversification and project management are outlined. Modern portfolio theory and the capital asset pricing model are also summarized.
The document discusses Harry Markowitz's model for portfolio selection and William Sharpe's Single Index Model. Markowitz developed the Mean-Variance model in 1952 to select portfolios that reduce risk by diversifying across assets with low covariance. Sharpe later extended this with the Single Index Model, which assumes returns are explained by just one market factor. The document also outlines the assumptions, parameters, efficient frontier, and criticisms of both models.
Portfolio management involves creating an investment portfolio for individuals based on their income, budget, age, and risk tolerance. It aims to minimize risk and maximize returns through diversification across different asset classes like stocks, bonds, and mutual funds. A portfolio manager evaluates various investment options and recommends an optimal mix tailored to the client's needs and objectives. The expected return on the overall portfolio is a weighted average of the returns of the individual assets within it, with weights being the proportion of investment in each asset. This allows portfolio managers to adjust weights to achieve a target return level for clients.
The document provides an introduction to asset pricing models and capital market theory. It discusses the assumptions and development of the Capital Asset Pricing Model (CAPM). The key assumptions include all investors having homogeneous expectations, a risk-free rate of return, and market equilibrium. The CAPM allows investors to determine the required rate of return for any risky asset based on its relationship to the market portfolio. The market portfolio contains all risky assets and has only systematic risk that cannot be diversified away. The CAPM leads investors to hold either the risk-free asset or the optimal market portfolio.
This seminar report summarizes a presentation on portfolio management for an MBA program. The report was submitted by Mohammad Jilani and guided by Dr. Vinay Kumar Yadav. It defines portfolio management as making investment mix decisions to match objectives and balance risk and return for individuals and institutions. The report discusses objectives of portfolio management, the portfolio management process, reasons for portfolio management, and key elements like asset allocation, diversification, and rebalancing. It also covers the Capital Asset Pricing Model and provides betas for Yes Bank and Gail Ltd. The conclusion emphasizes that portfolio management is a leading investment strategy and lists important investing rules.
Portfolio construction involves blending different asset classes like stocks, bonds, and cash to obtain the optimal risk-return tradeoff. Diversification across many assets reduces unsystematic risk. The traditional approach selects securities to meet an investor's needs, while the Markowitz model constructs portfolios on the efficient frontier with maximum return for a given risk. The Capital Market Line shows the combination of risky and risk-free assets that is optimal for an investor given their risk tolerance.
Equlibrium, mutual funds and sharpe ratioLuis Pons
The document discusses concepts related to optimal portfolios, mutual funds, and risk-adjusted performance measures. It defines optimal portfolios, two-fund separation, measures of return including time-weighted and dollar-weighted returns. It also discusses benchmarks, risk-adjusted measures including the Sharpe Ratio, Treynor Ratio, and Jensen's Alpha. It compares the Sharpe and Treynor measures and critiques risk-adjusted performance measures.
what do you want to do is you can do, if only you are willing to do....right? business it not only for our own selves, but also for everybody good also.
5_Saurabh-Agarwal-Sarita v.pdf a study on portfolio management & financial se...vaghasiyadixa1
This research report about portfolio management & financial sector including all the requirements of making research report as per University required.
This document discusses various ways to align text and numbers within cells in Microsoft Excel, including using the ribbon, keyboard shortcuts, and the Format Cells dialog box. It provides details on how to horizontally and vertically align text to the top, middle, bottom, left, right, or center of a cell. It also describes how to change text orientation, indentation, justification, and distribution. The Format Cells dialog box allows additional alignment options like filling a cell with text, centering text across selections, and changing text direction from left-to-right to right-to-left.
This document provides an overview of the key features and functions of Microsoft Word 2013. It describes the main sections of the Word interface, including the ribbon, tabs, groups, commands, rulers, zoom controls, views, and backstage view. It also explains how to get started with Word 2013 and open, save, and close documents.
This document provides an overview of the Microsoft Word application. It covers topics such as creating and opening documents, mouse and keyboard operations, navigating the Word interface including the ribbon and quick access toolbar, and formatting text and paragraphs. The document also discusses templates in Word and how they allow preconfigured settings to be applied to new documents for consistency.
