[PORTFOLIO MANAGEMENT SOFTWARE] INTRODUCTION

Portfolio management is the discipline of planning, organizing, securing and managing resources to bring about the successful completion of specific project goals and objectives. It is sometimes conflated with program management, however technically a program is actually a higher level construct: a group of related and somehow interdependent projects. A project is a temporary endeavor, having a defined beginning and end (usually constrained by date, but can be by funding or deliverables), undertaken to meet unique goals and objectives, usually to bring about beneficial change or added value. The temporary nature of projects stands in contrast to business as usual (or operations), which are repetitive, permanent or semipermanent functional work to produce products or services. In practice, the management of these two systems is often found to be quite different, and as such requires the development of distinct technical skills and the adoption of separate management.

OBJECTIVES OF THE PROJECT • •

Learning and Understanding the concept of Portfolio. Understanding the Models of Portfolio Management. Learning about the Instruments in Portfolio. Advantages and Diadvantages of Portfolio management Application of Computer in Portfolio. Understanding the operation of the Software used in Portfolio. Advantages of Software used and it limitations.

• • • •

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RESEARCH METHODOLOGY
• PRIMARY DATA Primary source is a term used in a number of disciplines to describe source material that is closest to the person, information, period, or idea being studied. • SECONDARY DATA Secondary source is a document or recording that relates or discusses information originally presented elsewhere. A secondary source contrasts with a primary source, which is an original source of the information being discussed. Secondary sources involve generalization, analysis, synthesis, interpretation, or evaluation of the original information. Primary and secondary are relative terms, and some sources may be classified as primary or secondary, depending on how it is used.

LIMITATIONS
• • Project is based on Secondary data. Time constraint

Portfolio Management
Most investors leave the more technical aspects of portfolio management to their financial consultants. However, this need not be the case. The average educated person can certainly gain a grasp of the topic sufficient enough to make his or her own investment decisions. The
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key to learning is gaining the knowledge and then practice applying it to your own portfolio in small amounts until you feel confident enough to manage it completely on your own. This article will briefly describe some of the concepts behind portfolio theory as well as some general techniques applied by portfolio managers. There are many good books that can give more in depth information if you feel this is something you would like to know more about. The first important facet of portfolio management is understanding the two main decisions, which are related but completely separate for purposes of practicality. These two decisions are 1) Broad-based asset allocation and 2) Specific security selection The most important thing an investor can do is go through the in-depth process of determining a portfolio asset mix at the very onset of each year and again anytime there is a significant change to their portfolio. It is only after this mix is determined that the process of choosing individual investments should be made. Asset classes are by far a bigger factor in overall performance than individual security selection as time invested increases. Or to put this in a more pragmatic way, it doesn’t matter in a 10-year period of time which stock you chose as much as it matters that you chose stock. This doesn’t mean an individual security can’t make a difference. It just means that it becomes less important over a period of five years or so since all securities of a given class tend to move toward an average performance which balances out extreme movements in specific periods of time. Another important facet of portfolio management is that one makes analytical decisions and not make decisions based on hunches or emotion. This kind of pragmatic and analytical approach will keep the average investor from making decisions to move money completely in or out of a security or an asset class based upon the latest market rumors or the five o’clock news. Regardless of what insight we feel inclined to follow, the numbers and the data of past performance gives us clear indications that moving in and out of asset classes or individual securities during adverse periods hurts more than it helps in the long run. And if a decision is made to divest out of a specific security, it is always advised to dollar-cost

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average out of the investment in the same manner that one should have dollar-cost averaged “in”. Dollar cost averaging is a technique by which an investor divides the given investment over a period of time and invests that amount on a regular basis as opposed to buying in all at once. This technique is covered in more detail in a previous article. The simple concepts above can help you to begin making decisions like a professional. Of course there are many other aspects of portfolio management that go in depth into both of the above investment decisions. Look for those more detailed articles elsewhere on this website.

Portfolio management is the discipline of planning, organizing, securing and managing resources to bring about the successful completion of specific project goals and objectives. It is sometimes conflated with program management, however technically a program is actually a higher level construct: a group of related and somehow interdependent projects. A project is a temporary endeavor, having a defined beginning and end (usually constrained by date, but can be by funding or deliverables), undertaken to meet unique goals and objectives, usually to bring about beneficial change or added value. The temporary nature of projects stands in contrast to business as usual (or operations), which are repetitive, permanent or semipermanent functional work to produce products or services. In practice, the management of these two systems is often found to be quite different, and as such requires the development of distinct technical skills and the adoption of separate management. The primary challenge of project management is to achieve all of the project goals[4] and objectives while honoring the preconceived project constraints.[5] Typical constraints are
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• History Roman Soldiers Building a Fortress. time. Thomas INDIAN INSTITUTE OF FINANCE Page 5 . and budget.[1] The secondary—and more ambitious—challenge is to optimize the allocation and integration of inputs necessary to meet pre-defined objectives. among those for example Vitruvius (1st century BC). Project management has been practiced since early civilization. Trajan's Column 113 ad.[PORTFOLIO MANAGEMENT SOFTWARE] scope. Christopher Wren (1632–1723) . Until 1900 civil engineering projects were generally managed by creative architects and engineers themselves.

His work is the forerunner to modern project management tools including work breakdown structure (WBS) and resource allocation. and informal techniques and tools. As a discipline. And the "Program Evaluation and Review Technique" or PERT. called the father of planning and control techniques[9]. Project Management developed from several fields of application including construction. The "Critical Path Method" (CPM) was developed as a joint venture between DuPont Corporation and Remington Rand Corporation for managing plant maintenance projects. The 1950s marked the beginning of the modern Project Management era. prior to the 1950s. and Henri Fayol for his creation of the 5 management functions which form the foundation of the body of knowledge associated with project and program management. who is famous for his use of the Gantt chart as a project management tool. was developed by Booz-Allen & Hamilton as part of the United States Navy's (in conjunction with the Lockheed Corporation) Polaris missile INDIAN INSTITUTE OF FINANCE Page 6 . At that time.[PORTFOLIO MANAGEMENT SOFTWARE] Telford (1757-1834) and Isambard Kingdom Brunel (1806–1859). Henry Gantt (1861-1919). projects were managed on an ad hoc basis using mostly Gantt Charts. and defense activity. It was in the 1950s that organizations started to systematically apply project management tools and techniques to complex projects.[10] Both Gantt and Fayol were students of Frederick Winslow Taylor's theories of scientific management.[11] In the United States. the father of planning and control techniques. two mathematical project-scheduling models were developed. engineering. Two forefathers of project management are Henry Gantt. Project management became recognized as a distinct discipline arising from the management discipline.

[15] PMI publishes A Guide to the Project Management Body of Knowledge (PMBOK Guide). IPMA maintains its federal structure today and now includes member associations on every continent except Antarctica. [13] as a federation of several national project management associations. The International Project Management Association (IPMA) was founded in Europe in 1967.[PORTFOLIO MANAGEMENT SOFTWARE] submarine program. the Project Management Institute (PMI) was formed in the USA. which describes project management practices that are common to "most projects. the American Association of Cost Engineers (now AACE International. program and project management (Total Cost Management Framework). and behavioral competences. contextual competences. the Association for the Advancement of Cost Engineering) was formed by early practitioners of project management and the associated specialties of planning and scheduling. with pioneering work by Hans Lang and others. most of the time.[12] These mathematical techniques quickly spread into many private enterprises. In 1969. PERT network chart for a seven-month project with five milestones At the same time. In 1956. and engineering economics was evolving." PMI also offers multiple certifications. The AAPM American Academy of Project Management International Board of Standards 1996 was the first to institute post-graduate certifications such as the MPM Master Project INDIAN INSTITUTE OF FINANCE Page 7 . IPMA offers a Four Level Certification program based on the IPMA Competence Baseline (ICB). AACE continued its pioneering work and in 2006 released the first integrated process for portfolio. technology for project cost estimating.[14] The ICB covers technical competences. cost management. cost estimating. and cost/schedule control (project control). as project-scheduling models were being developed.

and CIPM Certified International project Manager. In the "traditional approach". we can distinguish 5 components of a project (4 stages plus control) in the development of a project: Typical development phases of a project • • • • • Project initiation stage. 3 and 4 multiple times. Project monitoring and controlling systems. and phased approaches. Many industries use variations on these project stages. projects will typically progress through stages like PreINDIAN INSTITUTE OF FINANCE Page 8 . as well as the roles and responsibilities of all participants and stakeholders. careful consideration must be given to the overall project objectives. CEC Certified-Ecommerce Consultant. Some projects will go through steps 2. and cost. Some projects do not follow a structured planning and/or monitoring stages. Regardless of the methodology employed. incremental. when working on a brick and mortar design and construction. The AAPM also issues the post-graduate standards body of knowledge for executives. interactive. Approaches There are a number of approaches to managing project activities including agile.[PORTFOLIO MANAGEMENT SOFTWARE] Manager. Project execution or production stage. The traditional approach A traditional phased approach identifies a sequence of steps to be completed. Not all the projects will visit every stage as projects can be terminated before they reach completion. PME Project Management E-Business. Project planning or design stage. timeline. For example. Project completion.

but often fails in larger projects of undefined and ambiguous nature. resource leveling should be performed across projects. Design Development. Finally. the actual stages typically follow common steps to problem solving — "defining the problem. weighing options. although RUP does not require or explicitly recommend this practice. In software development." Critical Chain Project Management Critical Chain Project Management (CCPM) is a method of planning and managing projects that puts more emphasis on the resources (physical and human) needed in order to execute project tasks. To exploit the constraint. the system constraint for all projects is identified as are the resources. projects are planned and managed to ensure that the resources are ready when the critical chain tasks must start. implementation and evaluation. However. Schematic Design. Conceptual Design. one series of tasks after another in linear sequence.. this approach is often known as the waterfall model[16]. In software development many organizations have adapted the Rational Unified Process (RUP) to fit this methodology. i.[PORTFOLIO MANAGEMENT SOFTWARE] Planning. it is often enough to identify (or simply select) a single "drum" resource—a resource that acts INDIAN INSTITUTE OF FINANCE Page 9 . Regardless of project type.e. While the terms may differ from industry to industry. choosing a path. Construction Drawings (or Contract Documents). the project plan should undergo Resource Leveling. and Construction Administration. In multi-project environments. subordinating all other resources to the critical chain. Waterfall development works well for small. tasks on the critical chain are given priority over all other activities. Applying the first three of the five focusing steps of TOC. This becomes especially true as software development is often the realization of a new or novel product. well defined projects. and the longest sequence of resource-constrained tasks should be identified as the critical chain. requirements management is used to develop an accurate and complete definition of the behavior of software that can serve as the basis for software development[17]. It is an application of the Theory of Constraints (TOC) to projects. The Cone of Uncertainty explains some of this as the planning made on the initial phase of the project suffers from a high degree of uncertainty. The goal is to increase the rate of throughput (or completion rates) of projects in an organization. In projects where requirements have not been finalized and can change.

The generalization of Extreme Programming to other kinds of projects is extreme project management. which may be used in combination with the process modeling and management principles of human interaction management. it has been noted that several of these fundamentally PERT-based models are not well suited for the multi-project company environment of today. Planning and feedback loops in Extreme Programming (XP) with the time frames of the multiple loops. project management experts try to identify different "lightweight" models. Event chain methodology Event chain methodology is another method that complements critical path method and critical chain project management methodologies.[citation needed] Most of them are aimed at very large-scale. as well as to allow for easy modeling of uncertainties in the project schedules. Event chain methodology is based on the following principles. nonroutine projects.[PORTFOLIO MANAGEMENT SOFTWARE] as a constraint across projects—and stagger projects based on the availability of that single resource. Event chain methodology helps to mitigate the negative impact of psychological heuristics and biases. Instead. such as Agile Project Management methods including Extreme Programming for software development and Scrum techniques. Event chain methodology is an uncertainty modeling and schedule network analysis technique that is focused on identifying and managing events and event chains that affect project schedules. and nowadays all kinds of management are expressed in terms of projects. INDIAN INSTITUTE OF FINANCE Page 10 . Extreme Project Management In critical studies of Project Management. Using complex models for "projects" (or rather "tasks") spanning a few weeks has been proven to cause unnecessary costs and low maneuverability in several cases[citation needed]. one-time.

cost. This allows for automatic control of any deviations from INDIAN INSTITUTE OF FINANCE Page 11 . • Event chains: Events can cause other events. PRINCE2 The PRINCE2 process model PRINCE2 is a structured approach to project management. it is still possible to refine information about future potential events and helps to forecast future project performance. and events occurred is available. which can occur at some point in the middle of the task. Tasks are affected by external events. and what to do if the project has to be adjusted if it does not develop as planned. which will create event chains. In the method. PRINCE2 describes procedures to coordinate people and activities in a project. • Event chain visualization: Events and event chains can be visualized using event chain diagrams on a Gantt chart. how to design and supervise the project. • Critical events or event chains: The single events or the event chains that have the most potential to affect the projects are the “critical events” or “critical chains of events. released in 1996 as a generic project management method. • Project tracking with events: Even if a project is partially completed and data about the project duration.[PORTFOLIO MANAGEMENT SOFTWARE] • Probabilistic moment of risk: An activity (task) in most real life processes is not a continuous uniform process. These event chains can significantly affect the course of the project.[18] It combined the original PROMPT methodology (which evolved into the PRINCE methodology) with IBM's MITP (managing the implementation of the total project) methodology.” They can be determined by the analysis. each process is specified with its key inputs and outputs and with specific goals and activities to be carried out. Quantitative analysis is used to determine a cumulative effect of these event chains on the project schedule. PRINCE2 provides a method for managing projects within a clearly defined framework.

This contrasts sharply with the traditional approach. On the basis of close monitoring. rather than as a completely preplanned process.Software Process Improvement and Capability Estimation). the project can be carried out in a controlled and organized way. predecessor of the CMMI Model Also furthering the concept of project control is the incorporation of process-based management. the project is seen as a series of relatively small tasks conceived and executed as the situation demands in an adaptive manner. Process-based management Capability Maturity Model. Agile Project Management approaches based on the principles of human interaction management are founded on a process view of human collaboration.[PORTFOLIO MANAGEMENT SOFTWARE] the plan. In the agile software development or flexible product development approach. Please help improve this article by INDIAN INSTITUTE OF FINANCE Page 12 . PRINCE2 provides a common language for all participants in the project. Processes This section relies largely or entirely upon a single source. This area has been driven by the use of Maturity models such as the CMMI (Capability Maturity Model Integration) and ISO/IEC15504 (SPICE . the method enables an efficient control of resources. Divided into manageable stages. The various management roles and responsibilities involved in a project are fully described and are adaptable to suit the complexity of the project and skills of the organization.

