This chapter discusses equity portfolio management strategies, including passive and active approaches. For passive strategies, the goal is to match the return of a benchmark index through techniques like full replication, sampling, or quadratic optimization. Index funds and ETFs are common passive vehicles. Active strategies aim to outperform the benchmark through stock picking, market timing, or other techniques. Fundamental strategies include top-down or bottom-up approaches, while technical strategies use past price or earnings trends. Managers also employ value or growth styles and perform asset allocation using integrated, strategic, tactical, or insured approaches. The key is determining whether active managers can consistently achieve superior risk-adjusted returns compared to their expected performance benchmark.
The concept of the Security Market Line is very popular for portfolio management. It helps to derive the pricing of risky securities by plotting their expected returns.
To know more about it, click on the link given below:
https://efinancemanagement.com/investment-decisions/security-market-line
The document discusses various aspects of taxation related to salaries in India such as taxation of retrenchment compensation, provident funds, perquisites, and more.
It summarizes that retrenchment compensation up to Rs. 500,000 is tax exempt. For provident funds, statutory and recognized funds provide various tax exemptions while payments from unrecognized funds are partially taxable. Perquisites are taxable benefits provided in addition to salary, and some like rent-free housing are taxable for all employees while others only for specified employees.
The document also covers topics like voluntary retirement schemes, superannuation funds, health insurance premiums paid by employers, and various tax exemptions for allowances like education, food
Executive compensation consists of salary, bonus, long-term incentives, and perquisites. Salary makes up 40-60% of compensation but is subject to taxes, while bonuses and stock options are incentives. Perquisites include benefits like cars, clubs, and first-class travel. Compensation also includes retirement benefits, health insurance, and vacations. Unique features of executive pay include secrecy, varying amounts between executives, and tying pay to organizational performance. Companies use various strategies like cost-to-company packages, performance-linked payments, and flexible benefits to motivate and retain executives.
Income tax is a direct tax levied annually on a person's income by the central government of India. Key features include:
- It is levied according to the constitution on income, gains or profits earned in a year (assessment year) by individuals and entities.
- The tax is administered by the central government and applies to income earned in India as well as abroad in some cases.
- Agricultural income has a specific definition that excludes certain types of income derived from agricultural activities and land.
An assessee refers to any person who is liable to pay tax, interest or penalties under the Income Tax Act. This includes individuals being assessed, their representatives, and those deemed as assessees
Derivatives are financial instruments whose value is derived from an underlying asset. The three main types of traders in derivatives markets are hedgers who use derivatives to reduce risk, speculators who trade for profits, and arbitrageurs who exploit price discrepancies across markets. Derivatives can be traded over-the-counter (OTC) through privately negotiated contracts or on exchanges through standardized contracts. Common types of derivatives include forwards, futures, options, and swaps. Forwards and futures are binding agreements to buy or sell an asset in the future at an agreed upon price, while options provide the right but not obligation to buy or sell. Swaps involve exchanging cash flows of one asset for another.
Cost of capital ppt @ bec doms on financeBabasab Patil
The document discusses the cost of capital and how it is calculated. It can be summarized as:
1) The cost of capital is a weighted average of the costs of a firm's capital components (debt, preferred stock, common equity), weighted by the proportion of each in the firm's target capital structure.
2) The cost of each capital component is calculated based on its market yield after adjusting for taxes (for debt) and flotation costs.
3) The weighted average cost of capital (WACC) provides a benchmark to evaluate whether potential projects should be undertaken based on whether their returns exceed the WACC.
This document discusses dividend policies, including the meaning of dividends, types of dividend policies, and factors that influence dividend decisions. It explains that dividends refer to the portion of company profits distributed to shareholders. The dividend policy determines how earnings are divided between payments to shareholders and retained earnings. Key factors that influence dividend decisions include stability of earnings, financing needs, liquidity, growth requirements, and legal obligations. The document also outlines different forms of dividends, including cash, stock, and scrip dividends.
This document discusses various components of compensation including direct financial compensation like wages and salaries, indirect financial compensation like benefits, and non-financial compensation like job satisfaction. It provides examples of different types of compensation and outlines several theories about how wages should be determined, such as subsistence theory and wage fund theory. Compensation is important both for individuals' well-being and organizations' performance.
The concept of the Security Market Line is very popular for portfolio management. It helps to derive the pricing of risky securities by plotting their expected returns.
To know more about it, click on the link given below:
https://efinancemanagement.com/investment-decisions/security-market-line
The document discusses various aspects of taxation related to salaries in India such as taxation of retrenchment compensation, provident funds, perquisites, and more.
It summarizes that retrenchment compensation up to Rs. 500,000 is tax exempt. For provident funds, statutory and recognized funds provide various tax exemptions while payments from unrecognized funds are partially taxable. Perquisites are taxable benefits provided in addition to salary, and some like rent-free housing are taxable for all employees while others only for specified employees.
The document also covers topics like voluntary retirement schemes, superannuation funds, health insurance premiums paid by employers, and various tax exemptions for allowances like education, food
Executive compensation consists of salary, bonus, long-term incentives, and perquisites. Salary makes up 40-60% of compensation but is subject to taxes, while bonuses and stock options are incentives. Perquisites include benefits like cars, clubs, and first-class travel. Compensation also includes retirement benefits, health insurance, and vacations. Unique features of executive pay include secrecy, varying amounts between executives, and tying pay to organizational performance. Companies use various strategies like cost-to-company packages, performance-linked payments, and flexible benefits to motivate and retain executives.
Income tax is a direct tax levied annually on a person's income by the central government of India. Key features include:
- It is levied according to the constitution on income, gains or profits earned in a year (assessment year) by individuals and entities.
- The tax is administered by the central government and applies to income earned in India as well as abroad in some cases.
- Agricultural income has a specific definition that excludes certain types of income derived from agricultural activities and land.
An assessee refers to any person who is liable to pay tax, interest or penalties under the Income Tax Act. This includes individuals being assessed, their representatives, and those deemed as assessees
Derivatives are financial instruments whose value is derived from an underlying asset. The three main types of traders in derivatives markets are hedgers who use derivatives to reduce risk, speculators who trade for profits, and arbitrageurs who exploit price discrepancies across markets. Derivatives can be traded over-the-counter (OTC) through privately negotiated contracts or on exchanges through standardized contracts. Common types of derivatives include forwards, futures, options, and swaps. Forwards and futures are binding agreements to buy or sell an asset in the future at an agreed upon price, while options provide the right but not obligation to buy or sell. Swaps involve exchanging cash flows of one asset for another.