1) Business income is computed by adjusting the net profit as shown in the profit and loss account by adding back inadmissible expenses and deducting allowable expenses not accounted in the profit and loss account and income not taxable under the head 'profits and gains from business or profession'.
2) Several examples are given showing the computation of business income by making the prescribed additions and deductions like salary, interest, donations, depreciation, income from other heads etc.
3) House property income is also computed by deducting standard deduction and interest on home loan from annual rent received in case of let out and self-occupied properties respectively.
Forms of organisation non-corporate enterprisespremarhea
This document summarizes different forms of business organization in India. It discusses sole proprietorships, partnership firms, and joint Hindu family firms. Some key points covered are:
- Sole proprietorships are owned and managed by one person who has unlimited liability. They are easy to form but have limited capital and managerial ability.
- Partnership firms require an agreement between partners to share profits and have features like implied agency and unlimited liability of partners. They allow for larger capital but can lack stability.
- Joint Hindu family firms are formed by operation of law between members of a Hindu undivided family. They provide continuity but can have restricted membership and lack of incentive or stability.
The document provides examples of computing taxable professional income for different professionals - a doctor, chartered accountant, lawyer, and medical practitioner. It shows how to calculate professional receipts and allowable professional expenses to determine the net professional gain or income based on the accounting system and other details provided. The computations deduct expenses like rent, salary, depreciation allowances, and other costs from the total receipts to arrive at the taxable professional income.
The document provides examples of computing professional income for different professionals including doctors, chartered accountants, lawyers, and medical practitioners. It shows how to calculate professional receipts and deduct allowable professional expenses to determine the taxable professional gain. Expenses include rent, salaries, depreciation, cost of medicines/supplies, and more. The net professional income is calculated by deducting total expenses from total receipts.
The document defines business and profession and provides examples of computation of business income under various scenarios. It discusses adding inadmissible expenses and deducting allowable expenses not debited in arriving at business income. It also provides an example of computation of house property income where there is a let out property and self-occupied property with a loss.
Forms of organisation - non-corporate enterprisespremarhea
This document summarizes different forms of business organization in India. It discusses sole proprietorships, partnership firms, and joint Hindu family firms. Some key points covered are:
- Sole proprietorships are owned and controlled by one person who has unlimited liability. They are easy to form but have limited capital and managerial ability.
- Partnership firms require an agreement between partners to share profits and have implied agency and unlimited liability unless otherwise agreed. They allow for larger capital but can lack stability.
- Joint Hindu family firms are formed by operation of Hindu law between co-parceners of a family. They provide continuity but can lack incentive and stability if mismanaged by the head of the family.
This document provides an overview of the nature of business. It defines business as an organization that obtains resources like funds, labor, and equipment to provide goods or services to customers in exchange for money. The document outlines key characteristics of business like the sale of goods/services, continuity, and profit motive. It also discusses the components/systems of business including personnel, finance, marketing, and production functions. The primary objective of modern business is stated as making a profit, with secondary objectives like creating customers, innovating new products, providing value, employment, and fair returns. Principles of organization, essentials of success, qualities of successful businessmen, and business ethics are also summarized.
1. Mr. Prashant went to Germany for a diploma course from August 2020 to February 2021. As he was out of India for more than 182 days, his residential status for FY 2020-2021 is non-resident.
2. An individual was in India for 185 days in FY 2020-2021, 15 days in 2019-2020, and 26 days in 2018-2019. As the stay in India was less than 182 days in the last 2 years, the residential status for AY 2021-2022 is non-resident.
3. Mr. Rohan, a foreign national, has been in India for more than 120 days in 5 of the last 6 years. Therefore, his residential
1. The document discusses the residential status of individuals, HUFs, AOPs, and firms under the Indian Income Tax Act. It provides examples and solutions for determining residential status based on the number of days spent in India and the location from which business affairs are controlled.
2. Residential status is determined based on satisfying conditions for being a resident under section 6(1) or by being ordinarily resident as defined in section 6(6).
3. Location of control and management is the determining factor for residential status of HUFs, AOPs and firms, regardless of the residential status of members.
The document discusses the residential status rules for individuals, HUFs, firms, AOPs, and companies in India for income tax purposes. For individuals, residential status depends on the number of days spent in India in the relevant fiscal year or previous years. A HUF's residential status is based on the residential status of the Karta. For firms, AOPs, and other persons, residential status is determined by where their control and management is located. All Indian companies are considered residents, while foreign companies may be resident or non-resident depending on where their control and management is located.