[PORTFOLIO MANAGEMENT SOFTWARE] introducing appropriate citations of additional sources. Regardless of the methodology or terminology used. The project development stages[19] Major process groups generally include: • • • • • Initiation Planning or development Production or execution Monitoring and controlling Closing In project environments with a significant exploratory element these stages may be supplemented with decision points (go/no go decisions) at which the project's continuation is debated and decided. An example is the Stage-Gate model. the same basic project management processes will be used. project management includes a number of elements: four to five process groups. INDIAN INSTITUTE OF FINANCE Page 13 . and a control system. (August 2010) Traditionally.

and support personnel for the project Project charter including costs. including users. Any deficiencies should be reported and a recommendation should be made to fix them. tasks.[PORTFOLIO MANAGEMENT SOFTWARE] Initiation Initiating Process Group Processes[19] The initiation processes determine the nature and scope of the project. it is unlikely that the project will be successful in meeting the business’ needs. The key project controls needed here are an understanding of the business environment and making sure that all necessary controls are incorporated into the project. The initiation stage should include a plan that encompasses the following areas: • • • • • Analyzing the business needs/requirements in measurable goals Reviewing of the current operations Financial analysis of the costs and benefits including a budget Stakeholder analysis. If this stage is not performed well. deliverables. and schedule Planning and design Planning Process Group Activities[19] INDIAN INSTITUTE OF FINANCE Page 14 .

cost and resources adequately to estimate the work needed and to effectively manage risk during project execution. developing the scope statement. identifying the activities needed to complete those deliverables and networking the activities in their logical sequence. determining what to purchase for the project and holding a kick-off meeting are also generally advisable. and may help to inform the planning team when identifying deliverables and planning activities.[PORTFOLIO MANAGEMENT SOFTWARE] After the initiation stage. conceptual design of the operation of the final product may be performed concurrent with the project planning activities. such as planning for communications and for scope management. For new product development projects. developing the budget. estimating the resource requirements for the activities. the project is planned to an appropriate level of detail. risk planning.g. developing the schedule. estimating time and cost for activities. gaining formal approval to begin work. INDIAN INSTITUTE OF FINANCE Page 15 . identifying deliverables and creating the work breakdown structure. The main purpose is to plan time. a failure to adequately plan greatly reduces the project's chances of successfully accomplishing its goals. selecting the planning team. identifying roles and responsibilities. Additional processes. by level of detail or rolling wave). Project planning generally consists of • • • • • • • • • • • determining how to plan (e. As with the Initiation process group.

Monitoring and Controlling Process Group Processes[19] Monitoring and Controlling includes: • Measuring the ongoing project activities ('where we are').[PORTFOLIO MANAGEMENT SOFTWARE] Executing Executing Process Group Processes[19] Executing consists of the processes used to complete the work defined in the project management plan to accomplish the project's requirements. Execution process involves coordinating people and resources. Monitoring and controlling Monitoring and controlling consists of those processes performed to observe project execution so that potential problems can be identified in a timely manner and corrective action can be taken. INDIAN INSTITUTE OF FINANCE Page 16 . The deliverables are produced as outputs from the processes performed as defined in the project management plan. The key benefit is that project performance is observed and measured regularly to identify variances from the project management plan. when necessary. as well as integrating and performing the activities of the project in accordance with the project management plan. to control the execution of the project.

but not necessarily limited to.” The requirement for providing them is a norm in construction contracts. etc. INDIAN INSTITUTE OF FINANCE Page 17 . the monitoring and controlling process also provides feedback between project phases. differing site conditions. the design drawings. more specifically. and it includes: • • • Continuing support of end users Correction of errors Updates of the software over time Monitoring and Controlling cycle In this stage. Hence. material availability. to name a few. the work scope may change. the change normally needs to be documented to show what was actually constructed. or more simply. the owner usually requires a final record to show all changes or. in order to implement corrective or preventive actions to bring the project into compliance with the project management plan. Beyond executing the change in the field. Influencing the factors that could circumvent integrated change control so only approved changes are implemented In multi-phase projects. Over the course of any construction project. contractor-requested changes. any change that modifies the tangible portions of the finished work. Project Maintenance is an ongoing process.) against the project management plan and the project performance baseline (where we should be). scope. The end product of this effort is what the industry terms as-built drawings. This is referred to as Change Management. effort. value engineering and impacts from third parties. The record is made on the contract documents – usually. “as built.[PORTFOLIO MANAGEMENT SOFTWARE] • • • Monitoring the project variables (cost. Changes can be the result of necessary design modifications. auditors should pay attention to how effectively and quickly user problems are resolved. Identify corrective actions to address issues and risks properly (How can we get on track again). Change is a normal and expected part of the construction process.

change. and human resources. Administrative activities include the archiving of the files and documenting lessons learned. If project control is not implemented correctly. having a thorough involvement of each step in the process. how reliant the stakeholders are on controls. and how INDIAN INSTITUTE OF FINANCE Page 18 . When the changes accumulate. Project control systems Project control is that element of a project that keeps it on-track. In addition. risk. auditors should consider how important the projects are to the financial statements. communication. quality. too little control is very risky. Each project should be assessed for the appropriate level of control needed: too much control is too time consuming. time. Control systems are needed for cost. Closing Closing Process Group Processes. procurement.[PORTFOLIO MANAGEMENT SOFTWARE] When changes are introduced to the project. fixes. and additional audit fees. the cost to the business should be clarified in terms of errors.[19] Closing includes the formal acceptance of the project and the ending thereof. It is important not to lose sight of the initial goals and targets of the projects. on-time and within budget. the viability of the project has to be re-assessed. Project control begins early in the project with planning and ends late in the project with postimplementation review. This phase consists of: • • Project close: Finalize all activities across all of the process groups to formally close the project or a project phase Contract closure: Complete and settle each contract (including the resolution of any open items) and close each contract applicable to the project or project phase. the forecasted result may not justify the original proposed investment in the project.

typically relating to construction industry. Businesses sometimes use formal systems development processes. computing. building the project requirements. INDIAN INSTITUTE OF FINANCE Page 19 . execution. and managing the triple constraint for projects. A project manager is the person accountable for accomplishing the stated project objectives. Key project management responsibilities include creating clear and attainable project objectives. The process of development and the quality of the final product may also be assessed if needed or requested. These help assure that systems are developed successfully. Auditors should review the development process and procedures for how they are implemented. Many other fields in the production. and closing of any project. architecture. and scope. design and service industries also have project managers. and auditors should review this process to confirm that it is well designed and is followed in practice. Project managers can have the responsibility of the planning. A good formal systems development plan outlines: • • • • • A strategy to align development with the organization’s broader objectives Standards for new systems Project management policies for timing and budgeting Procedures describing the process Evaluation of quality of change Topics Project managers A project manager is a professional in the field of project management. A business may want the auditing firm to be involved throughout the process to catch problems earlier on so that they can be fixed more easily. which is cost. A formal process is more effective in creating strong controls. or telecommunications.[PORTFOLIO MANAGEMENT SOFTWARE] many controls exist. engineering. time. An auditor can serve as a controls consultant as part of the development team or as an independent auditor as part of an audit.

The cost constraint refers to the budgeted amount available for the project. The time constraint refers to the amount of time available to complete a project." and "cost". INDIAN INSTITUTE OF FINANCE Page 20 . and to form close links with the nominated representatives. can be realized. A further refinement of the constraints separates product "quality" or "performance" from scope. The ability to adapt to the various internal procedures of the contracting party. based on knowledge of the firm they are representing. Traditionally. One side of the triangle cannot be changed without affecting the others. a tight time constraint could mean increased costs and reduced scope. client satisfaction. The scope constraint refers to what must be done to produce the project's end result. quality and above all.[PORTFOLIO MANAGEMENT SOFTWARE] A project manager is often a client representative and has to determine and implement the exact needs of the client. time. Like any human undertaking. and a tight budget could mean increased time and reduced scope. projects need to be performed and delivered under certain constraints. The discipline of Project Management is about providing the tools and techniques that enable the project team (not just the project manager) to organize their work to meet these constraints. Project Management Triangle The Project Management Triangle. These three constraints are often competing constraints: increased scope typically means increased time and increased cost." "time.[1] These are also referred to as the "Project Management Triangle". and turns quality into a fourth constraint. where each side represents a constraint. is essential in ensuring that the key issues of cost. these constraints have been listed as "scope.

product. which shows a subdivision of effort required to achieve an objective. service. tasks. or process oriented. which include all steps necessary to achieve the objective. duration. A WBS can be developed by starting with the end objective and successively subdividing it into manageable components in terms of size. for example a program. project. The WBS may be hardware.g. subtasks.[20] The Work Breakdown Structure (WBS) is a tree structure. and contract.[17] The Work Breakdown Structure provides a common framework for the natural development of the overall planning and control of a contract and is the basis for dividing work into definable increments from which the statement of work can be developed and technical. and labor hour reporting can be established. schedule. cost. and responsibility (e. components. systems.[20] Project Management Framework INDIAN INSTITUTE OF FINANCE Page 21 . and work packages). subsystems..[PORTFOLIO MANAGEMENT SOFTWARE] Work Breakdown Structure Example of a Work breakdown structure applied in a NASA reporting structure.

Swiss general project management method. and the ISO 10006:2003.[19] The Program (Investment) Life Cycle integrates the project management and system development life cycles with the activities directly associated with system deployment and operation. Team Software Process (TSP) from the Software Engineering Institute. Program and Project Management) INDIAN INSTITUTE OF FINANCE Page 22 . selected for use in Luxembourg and international organizations. The figure illustrates the actions and associated artifacts of the VA IT Project and Program Management process. see figure. AACE International's Methodology for Integrated Portfolio. such as: • • • • • Capability Maturity Model from the Software Engineering Institute. A Guide to the Project Management Body of Knowledge HERMES method.an open source standard describing COMPETENCIES for project and program managers. By design. Global Alliance for Project Performance Standards. system operation management and related activities occur after the project is complete and are not documented within this guide.[19] For example. in the US United States Department of Veterans Affairs (VA) the program management life cycle is depicted and describe in the overall VA IT Project Management Framework to address the integration of OMB Exhibit 300 project (investment) management activities and the overall project budgeting process.[PORTFOLIO MANAGEMENT SOFTWARE] Example of an IT Project Management Framework. for Quality management systems and guidelines for quality management in projects. PRojects IN Controlled Environments.[19] International standards There have been several attempts to develop Project Management standards. • • • PRINCE2. Total Cost Management Framework. The project closing phase activities at the VA continues through system deployment and into system operation for the purpose of illustrating and describing the system activities the VA considers part of the project. The ISO standards ISO 9000. The VA IT Project Management Framework diagram illustrates Milestone 4 which occurs following the deployment of a system and the closing of the project. a family of standards for quality management systems. GAPPS.

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V-Model, an original systems development method. The Logical framework approach, which is popular in international development organizations. IAPPM, The International Association of Project & Program Management, guide to Project Auditing and Rescuing Troubled Projects.

Project portfolio management
An increasing number of organizations are using, what is referred to as, project portfolio management (PPM) as a means of selecting the right projects and then using project management techniques[21] as the means for delivering the outcomes in the form of benefits to the performing private or not-for-profit organization. Project management methods are used 'to do projects right' and the methods used in PPM are used 'to do the right projects'. In effect PPM is becoming the method of choice for selection and prioritising among resource inter-related projects in many industries and sectors.

Project Portfolio Management (PPM) is a term used by project managers and project management (PM) organizations to describe methods for analyzing and collectively managing a group of current or proposed projects based on numerous key characteristics. The fundamental objective of PPM is to determine the optimal mix and sequencing of proposed projects to best achieve the organization's overall goals - typically expressed in terms of hard economic measures, business strategy goals, or technical strategy goals - while honoring constraints imposed by management or external real-world factors. Typical attributes of projects being analyzed in a PPM process include each project's total expected cost, consumption of scarce resources (human or otherwise) expected timeline and schedule of
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investment, expected nature, magnitude and timing of benefits to be realized, and relationship or inter-dependencies with other projects in the portfolio. The key challenge to implementing an effective PPM process is typically securing the mandate to do so. Many organizations are culturally inured to an informal method of making project investment decisions, which can be compared to political processes observable in the U.S. legislature.[citation needed] However this approach to making project investment decisions has led many organizations to unsatisfactory results, and created demand for a more methodical and transparent decision making process. That demand has in turn created a commercial marketplace for tools and systems which facilitate such a process. Some commercial vendors of PPM software emphasize their products' ability to treat projects as part of an overall investment portfolio. PPM advocates see it as a shift away from one-off, ad hoc approaches to project investment decision making. Most PPM tools and methods attempt to establish a set of values, techniques and technologies that enable visibility, standardization, measurement and process improvement. PPM tools attempt to enable organizations to manage the continuous flow of projects from concept to completion. Treating a set of projects as a portfolio would be, in most cases, an improvement on the ad hoc, one-off analysis of individual project proposals. The relationship between PPM techniques and existing investment analysis methods is a matter of debate. While many are represented as "rigorous" and "quantitative", few PPM tools attempt to incorporate established financial portfolio optimization methods like modern portfolio theory or Applied Information Economics, which have been applied to project portfolios, including even nonfinancial issues.[1][2][3][4]

Contents
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1 Controversy over the "investment discipline" of PPM 2 Optimizing for payoff 3 Resource allocation 4 Pipeline management
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5 Organizational applicability 6 References 7 Further reading 8 See also

Controversy over the "investment discipline" of PPM
Developers of PPM tools see their solutions as borrowing from the financial investment world. However, other than using the word "portfolio", few can point to any specific portfolio optimization methods implemented in their tools. A project can be viewed as a composite of resource investments such as skilled labour and associated salaries, IT hardware and software, and the opportunity cost of deferring other project work. As project resources are constrained, business management can derive greatest value by allocating these resources towards project work that is objectively and relatively determined to meet business objectives more so than other project opportunities. Thus, the decision to invest in a project can be made based upon criteria that measures the relative benefits (eg. supporting business objectives) and its relative costs and risks to the organization. In principle, PPM attempts to address issues of resource allocation, e.g., money, time, people, capacity, etc. In order for it to truly borrow concepts from the financial investment world, the portfolio of projects and hence the PPM movement should be grounded in some financial objective such as increasing shareholder value, top line growth, etc. Equally important, risks must be computed in a statistically, actuarially meaningful sense. Optimizing resources and projects without these in mind fails to consider the most important resource any organization has and which is easily understood by people throughout the organization whether they be IT, finance, marketing, etc and that resource is money. While being tied largely to IT and fairly synonymous with IT portfolio management, PPM is ultimately a subset of corporate portfolio management and should be exportable/utilized by any group selecting and managing discretionary projects.[citation needed] However, most PPM
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methods and tools opt for various subjective weighted scoring methods, not quantitatively rigorous methods based on options theory, modern portfolio theory, Applied Information Economics or operations research. Beyond the project investment decision, PPM aims to support ongoing measurement of the project portfolio so each project can be monitored for its relative contribution to business goals. If a project is either performing below expectations (cost overruns, benefit erosion) or is no longer highly aligned to business objectives (which change with natural market and statutory evolution), management can choose to decommit from a project and redirect its resources elsewhere. This analysis, done periodically, will "refresh" the portfolio to better align with current states and needs. Historically, many organizations were criticized for focusing on "doing the wrong things well." PPM attempts to focus on a fundamental question: "Should we be doing this project or this portfolio of projects at all?" One litmus test for PPM success is to ask "Have you ever canceled a project that was on time and on budget?" With a true PPM approach in place, it is much more likely that the answer is "yes." As goals change so should the portfolio mix of what projects are funded or not funded no matter where they are in their individual lifecycles. Making these portfolio level business investment decisions allows the organization to free up resources, even those on what were before considered "successful" projects, to then work on what is really important to the organization.