Cost of capital ppt @ bec doms on financeBabasab Patil
The document discusses the cost of capital and how it is calculated. It can be summarized as:
1) The cost of capital is a weighted average of the costs of a firm's capital components (debt, preferred stock, common equity), weighted by the proportion of each in the firm's target capital structure.
2) The cost of each capital component is calculated based on its market yield after adjusting for taxes (for debt) and flotation costs.
3) The weighted average cost of capital (WACC) provides a benchmark to evaluate whether potential projects should be undertaken based on whether their returns exceed the WACC.
This document discusses dividend policies, including the meaning of dividends, types of dividend policies, and factors that influence dividend decisions. It explains that dividends refer to the portion of company profits distributed to shareholders. The dividend policy determines how earnings are divided between payments to shareholders and retained earnings. Key factors that influence dividend decisions include stability of earnings, financing needs, liquidity, growth requirements, and legal obligations. The document also outlines different forms of dividends, including cash, stock, and scrip dividends.
This document discusses various components of compensation including direct financial compensation like wages and salaries, indirect financial compensation like benefits, and non-financial compensation like job satisfaction. It provides examples of different types of compensation and outlines several theories about how wages should be determined, such as subsistence theory and wage fund theory. Compensation is important both for individuals' well-being and organizations' performance.
This document provides an overview of marginal costing. It defines marginal costing as a technique that differentiates between fixed and variable costs to determine the effect of changes in volume or output on profit. Marginal cost is defined as the additional cost of producing one more unit. The key features, assumptions, and advantages of marginal costing are outlined, including how it is used for decision making, cost control, and determining profitability. Formulas for calculating break-even point, margin of safety, and other metrics using marginal costing are also presented.
This document discusses portfolio management and revision strategies. A portfolio is a collection of investments like stocks, bonds, and mutual funds. Smart investors hire portfolio managers to manage their mix of assets. Portfolio revision involves changing the ratio of different assets in a portfolio, such as by buying or selling assets, in response to market changes or investment goals. There are active and passive revision strategies. Active strategies make frequent changes for maximum returns while passive strategies only change the portfolio according to predetermined formula plans in response to market fluctuations. Formula plans help investors systematically buy low and sell high to take advantage of market changes.
The Sharpe model provides a simpler approach to portfolio optimization compared to the Markowitz model. It assumes the return of individual securities is linearly related to a single market index. This allows estimation of systematic and unsystematic risk for individual stocks based on their beta coefficient. An optimal portfolio is constructed by selecting stocks with the highest excess returns over the risk-free rate relative to their beta, up to the cutoff point where this ratio begins declining. The percentage invested in each stock is based on its beta and unsystematic risk. This results in a portfolio with the highest expected return for a given level of risk.
The document discusses various strategic analysis and choice frameworks including the EFE matrix, IFE matrix, SWOT matrix, SPACE matrix, BCG matrix, GE nine-cell matrix, and IE matrix. It provides details on how to conduct an analysis using each framework, including how to evaluate internal and external factors, match strategies, and determine the appropriate strategic position and actions. The frameworks help organizations generate strategies by analyzing their internal strengths and weaknesses as well as external opportunities and threats.
Definition of leverage, Types of Leverages, meaning of operating leverage, financial leverage, combined leverage, Formulas for Operating and financial leverage, variable cost, fixed cost, EBIT, Contribution, EPS-EBIT Analysis, Income statement, practical problems on leverages, etc.
Financial management refers to planning and controlling a firm's financial resources to procure funds from sources like equity, bonds, and loans and effectively utilize them to maximize profitability and owner wealth. The finance function aims to procure and use financial resources to maximize firm and shareholder value. It involves financial planning, raising funds, allocating funds, and financial control. Key decisions include investments, financing, and dividends, which are affected by factors like cash flow, return, risk, costs, market conditions, and earnings.
- Leverage provides the framework for financing decisions and can be defined as using an asset or source of funds that requires paying a fixed cost or return.
- Operating leverage is associated with fixed operating costs and how much they magnify changes in sales on operating profits. Financial leverage measures how debt impacts changes in earnings per share.
- Degree of operating leverage (DOL) and degree of financial leverage (DFL) are used to measure the sensitivity of profits and earnings to changes in sales and operating profits respectively. Higher leverage means greater risk but also greater potential returns.
Developing a Strategic Vision, Mission,Objectives and Policies - SM - MBAChandra Shekar Immani
The document outlines key aspects of developing a strategic vision, mission, objectives, and policies for an organization. It defines a vision as describing the desired future state and reflecting pride in the organization's future. The mission defines the organization's current purpose and primary goals. Objectives help pursue the vision and mission and are performance targets to track progress. Policies provide guidelines for decision-making to achieve objectives.
This document discusses aligning compensation strategy with business strategy, HR strategy, and considerations for seniority and longevity pay. It provides tables matching compensation strategies to business strategies focused on innovation, quality, and low costs. Another table matches compensation strategies to HR strategies like attracting, retaining, and motivating staff. Seniority pay rewards tenure through base pay increases while longevity pay rewards those at pay grade maximums. Both aim to retain experienced employees.
Derivatives are financial instruments whose value is based on an underlying asset. The three main types of participants in derivatives markets are hedgers who use derivatives to reduce risk, speculators who try to profit from price movements, and arbitrageurs who take advantage of temporary price differences. Common derivatives include forward contracts which require delivery of the asset, and futures contracts which are exchange-traded and involve daily settlement. Options provide the right but not obligation to buy or sell the underlying asset and have non-linear payoffs. Key models for pricing derivatives include the cost-of-carry model and Black-Scholes options pricing formula.
This document discusses replacement theory and models for determining optimal replacement times for equipment and components. It covers different types of failure mechanisms including gradual, sudden, progressive, and retrogressive failure. Key factors in replacement decisions are purchase costs, salvage values, maintenance costs, and operating costs. Optimal replacement minimizes total average costs over the lifetime of the item. Group replacement policies can be more cost effective than individual policies for items that fail suddenly by replacing items in a group before failures occur.