- The document discusses the tax treatment of various incomes for individuals with resident, not ordinary resident, and non-resident tax statuses in India. It provides examples of incomes from different sources and whether they would be taxable under each residential status.
- Tables are presented showing the taxable income for three individuals - Mr. X, Mr. Devilal, and Mr. Deepak - under each residential status. The types of incomes included business income, agriculture, salary, house property, capital gains, and more.
- Whether an income is taxable depends on factors like where it was earned, where it was received, and whether a business or property is controlled from India. In general, more income sources are taxable
The document discusses the scope of total income based on a taxpayer's residential status in India as a resident and ordinarily resident, resident but not ordinarily resident, or non-resident. It outlines the different types of income that are taxable or not taxable in India for each residential status, based on factors such as where the income was earned and received, and whether it relates to a business or profession in or outside of India. The three main considerations for determining the scope of total income and tax incidence are the taxpayer's residential status, place of accrual or receipt of income, and the time at which income had accrued or was received.
This document provides an overview of basic income tax concepts in India. It defines key terms like assessee, previous year, assessment year, and heads of income. It explains the different types of taxes in India including direct and indirect taxes. It also outlines the criteria for determining an individual's residential status for income tax purposes as normal resident, resident but not ordinarily resident, or non-resident. Specific examples are provided to illustrate how to determine an individual's residential status based on their period of stay in India.
This document provides an introduction to income tax in India. It discusses why taxes are paid, what the government does with tax revenue such as healthcare, education, national defense, and welfare programs. It defines key aspects of Indian taxation including that it is compulsory, imposed by the government, and not a voluntary donation. The major sources of tax revenue are income, wealth, sales, and expenditures related to service, production, imports and exports. The constitution outlines which levels of government can tax which areas. The history of income tax in India is also briefly discussed.
The document discusses customs duty in India. It provides definitions and explanations of key terms:
1) Customs duty refers to taxes imposed on goods transported across international borders. Duties are determined based on factors like where goods were acquired or manufactured.
2) There are different types of customs duties including basic customs duty, additional customs duty, protective duty, and anti-dumping duty. Drawback allows refunds of import duties paid on goods that are later exported.
3) Sections 74-76 of the Customs Act cover duty drawback, allowing refunds of duties paid on imported goods that are re-exported, and on imported materials used to manufacture exported goods.
The document discusses various methods of financing for businesses. It describes capital structure as the combination of debt and equity used to finance a company's assets. It then discusses three main methods of financing - equity financing, debt financing, and lease financing. Equity financing involves selling ownership stakes, debt financing involves taking loans that must be repaid with interest, and lease financing allows using assets without ownership through rental agreements.
Capital budgeting involves planning expenditures for long-term assets that provide returns over several years. It is an important process that requires evaluating projects carefully due to their large size, long-term implications, and irreversible nature. Key aspects of capital budgeting include identifying and evaluating investment proposals, determining which provide the highest expected rates of return, and preparing a capital expenditure budget. Various techniques can be used to evaluate projects, including payback period, accounting rate of return, net present value, internal rate of return, and risk-adjusted methods that account for uncertainty in projected cash flows.
it describes the bony anatomy including the femoral head , acetabulum, labrum . also discusses the capsule , ligaments . muscle that act on the hip joint and the range of motion are outlined. factors affecting hip joint stability and weight transmission through the joint are summarized.
How to Fix the Import Error in the Odoo 17Celine George
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This presentation was provided by Steph Pollock of The American Psychological Association’s Journals Program, and Damita Snow, of The American Society of Civil Engineers (ASCE), for the initial session of NISO's 2024 Training Series "DEIA in the Scholarly Landscape." Session One: 'Setting Expectations: a DEIA Primer,' was held June 6, 2024.
