The document discusses portfolio management and asset allocation strategies. It defines a portfolio as a collection of investments that can include stocks, mutual funds, bonds, and cash. It then describes different types of portfolios including a market portfolio and a zero investment portfolio. The main phases of portfolio management are outlined as security analysis, portfolio analysis, portfolio selection, portfolio revision, and portfolio evaluation. Asset allocation strategies focus on establishing an appropriate mix of asset classes in a portfolio to optimize risk and return based on an investor's goals.

1. TOPIC- PORTFOLIO MANAGEMENT
MADE BY- SHRUTI (THANE CENTRE).
REGISTERATION NUMBER- S151117400328
GUIDED BY- MR. VENKAT RAO YAMANA
CF&MA ASSIGNMENT

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. 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. 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. PHASES OF PORTFOLIO MANAGEMENT-
Security
analysis
Portfolio
analysis
Portfolio
selection
Portfolio
revision
Portfolio
evaluation

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. 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. 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. 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. ELEMENTS OF
RISK
SYSTEMATIC
RISK
INTEREST RATE
RISK
MARKET RISK
PURCHASING
POWER RISK
UNSYSTEMATIC
RISK
BUSINESS RISK FINANCIAL RISK

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. 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. 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. 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.  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. 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.  EXAMPLE-

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. 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. 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. 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. 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. 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. THANK YOU