Optimizing for payoff
One method PPM tools or consultants might use is the use of decision trees with decision nodes that allow for multiple options and optimize against a constraint. The organization in the following example has options for 7 projects but the portfolio budget is limited to $10,000,000. The selection made are the projects 1, 3, 6 and 7 with a total investment of $7,740,000 - the optimum under these conditions. The portfolio's payoff is $2,710,000.

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Presumably, all other combinations of projects would either exceed the budget or yield a lower payoff. However, this is an extremely simplified representation of risk and is unlikely to be realistic. Risk is usually a major differentiator among projects but it is difficult to quantify risk in a statistically and actuarially meaningful manner (with probability theory, Monte Carlo Method, statistical analysis, etc.). This places limits on the deterministic nature of the results of a tool such as a decision tree (as predicted by modern portfolio theory).

Resource allocation
Resource allocation is a critical component of PPM. Once it is determined that one or many projects meet defined objectives, the available resources of an organization must be evaluated for its ability to meet project demand (aka as a demand "pipeline" discussed below). Effective resource allocation typically requires an understanding of existing labor or funding resource commitments (in either business operations or other projects) as well as the skills available in the resource pool. Project investment should only be made in projects where the necessary resources are available during a specified period of time.

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Resources may be subject to physical constraints. For example, IT hardware may not be readily available to support technology changes associated with ideal implementation timeframe for a project. Thus, a holistic understanding of all project resources and their availability must be conjoined with the decision to make initial investment or else projects may encounter substantial risk during their lifecycle when unplanned resource constraints arise to delay achieving project objectives. Beyond the project investment decision, PPM involves ongoing analysis of the project portfolio so each investment can be monitored for its relative contribution to business goals versus other portfolio investments. If a project is either performing below expectations (cost overruns, benefit erosion) or is no longer aligned to business objectives (which change with natural market and statutory evolution), management can choose to decommit from a project to stem further investment and redirect resources towards other projects that better fit business objectives. This analysis can typically be performed on a periodic basis (eg. quarterly or semi-annually) to "refresh" the portfolio for optimal business performance. In this way both new and existing projects are continually monitored for their contributions to overall portfolio health. If PPM is applied in this manner, management can more clearly and transparently demonstrate its effectiveness to its shareholders or owners. Implementing PPM at the enterprise level faces a challenge in gaining enterprise support because investment decision criteria and weights must be agreed to by the key stakeholders of the organization, each of whom may be incentivised to meet specific goals that may not necessarily align with those of the entire organization. But if enterprise business objectives can be manifested in and aligned with the objectives of its distinct business unit suborganizations, portfolio criteria agreement can be achieved more easily. (Assadourian 2005) From a requirements management perspective Project Portfolio Management can be viewed as the upper-most level of business requirements management in the company, seeking to understand the business requirements of the company and what portfolio of projects should be undertaken to achieve them. It is through portfolio management that each individual project should receive its allotted business requirements (Denney 2005).

Pipeline management
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In addition to managing the mix of projects in a company, Project Portfolio Management must also determine whether (and how) a set of projects in the portfolio can be executed by a company in a specified time, given finite development resources in the company. This is called pipeline management. Fundamental to pipeline management is the ability to measure the planned allocation of development resources according to some strategic plan. To do this, a company must be able to estimate the effort planned for each project in the portfolio, and then roll the results up by one or more strategic project types e.g., effort planned for research projects. (Cooper et al. 1998); (Denney 2005) discusses project portfolio and pipeline management in the context of use case driven development.

Organizational applicability
The complexity of PPM and other approaches to IT projects (e.g., treating them as a capital investment) may render them not suitable for smaller or younger organizations. An obvious reason for this is that a few IT projects doesn't make for much of a portfolio selection. Other reasons include the cost of doing PPM—the data collection, the analysis, the documentation, the education, and the change to decision-making processes.

Portfolio Management Services
Gone are the days when an investor could directly participate in the capital markets, for they have not only become far more complex in terms of compliances, methodologies, effects and analysis but also need a constant tracking mechanism. As is the case globally, the Indian investor has also realized the advantages of seeking professional advice in order to not only manage but also augment his portfolio. We at Unicon in our constant endeavor to bring to our esteemed clients global methodology have developed a proprietary model that has enabled us to outperform all major indices with a fair degree of consistency, over the longer term. We continue to be positive of both our approach and the Indian capital markets in general and especially so after UPA’s landslide mandate to guide the country over the next 5 years. However, we believe that the outperformance is more stock-specific and the major indices only provide a barometer for
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are managed by a highly competent team comprising of portfolio managers and equity strategists. backed by a team of fundamental. Partnership firms. Non Resident Indians etc. duly approved by SEBI. The principle objectives are to identify investment opportunities through globally recognized analytical methodologies. Hedging strategies comprising of derivative products Along with this water tight investment evaluation strategy we have up in place an equally foolproof client servicing and feedback methodology. Our qualified managers are constantly evolving methodologies and financial models that provide them with a composite mix of: 1. PMS is a very personalized service wherein each portfolio has to be specifically constructed in order to reflect the objective and risk appetite of a particular client. given pre-defined risk parameters construct portfolios to incorporate client objectives periodically review of portfolios in order to consistently deliver returns surpassing the benchmarked index and tailor-make portfolios to incorporate a judicious mix of equity. UNICON PMS provides following benefits: Strong Research Team Profile based investment solution Professional Fund Management Strict Risk Management Timely performance reporting Periodic reviews & rebalancing Dedicated relationship manager INDIAN INSTITUTE OF FINANCE Page 30 . this ensures that he is in a very good position to deliver a wholesome wealth experience to the client.[PORTFOLIO MANAGEMENT SOFTWARE] evaluation. The Company is registered with SEBI enabling it to undertake Portfolio Management activities under a specific license. quazi-equity. The Schemes. Short term comprising primarily of technical analysis and tools 3. All Investment advisors are hand picked and trained on a gamut of Wealth product. with larger players entering the markets with globally fine-tuned analytical tools. Medium term comprising of value investing and other fundament tools 2. technical and derivatives analysts. The Portfolio Management Schemes of the Company offer Discretionary Schemes (Unicon Optimizer & Unicon Growth) for Individuals. Corporate Bodies. Proprietors. This view is expected to only be enhanced going forward. money market instruments and derivate products.

indexes. It is vital to evaluate the functioning of investments and timing the returns effectively. Simply put. It is the measure of volatility or standard deviation of returns for a particular asset. The next step in portfolio analysis involves determining dispersion of returns. equities. commodities. dispersion refers is the difference between the real interest rate and the calculated average return. However. Portfolio analysis is broadly carried out for each asset at two levels:  Risk aversion: This method analyzes the portfolio composition while considering the risk appetite of an investor. compound return is the arithmetic mean that considers the cumulative effect on overall returns.[PORTFOLIO MANAGEMENT SOFTWARE] ANALYSIS OF PORTFOLIO MANAGEMENT:- Portfolio analysis involves quantifying the operational and financial impact of the portfolio.  Analyzing returns: While performing portfolio analysis. the composition of a portfolio impacts the rate of return on the overall investment. options and securities. Hence. Measuring the recovery period after a negative market cycle is equally INDIAN INSTITUTE OF FINANCE Page 31 . The analysis of a portfolio extends to all classes of investments such as bonds. funds. Some of the investors may prefer to play safe and accept low profits rather than invest in risky assets generating high returns. An average return is simply the arithmetic average of returns from individual assets. prospective returns are calculated through the average and compound return methods. Portfolio analysis gains importance because each asset class has peculiar risk factors and returns associated with it.

by carefully choosing the proportions of various assets.[PORTFOLIO MANAGEMENT SOFTWARE] Several specialized portfolio analysis software’s are available in the market to ease the task for an investor. and models a portfolio as a weighted combination of assets so that the return of a portfolio is the weighted combination of the assets' returns. or equivalently minimize risk for a given level of expected return. But diversification lowers risk even if assets' returns are not negatively correlated—indeed. MODERN PORTFOLIO THEORY:Modern portfolio theory (MPT) is a theory of investment which tries to maximize portfolio expected return for a given amount of portfolio risk. when prices in the stock market fall. By combining different assets whose returns INDIAN INSTITUTE OF FINANCE Page 32 . That this is possible can be seen intuitively because different types of assets often change in value in opposite ways. It is still advisable to hire professional experts for highly sophisticated portfolio compositions as they can offer direct assistance to help their clients earn good returns. For example. prices in the bond market often increase. defines risk as the standard deviation of return. calculation of risks and attainment of investment objectives. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel prize for the theory. They provide essential data for decision making on the allocation of assets. More technically. MPT models an asset's return as a normally distributed (or more generally as an elliptically distributed random variable). in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics. with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. These application tools can analyze and predict future trends for almost every investment asset. and vice versa[citation needed]. MPT is a mathematical formulation of the concept of diversification in investing. even if they are positively correlated. A collection of both types of assets can therefore have lower overall risk than either individually.

MPT describes how to select a portfolio with the highest possible expected return.)[3] MPT is therefore a form of diversification. MPT also assumes that investors are rational and markets are efficient. MPT explains how to find the best possible diversification strategy. Under certain assumptions and for specific quantitative definitions of risk and return. MPT was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. there is growing evidence that investors are not rational and markets are not efficient. assets with higher expected returns are riskier. Investing is a tradeoff between risk and expected return. each on their own merits. of course. Or. unless negative holdings of assets are possible. . These include the fact that financial returns do not follow a Gaussian distribution or indeed any symmetric distribution. Rather. MPT explains how to select a portfolio with the lowest possible risk (the targeted expected return cannot be more than the highest-returning available security. For a given amount of risk.[PORTFOLIO MANAGEMENT SOFTWARE] are not perfectly positively correlated. Further. Mathematical model INDIAN INSTITUTE OF FINANCE Page 33 . MPT seeks to reduce the total variance of the portfolio return. and that correlations between asset classes are not fixed but can vary depending on external events (especially in crises). it is important to consider how each asset changes in price relative to how every other asset in the portfolio changes in price. In general. many theoretical and practical criticisms have been leveled against it.[1][2] Concept The fundamental concept behind MPT is that the assets in an investment portfolio cannot be selected individually. for a given expected return. Since then.

but different investors will evaluate the trade-off differently based on individual risk aversion characteristics. In general: • Expected return: where Rp is the return on the portfolio.. Thus.[3] This section develops the "classic" MPT model. meaning that given two portfolios that offer the same expected return. The exact trade-off will be the same for all investors.e. Portfolio volatility is a function of the correlations ρij of the component assets. the share of asset i in the portfolio). however. • Portfolio return variance: INDIAN INSTITUTE OF FINANCE Page 34 . Conversely.[PORTFOLIO MANAGEMENT SOFTWARE] In some sense the mathematical derivation below is MPT. Under the model: • • Portfolio return is the proportion-weighted combination of the constituent assets' returns. see criticism. Note that the theory uses standard deviation of return as a proxy for risk. an investor will take on increased risk only if compensated by higher expected returns. for all asset pairs (i. There are problems with this. although the basic concepts behind the model have also been very influential. an investor who wants higher expected returns must accept more risk. j). investors will prefer the less risky one. There have been many extensions since. The implication is that a rational investor will not invest in a portfolio if a second portfolio exists with a more favorable risk-expected return profile – i. Risk and expected return MPT assumes that investors are risk averse. Ri is the return on asset i and wi is the weighting of component asset i (that is. if for that level of risk an alternative portfolio exists which has better expected returns.

INDIAN INSTITUTE OF FINANCE Page 35 . where ρij = 1 for i=j.[PORTFOLIO MANAGEMENT SOFTWARE] where ρij is the correlation coefficient between the returns on assets i and j. Diversification may allow for the same portfolio expected return with reduced risk. In other words. If all the asset pairs have correlations of 0—they are perfectly uncorrelated—the portfolio's return variance is the sum over all assets of the square of the fraction held in the asset times the asset's return variance (and the portfolio standard deviation is the square root of this sum). • Portfolio return volatility (standard deviation): For a two asset portfolio: • Portfolio return: • Portfolio variance: For a three asset portfolio: • • Portfolio return: Portfolio variance: Diversification An investor can reduce portfolio risk simply by holding combinations of instruments which are not perfectly positively correlated (correlation coefficient -1 <= ρij < 1)). investors can reduce their exposure to individual asset risk by holding a diversified portfolio of assets. Alternatively the expression can be written as: .

The hyperbola is sometimes referred to as the 'Markowitz Bullet'. without including any holdings of the risk-free asset. and is the efficient frontier if no risk-free asset is available. a portfolio lying on the efficient frontier represents the combination offering the best possible expected return for given risk level. can be plotted in risk-expected return space. Matrices are preferred for calculations of the efficient frontier. for a given "risk tolerance" expression: wTΣw − q * RTw where • . the efficient frontier is found by minimizing the following w is a vector of portfolio weights and ∑ wi = 1. As shown in this graph. Equivalently.[PORTFOLIO MANAGEMENT SOFTWARE] The efficient frontier with no risk-free asset Efficient Frontier. and the collection of all such possible portfolios defines a region in this space. The left boundary of this region is a hyperbola. every possible combination of the risky assets.[6] and the upper edge of this region is the efficient frontier in the absence of a risk-free asset (sometimes called "the Markowitz bullet"). In matrix form. INDIAN INSTITUTE OF FINANCE Page 36 . Combinations along this upper edge represent portfolios (including no holdings of the risk-free asset) for which there is lowest risk for a given level of expected return.

