Introduction to Portfolio Management

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  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Derivatives Markets Copyright@2007 Orbitra LLC
  • Introduction to Portfolio Management

    1. 1. Introduction to Portfolio Management Khader Shaik
    2. 2. Portfolio <ul><li>Financial Portfolio </li></ul><ul><ul><li>A collection of investments held as a group </li></ul></ul><ul><ul><li>Professional Institutions </li></ul></ul><ul><ul><li>Asset Management Corporations </li></ul></ul><ul><ul><li>Individual Investors etc </li></ul></ul><ul><li>Key objective </li></ul><ul><ul><li>Maximize the returns from the investments for given level of risk </li></ul></ul><ul><li>Portfolio Management Involves </li></ul><ul><ul><li>Investing and divesting different investments </li></ul></ul><ul><ul><li>Risk management </li></ul></ul><ul><ul><li>Monitoring and analyzing returns </li></ul></ul>
    3. 3. Portfolio Valuation <ul><li>Performance is measured using </li></ul><ul><ul><li>Expected Return </li></ul></ul><ul><ul><li>Risk associated with the return </li></ul></ul><ul><li>Portfolios are valuated using different models </li></ul><ul><ul><li>Markowitz Portfolio Theory </li></ul></ul><ul><ul><li>Modern Portfolio Theory </li></ul></ul><ul><ul><li>Capital asset pricing model </li></ul></ul><ul><ul><li>Arbitrage pricing theory etc </li></ul></ul>
    4. 4. Portfolio Management Key Factors <ul><li>Continuous P&L Calculations </li></ul><ul><li>Portfolio may contain different classes of products including derivatives </li></ul><ul><li>Computing the RISK/Exposure is the key </li></ul><ul><li>Incorrect pricing/valuation would expose the Portfolio </li></ul><ul><li>Incorrect Hedging would expose portfolio </li></ul><ul><li>Most Portfolios are rebalanced almost everyday </li></ul>
    5. 5. Factors affect the P&L <ul><li>P&L Changes from the RISKs that were unhedged </li></ul><ul><li>P&L Changes from the usage of imperfect Hedging Model </li></ul><ul><li>P&L Changes from new trades during the day </li></ul>
    6. 6. Derivative Product Types & Exposure <ul><li>Linear Product </li></ul><ul><ul><li>Price of the product is directly dependent on the price of the underlying asset </li></ul></ul><ul><ul><li>Hedge the product and forget </li></ul></ul><ul><li>Non-linear Product </li></ul><ul><ul><li>Price of the product is not directly dependent on the price of the underlying asset </li></ul></ul><ul><ul><li>Rebalance the Hedge as frequent as necessary </li></ul></ul>
    7. 7. Risk Management <ul><li>Risk </li></ul><ul><ul><li>The chance that an investment’s actual return will be different than expected </li></ul></ul><ul><ul><li>Actual return may wipe some or total original investment </li></ul></ul><ul><li>Risk and Reward </li></ul><ul><ul><li>The greater the amount of risk, the greater the potential return </li></ul></ul><ul><li>Categories of Risk </li></ul><ul><ul><li>Market Risk </li></ul></ul><ul><ul><li>Credit or Default Risk </li></ul></ul><ul><ul><li>Operational Risk </li></ul></ul>
    8. 8. Market Risk <ul><li>Market Risk – risk caused by the movements in the market factors like </li></ul><ul><ul><li>Interest Rates </li></ul></ul><ul><ul><li>Stock Prices </li></ul></ul><ul><ul><li>Exchange Rates etc </li></ul></ul><ul><li>Market Risk is usually measured by methodology referred as “Value at Risk” (VaR) </li></ul><ul><li>What is meant by Measuring Risk </li></ul><ul><ul><li>The probability of adverse circumstance happening </li></ul></ul><ul><ul><li>The cost of such adverse circumstance </li></ul></ul>
    9. 9. Credit Risk <ul><li>Risk of non-payment of interest and/or principal by borrower </li></ul><ul><li>Financial health of the borrower is the key factor </li></ul><ul><li>Lenders measure borrowers financial health using different methods </li></ul><ul><ul><li>Credit Rating </li></ul></ul><ul><ul><li>Credit History etc </li></ul></ul>
    10. 10. Credit Risk <ul><li>Risk of non-payment of interest and/or principal by borrower </li></ul><ul><li>Financial health of the borrower is the key factor </li></ul><ul><li>Lenders measure borrowers financial health using different methods </li></ul><ul><ul><li>Credit Rating </li></ul></ul><ul><ul><li>Credit History etc </li></ul></ul>
    11. 11. Operational Risk <ul><li>Risk of loss caused by inadequate or failed internal process, people, system and external events. </li></ul><ul><li>Operational Risk Management </li></ul><ul><ul><li>External Regulatory Agencies </li></ul></ul><ul><ul><li>Internal compliance and risk management departments </li></ul></ul>
    12. 12. VaR – Value at Risk <ul><li>VaR is used to measure a Market Risk of an Asset or Portfolio of Assets </li></ul><ul><li>It is single number that summarizes the total risk in financial portfolio or asset </li></ul><ul><li>It answers the question </li></ul><ul><ul><li>How bad things can go wrong? </li></ul></ul><ul><li>For example if VaR of a Portfolio is $2M, at 95% for 1 day </li></ul><ul><ul><li>95% sure/confident that in ONE day portfolio cannot lose more than $2M </li></ul></ul>

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