Portfolio mgmt copy

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Portfolio mgmt copy

  1. 1. PORTFOLIO CONSTRUCTION PORTFOLIO IS A COMBINATION OF SECURITIES SUCH AS STOCKS, BONDS AND MONEY MARKET INSTRUMENTS THE PROCESS OF BLENDING TOGETHER THE BROAD ASSET CLASSES SO AS TO OBTAIN OPTIMUM RETURN WITH MINIMUM RISK IS CALLED PORTFOLIO CONSTRUCTIONAPPROACHES IN PORTFOLIO CONSTRUCTION 1. TRADITIONAL APPROACH 2. MARKOWITZ APPROACHTRADITIONAL APPROACH
  2. 2. 1. ANALYSIS OF CONSTRAINTS A. INCOME NEEDS B. LIQUIDITY C. SAFETY OF PRINCIPAL D. TIME HORIZON E.TAX CONSIDERATION F. TEMPERAMENT2. DETERMINATION OF OBJECTIVES A. CURRENT INCOME B. GROWTH IN INCOME C. CAPITAL APPRECIATION D. PRESERVATION OF CAPITAL3. SELECTION OF PORTFOLIO A. CURRENT INCOME AND ASSET MIX B. GROWTH OF INCOME AND ASSET MIX C. CAPITAL APPRECIATION AND ASSET MIX D. SAFETY OF PRINCIPAL AND ASSET MIX4. RISK AND RETURN ANALYSIS
  3. 3. 5. DIVERSIFICATIONSIMPLE DIVERSIFICATION PORTFOLIO RISK CAN BE REDUCED BY SIMPLEST KIND OF DIVERSIFICATION THE NAÏVE KIND OF DIVERSIFICATION IS KNOWN AS SIMPLE DIVERSIFICATION IN SIMPLE DIVERSIFICATION SECURITIES ARE SELECTED RANDOMLY AND NO ANALYTICAL PROCEDURE IS USED. TOTAL RISK OF ANY PORTFOLIO CONSISTS OF SYSTEMATIC RISK AND UNSYSTEMATIC RISK AND THIS TOTAL RISK IS MEASURED BY VARIANCE OF RETURNS OVER TIME.
  4. 4. MANY STUDIES SHOW THAT SYSTEMATIC RISK COMPRISES OF ONE QUARTER OF TOTAL RISK THE SIMPLE RANDOM DIVERSIFICATION REDUCES THE UNSYSTAEMATIC RISK BUT IT FAILS TO REDUCE THE SYSTEMATIC RISK.PROBLEMS OF VAST DIVERIFICATION PURCHASE OF POOR PERFORMERS INFORMATION ADEQUACY HIGH RESEARCH COST HIGH TRANSACTION COSTMARKOWITZ MODELBASED ON MINIMISING PORTFOLIO RISK BYTAKING LIMITED NO OF SECURITIES OR BY
  5. 5. TAKING TWO SECURITIES OF NEGATIVECORRELATION.ASSUMPTIONS: THE INDIVIDUAL INVESTOR ESTIMATES RISK ON THE BASIS OF VARIABILITY OF RETURNS I.E VARIANCE OF RETURNS FOR A GIVEN LEVEL OF RISK, INVESTOR PREFERS HIGHER RETURN TO LOWER RETURN. LIKEWISE FOR A GIVEN LEVEL OF RETURNS INVESTOR PREFERS LOW RISK THAN HIGH RISK.FINDINGS: PORTFOLIO RISK IS NIL IF THE SECURITIES ARE RELATED NEGATIVELY
  6. 6. RISK CAN BE ELIMINATED IF THE SECURITIES ARE PERFECTLY NEGATIVELY CORRELATED THE STANDARD DEVIATION OR RISK OF PORTFOLIO IS SENSITIVE TO1. THE PROPORTION OF FUNDS DEVOTED TO EACH STOCK2. THE STANDARD DEVIATION OF EACH SECURITY3. COVARIANCE BETWEEN TWO STOCKS.

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