Approaches to determine appropriate capital structure - EBIT-EPS Approch
anybody can join my google class (financial Mangement)
by entering class code : avkkvj5
This document discusses aligning compensation strategy with human resources (HR) strategy and business strategy. It states that compensation strategy should focus on compensation choices that help the organization gain competitive advantage. HR strategy involves developing employee skills and behaviors to help the organization meet its goals through HR policies. Business strategy defines the organization's direction to achieve objectives. The document emphasizes that compensation systems should align with and change according to business strategies. It provides examples of how compensation strategy can align with HR strategy and business strategy in different organizations.
The document discusses modern human resource management practices including outsourcing. It notes that modern HRM focuses on careful selection, high levels of training, better communication between staff and management, and encouraging employee innovation. When it comes to outsourcing, the document outlines the advantages like reducing costs and gaining expertise, and disadvantages like loss of control. It also discusses trends in the workforce around diversity, technology changes, and a globalized economy.
A company raises finance by issuing shares to the public at different prices. Shares can be issued at par, where the price is equal to the face value; at a premium, where the price is higher than face value; or at a discount, where the price is lower than the face value. Issuing shares allows a company to generate capital from the public according to the type of share issue.
This document outlines the strategic management model process in 6 steps: 1) strategic elements, 2) environmental and organizational analysis, 3) identification of strategic alternatives, 4) choice of strategy, 5) implementation of strategy, and 6) evaluation and control. It defines strategic management as a stream of decisions and actions to develop effective strategies to achieve corporate objectives. The process allows firms to anticipate changing conditions and provide clear direction, though conditions may change too fast for planning.
The document discusses financial derivatives such as forwards, futures, options, and swaps used to hedge currency risk, noting that currency futures traded on an exchange provide benefits like price transparency, elimination of counterparty credit risk, and access for retail traders compared to over-the-counter currency forwards. Hedgers use derivatives to offset currency risk from imports/exports while speculators take views on market direction hoping to profit, and arbitrageurs look for mispricing opportunities; exchanges require initial and maintenance margin as well as mark positions to market daily to reduce default risk.
This document outlines the five stages of an industry life cycle: embryonic, growth, shakeout, maturity, and decline. It describes the characteristics of each stage, including how competitive forces change as industries evolve. Strategic managers must understand how their industry is progressing through the life cycle and adapt their strategies accordingly, such as preparing for intense competition during the shakeout stage or focusing on cost minimization as the industry reaches maturity. Recognizing the current stage is important for developing strategies that consider future changes in competitive dynamics.
Corporate strategic planning involves 4 activities: defining the corporate mission, establishing strategic business units (SBUs), assigning resources to each SBU, and planning new and downsizing older businesses. The corporate mission focuses competition and values. SBUs are defined by customer groups, needs, and technology. Resources are assigned using models like BCG that evaluate market growth and share. Strategies include building, holding, harvesting, and divesting SBUs. New businesses come from growth opportunities, and older businesses may be pruned to release resources. Marketing strategies include market penetration, development, product development, and diversification.
The document summarizes various passive and active equity portfolio management strategies. It discusses why equities are included in portfolios, the differences between passive and active management, and various passive strategies like full replication, sampling, and quadratic optimization. It also covers value and growth investing styles, benchmark portfolios, timing between styles, and active strategies like fundamental, technical, exploiting anomalies and attributes. Finally, it summarizes asset allocation strategies like integrated, strategic, tactical, and insured asset allocation and factors to consider when selecting an active allocation method.
This document discusses project portfolio management. It states that project portfolio management combines various management disciplines including general management, business management, and project and program management. Project portfolio management is an ongoing process that includes decision-making, prioritization, review, realignment, and reprioritization. The purpose of portfolio management is to execute strategy, deliver business value, enhance decision making, and manage organizational change. It also discusses selecting projects, optimizing portfolio value, protecting portfolio value, and delivering portfolio value.
This document provides an overview of marginal costing. It defines marginal costing as a technique that differentiates between fixed and variable costs to determine the effect of changes in volume or output on profit. Marginal cost is defined as the additional cost of producing one more unit. The key features, assumptions, and advantages of marginal costing are outlined, including how it is used for decision making, cost control, and determining profitability. Formulas for calculating break-even point, margin of safety, and other metrics using marginal costing are also presented.
This document discusses portfolio management and revision strategies. A portfolio is a collection of investments like stocks, bonds, and mutual funds. Smart investors hire portfolio managers to manage their mix of assets. Portfolio revision involves changing the ratio of different assets in a portfolio, such as by buying or selling assets, in response to market changes or investment goals. There are active and passive revision strategies. Active strategies make frequent changes for maximum returns while passive strategies only change the portfolio according to predetermined formula plans in response to market fluctuations. Formula plans help investors systematically buy low and sell high to take advantage of market changes.
The Sharpe model provides a simpler approach to portfolio optimization compared to the Markowitz model. It assumes the return of individual securities is linearly related to a single market index. This allows estimation of systematic and unsystematic risk for individual stocks based on their beta coefficient. An optimal portfolio is constructed by selecting stocks with the highest excess returns over the risk-free rate relative to their beta, up to the cutoff point where this ratio begins declining. The percentage invested in each stock is based on its beta and unsystematic risk. This results in a portfolio with the highest expected return for a given level of risk.
The document discusses various strategic analysis and choice frameworks including the EFE matrix, IFE matrix, SWOT matrix, SPACE matrix, BCG matrix, GE nine-cell matrix, and IE matrix. It provides details on how to conduct an analysis using each framework, including how to evaluate internal and external factors, match strategies, and determine the appropriate strategic position and actions. The frameworks help organizations generate strategies by analyzing their internal strengths and weaknesses as well as external opportunities and threats.
Definition of leverage, Types of Leverages, meaning of operating leverage, financial leverage, combined leverage, Formulas for Operating and financial leverage, variable cost, fixed cost, EBIT, Contribution, EPS-EBIT Analysis, Income statement, practical problems on leverages, etc.
Financial management refers to planning and controlling a firm's financial resources to procure funds from sources like equity, bonds, and loans and effectively utilize them to maximize profitability and owner wealth. The finance function aims to procure and use financial resources to maximize firm and shareholder value. It involves financial planning, raising funds, allocating funds, and financial control. Key decisions include investments, financing, and dividends, which are affected by factors like cash flow, return, risk, costs, market conditions, and earnings.