RTw is the expected return on the portfolio. provide optimization routines suitable for the above problem. The two mutual fund theorem One key result of the above analysis is the two mutual fund theorem. Many software packages. Mathematics and R. The above optimization finds the point on the frontier at which the inverse of the slope of the frontier would be q if portfolio return variance instead of standard deviation were plotted horizontally.[PORTFOLIO MANAGEMENT SOFTWARE] i • • • (The weights can be negative. which means investors can short a security. and • • • R is a vector of expected returns.[6] This theorem states that any portfolio on the efficient frontier can be generated by holding a combination of any two given portfolios on the frontier. Σ is the covariance matrix for the returns on the assets in the portfolio. The frontier in its entirely is parametric on q. This problem is easily solved using a Lagrange multiplier. the latter two given portfolios are the "mutual funds" in INDIAN INSTITUTE OF FINANCE Page 37 .). This version of the problem requires that we minimize wTΣw subject to RTw = μ for parameter μ. is a "risk tolerance" factor. MATLAB. where 0 results in the portfolio with minimal risk and results in the portfolio infinitely far out the frontier with both expected return and risk unbounded. wTΣw is the variance of portfolio return. An alternative approach to specifying the efficient frontier is to do so parametrically on expected portfolio return RTw. including Microsoft Excel.

and points on the half-line beyond the tangency point are leveraged portfolios involving negative holdings of the risk-free asset (the latter has been sold short—in other words. points between those points are portfolios containing positive amounts of both the risky tangency portfolio and the risk-free asset. and its formula can be shown to be INDIAN INSTITUTE OF FINANCE Page 38 . an investor can achieve any desired efficient portfolio even if all that is accessible is a pair of efficient mutual funds. In practice. when it is combined with any other asset. or portfolio of assets. Its horizontal intercept represents a portfolio with 100% of holdings in the risk-free asset. it is also uncorrelated with any other asset (by definition. the tangency with the hyperbola represents a portfolio with no risk-free holdings and 100% of assets held in the portfolio occurring at the tangency point. the investor has borrowed at the risk-free rate) and an amount invested in the tangency portfolio equal to more the 100% of the investor's initial capital. This efficient half-line is called the capital allocation line (CAL). the change in return is linearly related to the change in risk as the proportions in the combination vary. It is tangent to the hyperbola at the pure risky portfolio with the highest Sharpe ratio. The risk-free asset has zero variance in returns (hence is risk-free). As a result. because they pay a fixed rate of interest and have exceptionally low default risk. If the desired portfolio is outside the range spanned by the two mutual funds. So in the absence of a risk-free asset. shortterm government securities (such as US treasury bills) are used as a risk-free asset. since its variance is zero). the half-line shown in the figure is the new efficient frontier. then one of the mutual funds must be sold short (held in negative quantity) while the size of the investment in the other mutual fund must be greater than the amount available for investment (the excess being funded by the borrowing from the other fund). If the location of the desired portfolio on the frontier is between the locations of the two mutual funds. When a risk-free asset is introduced. both mutual funds will be held in positive quantities. The risk-free asset and the capital allocation line Main article: Capital allocation line The risk-free asset is the (hypothetical) asset which pays a risk-free rate.[PORTFOLIO MANAGEMENT SOFTWARE] the theorem's name.

portfolio risk or market risk) refers to the risk common to all securities .a. Asset pricing using MPT The above analysis describes optimal behavior of an individual investor. Since everyone holds the risky assets in identical proportions to each other—namely in the proportions given by the tangency portfolio—in market equilibrium the risky assets' prices.k. asset specific risk will be diversified away to the extent possible. F is the risk-free asset. and C is a combination of portfolios P and F. Asset pricing theory builds on this analysis in the following way. and therefore their expected returns. Systematic risk (a. unique. Systematic risk is therefore equated with the risk (standard deviation) of the market portfolio. INDIAN INSTITUTE OF FINANCE Page 39 . Thus relative supplies will equal relative demands. unsystematic. Within the market portfolio. will adjust so that the ratios in the tangecy portfolio are the same as the ratios in which the risky assets are supplied to the market.except for selling short as noted below.[PORTFOLIO MANAGEMENT SOFTWARE] In this formula P is the sub-portfolio of risky assets at the tangency with the Markowitz bullet. systematic risk cannot be diversified away (within one market). MPT derives the required expected return for a correctly priced asset in this context. the introduction of the risk-free asset as a possible component of the portfolio has improved the range of risk-expected return combinations available.within a portfolio these risks can be reduced through diversification (specific risks "cancel out"). Systematic risk and specific risk Specific risk is the risk associated with individual assets . The fact that all points on the linear efficient locus can be achieved by a combination of holdings of the risk-free asset and the tangency portfolio is known as the one mutual fund theorem. because everywhere except at the tangency portfolio the half-line gives a higher expected return than the hyperbola does at every possible risk level.[6] where the mutual fund referred to is the tangency portfolio. or idiosyncratic risk. By the diagram. Specific risk is also called diversifiable.

these are broadly referred to as conditional asset pricing models. the volatility of the asset. The CAPM is a model which derives the theoretical required expected return (i. given the risk-free rate available to investors and the risk of the market as a whole. Betas exceeding one signify more than average "riskiness" in the sense of the asset's contribution to overall portfolio risk. The CAPM is usually expressed: • β. are historically observed and are therefore given. Beta is usually found via regression on historical data. the relevant measure of the risk of a security is the risk it adds to the market portfolio.[PORTFOLIO MANAGEMENT SOFTWARE] Since a security will be purchased only if it improves the risk-expected return characteristics of the market portfolio. creating a "market neutral" portfolio. discount rate) for an asset in a market. and not its risk in isolation. Beta.) Systematic risks within one market can be managed through a strategy of using both long and short positions within one portfolio. the expected excess return of the market portfolio's expected return over the risk-free rate.. The price paid must ensure that the market portfolio's risk / return characteristics improve when the asset is added to it. is the measure of asset sensitivity to a movement in the overall market. (There are several approaches to asset pricing that attempt to price assets by modelling the stochastic properties of the moments of assets' returns . Capital asset pricing model Main article: Capital Asset Pricing Model The asset return depends on the amount paid for the asset today. In this context.e. • is the market premium. and its correlation with the market portfolio. This equation can be statistically estimated using the following regression equation: INDIAN INSTITUTE OF FINANCE Page 40 . betas below one indicate a lower than average risk contribution.

an asset is correctly priced when its observed price is the same as its value calculated using the CAPM derived discount rate. m. Rf. These results are used to derive the asset-appropriate discount rate. risk added to portfolio = but since the weight of the asset will be relatively low. If the observed price is higher than the valuation. βi is the asset's beta coefficient and SCL is the Securities Characteristics Line. follows from the formulae for a two-asset portfolio. the future cash flows of the asset can be discounted to their present value using this rate to establish the correct price for the asset. Market portfolio's risk = Hence. Thus: INDIAN INSTITUTE OF FINANCE Page 41 . m.[PORTFOLIO MANAGEMENT SOFTWARE] where αi is called the asset's alpha . additional risk = Market portfolio's expected return = Hence additional expected return = (2) If an asset. E(Ri). a. In theory. a. less sensitive stocks will have lower betas and be discounted at a lower rate. is calculated using CAPM. this is rational if . then the asset is overvalued. i. is added to the market portfolio. The assumption is that the investor will purchase the asset with funds borrowed at the risk-free rate. A riskier stock will have a higher beta and will be discounted at a higher rate.e. will at least match the gains of spending that money on an increased stake in the market portfolio. the improvement in its risk-to-expected return ratio achieved by adding it to the market portfolio. Once an asset's expected return. it is undervalued for a too low price. (1) The incremental impact on risk and expected return when an additional risky asset. is correctly priced.

In other words. or a general market crash.[7] While the model can also be justified by assuming any return distribution which is jointly elliptical[8][9].e. None of these assumptions are entirely true. Correlations depend on systemic relationships between the underlying assets. Examples include one country declaring war on another. because its model of financial markets does not match the real world in many ways. INDIAN INSTITUTE OF FINANCE Page 42 . all the joint elliptical distributions are symmetrical whereas asset returns empirically are not. • Correlations between assets are fixed and constant forever.[PORTFOLIO MANAGEMENT SOFTWARE] i. β -. Assumptions The mathematical framework of MPT makes many assumptions about investors and markets. some people question whether MPT is an ideal investing strategy. Some are explicit in the equations. Others are implicit. : is the “beta”. because they all move (down) together. such as the neglect of taxes and transaction fees. Criticism Despite its theoretical importance.the covariance between the asset's return and the market's return divided by the variance of the market return— i. MPT breaks down precisely when investors are most in need of protection from risk.e. such as the use of Normal distributions to model returns. During times of financial crisis all assets tend to become positively correlated. and each of them compromises MPT to some degree.e. the sensitivity of the asset price to movement in the market portfolio's value. : i. In fact. • Asset returns are (jointly) normally distributed random variables. Large swings (3 to 6 standard deviations from the mean) occur in the market far more frequently than the normal distribution assumption would predict. it is frequently observed that returns in equity and other markets are not normally distributed. and change when these relationships change.

• All investors have access to the same information at the same time. Real financial products are subject both to taxes and transaction costs (such as broker fees). and it is possible that some stock traders will pay for risk as well. to make as much money as possible. their actions do not influence prices. These assumptions can be relaxed with more complicated versions of the model. • All investors are rational and risk-averse. This is a key assumption of the efficient market hypothesis.[citation needed] • All investors are price takers. insider trading. Casino gamblers clearly pay for risk.e. This is another assumption of the efficient market hypothesis. This also comes from the efficient market hypothesis.) An investor may not even be able to assemble the theoretically optimal portfolio if the market moves too much while they are buying the required securities. and taking these into account will alter the composition of the optimum portfolio. and Avanidhar Subrahmanyam (2001). regardless of any other considerations). and those who are simply better informed than others. which uses psychological assumptions to provide alternatives to the CAPM such as the overconfidence-based asset pricing model of Kent Daniel. This possibility is studied in the field of behavioral finance..[10] • There are no taxes or transaction costs. In fact. A different possibility is that investors' expectations are biased. INDIAN INSTITUTE OF FINANCE Page 43 . but we now know from behavioral economics that market participants are not rational. i. real markets contain information asymmetry.. i. sufficiently large sales or purchases of individual assets can shift market prices for that asset and others (via cross-elasticity of demand. David Hirshleifer.e. In reality. upon which MPT relies. • Investors have an accurate conception of possible returns. causing market prices to be information ally inefficient. It does not allow for "herd behavior" or investors who will accept lower returns for higher risk. the probability beliefs of investors match the true distribution of returns.[PORTFOLIO MANAGEMENT SOFTWARE] • All investors aim to maximize economic utility (in other words.

return. which means that they are mathematical statements about the future (the expected value of returns is explicit in the above equations. The components of a system and their relationships are modeled in Monte Carlo simulations. In reality. fractional shares usually cannot be bought or sold. it causes a loss of back pressure on pump Y. causing a drop in flow to vessel Z. MPT does not really model the market The risk. and implicit in the definitions of variance and covariance. every investor has a credit limit. investors are stuck with estimating key parameters from past market data because MPT attempts to model risk in terms of the likelihood of losses. not structural. A PRA is what economists would call a structural model. More fundamentally. there is no attempt to explain an underlying structure to price changes. If valve X fails. and correlation measures used by MPT are based on expected values. But in the Black-Scholes equation and MPT. • All securities can be divided into parcels of any size. and some assets have minimum orders sizes. Very often such expected values fail to take account of new circumstances which did not exist when the historical data were generated. This is a major difference as compared to many engineering approaches to risk management. and so on. Various outcomes are simply given probabilities. but says nothing about why those losses might occur. In reality. unlike the INDIAN INSTITUTE OF FINANCE Page 44 .) In practice investors must substitute predictions based on historical measurements of asset return and volatility for these values in the equations. More complex versions of MPT can take into account a more sophisticated model of the world (such as one with non-normal distributions and taxes) but all mathematical models of finance still rely on many unrealistic premises.[PORTFOLIO MANAGEMENT SOFTWARE] • Any investor can lend and borrow an unlimited amount at the risk free rate of interest. Options theory and MPT have at least one important conceptual difference from the probabilistic risk assessment done by nuclear power [plants]. The risk measurements used are probabilistic in nature. And.

In particular. If nuclear engineers ran risk management this way. INDIAN INSTITUTE OF FINANCE Page 45 . MPT uses the mathematical concept of variance to quantify risk. the mathematics of MPT view the markets as a collection of dice.the world. investors are only concerned about losses. there is no way to compute the odds of it. accurate structural models of real financial markets are unlikely to be forthcoming because they would essentially be structural models of the entire world. but for general return distributions other risk measures (like coherent risk measures) might better reflect investors' true preferences. and do not care about the dispersion or tightness of above-average returns. Nonetheless there is growing awareness of the concept of systemic risk in financial markets. John Wiley & Sons. our intuitive concept of risk is fundamentally asymmetric in nature. p. For this reason. if there is no history of a particular system-level event like a liquidity crisis. By examining past market data we can develop hypotheses about how the dice are weighted.there is no point minimizing a variable that nobody cares about in practice. but this isn't helpful if the markets are actually dependent upon a much bigger and more complicated chaotic system -. in reality. variance is a symmetric measure that counts abnormally high returns as just as risky as abnormally low returns. —Douglas W. Some would argue that. ISBN 978-0-470-38795-5 Essentially. 2009. Variance is not a good measure of risk Mathematical risk measurements are also useful only to the degree that they reflect investors' true concerns -. they would never be able to compute the odds of a meltdown at a particular plant until several similar events occurred in the same reactor design. 'The Failure of Risk Management'.[PORTFOLIO MANAGEMENT SOFTWARE] PRA. and this might be justified under the assumption of elliptically distributed returns such as normally distributed returns. which should lead to more sophisticated market models. 67. According to this view. Hubbard.

or personal dimensions of investment decisions. See also socially-responsible investing. asymmetric measures of risk. Black-Litterman model optimization is an extension of unconstrained Markowitz optimization which incorporates relative and absolute `views' on inputs of risk and returns. More broadly. Other Applications Applications to project portfolios and other "non-financial" assets Some experts apply MPT to portfolios of projects and other assets besides financial instruments. its complete reliance on asset prices makes it vulnerable to all the standard market failures such as those arising from information asymmetry.[11] When MPT is applied outside of traditional financial portfolios. and public goods. a firm may have strategic or social goals that shape its investment decisions. environmental. especially by using more realistic assumptions. This helps with some of these problems. strategic. some differences between the different types of portfolios must be considered. Post-modern portfolio theory extends MPT by adopting non-normally distributed. INDIAN INSTITUTE OF FINANCE Page 46 . and an individual investor might have personal goals. Extensions Since MPT's introduction in 1952. In either case. without regard to other consequences. many attempts have been made to improve the model. but not others. It also rewards corporate fraud and dishonest accounting. fundamental analysis. In a narrow sense.[PORTFOLIO MANAGEMENT SOFTWARE] "Optimal" doesn't necessarily mean "most profitable" MPT does not account for the social. It only attempts to maximize risk-adjusted returns. externalities. information other than historical returns is relevant.