8. Dr. NGPASC
COIMBATORE | INDIA
Steps in traditional approach
8
Analysis of constraints
Determination of objectives
Selection of portfolio
Assessment of risk and
return
Evaluation/Diversification
9. Dr. NGPASC
COIMBATORE | INDIA
1. Analysis of Constraints
Income Needs
Liquidity
Safety of the Principal
Time Horizon
Tax Consideration
Temperament
9
10. 2. Determination of objectives
Dr. NGPASC
COIMBATORE | INDIA
Current Income
Growth in Income
Capital Appreciation
Preservation of capital
10
11. 3. Selection of Portfolio
Dr. NGPASC
COIMBATORE | INDIA
Objectives
and asset
mix
Growth of
income
and asset
mix
Capital
appreciation
and asset
mix
Safety of
Principal
and asset
mix
11
12. 4. Risk and Return Analysis
Dr. NGPASC
COIMBATORE | INDIA
High Risk
Low Risk
Higher Return
Lower Return
12
14. Assumptions
Dr. NGPASC
COIMBATORE | INDIA
The market is inefficient.
The fundamentalists can take advantage of market
inefficiency situation.
The fundamentalists can earn quick profits.
The fundamentalists will expect the growth of a particular
company for predicting the future trend of the share prices.
14
17. Assumptions
Dr. NGPASC
COIMBATORE | INDIA
It is based on assumption of free and perfect flow
of information.
It believes that markets are perfect and absorbs all
information quickly.
The riskiness of a financial asset in portfolio is to be
seen in the context of market related risk or portfolio
risk, but not in isolation.
17
19. Difference Between Traditional and Modern Portfolio Theory
Dr. NGPASC
COIMBATORE | INDIA
Traditional
Theory
• It deals with the evaluation of
return and risk conditions in
each security.
• It is based on measurement of
standard deviation of particular
scrip.
• It assumes that market is
inefficient.
• It gives more importance to
standard deviation
Modern Theory
• It deals with the maximization of
returns through a combination of
different types of financial
assets.
• It is based on mainly
diversification process.
• It assumes that market is perfect
and all information is known to
public.
• It gives more importance to
Beta.
19
20. Managing the portfolio
Dr. NGPASC
COIMBATORE | INDIA
Managing the
portfolio
Passive
Approach
Active
Approach
20
22. Modern Portfolio Theories
Dr. NGPASC
COIMBATORE | INDIA
Markowitz
Theory of
Portfolio
Management.
Sharpe’s
Theory of
Portfolio
Management.
Capital
Asset
Pricing
Model.
Modern
Portfolio
Theories
22
24. Harry Markowitz is considered the father of modern
portfolio theory, mainly because he is the first person
who gave a mathematical
diversification.
model for portfolio
optimization and
Modern Portfolio theory is a theory of finance that
attempts to maximize portfolio expected returns for a
given amount of risk, or minimize the risk for a given
level of expected return
Markowitz Theory advise investors to invest in
multiple securities rather than pulling all eggs in one
basket.
Dr. NGPASC
COIMBATORE | INDIA
MARKOWITZ THEORY
27. Risk of a portfolio is based on the variability of returns
from the said portfolio.
An investor is risk averse.
An investor prefers to increase consumption.
Analysis is based on single period model of investment.
An investor either maximizes his portfolio return for a
given level of risk or maximizes his return for the
minimum risk.
An investor is rational in
nature.
Dr. NGPASC
COIMBATORE | INDIA
ASSUMPTION OF MARKOWITZ THEORY
33. CAPM is used to determine a theoretically appropriate
require rate of return of an asset, if that asset is to be
added to an already well diversified portfolio, given
that assets non-diversifiable risk.
Model starts with the idea that individual investment
contains two types of risk.
Those are as follows:
Dr. NGPASC
COIMBATORE | INDIA
CAPITAL ASSET PRICING MODEL
34. Systematic risk:
This are market risk that cannot be diversified away.
Interest rate, recession & wars are example of
systematic risk.
Un-systematic risk:
Also known as specific risk. This risk is specific to
individual
investors
portfolio.
stock and can be diversified away as the
his
the
increases the number of stocks in
In more technical terms, it represent
component of a stocks return i.e. not correlated with
general market moves.
Dr. NGPASC
COIMBATORE | INDIA
35. Dr. NGPASC
COIMBATORE | INDIA
Assumption of CAPM
Risk-return assessments measured in terms of expected returns
and standard deviation ofreturn.
It cannot affect prices.
Infinitely divisible unit.
There are no transaction costs.
Investors share homogeneity of expectations.
The investor can sell short any amount of any shares.
