intro to beginner to learn on HM model

1. Portfolio Management
• Portfolio selection
• Markowitz model

2. MEANING - PORTFOLIO
• It is a collection or combination of financial
assets (shares, debentures, government
securities)
• It can also be called collection of Physical
Assets (gold, silver, real estate etc).
• Here, it is used for” investment purpose” and
not for consumption.

3. PORTFOLIO SELECTION
• The objective of every rational investor is to maximize
his returns and minimize the risk.
• Diversification is the method adopted for reducing risk.
• It essentially results in the construction of portfolios.
• The proper goal of portfolio construction would be to
generate a portfolio that provides the highest return and
the lowest risk.
• Such a portfolio would be known as the optimal
portfolio.
• The process of finding the optimal portfolio is
described as portfolio selection.

4. MARKOWITZ MODEL
• Modern portfolio theory or portfolio theory
was introduced by harry markowowiz with his
paper portfolio selection .
• The markowitz model describe a set of
rigorous statistical procedures used to select
the optimal portfolio for wealth maximizing /
risk-averse investors.
• The model is describing under the framework
of a risk-return tradeoff graph.

5. MARKOWITZ MEAN VARIANCE MODEL
ASSUMPTION
• The return on investment adequately summarizes
the outcome of the investment
• All investors are risk-averse.
• Investors are assumed to be rational
• Return could be any suitable measure of monetary
inflow
• Investors base their investment decision on two
criteria expected return and variance of return

6. DIAGRAM

7. EFFICIENT SET OF PORTFOLIO
• It is the portfolio that offers the highest excepted
return for a given level of risk or one with the
lowest level of risk for a excepted return and the line
that connect all these efficient portfolios is efficient
frontier.

8. GRAPH

9. SETTING UP OF PORTFOLIO
• The portfolio manager will determine how to
structure the portfolio based on the restriction
and guidelines in the portfolio prospectus.
Portfolio prospectus includes;
• Fee
• Investment objective
• Limitation
• Names of the portfolio manager

10. DIVERSIFICATION
Why diversify?
• Higher more consistent return
• Lower risk
• A diversified portfolio will hold a number of
securities
• Diversification is not having all your money in
one basket
• Losses in some securities should be offset by
gains in others

11. How to get the best diversification?
• Spread your portfolio among multiple
investment vehicles such as cash,stock,mutual
fund.
• Vary the risk in your securities
• Vary your securities by industry

12. Diversification of risk
TWO TYPES OF RISK;
1. Systematic risk
2. Unsystematic risk

13. SELECTION OF OPTIMUM PORTFOLIO
• Step 1; use the markowitz portfolio selection
model to identify optimal combinations
• Step 2; consider riskless borrowing and
lending possibilities
• Step 3; choose the final portfolio based on
your preference for return relatives to risk