- Leverage provides the framework for financing decisions and can be defined as using an asset or source of funds that requires paying a fixed cost or return.
- Operating leverage is associated with fixed operating costs and how much they magnify changes in sales on operating profits. Financial leverage measures how debt impacts changes in earnings per share.
- Degree of operating leverage (DOL) and degree of financial leverage (DFL) are used to measure the sensitivity of profits and earnings to changes in sales and operating profits respectively. Higher leverage means greater risk but also greater potential returns.
Developing a Strategic Vision, Mission,Objectives and Policies - SM - MBAChandra Shekar Immani
The document outlines key aspects of developing a strategic vision, mission, objectives, and policies for an organization. It defines a vision as describing the desired future state and reflecting pride in the organization's future. The mission defines the organization's current purpose and primary goals. Objectives help pursue the vision and mission and are performance targets to track progress. Policies provide guidelines for decision-making to achieve objectives.
This document discusses aligning compensation strategy with business strategy, HR strategy, and considerations for seniority and longevity pay. It provides tables matching compensation strategies to business strategies focused on innovation, quality, and low costs. Another table matches compensation strategies to HR strategies like attracting, retaining, and motivating staff. Seniority pay rewards tenure through base pay increases while longevity pay rewards those at pay grade maximums. Both aim to retain experienced employees.
Derivatives are financial instruments whose value is based on an underlying asset. The three main types of participants in derivatives markets are hedgers who use derivatives to reduce risk, speculators who try to profit from price movements, and arbitrageurs who take advantage of temporary price differences. Common derivatives include forward contracts which require delivery of the asset, and futures contracts which are exchange-traded and involve daily settlement. Options provide the right but not obligation to buy or sell the underlying asset and have non-linear payoffs. Key models for pricing derivatives include the cost-of-carry model and Black-Scholes options pricing formula.
This document discusses replacement theory and models for determining optimal replacement times for equipment and components. It covers different types of failure mechanisms including gradual, sudden, progressive, and retrogressive failure. Key factors in replacement decisions are purchase costs, salvage values, maintenance costs, and operating costs. Optimal replacement minimizes total average costs over the lifetime of the item. Group replacement policies can be more cost effective than individual policies for items that fail suddenly by replacing items in a group before failures occur.
Approaches to determine appropriate capital structure - EBIT-EPS Approch
anybody can join my google class (financial Mangement)
by entering class code : avkkvj5
This document discusses aligning compensation strategy with human resources (HR) strategy and business strategy. It states that compensation strategy should focus on compensation choices that help the organization gain competitive advantage. HR strategy involves developing employee skills and behaviors to help the organization meet its goals through HR policies. Business strategy defines the organization's direction to achieve objectives. The document emphasizes that compensation systems should align with and change according to business strategies. It provides examples of how compensation strategy can align with HR strategy and business strategy in different organizations.
The document discusses modern human resource management practices including outsourcing. It notes that modern HRM focuses on careful selection, high levels of training, better communication between staff and management, and encouraging employee innovation. When it comes to outsourcing, the document outlines the advantages like reducing costs and gaining expertise, and disadvantages like loss of control. It also discusses trends in the workforce around diversity, technology changes, and a globalized economy.
A company raises finance by issuing shares to the public at different prices. Shares can be issued at par, where the price is equal to the face value; at a premium, where the price is higher than face value; or at a discount, where the price is lower than the face value. Issuing shares allows a company to generate capital from the public according to the type of share issue.
This document outlines the strategic management model process in 6 steps: 1) strategic elements, 2) environmental and organizational analysis, 3) identification of strategic alternatives, 4) choice of strategy, 5) implementation of strategy, and 6) evaluation and control. It defines strategic management as a stream of decisions and actions to develop effective strategies to achieve corporate objectives. The process allows firms to anticipate changing conditions and provide clear direction, though conditions may change too fast for planning.
The document discusses financial derivatives such as forwards, futures, options, and swaps used to hedge currency risk, noting that currency futures traded on an exchange provide benefits like price transparency, elimination of counterparty credit risk, and access for retail traders compared to over-the-counter currency forwards. Hedgers use derivatives to offset currency risk from imports/exports while speculators take views on market direction hoping to profit, and arbitrageurs look for mispricing opportunities; exchanges require initial and maintenance margin as well as mark positions to market daily to reduce default risk.
This document outlines the five stages of an industry life cycle: embryonic, growth, shakeout, maturity, and decline. It describes the characteristics of each stage, including how competitive forces change as industries evolve. Strategic managers must understand how their industry is progressing through the life cycle and adapt their strategies accordingly, such as preparing for intense competition during the shakeout stage or focusing on cost minimization as the industry reaches maturity. Recognizing the current stage is important for developing strategies that consider future changes in competitive dynamics.
Corporate strategic planning involves 4 activities: defining the corporate mission, establishing strategic business units (SBUs), assigning resources to each SBU, and planning new and downsizing older businesses. The corporate mission focuses competition and values. SBUs are defined by customer groups, needs, and technology. Resources are assigned using models like BCG that evaluate market growth and share. Strategies include building, holding, harvesting, and divesting SBUs. New businesses come from growth opportunities, and older businesses may be pruned to release resources. Marketing strategies include market penetration, development, product development, and diversification.
The document summarizes various passive and active equity portfolio management strategies. It discusses why equities are included in portfolios, the differences between passive and active management, and various passive strategies like full replication, sampling, and quadratic optimization. It also covers value and growth investing styles, benchmark portfolios, timing between styles, and active strategies like fundamental, technical, exploiting anomalies and attributes. Finally, it summarizes asset allocation strategies like integrated, strategic, tactical, and insured asset allocation and factors to consider when selecting an active allocation method.
This document discusses project portfolio management. It states that project portfolio management combines various management disciplines including general management, business management, and project and program management. Project portfolio management is an ongoing process that includes decision-making, prioritization, review, realignment, and reprioritization. The purpose of portfolio management is to execute strategy, deliver business value, enhance decision making, and manage organizational change. It also discusses selecting projects, optimizing portfolio value, protecting portfolio value, and delivering portfolio value.
This document discusses project portfolio management. It states that project portfolio management combines various management disciplines including general management, business management, and project and program management. Project portfolio management is an ongoing process that includes decision-making, prioritization, review, realignment, and reprioritization. The purpose of portfolio management is to execute strategy, deliver business value, enhance decision making, and manage organizational change. It also discusses selecting projects, optimizing portfolio value, protecting portfolio value, and delivering portfolio value.
