market timing new

8/6/2019 Market Timing New.....

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GROUP MEMBERS

SHRUSHTI RAJGOR 1084CHITRA SARODE 1093

NEELIMA NIMJE 1071

SNEHA TURILAY 1104

KASTURI YADAV 1109

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What is Portfolio?

Holding a portfolio is a part of an investment andrisk-limiting strategy called expansion &diversification.

By owning several assets, certain types of risk (inparticular specific risk) can be reduced. The assetsin the portfolio could include bank accounts,stocks, bonds, options, warrants, gold certificates,

real estate, futures contracts, or any other itemthat is expected to retain its value & earn revenue.

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What is Portfolio Management?Portfolio management is an investmentadvisory that incorporates financial planning

,investment portfolio management and a other

numerous aggregate financial services.Typically there are two strategicallyapproaches to manage portfolio.

Portfolio Management

Active Portfolio Management Passive Portfolio Management

Index Booster Index Followers4



� Active management refers to a portfoliomanagement strategy where the manager makesspecific investments with the goal of outperforming

an investment benchmark index.

� The active manager exploits market inefficiencies bypurchasing securities (stocks etc.) that are

undervalued or by short selling securities that areovervalued.

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� Passive management is a financial strategy in whichan investor invests in accordance with a pre-determined strategy that doesn't entail any

forecasting.� The idea is to minimize investing fees and to avoid

the adverse consequences of failing to correctlyanticipate the future.

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� By Hendricks, Patel and ZeckhauserActive fund managers allocation, both strategic aswell as tactical and stock selection. In shorter periodactive fund management performed better thanpassive management

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�

By Elton, Gruber and Blak

e, 1996; Gruber, 1996;Carhart, 1997

Passive fund managers try to track an index.

They do not try to forecast the movement of the

economy and sectors, these activities reduce theexpenses of managing the portfolio.

Over a long term index funds are likely to outperform a majority of actively managed funds ofsimilar risk showed neither the growth nor the valueinvestment styles outperformed indexes over thelong term

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� Value of financial assets is obtained as present valueof all future cash flow expected to be received fromthe asset .

V = CFi

/(1+k) i

� Beginning from the general relationship it is possibleto derive the relationship among maturity,systematic risk and price changes in a financial asset

when the market risk premium changes.� The assets proportional change in the value per unit

in the market risk premium as its elasticity anddenote it with letter ´Eµ

E= V/V /MRP 9



� Market risk premium

Risk premium is the added compensation, aninvestor receives for placing his money at risk of loss.The greater the risk of an investment, the greater therisk premium the investor receives.

E= (-N)/ (1+Rf)/ +(MRP)

� Modified Duration

� The magnitude of elasticity E increases with

modified duration as well as systematic risk.� If the direction of change in market risk premium

could be anticipated investment gains could be madeby increasing or decreasing E appropriately.

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� The ability to correctly anticipate changes in marketrisk premium and suitably alter E would add valueto investment.

� The relationship between systematic risk and N for agiven value of E is a rectangular hyperbole.

� For each value of E there is distinct curve, thesecurves are indifference curves of E.

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� Equity Investment

� Government Debt

� Corporate Debt

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DEPENDANT FACTORS

� Investment in different asset classes offer differentopportunity for timing the market.

� A pure equity investment would rely on systematic

risk change on market timing.� Investment in government securities would rely

more on changing the duration of investment.

� Corporate debt would rely on both.

� Balance funds is that which invests it equity and debtand offers better scope to explore such opportunities.

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� Equity portfolios offers scope to time the marketthrough change of portfolio systematic risk.

� The overall response to changes in market riskpremium is governed by both the portfoliosystematic risk as well as its duration.

�

Some asset classes offer considerable leeway tomodify duration while others offer handle tochange the systematic risk.

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� Market timing has been seen in the limitedcontacts of changes in the market risk.

� There are complex security such as bonds with

options, high yield bonds, equity derivatives,bonds denomination in different currenciesand so on.

�

The simple model used might fail to dealcomplex situations.

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From this we would like to conclude that as ageneral case varying both duration as well assystematic risk enables market timing.

The relative importance of these two enablersvaries with the portfolio asset class.

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