35%. Michael Conroy modeled the labor force in the economy using portfolio-theoretic methods to examine growth and variability in the labor force. The assets in financial portfolios are.[11] Application to other disciplines In the 1970s. there is little or no recovery/salvage value of a half-complete IT project). have logical units that cannot be separated. say. MPT. concepts from Modern Portfolio Theory found their way into the field of regional science. some of the simplest elements of Modern Portfolio Theory are applicable to virtually any kind of portfolio. 2. The assets of financial portfolios are liquid can be assessed or re-assessed at any point in time while opportunities for new projects may be limited and may appear in limited windows of time and projects that have already been initiated cannot be abandoned without the loss of the sunk costs (i.e. This was followed by a long literature on the relationship between economic growth and volatility. IT projects might be all or nothing or. however. the optimal position for an IT portfolio may not allow us to simply change the amount spent on a project. 44%. 21%. The concept of capturing the risk tolerance of an investor by documenting how much risk is acceptable for a given return could be and is applied to a variety of decision analysis problems. the MPT investment boundary can be expressed in more general terms like "chance of an ROI less than cost of capital" or "chance of losing more than half of the investment". For example. Neither of these necessarily eliminate the possibility of using MPT and such portfolios. In this case. A portfolio optimization method would have to take the discrete nature of some IT projects into account.. for practical purposes.[12] INDIAN INSTITUTE OF FINANCE Page 47 . while we can compute that the optimal portfolio position for 3 stocks is. When risk is put in terms of uncertainty about forecasts and possible losses then the concept is transferable to various types of investment. In a series of seminal works. Furthermore. at least. continuously divisible while portfolios of projects like new software development are "lumpy". They simply indicate the need to run the optimization with an additional set of mathematicallyexpressed constraints that would not normally apply to financial portfolios.[PORTFOLIO MANAGEMENT SOFTWARE] 1. uses historical variance as a measure of risk and portfolios of assets like IT projects don't usually have an "historical variance" for a new piece of software.

This prediction has been confirmed in studies involving human subjects. however. When the self attributes comprising the self-concept constitute a well-diversified portfolio.the number and nature of these factors is likely to change over time and between economies.[13] Recently. where sensitivity to changes in each factor is represented by a factor specific beta coefficient. Unlike the CAPM. The APT is less restrictive in its assumptions: it allows for an explanatory (as opposed to statistical) model of asset returns. Given a query. does not itself reveal the identity of its priced factors . the APT. modern portfolio theory has been used to model the self-concept in social psychology. modern portfolio theory has been applied to modelling the uncertainty and correlation between documents in information retrieval.[PORTFOLIO MANAGEMENT SOFTWARE] More recently. as opposed to the identical "market portfolio". the aim is to maximize the overall relevance of a ranked list of documents and at the same time minimize the overall uncertainty of the ranked list . which holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors. and assumes that each investor will hold a unique portfolio with its own particular array of betas. Comparison with arbitrage pricing theory The SML and CAPM are often contrasted with the arbitrage pricing theory (APT). then psychological outcomes at the level of the individual such as mood and selfesteem should be more stable than when the self-concept is undiversified. INDIAN INSTITUTE OF FINANCE Page 48 .

[PORTFOLIO MANAGEMENT SOFTWARE] UNDERSTANDING PORTFOLIO MANAGEMENT A good way to begin understanding what portfolio management is (and is not) may be to define the term portfolio. deciding what additional stocks. According to modern portfolio theory. You build the portfolio by buying additional stocks. • The management of a portfolio is goal-driven. or other investments. • • A portfolio contains many investment vehicles. In a business context. what and when to sell. or classes. bonds. mutual funds. Managing a portfolio involves inherent risks. For an investment portfolio. when to buy. of securities so that at least some of them may produce strong returns in any economic climate. or other financial instruments to buy. bonds. Your goal is to increase the portfolio's value by selecting investments that you believe will go up in price. Making such decisions is a form of management. you can reduce your investment risk by creating a diversified portfolio that includes enough different types. Owning a portfolio involves making choices -. Morgan Stanley's Dictionary of Financial Terms offers the following explanation: If you own more than one security. we can look to the mutual fund industry to explain the term's origins. • INDIAN INSTITUTE OF FINANCE Page 49 . you have an investment portfolio. the specific goal is to increase the value.that is. and so forth.

which to continue. spin off or divest). Managers must continually choose among competing initiatives (i.e. and which to reject or discontinue. whether to buy additional applications. • Managers can group a number of initiatives into a portfolio that supports a business segment. Organizations regard these applications as investments because they require development (or acquisition) costs and incur continuing maintenance costs. other industry sectors have adapted and applied these ideas to other types of "investments. selecting those that best support and enable diverse business goals (i. Businesses group major products that they develop and sell into (logical) portfolios. This refers to the practice of managing an entire group or major subset of software applications within a portfolio. in the simplest sense. A defined beginning and end. organized by major line-of-business or business segment. organizations must constantly make financial decisions about new and existing software applications. they diversify investment risk). What Does Portfolio Management Mean? The art and science of making decisions about investment mix and policy. A group of people who are responsible for executing the initiative and use resources." including the following: Application portfolio management. manage the organization's investments). including whether to invest in modifying them.e. they support major goals and/or components of the enterprise's business strategy.e.. is a body of work with: • • A specific (and limited) collection of needed results or work products. retire -.that is. Such portfolios require ongoing management decisions about what new products to develop (to diversify investments and investment risk) and what existing products to transform or retire (i. They must also manage their investments by providing continuing oversight and decision-making about which initiatives to undertake.an obsolete software application. that is. such as funding.[PORTFOLIO MANAGEMENT SOFTWARE] Over time. Also. Project or initiative portfolio management. or product line. product. INDIAN INSTITUTE OF FINANCE Page 50 ... These efforts are goal-driven. An initiative. Product portfolio management. and when to "sell" -.

and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk. co-managers. Portfolio Management is used to select a portfolio of new product development projects to achieve the following goals: • • • Maximize the profitability or value of the portfolio Provide balance Support the strategy of the enterprise Portfolio Management is the responsibility of the senior management team of an organization or business unit. there are two forms of portfolio management: passive and active. growth vs. INDIAN INSTITUTE OF FINANCE Page 51 . each project must be assessed for profitability (rewards). Third. products. and balancing risk against performance. commonly referred to as indexing or index investing. and other appropriate factors.[PORTFOLIO MANAGEMENT SOFTWARE] matching investments to objectives. Closed-end funds are generally actively managed.markets. weaknesses. equity. safety. customers. which might be called the Product Committee. domestic vs. The second step is to understand the budget or resources available to balance the portfolio against. Portfolio management is all about strengths. meets regularly to manage the product pipeline and make decisions about the product portfolio. competitive emphasis. Passive management simply tracks a market index. risks. investment requirements (resources). Active management involves a single manager. etc. Often. or a team of managers who attempt to beat the market return by actively managing a fund's portfolio through investment decisions based on research and decisions on individual holdings. A logical starting point is to create a product strategy . asset allocation for individuals and institutions. opportunities and threats in the choice of debt vs. Investopedia explains Portfolio Management In the case of mutual and exchange-traded funds (ETFs). international. strategy approach. this is the same group that conducts the stage-gate reviews in the organization. This team.

probability of success. etc. market vs. this approach paid little attention to balance or aligning the portfolio to the organization's strategy. marketplace fit vs. Mapping techniques use graphical presentation to visualize a portfolio's balance. risk and strategic alignment. short-term. long-term vs. reward. improvements. INDIAN INSTITUTE OF FINANCE Page 52 . profitability. new products vs. product line. Scoring techniques weight and score criteria to take into account investment requirements. But organizations must balance these goals: risk vs.[PORTFOLIO MANAGEMENT SOFTWARE] The weighting of the goals in making decisions about products varies from company. financial return vs. However. profitability. profitability. These are typically presented in the form of a two-dimensional graph that shows the trade-off's or balance between two factors such as risks vs. product line coverage. The shortcoming with this approach can be an over emphasis on financial measures and an inability to optimize the mix of projects. strategy fit vs. Several types of techniques have been used to support the portfolio management process: • • • Heuristic models Scoring techniques Visual or mapping techniques The earliest Portfolio Management techniques optimized projects' profitability or financial returns using heuristic or mathematical models.

and related sales expected INDIAN INSTITUTE OF FINANCE Page 53 . headcount. etc. The horizontal axis is Net Present Value.). This mix is often dependent upon the priority of the goals. The size of the bubble is proportional to the total revenue generated over the lifetime sales of the product.g. the vertical axis is Probability of Success. Our recommended approach is to start with the overall business plan that should define the planned level of R&D investment. it can't prioritize projects.neither too risky nor conservative and appropriate levels of reward for the risk involved. While this visual presentation is useful.. Therefore. It is used to assure balance in the portfolio of projects . some mix of these techniques is appropriate to support the Portfolio Management Process. resources (e.[PORTFOLIO MANAGEMENT SOFTWARE] The chart shown above provides a graphical view of the project portfolio risk-reward balance.

we recommend a strategic allocation process based on the business plan. product lines or types of development. It factors the NPV by the probability of both technical and commercial success. it places more weight on projects nearer completion and with lower uncommitted costs. new products. and continuously evolving. This strategic allocation should apportion the planned R&D investment into business units. The basis for constructing a portfolio should reflect the enterprise's particular needs. In the IBM view. etc. markets. e. The scoring method uses a set of criteria (potentially different for each stage of the project) as a basis for scoring or evaluating each project. business segment. Once this is done. let's look at some basic concepts and components of portfolio management practices.[PORTFOLIO MANAGEMENT SOFTWARE] from new products. With multiple business units. approved. platform development. constructed to actualize significant elements in the Enterprise Business Strategy. The portfolio First. It contains a selected. collection of Initiatives which are aligned with the organizing element of the Portfolio. product lines. then a portfolio listing can be developed including the relevant portfolio data. INDIAN INSTITUTE OF FINANCE Page 54 . we can now introduce a definition of portfolio that relates more directly to the context of our preceding discussion. geographic areas. and.g. By dividing this result by the development cost remaining. It may also breakdown the R&D investment into types of development.. etc. you might choose to build a portfolio around initiatives for a specific product. technology development. a portfolio is: One of a number of mechanisms. which contribute to the achievement of goals or goal components identified in the Enterprise Business Strategy. or separate business unit within a multinational organization. and upgrades/enhancements/line extensions. Basic concepts and components for portfolio management Now that we understand some of the basic dynamics and inherent challenges organizations face in executing a business strategy via supporting initiatives. The development productivity index is calculated as follows: (Net Present Value x Probability of Success) / Development Cost Remaining. We favor use of the development productivity index (DPI) or scores from the scoring method. For example.

A portfolio manager is responsible for continuing oversight of the contents within a portfolio. and individual portfolio managers oversee their planning and execution. The portfolio manager ensures that data is collected and analyzed about each of the initiatives in the portfolio. If you have a product-oriented portfolio structure. The exact range of responsibilities (and authority) will vary from one organization to another. for example. should align with significant planning and results boundaries. and with business components. • • Portfolio reviews and decision making As initiatives are executed. then you will likely need a portfolio manager for each one. adherence to plan. The portfolio manager periodically reviews the performance of. support for business strategy goals and delivery of expected organizational benefits). including both tactical elements (e. initiatives within the portfolio. the organization should conduct periodic reviews of actual (versus planned) performance and conformance to original expectations.. Typically.g. The portfolio manager This is a new role for organizations that embrace a portfolio management approach. Each portfolio would contain all the initiatives that help that particular product or product group contribute to the success of the enterprise business strategy.[PORTFOLIO MANAGEMENT SOFTWARE] The portfolio structure As we noted earlier. budget. then you would have a separate portfolio for each major product or product group. INDIAN INSTITUTE OF FINANCE Page 55 .. If you have several portfolios within your portfolio structure. and resource allocation) and strategic elements (e. like the portfolios within it. 1 but the basics are as follows: • • • One portfolio manager oversees one portfolio.g. and conformance to expectations for. organization managers specify the frequency and contents for these periodic reviews. This structure. a portfolio structure identifies and contains a number of portfolios. The reviews should be multi-dimensional. The portfolio manager enables periodic decision making about the future direction of individual initiatives. The portfolio manager provides day-to-day oversight.

control. so that managers can periodically evaluate data and decide whether to continue the work.). and the responsibilities of those who exercise this oversight and decision-making. Portfolio management governance involves multiple dimensions. Providing initiatives. INDIAN INSTITUTE OF FINANCE Page 56 . continuing direction. That is where the notion of governance comes into play. and performance. Making these decisions at multiple points in the initiative's lifecycle helps to ensure that managers will continually examine and assess changing internal and external circumstances. and strategic contribution. projects. including: • • Defining and maintaining an enterprise business strategy. and decision-making for all ongoing • • • Ownership of portfolios and their contents. etc. expected benefits.[PORTFOLIO MANAGEMENT SOFTWARE] A significant aspect of oversight is setting multiple decision points for each initiative. oversight. needs. defining (and filling) new roles to identify portfolios (collections of work to be done). and oversight and control for all portfolios and the initiatives they encompass. Defining and maintaining a portfolio structure containing all of the organization's initiatives (programs. and delineating boundaries among work efforts and collections. These "continue/change/discontinue" decisions should be driven by an understanding (developed via the periodic reviews) of a given initiative's continuing value. exercise of control and oversight. and decision-making authority. together with the definition of the functions. The IBM view of governance is: An abstract. Implementing portfolio management also requires creating a structure to provide planning. and within which actions and activities are legitimately and properly executed. collective term that defines and contains a framework for organization. the roles. Reviewing and approving business cases that propose the creation of new initiatives. Governance Implementing portfolio management practices in an organization is a transformation effort that typically involves developing new capabilities to address new work efforts.