1. This document provides an overview of passive and active equity portfolio management strategies. It discusses index construction techniques for passive strategies, including full replication, sampling, and quadratic optimization. It also covers tracking error and methods of index investing like index funds and ETFs.
2. For active strategies, it outlines fundamental approaches like tactical asset allocation and sector rotation based on economic cycles. It also discusses technical strategies like earnings momentum, price momentum, and contrarian investing. Common anomalies and attributes used in active strategies are mentioned.
3. Specific strategies covered for active managers include 130/30, earnings momentum, price momentum, and exploiting anomalies like the January effect and weekend effect. The comparison of earnings versus price momentum strategies is
This document discusses portfolio management strategies, including active and passive strategies. Active strategies aim to outperform benchmarks by exploiting market inefficiencies. They involve frequent trading but carry more risk. Passive strategies track market indices to achieve market returns at low cost. They provide diversification and transparency but limit choice. The key is understanding each approach and choosing one aligned with an investor's goals, market conditions, and tolerance for risk.
by-group 9
For downloading this contact- bikashkumar.bk100@gmail.com
Prepared by Students of University of Rajshahi
Md. Imran Hossain
Rima Binte Rahamot
F.M. Alimuzzaman
Md.Sultan Mahmud
Md. Al-Amin
Robiul IsLAm
Tamanna Toma
Md. Junayed Hossain
Yousuf Chowdhury
Md. Roxy Hossain
This document discusses strategy evaluation and review. It outlines the importance of evaluating strategy on an ongoing basis to ensure it remains relevant given changes in the internal and external environment. It describes evaluating strategy by reviewing its underlying bases, measuring organizational performance against plans, and taking corrective actions if needed. Key aspects of effective evaluation discussed include using both quantitative financial metrics and qualitative assessments, generating timely and useful information, and engaging in contingency planning to prepare for favorable and unfavorable events.
The document provides steps for assembling a portfolio of regression-based strategies to systematically navigate changing market conditions. It recommends:
1) Developing an understanding of statistics and using statistical tools over simplistic indicators.
2) Implementing a core strategy with discipline, understanding when it performs best, and selecting contrasting strategies.
3) Choosing additional strategies with different frequencies and those that contrast the core strategy's weaknesses to reduce volatility.
4) Establishing allocation parameters to enhance performance and limit drawdowns, such as reducing neutral strategies in high volatility. The LRC Credit Spreads course is presented as an introduction to building the first wave.
This document discusses passive and active investment strategies for common stocks. The passive strategy believes market prices reflect intrinsic value and aims to minimize costs. It uses buy-and-hold and index funds. The active strategy assumes some advantage in identifying superior stocks. It uses fundamental analysis including economy, industry, and company analysis to select undervalued stocks and sector rotations. Technical analysis also informs momentum strategies by analyzing price movements and volumes.
Portfolio strategy is a roadmap that investors use to achieve financial goals by designing optimal portfolios. There are two main types of portfolio strategies: active and passive. Active strategies use forecasting techniques to buy and sell securities frequently to achieve high returns, while passive strategies track market indexes with low fees to match market performance over the long run. Portfolio strategies also differ in their investment approaches, such as top-down which observes the market overall versus bottom-up which focuses on individual company strengths. Other considerations in developing a portfolio strategy include an investor's risk tolerance, asset allocation, rebalancing over time, performance measurement, and responding to market innovations.
This document discusses portfolio revision. It defines portfolio revision as changing the existing mix of securities in a portfolio by altering either the securities included or the proportion invested in each. The objective is to maximize returns while minimizing risk. Portfolios need revision over time as markets change, making the original portfolio no longer optimal. Active revision involves frequent adjustments based on analysis, while passive revision uses minor, infrequent adjustments by predetermined formula plans. The plans provide rules for purchases and sales at different market levels to optimize gains over time.
Portfolio revision, securities, New securities, existing securities, purchases and sales of securities, maximizing the return, minimizing the risk, Transaction cost, Taxes, Statutory stipulations, Intrinsic difficulty, commission and brokerage, push up transaction costs, reducing the gains, constraint, Taxes, capital gains, long-term capital, lower rate, Frequent sales, short-term capital gains, investment companies, constraints, established, objectives, skill, resources and time, substantial adjustments, mispriced, excess returns, heterogeneous expectations, better estimates, generate excess returns, market efficiency, little incentive, predetermined rules, changes in the securities market, Performance measurement, Performance evaluation, superior or inferior, small investors, better performance, prompt liquidity, comparative performance, purchase and sale of securities.
Financial Metrics to Drive Strategic Portfolio Performance Sopheon
While all companies forecast the financial impact of their new product development investments, not all realize that the specific metrics that are used to rank and select projects heavily influence the performance of portfolios, possibly towards an unintended outcome.
This webinar explores typical project and portfolio valuation metrics with respect to what these metrics specifically indicate, and the decision-making behaviors they drive.
Given that the most successful portfolios are guided by a focused innovation strategy, which metrics should your organization be using to measure and maximize investment performance?
During this session you will learn:
How to choose the right financial metrics to drive your innovation strategy
Understand the unintended consequences of picking the wrong financial metrics
How financial metrics drive different decision-making behavior.
View the webinar in its entirety at: http://budurl.com/ld4g
Complete guide to Building an Acquistion Strategy and Valuation MethodologiesSTRATICX
DESCRIPTION
For a business any business looking to engage in acquisition activity it is critical to understand what your strategy is. Acquisition and investment is more than a financial exercise, there has to be a strategy intent as well.
This document is in three main sections to help formulating an acquisition strategy:
1. Identifying the Acquisition Target and Process
2. Diligencing the Target
3. Evaluating Other Strategic Considerations
Followed by a overview of valuation methodologies commonly used to value targets:
1. Public Market Comparables
2. Merger Market Comparables
3. DCF
4. Pro Forma
This powerpoint is designed to give a good foundations and building blocks for those interesting in learning more about the above techniques.
Kiran Kumar has a PhD in finance from the Indian Institute of Science. He has over 20 research papers and has received five best research paper awards. He is currently an associate professor at IIM Indore and has previously held positions at the National Institute of Securities Markets and ISB. His research focuses on high frequency data analysis, market microstructure, and derivatives.