The investor can lend or borrow any amount of fund desired at a rate of interest equal to
the rate of risk less securities.
There are no personal income taxes.
35
36. Dr. NGPASC
COIMBATORE | INDIA
Lending and Borrowing
𝑅𝑝 = 𝑅𝑓 𝑋𝑓+ 𝑅 𝑚(1 − 𝑋𝑓)
R p= portfolio return
X p= the proportion of funds invested in risk free assets
1-Xp= the proportion of funds invested in risky assets.
R f =risk free rate of return
R m= return on risky assets.
This formula can be used to calculate the expected returns for different situations, like
mixing riskless assets with risky assets, investing only in the risky assets and maximizing
the borrowings with risky assets.
36
37. If we assume the expected market risk premium to be 8% and the risk of return to be 7%, we
can calculate expected return for A,B,C, and D securities.
E(Ri)= Rf+βi (E(Rm)-Rf)
If beta is =1, E(R)= 7+1(8) =15%
Security A, Beta = 1.10
E(R)=7+1.10(8) =15.8
Security B, Beta = 1.20,
E(R)= 7+1.20(8) =16.8=16.6
Security C, Beta= 0.7,
E(R)= 7+0.7(8) =12.6
Dr. NGPASC
COIMBATORE | INDIA
Security Market Line
37
40. SHARPE SINGLE INDEX MODEL
Dr. NGPASC
COIMBATORE | INDIA
• This model was developed by William Sharpe. He
simplified the method of diversification of portfolios.
Sharpe published a model simplifying the
mathematical calculations done by the Markowitz
model.
• According to Sharpe’s model, the theory estimate, the
expected return and variance of indices which may be
one or more and are related to economic activity.
• This theory has come to be known as market model.
40
41. Assumptions
Dr. NGPASC
COIMBATORE | INDIA
The securities returns are related to
each other.
The expected return and variance of
indices are the same.
The return on individual securities is
determined by unpredictable factors.
41
42. Single index model:
Ri= αi+βiRm+ei
Where Ri= expected return on security i αi=intercept of the
straight line or alpha co-efficient
βi = slope of straight line or beta co-efficient Rm=the rate of
return on market index
ei=error term
Dr. NGPASC
COIMBATORE | INDIA
Single index model
42
43. The single index model is based on the assumption that stocks vary
together because of the common movement in the stock market and there
are no effect beyond the market. The variance of the security has two
components systematic risk and unsystematic risk.
Total risk= systematic risk + unsystematic risk
Total risk= β 2 𝜎2 +e2
Systematic risk= β2 * variance of market index
Unsystematic risk = total variance – systematic risk.
e2 = 𝜎2 − 𝛽2 𝜎2
Dr. NGPASC
COIMBATORE | INDIA
Single index model
𝑖 𝑖 𝑚
i m i
i
i
43
45. A portfolio is a mix of securities selected from a vast
universe of securities.
Two variables determine the composition of a portfolio.
Portfolio revision involves changing the existing mix of
securities.
Portfolio revision thus leads to purchase and sales of
securities.
Maximizing the return for a given level of risk or
minimizing the risk for a given level of return.
Dr. NGPASC
COIMBATORE | INDIA
Portfolio Revision
45
46. • Portfolio management would be an incomplete
exercise without a periodic review.
• The portfolio, which is once selected, has to
be continuously reviewed over a period of
time and if necessary revised depending on the
objectives of investor.
• Thus, portfolio revision means changing the
asset allocation of a portfolio.
Dr. NGPASC
COIMBATORE | INDIA
Portfolio Revision
47. • However, the frequency of review depends upon the
size of the portfolio, the sum involved, the kind
of securities held and the time available to the
investor.
The review
examination
• should include a careful
of investment objectives, targets
obtaine
d
for
portfolio performance, actual results
and
The
and
analysis of reason for variations.
followed by suitable• review should be
timely action.
Dr. NGPASC
COIMBATORE | INDIA
48. Dr. NGPASC
COIMBATORE | INDIA
Need for Portfolio Revision
48
§ Availability of additional
funds for investment
§ Change in risk tolerance
§ Change in the investment
goal
§ Need to liquidate a part of
the portfolio to provide funds
for some alternative use
49. Investors buy stock according to their objectives and
return-risk framework.
These fluctuations may be related to economic
activity or due to other factors.