Portfolio management essentials Every practical discipline is based on a collection of fundamental concepts that people have identified and proven (and sometimes refined or discarded) through continuous application. and links them to an authority scheme.[PORTFOLIO MANAGEMENT SOFTWARE] Each of these dimensions requires an owner -. The complexities of governance structures extend well beyond the scope of this article.either an individual or a collective -. is a discipline. They applied this principle all across the Roman Empire. supplanted by newer and more effective ideas. and a number of authors and practitioners have documented fundamental ideas about its exercise. For now. We are beginning to express this view as a collection of "essentials" that are. So that became the new standard for bridge construction. like bridge-building.e. grouped around a small collection of portfolio management themes. Recently. These concepts are useful until they become obsolete. A good governance structure decomposes both the types of work and the authority to plan and oversee work. a program or project) should be estimated and approved in order to start INDIAN INSTITUTE OF FINANCE Page 57 . Many organizations turn to experts for help in this area because it is so critical to the success of any business transformation effort that encompasses portfolio management. in turn. suffice it to say that it is worth investing time and effort to create a sound and flexible governance structure before you attempt to implement portfolio management practices. Portfolio management. It suggests that the value of an initiative (i. one of these themes is initiative value contribution. we have started to shape an IBM view of fundamental ideas around portfolio management. continuously adjust direction.to develop and approve plans. For example. based on our experiences with clients who have implemented portfolio management practices and on our research into the discipline. they would last longer. For example. Policies that are collectively developed and agreed upon provide a framework for the exercise of governance. engineers discovered that such supports would last even longer if their downstream side was also shaped to offer little resistance to the current. It defines individual and collective roles.. and exercise control through periodic assessment and review of conformance to expectations. Then. engineers discovered that if the upstream supports of a bridge were shaped to offer little resistance to the current of a stream or river. in Roman times. in the Middle Ages.

so continuous value monitoring is necessary. But what about an initiative that is a large program effort.[PORTFOLIO MANAGEMENT SOFTWARE] work. On this basis (in part) the proposed initiative becomes an approved initiative. These assessments determine (in part) whether the initiative warrants continued support. The portfolio management process steps include:  Portfolio Management Process • • • • • • • • • Identification Categorization Evaluation Selection Prioritization Balancing Authorization Review and Reporting Strategic Change Consultation Preparation Selection Status Summary View Page 58  Governance Process • • •  Portfolio Management Dashboards • INDIAN INSTITUTE OF FINANCE . and then assessed periodically on the basis of the initiative's contribution to the goals and goal components in the enterprise business strategy. This theme encompasses the notion that initiative value changes over time. we can derive an essential statement: Initiative value changes and requires continuous monitoring over the life of the initiative. with a two-year duration? It is highly unlikely that the program's expected value will remain static during the entire two-year period. When an initiative is in the proposal stage. it is possible to quantify an anticipated value contribution. From this. Portfolio Management Process The Processes on Demand portfolio management process is a best practice for management of the projects and programs of the portfolio.

ROI. An effective way of portfolio management ensures the growth of the organization and also the other business establishments of the organization. bottomINDIAN INSTITUTE OF FINANCE Page 59 .[PORTFOLIO MANAGEMENT SOFTWARE] • • • Gantt View Cost View Risk view The process of portfolio management provides a better understanding about the benefits. and across various markets. The enterprise portfolio management gives information regarding the amount of finance to be spent over the business and the requirement of the enterprise architecture. histograms and pie charts. Typical methods used to reveal balance include bubble diagrams. 3. The three main approaches are: top-down (strategic buckets). Value Maximization Allocate resources to maximize the value of the portfolio via a number of key objectives such as profitability. They are the enterprise portfolio management process and the project portfolio management process. loss and the risks regarding the business. and acceptable risk. A variety of methods are used to achieve this maximization goal. The portfolio management is differentiated into two major types. 1. ranging from financial methods to scoring models. Business Strategy Alignment Ensure that the portfolio of projects reflects the company’s product innovation strategy and that the breakdown of spending aligns with the company’s strategic priorities. business arenas and technologies. Portfolio management is the best process or making planned decisions and also for determining the expenditures of the business. The project portfolio management gives an analytical approach to the decisions over the sets of portfolio. Balance Achieve a desired balance of projects via a number of parameters: risk versus return. The outcome of the process of the portfolio management is evaluated with the performance graph of the organization. 2. short-term versus long-term.

high value activity: • • • • • • • • Maximizes the return on your product innovation investments Maintains your competitive position Achieves efficient and effective allocation of scarce resources Forges a link between project selection and business strategy Achieves focus Communicates priorities Achieves balance Enables objective project selection Top performers emphasize the link between project selection and business strategy. Why is it so important? Companies without effective new product portfolio management and project selection face a slippery road downhill. What are the benefits of Portfolio Management? When implemented properly and conducted on a regular basis. Portfolio Management is a high impact. Typically this is conducted via a financial analysis of the pipeline’s potential future value.[PORTFOLIO MANAGEMENT SOFTWARE] up (effective gate keeping and decision criteria) and top-down and bottom-up (strategic check). The goal is to avoid pipeline gridlock (too many projects with too few resources) at any given time. 5. Many of the problems that plague new product development initiatives in businesses can be directly traced to INDIAN INSTITUTE OF FINANCE Page 60 . Pipeline Balance Obtain the right number of projects to achieve the best balance between the pipeline resource demands and the resources available. Sufficiency Ensure the revenue (or profit) goals set out in the product innovation strategy are achievable given the projects currently underway. A typical approach is to use a rank ordered priority list or a resource supply and demand assessment. 4.

Edgett. some of the problems that arise when portfolio management is lacking are: • • • • • Projects are not high value to the business Portfolio has a poor balance in project types Resource breakdown does not reflect the product innovation strategy A poor job is done in ranking and prioritizing projects There is a poor balance between the number of projects underway and the resources available Projects are not aligned with the business strategy • As a result too many companies have: • • • • Too many projects underway (often the wrong ones) Resources are spread too thin and across too many projects Projects are taking too long to get to market. Models  Arbitrage pricing theory Some of the financial models used in the process Maximizing return.[PORTFOLIO MANAGEMENT SOFTWARE] ineffective portfolio management. supports your business strategy. Cooper and Dr. If you pick the right projects. given an acceptable level of risk Modern portfolio theory—a model proposed by Harry Markowitz among The single-index model of portfolio variance Capital asset pricing model The Jensen Index Page 61 of Valuation. and The pipeline has too many low value projects Portfolio Management is about doing the right projects. stock selection. the result is an enviable portfolio of high value projects: a portfolio that is properly balanced and most importantly. According to benchmarking studies conducted by Dr. and management of portfolios include:   others    INDIAN INSTITUTE OF FINANCE .

with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. even if they are positively correlated. MPT also assumes that investors are rational and markets are efficient. MPT is a mathematical formulation of the concept of diversification in investing. By combining different assets whose returns are not perfectly positively correlated. That this is possible can be seen intuitively because different types of assets often change in value in opposite ways. many theoretical and practical criticisms have been leveled against it. A collection of both types of assets can therefore have lower overall risk than either individually. The fundamental concept behind MPT is that the assets in an INDIAN INSTITUTE OF FINANCE Page 62 . More technically.[PORTFOLIO MANAGEMENT SOFTWARE]    The Treynor Index The Sharpe Diagonal (or Index) model Value at risk model Modern portfolio theory (MPT) is a theory of investment which tries to maximize portfolio expected return for a given amount of portfolio risk. MPT seeks to reduce the total variance of the portfolio return. by carefully choosing the proportions of various assets. and models a portfolio as a weighted combination of assets so that the return of a portfolio is the weighted combination of the assets' returns. Further. prices in the bond market often increase. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel prize for the theory. But diversification lowers risk even if assets' returns are not negatively correlated—indeed. MPT was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. or equivalently minimize risk for a given level of expected return. in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics. defines risk as the standard deviation of return. when prices in the stock market fall. there is growing evidence that investors are not rational and markets are not efficient. MPT models an asset's return as a normally distributed (or more generally as an elliptically distributed random variable). For example. These include the fact that financial returns do not follow a Gaussian distribution or indeed any symmetric distribution. and that correlations between asset classes are not fixed but can vary depending on external events (especially in crises). and vice versa. Since then.

For a given amount of risk. Rather.) MPT is therefore a form of diversification. INDIAN INSTITUTE OF FINANCE Page 63 . for a given expected return. In general:  Expected return: where Rp is the return on the portfolio. where ρij = 1 for i=j. unless negative holdings of assets are possible. Investing is a tradeoff between risk and expected return.[PORTFOLIO MANAGEMENT SOFTWARE] investment portfolio cannot be selected individually. assets with higher expected returns are riskier. In general. Ri is the return on asset i and wi is the weighting of component asset i (that is. Or. Alternatively the expression can be written as: . MPT explains how to select a portfolio with the lowest possible risk (the targeted expected return cannot be more than the highest-returning available security. it is important to consider how each asset changes in price relative to how every other asset in the portfolio changes in price. MPT explains how to find the best possible diversification strategy. the share of asset i in the portfolio). Under certain assumptions and for specific quantitative definitions of risk and return.  Portfolio return variance: where ρij is the correlation coefficient between the returns on assets i and j. each on their own merits. MPT describes how to select a portfolio with the highest possible expected return. of course.

or responsiveness to the market return INDIAN INSTITUTE OF FINANCE Page 64 . Mathematically the SIM is expressed as: where: rit is return to stock i in period t rf is the risk free rate (i. or abnormal return βi is the stocks's beta. the interest rate on treasury bills) rmt is the return to the market portfolio in period t αi is the stock's alpha.e.[PORTFOLIO MANAGEMENT SOFTWARE]  Portfolio return volatility (standard deviation): For a two asset portfolio:  Portfolio return:  Portfolio variance: For a three asset portfolio:   Portfolio return: Portfolio variance: The single-index model (SIM) is a simple asset pricing model commonly used in the finance industry to measure risk and return of a stock.

the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset.[PORTFOLIO MANAGEMENT SOFTWARE] Note that rit − rf is called the excess return on the stock. John Lintner(1965a. For individual securities. Therefore. The model was introduced by Jack Treynor (1961. as well as the expected return of the market and the expected return of a theoretical risk-free asset. Each stock's performance is in relation to the performance of a market index (such as the All Ordinaries). given that asset's non-diversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk). we make use of the security market line (SML) and its relation to expected return and systematic risk (beta) to show how the market must price individual securities in relation to their security risk class. thus: INDIAN INSTITUTE OF FINANCE Page 65 . William Sharpe (1964). building on the earlier work of Harry Markowitz on diversification and modern portfolio theory. Security analysts often use the SIM for such functions as computing stock betas. and conducting event studies. In finance.b) and Jan Mossin (1966) independently. has a firm specific expected value (alpha) and firm-specific unexpected component (residual). which is assumed normally distributed with mean zero and standard deviation σi These equations show that the stock return is influenced by the market (beta). 1962). when the expected rate of return for any security is deflated by its beta coefficient. often represented by the quantity beta (β) in the financial industry. Sharpe. Markowitz and Merton Miller jointly received the Nobel Memorial Prize in Economics for this contribution to the field of financial economics. evaluating stock selection skills. The CAPM is a model for pricing an individual security or a portfolio. if that asset is to be added to an already welldiversified portfolio. rmt − rf the excess return on the market εit is the residual (random) return. the reward-to-risk ratio for any individual security in the market is equal to the market reward-to-risk ratio. The SML enables us to calculate the reward-to-risk ratio for any security in relation to that of the overall market.

that has become influential in the pricing of stocks. Arbitrage pricing theory (APT). we obtain the Capital Asset Pricing Model (CAPM). is the expected return of the market is sometimes known as the market premium or risk premium (the difference between the expected market rate of return and the risk-free rate of return). Restated. is a general theory of asset pricing. in finance. Note 2: the risk free rate of return used for determining the risk premium is usually the arithmetic average of historical risk free rates of return and not the current risk free rate of return.[PORTFOLIO MANAGEMENT SOFTWARE] The market reward-to-risk ratio is effectively the market risk premium and by rearranging the above equation and solving for E(Ri).g. where:   is the expected return on the capital asset is the risk-free rate of interest such as interest arising from government bonds  (the beta) is the sensitivity of the expected excess asset returns to the expected excess market returns. INDIAN INSTITUTE OF FINANCE Page 66 . Note 1: the expected market rate of return is usually estimated by measuring the Geometric Average of the historical returns on a market portfolio (e. or also   . For the full derivation see Modern portfolio theory. S&P 500). we find that: which states that the individual risk premium equals the market premium times β. in terms of risk premium.

[PORTFOLIO MANAGEMENT SOFTWARE]
APT holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient. The model-derived rate of return will then be used to price the asset correctly - the asset price should equal the expected end of period price discounted at bring it the back rate into implied line. by model. If the price by diverges, arbitrage should The theory was initiated

the economist Stephen Ross in 1976.

The APT model Risky asset returns are said to follow a factor structure if they can be expressed as:

where
  

E(rj) is the jth asset's expected return, Fk is a systematic factor (assumed to have mean zero), bjk is the sensitivity of the jth asset to factor k, also called factor and εj is the risky asset's idiosyncratic random shock with mean

loading,

zero.

Idiosyncratic shocks are assumed to be uncorrelated across assets and uncorrelated with the factors. The APT states that if asset returns follow a factor structure then the following relation exists between expected returns and the factor sensitivities:

where
 

RPk is the risk premium of the factor, rf is the risk-free rate,

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That is, the expected return of an asset j is a linear function of the assets sensitivities to the n factors. Note that there are some assumptions and requirements that have to be fulfilled for the latter to be correct: There must be competition in the market, and the total number of factors may never surpass the total number of assets (in order to avoid the problem of matrix singularity),

In finance, Jensen's alpha (or Jensen's Performance Index, ex-post alpha) is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return. The security could be any asset, such as stocks, bonds, or derivatives. The theoretical return is predicted by a market model, most commonly the Capital Asset Pricing Model (CAPM) model. The market model uses statistical methods to predict the appropriate risk-adjusted return of an asset. The CAPM for instance uses beta as a multiplier. Jensen's alpha was first used as a measure in the evaluation of mutual fund managers by Michael Jensen in 1968. The CAPM return is supposed to be 'risk adjusted', which means it takes account of the relative riskyness of the asset. After all, riskier assets will have higher expected returns than less risky assets. If an asset's return is even higher than the risk adjusted return, that asset is said to have "positive alpha" or "abnormal returns". Investors are constantly seeking investments that have higher alpha. In the context of CAPM, calculating alpha requires the following inputs:
   

the realized return (on the portfolio), the market return, the risk-free rate of return, and the beta of the portfolio.

