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portfolio management PPT

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its a slideshow on basic understanding and examples of portfolio management(finance)

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portfolio management PPT

  1. 1. TOPIC- PORTFOLIO MANAGEMENT MADE BY- SHRUTI (THANE CENTRE). REGISTERATION NUMBER- S151117400328 GUIDED BY- MR. VENKAT RAO YAMANA CF&MA ASSIGNMENT
  2. 2. • Refers to a collection of investment tools such as stocks, mutual funds, bonds, cash etc. depending on the investor’s income, budget & convenient time frame. MEANING- TYPES- MARKET PORTFOLIO- A theoretical bundle of investments that includes every type of asset available in the world financial market, with each asset weighted in proportion to its total presence in the market. ZERO INVESTMENT PORTFOLIO- A group of investments which when combined, create zero net value. Such portfolios can be achieved by simultaneously purchasing securities & selling equivalent securities.
  3. 3. PORTFOLIO MANAGEMENT- • The art of selecting the right investment policy for the individuals in terms of minimum risk & maximum return is called as portfolio management. MEANING – NEEDS- 1) Reduces the risk without affecting returns. 2) Helps investors in rational decision making. 3) Helps to select best investment portfolio by- a) Identifying the asset class that the investor should invest in. b) Deciding the proportion of each asset class in the entire portfolio. c) Deciding the proportion of each security in the asset classes.
  4. 4. Objectives of portfolio management- Safety of principal amount- Investment of the disposable income Growth of capital Marketability Liquidity Well- diversified portfolio Minimal tax burden Portfolio management not only involves keeping the investment intact but also contributes towards the growth of its purchasing power over the period. The objective of some investors of portfolio management is that only their current wealth is invested in the securities and also want a channel where their future income will be invested. Portfolio management guarantees growth of capital by reinvesting growth securities. A portfolio shall appreciate in value in order to safeguard the investor from any erosion in purchasing power. A portfolio consists of such investment which can be marketed & traded. Its always recommended to invest only in those shares which are listed on major stock exchanges. The portfolio should always ensure that there are enough funds available at short notice to take care of the investor’s liquidity requirements. Portfolio management is purposely designed to reduce the risk of loss of capital or income by investing in different types of securities. There is no such thing as zero risk investment. Portfolio management is planned in such a way to increase the effective yield an investor gets from his surplus invested funds. By minimizing tax burden, yield can be effectively improved.
  5. 5. PHASES OF PORTFOLIO MANAGEMENT- Security analysis Portfolio analysis Portfolio selection Portfolio revision Portfolio evaluation
  6. 6. 1. SECURITY ANALYSIS-  This is the first phase of portfolio management  A detailed evaluation and analysis of the various types of securities, such as equity shares, preference shares, debentures, global depository receipts, and euro currency bonds, is performed.  The risk-return characteristics of each security chosen by an investor in a portfolio are examined. 2. PORTFOLIO ANALYSIS-  Each security identified as part of a portfolio is analyzed for risks and returns, separately and as part of a group.  A number of portfolios are reviewed to determine the best possible option.  The risks and returns of selected securities are assessed in :  Various permutations and combinations.  With varying numbers and proportions of each security.
  7. 7. 3. PORTFOLIO SELECTION-  Securities for building each portfolio are selected with the goal of providing greater returns at the given level of risk.  Portfolio selection helps in selecting one or more optimal portfolios from a set of efficient portfolios. 4. PORTFOLIO REVISION-  Continuous monitoring of the portfolio is required so that it does not deviate from the optimal combination.  Portfolio revision may be required because of changes in the global economic and financial markets, which might cause:  Some securities to become less attractive.  New securities with higher returns and low risk to emerge.
  8. 8. 5. PORTFOLIO REVISION-  This is the last phase in portfolio management.  Portfolio evaluation is a process that involves assessing the performance of the portfolio in terms of :  RISK – The risk borne by the portfolio over a period is assessed.  RETURNS- The actual return earned by the portfolio is measured quantitatively.
  9. 9. QUESTION-  Which one of the following options is a phase in portfolio management? o A. marketability evaluation o B. security analysis o C. liquidity assessment o D. financial analysis Correct answer- B. Security analysis
  10. 10. ELEMENTS OF RISK SYSTEMATIC RISK INTEREST RATE RISK MARKET RISK PURCHASING POWER RISK UNSYSTEMATIC RISK BUSINESS RISK FINANCIAL RISK
  11. 11. SYSTEMATIC RISK- Systematic risk occurs because of the impact of economic, social, and political changes on the stock market. Interest rate risk- Occurs mainly in the debt security market because debt securities carry a fixed interest rate. Market risk- Occurs because of a rise and fall in the prices of shares in the market. Purchasing power risk- Occurs because of inflation which adversely affects the purchasing power of investors. EXAMPLES-  Changes in the interest rate policy by the government.  Declaration of restrictive credit policy by RBI.  Resorting to massive deficit financing by the government.  Relaxation of foreign exchange controls by the government.