Finance involves making investment and funding decisions to allocate resources and generate returns. The three major corporate finance decisions are investments, financing, and dividends. Investments should earn returns above the hurdle rate, financing should minimize costs, and excess cash should be returned to shareholders if no high-return investments exist. The traditional goal of corporate finance is to maximize
Portfolio revision involves periodically reviewing and changing the asset allocation of a portfolio to align with an investor's objectives. The frequency of review depends on factors like portfolio size and securities held. The review should examine objectives, performance targets, actual results, and reasons for variations. It should be followed by timely action. Techniques for revision include buying low and selling high relative to normal price fluctuations. The timing of revisions is important to balance transaction costs and analysis against ensuring the portfolio still meets its goals.
How Investment Analysis & Portfolio Management greatly focuses on portfolio c...QUESTJOURNAL
Abstract: Portfolio Construction is a capstone elective that draws on previously studied investment principles, theories and techniques. Its enable synthesize that acquired financial theories and knowledge in the context of portfolio construction and asset allocation. It focuses on gaps in theory and how they can be managed in practice.
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2. Equity Portfolio Management Strategies
After you read this chapter, you should be able to answer the
following questions:
➤What are the two generic equity portfolio management
styles?
➤What are three techniques for constructing a passive
index portfolio?
➤How does the goal of a passive equity portfolio manager
differ from the goal of an active manager?
➤What is a portfolio’s tracking error and how is it useful in
the construction of a passive equity investment?
➤What is the difference between an index mutual fund and
an exchange-traded fund?
3. Equity Portfolio Management Strategies
What are the three themes that active equity portfolio
managers can use?
➤What stock characteristics differentiate value-oriented and
growth-oriented investment styles?
➤What is style analysis and what does it indicate about a
manager’s investment performance?
➤What techniques are used by active managers in an attempt to
outperform their benchmark?
➤What are the differences between the integrated, strategic,
tactical, and insured approaches to asset allocation?
➤How can futures and options be used to help manage an
equity portfolio?
5. Passive versus Active Management
• Total Portfolio Return
– The total actual return on any equity portfolio can
be decomposed into:
Expected return
Alpha
– The Equation
Total Actual Return
=[Expected Return] + [“Alpha”]
=[Risk-Free Rate + Risk Premium]+[“Alpha”]
6. Passive versus Active Management
• Passive equity portfolio management
– Long-term buy-and-hold strategy
– Usually tracks an index over time
– Designed to match market performance
– Manager is judged on how well they track the
target index
• Active equity portfolio management
– is an attempt by the manager to outperform, on a risk-
adjusted basis, a passive benchmark portfolio.
– Attempts to outperform a passive benchmark portfolio
on a risk-adjusted basis by seeking the “alpha” value
7. When deciding whether to follow an active or a passive strategy an investor must assess
the trade-off between the low-cost but less-exciting alternative of indexing versus the
higher-cost but potentially more lucrative alternative of active management.
8. An Overview of Passive Strategies
• Attempts to design a portfolio to replicate the
performance of a specific index- to replicate the
performance of an index
A passive manager earns his or her fee by constructing
a portfolio that closely tracks the performance of a
specified equity index (referred to as the benchmark
index) that meets the client’s needs and objectives.
If the manager attempts to outperform the index
selected, he or she violates the passive premise of
the portfolio.
• May slightly underperform the target index due to fees
and commissions
9. Passive Strategies
• Strong rationale for this approach
–Strong evidence indicates that the stock
market is fairly efficient.
– Costs of active management (1 to 2 percent) are
hard to overcome in risk-adjusted performance
– the S&P 500 index typically outperforms most
equity mutual funds on an annual basis.
• Many different market indexes are used for
tracking portfolios
–S&P 500 Index, NASDAQ Composite Index
15-9
10. Index Portfolio Construction Techniques
• Full Replication
–All securities in the index are purchased in
proportion to weights in the index
–This helps ensure close tracking but it may be
suboptimal for two reasons
– First, the need to buy many securities will increase
transaction costs that will detract from performance.
Second, the reinvestment of dividends will also
result in high commissions when many firms pay
small dividends at different times in the year.
11. Index Portfolio Construction
Techniques
• Sampling
–Buys a representative sample of stocks in
the benchmark index according to their
weights in the index
–Fewer stocks means lower commissions
–Reinvestment of dividends is less difficult
–Will not track the index as closely as will
full replication, so there will be some
tracking error
12. Index Portfolio Construction Techniques
• Quadratic Optimization (or programming
techniques)
– Historical information on price changes and
correlations between securities are input into a
computer program that determines the
composition of a portfolio that will minimize
tracking error with the benchmark
– Relies on historical correlations, which may
change over time, leading to failure to track the
index
13. Tracking Error and Index Portfolio
Construction
• The goal of the passive manager should be to minimize
the portfolio’s return volatility relative to the index, i.e.,
to minimize tracking error
• Tracking Error Measure
– Return differential in time period t
Δt =Rpt – Rbt
Where Rpt= return to the managed portfolio in Period t
Rbt= return to the benchmark portfolio in Period t
– Tracking error is measured as the standard deviation
of Δt , normally annualized (TE)
– See Exhibit 4.2
15. Methods of Index Portfolio Investing
• Index Funds(mutual funds)
– In an indexed portfolio, the fund manager will typically
attempt to replicate the composition of the particular
index exactly
– The fund manager will buy the exact securities
comprising the index in their exact weights
– Change those positions anytime the composition of the
index itself is changed
– Low trading and management expense ratios
– The advantage of index mutual funds is that they
provide an inexpensive way for investors to acquire a
diversified portfolio
16. Methods of Index Portfolio Investing
• Exchange-Traded Funds (ETF)
– ETFs are depository receipts that give investors a pro
rata claim on the capital gains and cash flows of the
securities that are held in deposit by a financial
institution that issued the certificates
– A significant advantage of ETFs over index mutual
funds is that they can be bought and sold (and short
sold) like common stock
– The notable example of ETFs
• Standard & Poor’s 500 Depository Receipts(SPDRs)
• iShares
• Sector ETFs
17. Summary: Passive management
•Objective
•Match the return of a benchmark