Ideally investors should buy when prices are low
and sell when prices rise to levels higher than their
normal fluctuations.
The investor should decide how often the portfolio
should be revised.
If revision occurs to often, transaction and analysis
costs may be high.
Dr. NGPASC
COIMBATORE | INDIA
Techniques of Portfolio Revision
50. Dr. NGPASC
COIMBATORE | INDIA
Constraints in portfolio revision
50
Constraints
Transaction
Cost
Intrinsic
difficulty
Taxes
Statutory
Stipulations
51. -2 ± ..r:;-;;
2
-2 ± Jo -
22
- -2
2
Portfolio Revision Strategies
Dr. NGPASC
COIMBATORE | INDIA
52. •
• It is a process of holding a well diversified
portfolio for long term with the buy and hold
approach.
It also refers to the investor’s attempt to
construct a portfolio that resembles the overall
market returns.
For e.g.- If Reliance Industry’s stock
constitutes 5% of the index, the fund also
invests of 5% of its money in Reliance
Industry Stock.
•
•
Dr. NGPASC
COIMBATORE | INDIA
Passive Management
53. •
• It is holding securities based on the forecast
about the future.
The portfolio managers vary their cash
position or beta of the equity portion of the
portfolio based on the market forecast.
For e.g.- IT or FMCG industry stocks may be
given more weights than their respective
weights in the NSE-50.
•
•
Dr. NGPASC
COIMBATORE | INDIA
Active Management
54. The formula plans provide the basic rules and
regulations for the purchase & sale of securities.
These predetermined rules call for specified
actions when there are changes in the securities
market.
In this, the investor divide his investment funds
into 2 portfolios i.e. one aggressive(portfolio
consists of equity shares)& other conservative or
defensive ( bonds & debentures)
•
•
•
Dr. NGPASC
COIMBATORE | INDIA
Formula Plans
55. 1. Formula plans require the investor to divide
his investment funds in two portfolios i.e.
aggressive & Conservative (defensive)
2. The volatility of aggressive portfolio must be
greater than that of conservative portfolio, the
larger the difference between the two, the greater
the profits the formula plan can yield.
3. The conservative (defensive) portfolio must
include high- grade bonds having a high degree of
safety and stability of the returns.
Dr. NGPASC
COIMBATORE | INDIA
Basic Rules of Formula Revision
56. 4. The conservative portfolio tends to decline during
periods of prosperity, owing to falling interest rates.
While the stock prices are rising, therefore, the
aggressive portfolio also rises.
5. The basic premise of formula plans is that stock
bond prices of the portfolios move in opposite
and
direction. If they move in same direction then this
phenomenon certainly impairs profitability of the
formula plans.
6. The formula plans do not deal with the selection of
stocks or bonds
Dr. NGPASC
COIMBATORE | INDIA
57. Dr. NGPASC
COIMBATORE | INDIA
Assumptions of formula plan
1.Fixed income securities and common stocks.
2.If the market moves higher, the proportion of
stocks in the portfolio may either decline or
remain constant.
3.There is a significant change in the price.
4.Strictly follow the formula plan once he chooses
it.
5.The investor should select good stocks that move
along with the market.
57
58. Dr. NGPASC
COIMBATORE | INDIA
Advantages of formula plan
1.Basic rules and regulations for the purchase and sale of
securities are provided.
2.The rules and regulations are rigid and help to overcome
human emotion.
3.The investor can earn higher profits by adopting the plan.
4.A course of action is formulated according to the investor’s
objective.
5.It controls the buying and selling of securities by the investor.
6.It is useful for taking decision on the timing of investments.
58
59. Dr. NGPASC
COIMBATORE | INDIA
Disadvantages of formula plan
1.The formula plan does not help the selection of the
security.
2.It is strict and not flexible with the inherent problem of
adjustment.
3.The formula plan should be applied for long periods,
otherwise the transaction cost may be high.
4.Even if the investors adopts the formula plan,
he needs forecasting. Market forecasting helps him to
identify the best stocks.
59
60. Different types of Formula Plans are-
•
•
•
•
Rupee Cost Averaging
Constant Rupee Plan
Constant Ratio Plan
Variable Ratio Plan
Dr. NGPASC
COIMBATORE | INDIA
Types of formula plans