Jensen's alpha = Portfolio Return − [Risk Free Rate + Portfolio Beta * (Market Return − Risk Free Rate)]

Since Eugene Fama, many academics believe financial markets are too efficient to allow for repeatedly earning positive Alpha, unless by chance. To the contrary, empirical
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studies of mutual funds spearheaded by Russ Wermers usually confirm managers' stockpicking talent, finding positive Alpha. However, they also show that after fees and expenses are deducted, the effective Alpha for investors is negative. (These results also explain why passive investing is increasingly popular.) Nevertheless, Alpha is still widely used to evaluate mutual fund and portfolio manager performance, often in conjunction with the Sharpe ratioand the Treynor ratio.

The Treynor ratio (sometimes called the reward-to-volatility ratio or Treynor measure), named after Jack L. Treynor, is a measurement of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk (e.g., Treasury Bills or a completely diversified portfolio), per each unit of market risk assumed. The Treynor ratio relates excess return over the risk-free rate to the additional risk taken; however, systematic risk is used instead of total risk. The higher the Treynor ratio, the better the performance of the portfolio under analysis.

where
Treynor ratio, portfolio i's return, risk free rate Portfolio i's beta

Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of active portfolio management. It is a ranking criterion only. A ranking of portfolios based on the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic risk, but different total risk, will be rated the same. But the portfolio with a higher total risk is less diversified and therefore has a higher unsystematic risk which is not priced in the market. An alternative method of ranking portfolio management is Jensen's alpha, which quantifies the added return as the excess return above the security in the capital asset pricing model. As

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they two both determine rankings based on systematic risk alone, they will rank portfolios identically.

In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used risk measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level. For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 0.05 probability that the portfolio will fall in value by more than $1 million over a one day period, assuming markets are normal and there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day in 20. A loss which exceeds the VaR threshold is termed a “VaR break.” "Given some confidence level not larger than (1 − α)" the VaR of the portfolio at the confidence

level α is given by the smallest number l such that the probability that the loss L exceeds l is

The left equality is a definition of VaR. The right equality assumes an underlying probability distribution, which makes it true only for parametric VaR. Risk managers typically assume that some fraction of the bad events will have undefined losses, either because markets are closed or illiquid, or because the entity bearing the loss breaks apart or loses the ability to compute accounts. Therefore, they do not accept results based on the assumption of a welldefined probability distribution. Nassim Taleb has labeled this assumption, "charlatanism." On the other hand, many academics prefer to assume a well-defined distribution, albeit usually one with fat tails. This point has probably caused more contention among VaR theorists than any other.

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[PORTFOLIO MANAGEMENT SOFTWARE] INSTRUMENTS IN PORTFOLIO • BONDS BY COUPON • Fixed Rate Bonds Floating Rate Bonds Zero Coupon Bond Inflation Indexed Bond Commercial Paper Perpetual Paper BONDS BY ISSUER Page 71 INDIAN INSTITUTE OF FINANCE .

[PORTFOLIO MANAGEMENT SOFTWARE] • • Corporate Bond Government Bond Muncipal Bond Sovereign Bond EQUITIES INVESTMENT FUNDS Mutual Fund Indexed Fund Exchange transfer Fund Close End Fund Segregated Fund Hedge Fund • STRUCTURED FINANCE Securitization Asset Backed Security Mortgage Backed Security Commercial Mortgage Backed Security Residential Mortgage Backed Security Tranche Collateralized Debt Obligation Collateralized Fund Obligation Collateralized Mortgage Obligation Credit Linked Note Unsecured Debt Agency Security • DERIVATIVES Option Warrant Page 72 INDIAN INSTITUTE OF FINANCE .

termed maturity. but the major difference between the two is that stockholders have an equity stake in the company (i. or. in the case of government bonds. in which the authorized issuer owes the holders a debt and. Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds. and the coupon is the interest. to finance current expenditure. A bond is a formal contract to repay borrowed money with interest at fixed intervals.e. Bonds provide the borrower with external funds to finance long-term investments.. is obliged to pay interest (the coupon) and/or to repay the principal at a later date. Bonds and stocks are both securities. whereas INDIAN INSTITUTE OF FINANCE Page 73 . depending on the terms of the bond. Bonds must be repaid at fixed intervals over a period of time.[PORTFOLIO MANAGEMENT SOFTWARE] Futures Forward Contract Swaps Credit Derivative Hybrid Security BONDS A bond is a debt security. the holder is the lender (creditor). Thus a bond is like a loan: the issuer is the borrower (debtor). they are owners).

as the principal amount grows. and more than one of them may apply to a particular bond.[PORTFOLIO MANAGEMENT SOFTWARE] bondholders have a creditor stake in the company (i. The United Kingdom was the first sovereign issuer to issue inflation linked Gilts in the 1980s. they are lenders). whereas stocks may be outstanding indefinitely. The coupon rate is recalculated periodically. such as LIBOR or Euribor. • Inflation linked bonds. which are also known as INDIAN INSTITUTE OF FINANCE Page 74 . However.. Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the U. or maturity. • • Fixed rate bonds have a coupon that remains constant throughout the life of the bond. They are issued at a substantial discount to par value. They have no maturity date. In other words. • Perpetual bonds are also often called perpetuities or 'Perps'. the separated coupons and the final principal payment of the bond may be traded separately. after which the bond is redeemed. • Zero-coupon bonds pay no regular interest. the payments increase with inflation. The interest rate is normally lower than for fixed rate bonds with a comparable maturity (this position briefly reversed itself for short-term UK bonds in December 2008). An example of zero coupon bonds is Series E savings bonds issued by the U. Zero-coupon bonds may be created from fixed rate bonds by a financial institution separating "stripping off" the coupons from the principal. The bondholder receives the full principal amount on the redemption date. Another difference is that bonds usually have a defined term. government.e.e.20%. so that the interest is effectively rolled up to maturity (and usually taxed as such). The following descriptions are not mutually exclusive. bond with no maturity). which is a perpetuity (i.S. An exception is a consol bond. For example the coupon may be defined as three month USD LIBOR + 0. in which the principal amount and the interest payments are indexed to inflation.. See IO (Interest Only) and PO (Principal Only). government.S. Floating rate note (FRNs) have a variable coupon that is linked to a reference rate of interest. typically every one or three months. The most famous of these are the UK Consoles.

but are typically lower than banks' rates.[PORTFOLIO MANAGEMENT SOFTWARE] Treasury Annuities or Undated Treasuries. payroll). and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. generally with a maturity date falling at least a year after their issue date. A government bond is a bond issued by a national government denominated in the country's own currency. the higher the interest rate the issuing institution must pay. • A bond is a debt investment in which an investor loans a certain amount of money. however. The first ever government bond was issued by the English government in 1693 to raise money to fund a war against France. for a certain amount of time. Commercial paper is usually sold at a discount from face value. with a certain interest rate. Since it is not backed by collateral. only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. the term "corporate bonds" is used to include all bonds except those issued by governments in their own currencies. to a company. (The term "commercial paper" is sometimes used for instruments with a shorter maturity. • A corporate bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business. Interest rates fluctuate with market conditions. The term is usually applied to longer-term debt instruments. The bonds of local authorities and supranational organizations do not fit in either category. Some of these were issued back in 1888 and still trade today. it only applies to those issued by corporations. the longer the maturity on a note. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.) Sometimes. Commercial Paper is a money-market security issued (sold) by large banks and corporation to get money to meet short term debt obligations (for example. commercial paper is a unsecured promissory note with a fixed maturity of 1 to 270 days. Strictly speaking. Typically. and carries higher interest repayment dates than bonds. INDIAN INSTITUTE OF FINANCE Page 75 . • In the global money market. It was in the form of a tontine.

INDIAN INSTITUTE OF FINANCE Page 76 . special-purpose districts. Secondly. The term usually refers to bonds issued in foreign currencies. there is inflation risk. while bonds issued by national governments in the country's own currency are referred to as government bonds. the term "risk-free" means free of credit risk. • A sovereign bond is a bond issued by a national government. counties. This raises the issue of sovereign default if the nation cannot afford to repurchase the necessary foreign currency at bond repayment time. However. Municipal bonds may be general obligations of the issuer or secured by specified revenues. such as Russia in 1998 (the "ruble crisis"). In this instance. such as currency risk for foreign investors (for example non-US investors of US Treasury securities would have received lower returns in 2004 because the value of the US dollar declined against most other currencies). in the US. The total amount owed to the holders of the sovereign bonds is called sovereign debt. Many governments issue inflation-indexed bonds. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued. Nations with very high or unpredictable inflation or with unstable exchange rates often find it uneconomic to issue bonds in their own currencies and so are forced to issue bonds denominated in more stable foreign currencies. school districts. which should protect investors against inflation risk. investors require the bonds to be issued with a higher yield. and any other governmental entity (or group of governments) below the state level. public utility districts. because the government can raise taxes to redeem the bond at maturity. publicly owned airports and seaports. Potential issuers of municipal bonds include cities. or their agencies. As an example. although municipal bonds issued for certain purposes may not be tax exempt. Some counter examples do exist where a government has defaulted on its domestic currency debt. though this is very rare. Because of the risk of default. This makes the debt more expensive to service. • A municipal bond is a bond issued by a city or other local government. Treasury securities are denominated in US dollars.[PORTFOLIO MANAGEMENT SOFTWARE] Government bonds are usually referred to as risk-free bonds. in that the principal repaid at maturity will have less purchasing power than anticipated if the inflation outturn is higher than expected. other risks still exist. redevelopment agencies.

In the event of default. This claim is paid in the form of Dividends. unlike a corporation or even a municipal subdivision. just as in defaults on corporate bonds. If a company goes into liquidation.[PORTFOLIO MANAGEMENT SOFTWARE] increasing risk of default. The majority of stock issued is common stock. Stockholders receive one vote per share owned in the elections to the company board. bondholders and preference shareholders are paid. the management of the company can either pay out the remaining earnings to stockholder in the form of Dividends or reinvest part or all the earnings. After holders of debt claims are paid. The holder of a common stock has limited liability up to the amount of share capital contributed. However. a nation cannot file for bankruptcy. as has been the case in US dollar denominated bonds issued by Peru (1996) and Argentina (2001). recent practice has been that the defaulting borrower presents an exchange offer to its bond holders in an effort to restructure the sovereign debt. which represents a share of the ownership of a company and a claim on a portion of profits. getting the bond holders to accept an exchange offer has become very difficult. But on the rare occasions that a default occurs. common stock holders do not receive any money until the creditors. INDIAN INSTITUTE OF FINANCE Page 77 . • EQUITY COMMON SHARES: It represents an ownership claim on the earnings and the assets of a company. something caused by the holdout problem.

• It carries preferential rights in respect of dividend at fixed amount or at fixed rate. a share which does not fulfill both these conditions is an equity shares. or expanding the existing set up or meeting up the enhanced working capital requirement. These shares can be issued at face value. It means the amount paid on preference shares must be paid back to preference shareholders before anything in paid to the equity shareholders. Therefore. SECONDARY MARKET INDIAN INSTITUTE OF FINANCE Page 78 . The payment of dividend should be made before the payment of dividend to holders of equity shares. or at discount. or at premium. The issuer thus issues fresh capital in the form of equity shares. preference shares or raises loan in form of debt via public issue or through private placements.[PORTFOLIO MANAGEMENT SOFTWARE] PREFERENCE SHARE: It means shares can which fulfill the following 2 conditions. INVESTMENT IN EQUITIES There are primarily two routes to investing in equities. • It also carries preferential rights in regard to payment of capital or winding up or otherwise. a) Through the primary market b) Through the secondary market PRIMARY MARKET It provides opportunity to corporate and government to raise resources to meet their requirement of capital for funding their new business plan.

By its nature.[PORTFOLIO MANAGEMENT SOFTWARE] In finance. a significant amount of capital has been committed to dedicated secondary market funds from investors looking to increase and diversify their private equity exposure. however. the private equity secondary market (also often called private equity secondaries or secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. For the vast majority of private equity investments. Driven by strong demand for private equity exposure. the private equity asset class is illiquid. INDIAN INSTITUTE OF FINANCE Page 79 . there is a robust and maturing secondary market available for sellers of private equity assets. intended to be a long-term investment for buy-and-hold investors. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. there is no listed public market.

Conversely. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase. Going short can be contrasted with the more conventional practice of "going long". that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. short selling (also known as shorting or going short) is the practice of selling assets. whereby an investor profits price of the asset. from any increase in the INDIAN INSTITUTE OF FINANCE Page 80 . the short seller will incur a loss if the price of the assets rises. as the seller will pay less to buy the assets than the seller received on selling them. "Shorting" and "going short" also refer to entering into any derivative or other contract under which the investor profits from a fall in the value of an asset. usually securities. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets.[PORTFOLIO MANAGEMENT SOFTWARE] SHORT SELLING In finance.

S. bonds.S. other mutual funds. The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective. other securities. In the U. regardless of market conditions. Tracking INDIAN INSTITUTE OF FINANCE Page 81 . Most funds are overseen by a board of directors or trustees (if the U. fund is organized as a trust as they commonly are) which is charged with ensuring the fund is managed appropriately by its investment adviser and other service organizations and vendors. INDEX FUNDS An index fund or index tracker is a collective investment scheme (usually a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market. and/or commodities such as precious metals. all in the best interests of the fund's investors.[PORTFOLIO MANAGEMENT SOFTWARE] INVESTMENT FUNDS MUTUAL FUNDS A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks. short-term money market instruments.. or a set of rules of ownership that are held constant. a fund registered with the Securities and Exchange Commission (SEC) under both SEC and Internal Revenue Service (IRS) rules must distribute nearly all of its net income and net realized gains from the sale of securities (if any) to its investors at least annually.