•Approach
•Replicate the benchmark
•Techniques
•Full replication
•Issues: Transaction costs
•Sampling
•Issues: Tracking error
•Quadratic optimization
•Issues: Programming
•Completeness funds
•Issues: Special benchmark to complement
active portfolio management
18. An Overview of Active Strategies
• Goal is to earn a portfolio return that exceeds
the return of a passive benchmark portfolio,
net of transaction costs, on a risk-adjusted basis
–Portfolio return > Benchmark return + transaction costs
–Need to select an appropriate benchmark
• Practical difficulties of active manager
– Transactions costs must be offset by superior
performance vis-à-vis the benchmark
– Higher risk-taking can also increase needed
performance to beat the benchmark
• See Exhibits 4.2 and 4.3
21. Fundamental Strategies
• Top-Down versus Bottom-Up Approaches
– Top-Down
Broad country and asset class allocations
Sector allocation decisions
Individual securities selection
– Bottom-Up
Emphasizes the selection of securities without any
initial market or sector analysis
Form a portfolio of equities that can be purchased at
a substantial discount to what his or her valuation
model indicates they are worth
22. Fundamental Strategies
• Three Generic Themes
– Time the equity market by shifting funds into and
out of stocks, bonds, and T-bills depending on
broad market forecasts & risk estimation
– Shift funds among different equity sectors and
industries (e.g., financial stocks, technology stocks)
or among investment styles (e.g., value, growth
large capitalization, small capitalization). This is
basically the sector rotation strategy
– Do stock picking and look at individual issues in an
attempt to find undervalued stocks
24. Fundamental Strategies
• The 130/30 Strategy
– Long positions up to 130 percent of the portfolio’s
original capital and short positions up to 30 percent
– The use of the short positions creates the leverage
needed, increasing both risk and expected returns
compared to the fund’s benchmark
– Enable managers to make full use of their
fundamental research to buy stocks they identify as
undervalued as well as short those that are
overvalued
25. Technical Strategies
• Active managers can form equity portfolios on the basis
of past stock price trends by assuming that one of two
things will happen: (1) past stock price trends will
continue in the same direction, or (2) they will reverse
themselves.
• Contrarian Investment Strategy
– The belief that the best time to buy (sell) a stock is when
the majority of other investors are the most bearish
(bullish) about it
– The concept of mean reverting
– The overreaction hypothesis (Exhibit 4.4)
• Price Momentum Strategy
– Focus on the trend of past prices alone and makes
purchase and sale decisions accordingly
– Assume that recent trends in past prices will continue
28. Anomalies and Attributes
• The price momentum strategies could either be based on
pure price trend analysis or supported by the underlying
economic fundamentals of the company.
• Earnings Momentum Strategy
– Momentum is measured by the difference of actual
EPS to the expected EPS
– Purchases stocks that have accelerating earnings and
sells (or short sells) stocks with disappointing
earnings
– The notion behind this strategy is that, ultimately, a
company’s share price will follow the direction of its
earnings, which is one “bottom line” measure of the
firm’s economic success.
29. Anomalies and Attributes
• Calendar-Related Anomalies
–The Weekend Effect
–The January Effect
• Firm-Specific Attributes
• A more promising approach to active anomaly
investing involves forming portfolios based on
various characteristics of the companies themselves.
• Two such characteristics we have seen to matter in
the stock market are the total capitalization of the
firm’s outstanding equity (i.e., firm size) and the
financial position of the firm,
30. Anomalies and Attributes
Firm Size
P/E and P/BV ratios (Exhibit 4.5)
• Studies came to two general conclusions about these firm
characteristics.
• First, over time, firms with smaller market capitalizations
produce bigger risk-adjusted returns than those with large
market capitalizations.
• Second, over time, firms with lower P/E and P/BV ratios
produce bigger risk-adjusted returns than those with higher
levels of those ratio
• In fact, as we have seen low and high levels of these ratios are
used in practice to define value and growth stocks,
respectively.
32. Value versus Growth
• A growth investor focuses on the current and
future economic “story” of a company, with
less regard to share valuation
• A value investor focuses on share price in
anticipation of a market correction and,
possibly, improving company fundamentals.
• Growth stocks will outperform value stocks for
a time and then the opposite occurs
• Over time value stocks have offered somewhat
higher returns than growth stocks
33. Value versus Growth
• Growth-oriented investor will:
– Focus on EPS and its economic determinants
– Look for companies expected to have rapid EPS
growth
– Assumes constant P/E ratio
• Value-oriented investor will:
– Focus on the price component
– Not care much about current earnings
– Assume the P/E ratio is below its natural level
34. Style Analysis
• Construct a portfolio to capture one or more of the
characteristics of equity securities
• Small-cap stocks, low-P/E stocks, etc…
• Value stocks (those that appear to be under-priced
according to various measures)
– Low Price/Book value or Price/Earnings ratios
• Growth stocks (above-average earnings per share
increases)
– High P/E, possibly a price momentum strategy
• See Exhibit 4.6
35. Exhibit 4.6 :Style analysis: Grid style
Value Growth
Small
cap
Large
cap
Wilshire 5000
S&P 5000
Russel midcap
Nasdaq
Russel 2000
Russel 1000
Joe B.
TSE300
37. Does Style Matter?
• Choice to align with investment style
communicates information to clients
• Determining style is useful in measuring
performance relative to a benchmark
• Style identification allows an investor to
diversify by portfolio
• Style investing allows control of the total
portfolio to be shared between the investment
managers and a sponsor
• Intentional and unintentional style drift
38. Asset Allocation Strategies
• Integrated asset allocation
– Capital market conditions
– Investor’s objectives and constraints
• Selecting an Active Allocation Method
– Perceptions of variability in the client’s objectives
and constraints
– Perceived relationship between the past and future
capital market conditions
– The investor’s needs and capital market conditions
are can be considered constant and can be
considered variable
39. Asset Allocation Strategies
• Strategic asset allocation
–Constant-mix
–Is one in which the manager makes
adjustments to maintain the relative
weighting of the asset classes within the
portfolio as their prices change
–Requires the purchase of securities that
have performed poorly and the sale of
securities that have performed the best
40. 40
Constant Mix Strategy (cont’d)
Example
A portfolio has a market value of $2 million. The investment
policy statement requires a target asset allocation of 60 percent
stock and 30 percent bonds.
The initial portfolio value and the portfolio value after one
quarter are shown on the next slide.
41. 41
Constant Mix Strategy (cont’d)
Example (cont’d)
What dollar amount of stock should the portfolio manager buy
to rebalance this portfolio? What dollar amount of bonds
should he sell?
