APPLICATION OF PORTFOLIO MANAGEMENT:
Portfolio Management involves time element and time horizon. The present value of future return/cash flows by discounting is useful for share valuation and bond valuation. Theinvestment strategy in portfolio construction should have a time horizon, say 3 to 5 year; to produce the desired results of say 20-30% return per annum.Besides portfolio management should also take into account tax benefits andinvestment incentives. As the returns are taken by investors net of tax payments, and there isalways an element of inflation, returns net of taxation and inflation are more relevant totaxpaying investors. These are called net real rates of returns, which should be more thanother returns. They should encompass risk free return plus a reasonable risk premium,depending upon the risk taken, on the instruments/assets invested.
SCOPE OF PORTFOLIO MANAGEMENT:-
Portfolio management is a continuous process. It is a dynamic activity. The followingare the basic operations of a portfolio management.a)
Monitoring the performance of portfolio by incorporating the latest market conditions. b)
Identification of the investor‟s objective, constraints and preferences.
Making an evaluation of portfolio income (comparison with targets and achievement).d)
Making revision in the portfolio.e)
Implementation of the strategies in tune with investment objectives.
Interest, dividend or appreciation of investment is called return which is used to evaluate the performance of the investment. There can be of two types of return.
Expected return is the anticipated return.
Realized return is actually earned income of the investors.
MEANING OF RISK
Risk & uncertainty
are an integrate part of an investment decision. Technically „risk‟ can be
defined as situation where the possible consequences of the decision that is to be taken are
known. „Uncertainty‟ is generally defined to apply to situations where the probabilitie
scannot be estimated. However, risk & uncertainty are used interchangeably.