portfolio management: an overview

Portfolio management: An

overview

Portfolio Management: An Overview

The portfolio perspective

Evaluating investment based on their contribution to risk and return of an investor’s overall portfolio( not in isolation)

Adding a risky asset can actually reduce portfolio risk

Diversification ration =


Markowitz model(1950):

A framework for measuring the risk reduction benefits of diversification Conclusion : unless the returns of the risky assets are perfectly positively correlated,

risk is reduced by diversifying across assets.


Modern portfolio theory (MPT):

MPT results in equilibrium expected returns for securities and portfolios that are a linear function of each security’s or portfolios market risk (the risk that can not be reduced by diversification).


Types of investors and distinctive characteristics Individual investors :Save and invests for variety of reasons Endowment: is a fund that is dedicated to providing financial support for a specific

reason Insurance companies: invest customer premiums with the objective of funding

customer claims as they occur. Investment companies : managed the pooled funds of many investors. Sovereign wealth funds: refer to pools of assets owned by a government

Characteristics of Different Types of Investors Investor Risk Tolerance Investment

Horizon Liquidity Needs Income Needs

Individuals Depends on individuals

Depends on individual

Depends on individual

Depends on individuals

Banks Low Short High Pay interest Endowments High Long Low Spending level Insurance Low Long-life

Short-P&CHigh Depends on

fund

Mutual funds Depends on fund

Depends on fund

High Depends on fund

Defined benefit pensions

High Long Low Depends on age



Portfolio management process Step1: Planning

Understanding client needs and constraints

Write an investment policy statement (IPS )

Develop an investment strategy consistent with the IPS

Specify performance benchmark

Step 2: Execution Analyze risk and return characteristics of asset classes

Analyze market conditions to identify attractive securities within asset classes

Portfolio constructions : target/strategic asset allocation individual securities weightings

Step 3 : feedback Monitor and update investor’s needs and market conditions

Rebalance portfolio as needs

Measure and report performance


Pooled investments 1. Open-end mutual funds

Purchase or redeem shares at NAV(net asset value)

Number of shares changes with purchases and redemptions

Fee(%) for ongoing management

Loan funds: up-front charges . Redemption charges, or both

No-load funds :neither type of charges

2. Closed-end mutual funds Fixed number of shares

Issued as an IPO

Trade like shares of stock , commission and spread, and margin and shorting

Fee(%) for ongoing management

Market prices can (do) differ from NAV

do not need to hold cash or sell shares to need redemptions as open end funds do


Pooled investments :

Types of mutual funds by investment objective

Money market funds :investment on short debt securities Bond funds :investment on fixed income securities, high

yield , global , domestic, government, corporate, long-term, short-term, tax-exempt, etc.

Stock funds :investment on a great variety of stocks Stock funds

Actively managed funds Index funds

Balanced funds


pooled investments

3. Exchange- traded funds (ETFs):similar to closed-end funds Typically index funds Trade like shares of closed end funds Can be shorted or margined Dividends typically paid out In-kind purchase and redemptions keep market price close to NAV May have tax advantage over open–end index funds

4. separately managed account owned by a single investor Also called wrap accounts Minimum investment 100$-500k


Pooled investments 5. Buyout funds

Buy al public shares and take company private Heavy use of debt ,high leverage Hope to restructure, improve cash flow, and resell as an IPO at a profit

6. Venture capital funds Provide start-up/early-stage financing Expect failures but with some big success Active in management of portfolio firms


Pooled investments 7. Hedge funds

Not registered of offered to the public Small number of accredited investors high minimum investment, high leverage, derivatives Many strategies are used(e.g., long/ short, global macro, event driven)

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