  12. 12. UNSYSTEMATIC RISK- It is a result of specific microeconomic factors that impact returns from securities. It occurs in addition to systematic risk. Business risk- Occurs during the day- to-day activities of a business because of changes in the business environment, technology, and other similar aspects. Financial risk- Occurs as a result of changes in the capital structure of a company. EXAMPLES-  Declaration of strike by company workers.  Entry of a formidable competitor in the market.  Inability of a company to obtain adequate quantity of raw material.  Losing a big contract in a bid.
  13. 13. QUESTION-  Which of the following options is a type of unsystematic risk? o A. Interest risk rate o B. Market risk o C. Purchasing power risk o D. Business risk CORRECT ANSWER- D. Business risk
  14. 14. PORTFOLIO RETURN  MEANING-  It is the monetary return experienced by a holder of a portfolio.  It can be calculated on a daily basis to serve as a method of assessing a particular investment strategy.  Main components of portfolio return are-  Dividends  Capital appreciation R = 𝐷𝑡+(𝑃𝑡 − 𝑃𝑡−1) 𝑃𝑡−1 Where, R = return 𝐷𝑡 = income received 𝑃𝑡 − 𝑃𝑡−1 = change in market price 𝑃𝑡−1 = market price in the beginning/ initial market price  FORMULA-
  15. 15.  EXAMPLE- One year ago, the stock price for stock A was ₹10 per share. The stock is currently trading at ₹9.50 per share and shareholders just received a ₹1 dividend. What return was earned over the past year?  SOLUTION- R = 𝐷𝑡+( 𝑃𝑡 − 𝑃𝑡−1) 𝑃𝑡−1 R = ₹1+(₹9.50 − ₹10) ₹10 R = 0.05 or 5%
  16. 16. EXPECTED RATE OF RETURN  MEANING-  The amount one would anticipate receiving on an investment that has various known or expected rates of return.  It is usually based on historical data and is not guaranteed.  It is a tool to determine whether or not an investment has a positive or negative average net outcome.  The video below explains how to calculate expected rate of return-
  17. 17.  EXAMPLE-
  18. 18. QUESTION-  Which of the following is one of the main components of portfolio return? o A. capital appreciation o B. Market analysis o C. business risk o D. portfolio evaluation CORRECT ANSWER A. Capital appreciation
  19. 19. PORTFOLIO RETURN: TWO ASSET CASE  The return of a portfolio is equal to the weighted average of the returns of individual assets(or securities) in the portfolio with weights being equal to the proportion of investment value in each asset. EXAMPLE- Mr. Mark has an opportunity of investing his wealth in either asset X or asset Y. The possible outcomes of two assets in different states of economy are given in the following table- What will be the expected rate of return for Mr. Mark? State of economy Probability Return(%) X Y A 0.10 -8 14 B 0.20 10 -4 C 0.40 8 6 D 0.20 5 15 E 0.10 -4 20
  20. 20. ANSWER-  Formula to calculate the expected rate of return of an individual asset is- Expected rate of return(E𝑅 𝑎𝑠𝑠𝑒𝑡) = (𝑅1 × 𝑃1) + (𝑅2 × 𝑃2) + (𝑅3× 𝑃3) +…… +(𝑅 𝑛×𝑃𝑛) Therefore, the expected rate of return for asset X will be- E(𝑅 𝑋) = (-8×0.10) + (10×0.20) + (8×0.40) + (5×0.20) + (-4×0.10) = 5% Similarly, The expected rate of return for asset Y will be- E(𝑅 𝑌) = (14×0.10) + (-4×0.20) + (6×0.40) + (15×0.20) + (20×0.10) = 8% Therefore, Mr. Mark should invest in asset Y as it gives higher returns. Now, suppose Mr. Mark decides to invest 50% of his wealth in asset X and 50% in asset Y. what would be the expected rate of return on a portfolio consisting of both X and Y?
  21. 21. This can be done in two steps- Calculate the combined outcome under each state of economic condition. Multiply each combined outcome by its probability. In the case of two-asset portfolio, the expected rate of return is given by the following formula- Expected return on portfolio = (weight of security X × expected return on security X) + (weight of security Y × expected return on security Y) State of economy (1) Probability (2) Combined returns(%) X(50%) & Y(50%) (3) Expected return(%) (4) = (2) × (3) A 0.10 (-8×0.50) + (14×0.50)= 13.0 0.10×3.0 = 0.30 B 0.20 (10×0.50) + (-4×0.50)= 13.0 0.20×3.0 = 0.60 C 0.40 (8×0.50) + (6×0.50)= 17.0 0.40×7.0 = 2.80 D 0.20 (5×0.50) + (15×0.50)= 10.0 0.20×10.0 = 2.0 E 0.10 (-4×0.50) + (20×0.50)= 18.0 0.10×8.0 = 0.80 Expected return on portfolio 6.50
  22. 22. ASSET ALLOCATION STRATEGY Establishing an appropriate asset mix is a dynamic process, and it plays a key role in determining your portfolio’s overall risk and return. As such, your portfolio’s asset mix should reflect your goals at any point in time. Following are the different strategies of asset allocation- Strategic asset allocation- the returns, risk and co-variances associated with a portfolio are assessed and adjusted periodically. Integrated asset allocation- capital market conditions and the investor’s objectives and their limitations are evaluated and analyzed. Tactical asset allocation- the investor’s risk tolerance factor is taken as a constant, and assets are allocated with respect to the expectations from the capital market. Insured asset allocation- The risk exposure is adjusted for changing portfolio values. The higher the value, the higher the risk-taking capacity. Constant weighting asset allocation- There are no hard and fast rules for timing portfolio rebalancing under strategic or constant weighting asset allocation. Common rule of thumb is that the portfolio should be rebalanced to its original mix when any given asset class moves more than 5% from its original value. Dynamic asset allocation- With dynamic asset allocation, one can constantly adjust the mix of assets as markets rise and fall, and as the economy strengthens and weakens.
  23. 23. CONCLUSION  Asset allocation can be an active process to varying degree or strictly passive in nature.  Whether an investor chooses a precise asset allocation strategy or a combination of different strategies depends on that investor’s goals, age, market expectations and risk tolerance.  Allocation approaches that involve anticipating & reacting to market movements require a great deal of expertise & talent in using particular tools fro timing these movements.  Some would say that accurately timing the market is next to impossible, so make sure your strategy isn’t too vulnerable to unforeseeable errors.
  24. 24. THANK YOU

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