This topic deals with the diversification of risk through portfolio management using models like markowitz model.

1. Portfolio Management
Dr. Mohammed Arif Pasha
Principal
Brindavan College
Bangalore - 560063

2. PORTFOLIO MANAGEMENT
Portfolio is a combination of securities.
A process of blending together the broad asset classes
to obtain optimum return with minimum risk.
Diversification helps to spread risk over assets.
Portfolio management is the art of
• making decisions about investment mix and policy,
• matching investments to objectives,
• asset allocation for individuals and institutions, and
• balancing risk against Performance

3. Approaches to portfolio construction
• Traditional and Modern approach
• Tradition approach:
• Determining the objectives of portfolio as per
investor’s needs,
• Securities are evaluated and
• Selection of securities is made

4. Analysis of
constraints
Determination of
objectives
Selection of
portfolio
common stock
Common stock and
bond
Bond
Steps in traditional approach
Assessment of risk
and return
Diversification

5. Constraints
• Time horizon (duration of investment based on needs)
• Liquidity (short term, medium or long term)
• Safety (where to invest)
• Taxes (rebates, concessions, exemptions)
• Temperament (risk lovers, neutral, risk averse)

6. Determination of objectives
• Current income
• Growth in income
• Capital appreciation
• Preservation of capital

7. objectives
• Income needs (meet all or part of living expenses,
constant income)
• Invest surplus (avenues)
• Return requirements (income, growth, stability)
• Risk tolerance (more, moderate, less, no risk)

8. Selection of portfolio
• Objectives and asset mix (debt equity)
• Safety and asset mix
• Capital appreciation
• Risk and return
• Diversification
Selection of
industries
Selection of
companies
Determining the
Size of investment

9. Modern approach
• Developed by Harry Markowitz
• Attention is on the process of selecting the
portfolio
• Gives attention to equity than bond
• Stocks are selected not on income needs but on
risk and return analysis
• Return includes market return and dividend
• Investor maximize return & minimize risk
• Investor takes risk if adequately rewarded.

10. Portfolio – Markowitz model
• Introduced by Harry Markowitz with his paper
"Portfolio Selection," in 1952, Journal of
Finance.
• A good portfolio is more than a long list of
securities
• investors focus on selecting portfolios based on
their risk-reward characteristics instead of merely
compiling portfolios from securities

11. Simple diversification
• Risk can be reduced by diversification
• Diversification by selecting different industries
• Total risk consists of systematic and unsystematic risk
• Diversification reduces unsystematic risk (15)
• It cannot reduce systematic risk
• With different assets added to portfolio, total risk tends to
decrease.
• Beyond optimum portfolio, additional risk reduction
cannot be gained
• Securities selected at random & no analytical procedure
• As portfolio size increases, total risk line starts declining.

12. Problems of diversification
• Purchase of poor performers
• Information inadequacy
• High research cost
• High transaction cost

13. Assumptions
• Investors decision is based on expected return
and variance of returns
• For a given risk, investor prefers high return to
low risk
• Risk averse investors like to join Markowitz
model than keeping single stock as
diversification reduces risk.