Portfolio management is the centralized management of one or more portfolios, which includes identifying, prioritizing, authorizing, managing, and controlling projects, programs and other related work to achieve specific strategic business objectives.

1. Portfolio management:
An overview

2. The portfolio perspective
 Evaluating investment based on their contribution to risk and return of an
investor’s overall portfolio( not in isolation)
 Adding a risky asset can actually reduce portfolio risk
 Diversification ration =
𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑟𝑒𝑡𝑢𝑟𝑛𝑠
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑑.𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛𝑠 𝑜𝑛 𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑎𝑠𝑠𝑒𝑡𝑠
Portfolio Management: An Overview

3. Markowitz model(1950):
 A framework for measuring the risk reduction benefits of diversification
 Conclusion : unless the returns of the risky assets are perfectly positively correlated, risk is
reduced by diversifying across assets.
Portfolio Management: An Overview

4. Modern portfolio theory (MPT):
 MPT results in equilibrium expected returns for securities and portfolios that
are a linear function of each security’s or portfolios market risk (the risk that
can not be reduced by diversification).
Portfolio Management: An Overview

5. Types of investors and distinctive characteristics
 Individual investors :Save and invests for variety of reasons
 Endowment: is a fund that is dedicated to providing financial support for a specific reason
 Insurance companies: invest customer premiums with the objective of funding customer claims
as they occur.
 Investment companies : managed the pooled funds of many investors.
 Sovereign wealth funds: refer to pools of assets owned by a government
Portfolio Management: An Overview

6. Characteristics of Different Types of Investors
Investor Risk Tolerance Investment
Horizon
Liquidity Needs Income Needs
Individuals Depends on
individuals
Depends on
individual
Depends on
individual
Depends on
individuals
Banks Low Short High Pay interest
Endowments High Long Low Spending level
Insurance Low Long-life
Short-P&C
High Depends on fund
Mutual funds Depends on fund Depends on fund High Depends on fund
Defined benefit
pensions
High Long Low Depends on age
Portfolio Management: An Overview

7. Portfolio management process
Step1: Planning
 Understanding client needs and constraints
 Write an investment policy statement (IPS )
 Develop an investment strategy consistent with the IPS
 Specify performance benchmark
Step 2: Execution
 Analyze risk and return characteristics of asset classes
 Analyze market conditions to identify attractive securities within asset classes
 Portfolio constructions : target/strategic asset allocation individual securities weightings
Step 3 : feedback
 Monitor and update investor’s needs and market conditions
 Rebalance portfolio as needs
 Measure and report performance
Portfolio Management: An Overview

8. Pooled investments
1. Open-end mutual funds
 Purchase or redeem shares at NAV(net asset value)
 Number of shares changes with purchases and redemptions
 Fee(%) for ongoing management
 Loan funds: up-front charges . Redemption charges, or both
 No-load funds :neither type of charges
2. Closed-end mutual funds
 Fixed number of shares
 Issued as an IPO
 Trade like shares of stock , commission and spread, and margin and shorting
 Fee(%) for ongoing management
 Market prices can (do) differ from NAV
 do not need to hold cash or sell shares to need redemptions as open end funds do
Portfolio Management: An Overview

9. Pooled investments :
Types of mutual funds by investment objective
 Money market funds :investment on short debt securities
 Bond funds :investment on fixed income securities, high yield ,
global , domestic, government, corporate, long-term, short-
term, tax-exempt, etc.
 Stock funds :investment on a great variety of stocks
 Stock funds
Actively managed funds
Index funds
 Balanced funds
Portfolio Management: An Overview

10. pooled investments
3. Exchange- traded funds (ETFs):similar to closed-end funds
 Typically index funds
 Trade like shares of closed end funds
 Can be shorted or margined
 Dividends typically paid out
 In-kind purchase and redemptions keep market price close to NAV
 May have tax advantage over open–end index funds
4. separately managed account
 owned by a single investor
 Also called wrap accounts
 Minimum investment 100$-500k
Portfolio Management: An Overview

11. Pooled investments
5. Buyout funds
 Buy al public shares and take company private
 Heavy use of debt ,high leverage
 Hope to restructure, improve cash flow, and resell as an IPO at a profit
6. Venture capital funds
 Provide start-up/early-stage financing
 Expect failures but with some big success
 Active in management of portfolio firms
Portfolio Management: An Overview

12. Pooled investments
7. Hedge funds
 Not registered of offered to the public
 Small number of accredited investors
 high minimum investment, high leverage, derivatives
 Many strategies are used(e.g., long/ short, global macro, event driven)
Portfolio Management: An Overview