Date Portfolio Value Actual Allocation Stock Bonds
1 Jan $2,000,000 60%/40% $1,200,000 $800,000
1 Apr $2,500,000 56%/44% $1,400,000 $1,100,000
42. 42
Constant Mix Strategy (cont’d)
Example (cont’d)
Solution: a 60%/40% asset allocation for a $2.5 million portfolio
means the portfolio should contain $1.5 million in stock and $1
million in bonds. Thus, the manager should buy $100,000
worth of stock and sell $100,000 worth of bonds.
45. Active vs. Passive Equity Portfolio Management
• The “conventional wisdom” held by many investment analysts is that there
is no benefit to active portfolio management because:
– The average active manager does not produce returns that exceed those of
the benchmark
– Active managers have trouble outperforming their peers on a consistent basis
• However, others feel that this is the wrong way to look at the Active vs.
Passive management debate. Instead, investors should focus on ways to:
– Identifying those active managers who are most likely to produce superior
risk-adjusted return performance over time
• This discussion is based on research authored jointly with Van Harlow of
Fidelity Investments titled:
“The Right Answer to the Wrong Question:
Identifying Superior Active Portfolio Management”
46. The Wrong Question
• Stylized Fact:
Most active mutual fund managers cannot outperform the S&P 500 index
on a consistent basis
Beat %
10%
30%
50%
70%
90%
DATE
JAN80 JAN82 JAN84 JAN86 JAN88 JAN90 JAN92 JAN94 JAN96 JAN98 JAN00 JAN02 JAN04
47. Defining Superior Investment Performance
• Over time, the “value added” by a portfolio
manager can be measured by the difference
between the portfolio’s actual return and the
return that the portfolio was expected to
produce.
• This difference is usually referred to as the
portfolio’s alpha.
Alpha = (Actual Return) – (Expected Return)
48. Measuring Expected Portfolio Performance
• In practice, there are three ways commonly used to measure the return that was
expected from a portfolio investment:
– Benchmark Portfolio Return
• Example: S&P 500 or Russell 1000 indexes for a U.S. Large-Cap Blend fund manager
• Pros: Easy to identify; Easy to observe
• Cons: Hypothetical return ignoring taxes, transaction costs, etc.; May not be representative
of actual investment universe; No explicit risk adjustment
– Peer Group Comparison Return
• Example: Median Return to all U.S. Small-Cap Growth funds for a U.S. Small-Cap Growth
fund manager
• Pros: Measures performance relative to manager’s actual competition
• Cons: Difficult to identify precise peer group; “Median manager” may ignore large
dispersion in peer group universe; Universe size disparities across time and fund categories
– Return-Generating Model
• Example: Single Risk-Factor Model (CAPM); Multiple Risk-Factor Model (Fama-French
Three-Factor, Carhart Four-Factor)
• Pros: Calculates expected fund returns based on an explicit estimate of fund risk; Avoids
arbitrary investment style classifications
• Cons: No direct investment typically; Subject to model misspecification and factor
measurement problems; Model estimation error
49. The Wrong Question (Revisited)
• Stylized Fact:
Across all investment styles, the “median manager” cannot produce
positive risk-adjusted returns (i.e., PALPHA using return model)
Monthly Mean PALPHA Value at Percentile (%):
Fund Style # of Obs. 5th 25th Median 75th 95th
% Pos.
Alphas
Overall 19551 -1.56 -0.55 -0.18 0.12 0.79 33.77
LV 2,387 -2.11 -0.57 -0.21 0.07 0.66 23.51
LB 3,377 -1.44 -0.55 -0.22 -0.01 0.38 42.02
LG 3,351 -1.08 -0.38 -0.07 0.17 0.80 30.21
MV 1,413 -2.61 -0.67 -0.23 0.11 0.69 29.10
MB 1,691 -1.86 -0.79 -0.32 0.07 0.64 35.31
MG 3,169 -1.48 -0.63 -0.21 0.19 1.04 32.77
SV 929 -2.02 -0.65 -0.25 0.01 0.57 32.16
SB 1,222 -1.42 -0.59 -0.19 0.12 0.77 48.46
SG 2,012 -1.37 -0.45 -0.02 0.39 1.24 25.62
S&P 500
Index Fund
0.04
50. The Right Answer
• When judging the quality of active fund managers, the important
question is not whether:
– The average fund manager beats the benchmark
– The median manager in a given peer group produces a positive alpha
• The proper question to ask is whether you can select in advance those
managers who can consistently add value on a risk-adjusted basis
– Does superior investment performance persist from one period to the next
and, if so, how can we identify superior managers?
51. Lessons from Prior Research
• Fund performance appears to persist over time
– Original View:
Managers with superior performance in one period are equally likely to produce superior or inferior performance in the next
period
– Current View:
Some evidence does support the notion that investment performance persists from one period to the next
The evidence is particularly strong that it is poor performance that tends to persist (i.e., “icy” hands vs. “hot” hands)
•Security characteristics, return momentum, and fund style appear to influence fund performance
– Security Characteristics:
After controlling for risk, portfolios containing stocks with different market capitalizations, price-earnings ratios, and price-
book ratios produce different returns
Funds with lower portfolio turnover and expense ratios produce superior returns
– Return Momentum:
Funds following return momentum strategies generate short-term performance persistence
When used as a separate risk factor, return momentum “explains” fund performance persistence
52. Lessons from Prior Research (cont.)
• Security characteristics, return momentum, and fund style appear to influence fund performance (cont.)
– Fund Style Definitions:
After controlling for risk, funds with different objectives and style mandates produce different returns
Value funds generally outperform growth funds on a risk-adjusted basis
– Style Investing:
Fund managers make decisions as if they participate in style-oriented return performance “tournaments”
The consistency with which a fund manager executes the portfolio’s investment style mandate affects fund performance, in
both up and down markets
•Active fund managers appear to possess genuine investment skills
– Stock-Picking Skills:
Some fund managers have security selection abilities that add value to investors, even after accounting for fund expenses
A sizeable minority of managers pick stocks well enough to generate superior alphas that persist over time
– Investment Discipline:
Fund managers who control tracking error generate superior performance relative to traditional active managers and passive
portfolios
– Manager Characteristics:
The educational backgrounds of managers systematically influence the risk-adjusted returns of the funds they manage