Robert Arnott and Professor Jeremy Siegel have also created new competing fundamentally based indexes based on such criteria as dividends. is an investment fund traded on stock exchanges. Index funds are available from many investment managers. Of course. Some common indices include the S&P 500. which are usually exchanged in-kind with baskets INDIAN INSTITUTE OF FINANCE Page 82 . and sales. much like stock. the Nikkei 225. In addition it is usually impossible to precisely mirror the index as the models for sampling and mirroring. the fees reduce the return to the investor relative to the index. cannot be 100% accurate. Other methods include statistically sampling the market and holding "representative" securities. ETFs may be attractive as investments because of their low costs. and then only in creation units. The difference between the index performance and the fund performance is known as the "tracking error" or informally "jitter". EXCHANGE TRADED FUNDS An exchange-traded fund (ETF). commodities. Most ETFs track an index. tax efficiency. An ETF holds assets such as stocks. large institutional investors) actually buy or sell shares of an ETF directly from/to the fund manager. who created "research indexes" in order to develop asset pricing models. in the same proportions as the index. by their nature. such as the S&P 500 or MSCI EAFE. or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. The Fama-French threefactor model is used by Dimensional Fund Advisors to design their index funds. book value. such as their Three Factor Model. earnings. Less common indexes come from academics like Eugene Fama and Kenneth French. also known as an exchange-traded product (ETP). Many index funds rely on a computer model with little or no human input in the decision as to which securities are purchased or sold and is therefore a form of passive management.[PORTFOLIO MANAGEMENT SOFTWARE] Tracking can be achieved by trying to hold all of the securities in the index. and the FTSE 100. Only so-called authorized participants (typically. large blocks of tens of thousands of ETF shares. and stock-like features. Fees The lack of active management generally gives the advantage of lower fees and lower taxes in taxable accounts.

The price of a share in a closed-end fund is determined partially by the value of the investments in the fund.S. trade ETF shares on this secondary market. such as individuals using a retail broker.[PORTFOLIO MANAGEMENT SOFTWARE] of the underlying securities. Inc. shares are not normally redeemable for cash or securities until the fund liquidates. which can be bought or sold at the end of each trading day for its net asset value. CLOSE END FUNDS A closed-end fund. An ETF combines the valuation feature of a mutual fund or unit investment trust. BGI and a small independent third party Distribution firm called Funds Distributor. the first country specific ETFs were a collaboration between MSCI. and partially by the premium (or discount) placed on it by the market. Other investors. Typically an investor can acquire shares in a closed-end fund by buying shares on a secondary market from a broker. The total value of all the securities in the fund divided by the number of shares in the INDIAN INSTITUTE OF FINANCE Page 83 . Authorized participants may wish to invest in the ETF shares long-term. but usually act as market makers on the open market. Securities and Exchange Commission began to authorize the creation of actively managed ETFs. market maker. which trades throughout the trading day at prices that may be more or less than its net asset value. The product eventually evolved into the iShares brand widely known around the globe. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds. with the tradability feature of a closed-end fund. using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates to the net asset value of the underlying assets. Closed-end funds are not considered to be "ETFs". or other investor as opposed to an open-end fund where all transactions eventually involve the fund company creating new shares on the fly (in exchange for either cash or securities) or redeeming shares (for cash or securities). In 1993. or closed-ended fund (CEF) is a collective investment scheme with a limited number of shares. even though they are funds and are traded on an exchange. but in 2008 the U. New shares are rarely issued after the fund is launched.

Other examples of closed-ended funds are investment trusts in the UK and listed investment companies in Australia. INDIAN INSTITUTE OF FINANCE Page 84 . As required by law. and stocks. legally they are called closed-end companies and form one of three SEC recognized types of investment companies along with mutual funds and unit investment trusts. The value of the segregated fund fluctuates according to the market value of the underlying securities. A Seg Fund is synonymous with the U. at a discount to the per share NAV. The market price of a fund share is often higher or lower than the per share NAV: when the fund's share price is higher than per share NAV it is said to be selling at a premium. Like mutual funds. segregated funds consist of a pool of investments in securities such as bonds.S. hence the eponym.S. Instead. Usage A segregated fund is an investment fund that combines the growth potential of a mutual fund with the security of a life insurance policy. In the U. debentures. the investor is the holder of a segregated fund contract. Segregated funds are often referred to as "mutual funds with an insurance policy wrapper". variable life insurance contracts offering certain guarantees to the policyholder such as reimbursement of capital upon death. Segregated funds do not issue units or shares.[PORTFOLIO MANAGEMENT SOFTWARE] fund is called the net asset value (NAV) per share. therefore a segregated fund investor is not referred to as a unitholder. these funds are fully segregated from the company's general investment funds. insurance industry "separate account" and related insurance and annuity products. SEGREGATED FUNDS A Segregated Fund (Seg Fund) is a type of investment fund administered by Canadian insurance companies in the form of individual. when it is lower.

In either case. Segregated funds are owned by the life insurance company. Features Insurance Contracts Segregated funds are sold as deferred variable annuity contracts and can be sold only by licensed insurance representatives. Segregated funds are made up of underlying assets that are purchased via the Life assurance companies. Maturity Dates All segregated fund contracts have maturity dates. not the individual investors. Maturity & Death Guarantees Guarantee amounts are offered in all segregated funds whereby no less than a certain percentage of the initial investment in a contract (usually 75% or higher) will be paid out at death or contract maturity. Nonregistered investments are subject to tax payments on the capital gains each year and capital losses can also be claimed. Should the investor leave before the end date. Segregated Funds have guarantees and run for a period. the contract holder or their beneficiary will receive the greater of the guarantee or the investment’s current market value. The maturity date is the date at which the maturity guarantee is available to the contract holder. he/she may be penalized. Registered investments qualify for annual tax-sheltered RRSP contributions. Investors do not have ownership share. Holding periods to reach maturity are usually 10 or more years.[PORTFOLIO MANAGEMENT SOFTWARE] Contracts can be registered (held inside an RRSP) or non-registered (not held inside an RRSP). INDIAN INSTITUTE OF FINANCE Page 85 . which are not to be confused with maturity guarantees (outlined below). and must be kept separate (or “segregated”) from the company’s other assets.

since resetting the guaranteed amount at a higher level means that the issuer will be liable for this higher amount. Probate Protection If a beneficiary is named. and extends the maturity date. A contract holder's use of reset provisions also contributes to costs. usually one or two. If the named beneficiary is a family member (such as a spouse. Contract holders are limited to a certain number of resets. This is an important feature for business owners or professionals whose assets may have a high exposure to creditors.the higher the risk exposure of the insurer and the cost of the guarantees. restarts the contract term.[PORTFOLIO MANAGEMENT SOFTWARE] Potential Creditor Protection Granted certain qualifications are met. Reset Option A reset option allows the contract holder to lock in investment gains if the market value of a segregated fund contract increases. the investment may also be secure from creditors in case of bankruptcy. This inverse relationship is based on the premise that there is a greater chance of market decline (and hence a greater chance of collecting on a guarantee) over shorter periods. segregated fund investments may be protected from seizure from creditors.whether they are segregated funds or protected mutual funds . in a given calendar year. HEDGE FUND INDIAN INSTITUTE OF FINANCE Page 86 . or parent). the segregated fund investment may be exempt from probate and executor’s fees and pass directly to the beneficiary. Cost of the Guarantees The shorter the term of the maturity guarantees on investment funds . This resets the contract’s deposit value to equal the greater of the deposit value or current market value. These protections apply to both registered and non-registered investments. child.

Every hedge fund has its own investment strategy that determines the type of investments and the methods of investment it undertakes. and the gross assets of the fund will usually be higher still due to leverage. In most jurisdictions hedge funds are open only to a limited range of professional or wealthy investors who meet certain criteria set by regulators. The exempted regulations typically cover short selling. and the rules by which investors can remove their capital from the fund. in general. the use of derivatives and leverage. pays a performance fee to its investment manager. as well as (or instead of) hedging certain risks. fee structures. ] As the name implies. and are accordingly exempted from many regulations that govern ordinary investment funds. During this time frame. most notably short selling and derivatives. Hedge funds. the buyer of the option gains the right. debt and commodities. but not the obligation.[PORTFOLIO MANAGEMENT SOFTWARE] A hedge fund is an investment fund open to a limited range of investors that undertakes a wider range of investment and trading activities than traditional long-only investment funds. The net asset value of a hedge fund can run into many billions of dollars. use short selling and other "hedging" methods as a trading strategy to generate a return on their capital. as a class. hedge funds often seek to hedge some of the risks inherent in their investments using a variety of methods. Light regulation and the presence of performance fees are the distinguishing characteristics of hedge funds. the term "hedge fund" has also come to be applied to certain funds that. invest in a broad range of investments including shares. DERIVATIVES OPTIONS An option is a derivative financial instrument that establishes a contract between two parties concerning the buying or selling of an asset at a reference price during a specified time frame. and that. to INDIAN INSTITUTE OF FINANCE Page 87 . Hedge funds dominate certain specialty markets such as trading within derivatives with high-yield ratings and distressed debt. However.

usually by an investment bank. An option can usually be sold by its original buyer to another party. and options can in principle be created for any type of valuable asset. a currency or a futures contract) plus a premium based on the time remaining until the expiration of the option. the premium. while other over-the-counter options are customized to the desires of the buyer on an ad hoc basis. it becomes void and worthless. In return for granting the option. Many options are created in standardized form and traded on an anonymous options exchange among the general public. An option which conveys the right to buy something is called a call. Other types of options exist. an option which conveys the right to sell is called a put. WARRANTS A warrant is a security that entitles the holder to buy stock of the issuing company at a specified price. The price specified at which the underlying may be traded is called the strike price or exercise price. The word warrant simply means to "endow with the right".[PORTFOLIO MANAGEMENT SOFTWARE] engage in some specific transaction on the asset. while the seller incurs the obligation to fulfill the transaction if so requested by the buyer. The writer of an option must make good on delivering (or receiving) the underlying asset or its cash equivalent. The process of activating an option and thereby trading the underlying at the agreed-upon price is referred to as exercising it. from the buyer. Both are discretionary and have expiration dates. If the option is not exercised by the expiration date. which can be higher or lower than the stock price at time of issue. The price of an option derives from the value of an underlying asset (commonly a stock. the originator of the option collects a payment. Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. which is only slightly different to the meaning of an option. INDIAN INSTITUTE OF FINANCE Page 88 . Most options have an expiration date. if the option is exercised. a bond. called writing the option.

In Hong Kong Stock Exchange. warrants accounted for 11. such as options. it is important to consider the following main characteristics: • Premium: A warrant's "premium" represents how much extra you have to pay for your shares when buying them through the warrant as compared to buying them in the regular way. STRUCTURE AND FEATURES Warrants have similar characteristics to that of other equity derivatives. • Expiration Date: This is the date the warrant expires. stockholders may need to detach and sell the warrant before they can receive dividend payments. such as exercise price. Thus. Warrants can also be used in private equity deals.7% of the turnover in the first quarter of 2009. With warrants. for instance: • Exercising: A warrant is exercised when the holder informs the issuer their intention to purchase the shares underlying the warrant. If you plan on exercising the warrant you must do so before the expiration date. and make them more attractive to potential buyers. allowing the issuer to pay lower interest rates or dividends. The warrant parameters. In the case of warrants issued with preferred stocks. Warrants are actively traded in some financial markets such as Deutsche Börse and Hong Kong. and can be sold independently of the bond or stock. it is sometimes beneficial to detach and sell a warrant as soon as possible so the investor can earn dividends.[PORTFOLIO MANAGEMENT SOFTWARE] Warrants are frequently attached to bonds or preferred stock as a sweetener. The more time remaining until INDIAN INSTITUTE OF FINANCE Page 89 . • Gearing (leverage): A warrant's "gearing" is the way to ascertain how much more exposure you have to the underlying shares using the warrant as compared to the exposure you would have if you buy shares through the market. these warrants are detachable. are fixed shortly after the issue of the bond. just second to the callable bull/bear contract. They can be used to enhance the yield of the bond. Frequently.

[PORTFOLIO MANAGEMENT SOFTWARE] expiry. though they are a type of derivative contract. The future date is called the delivery date or final settlement date. except they are exchange-traded and defined on standardized assets. Future contracts are very similar to forward contracts. Unlike forwards. which. for financial futures. the more time for the underlying security to appreciate. The contracts are traded on a futures exchange. In many cases. They are still securities. The price is determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract. the underlying asset or item can be currencies. futures typically have interim partial settlements or INDIAN INSTITUTE OF FINANCE Page 90 . the underlying asset to a futures contract may not be traditional "commodities" at all – that is. A closely related contract is a forward contract. they differ in certain respects. • Restrictions on exercise: Like options. Warrants are longer-dated options and are generally traded over-the-counter. bonds. The party agreeing to buy the underlying asset in the future assumes a long position. the expiry date is the date on which the right to exercise no longer exists. rights or warrants. there are different exercise types associated with warrants such as American style (holder can exercise anytime before expiration) or European style (holder can only exercise on expiration date). in turn. however. Futures contracts are not "direct" securities like stocks. Therefore. FUTURES A futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality at a specified future date at a price agreed today (the futures price). will increase the price of the warrant (unless it depreciates). and the party agreeing to sell the asset in the future assumes a short position. securities or financial instruments and intangible assets or referenced items such as stock indexes and interest rates. The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange.

This can be the notional amount of bonds. To exit the commitment prior to the settlement date. In other words. then cash is transferred from the futures trader who sustained a loss to the one who made a profit. the net gain or loss accrued over the life of the contract is realized on the delivery date. (but not future or future contract) are exchange-traded derivatives. sets margin requirements. the owner of an options contract may exercise the contract. • The type of settlement. units of foreign currency. STANDARDIZATION Futures contracts ensure their liquidity by being highly standardized. or simply futures. if it is a cash-settled futures contract. • INDIAN INSTITUTE OF FINANCE Page 91 . whereas an option grants the buyer the right. but both parties of a "futures contract" must fulfill the contract on the settlement date. a fixed number of barrels of oil. The amount and units of the underlying asset per contract. to establish a position previously held by the seller of the option.[PORTFOLIO MANAGEMENT SOFTWARE] "true-ups" in margin requirements. A futures contract gives the holder the obligation to make or take delivery under the terms of the contract. or. This could be anything from a barrel of crude oil to a short term interest rate. For typical forwards. the holder of a futures position has to offset his/her position by either selling a long position or buying back (covering) a short position. and crucially also provides a mechanism for settlement. but not the obligation. The exchange's clearing house acts as counterparty on all contracts. The seller delivers the underlying asset to the buyer. either cash settlement or physical settlement. usually by specifying: • The underlying asset or instrument. Futures contracts. effectively closing out the futures position and its contract obligations.

The last trading date. • • The currency in which the futures contract is quoted. WHO TRADES FUTURES? Futures traders are traditionally placed in one of two groups: hedgers. making it easier for them to plan. Other details such as the commodity tick. INDIAN INSTITUTE OF FINANCE Page 92 . the minimum permissible price fluctuation. the NYMEX Light Sweet Crude Oil contract specifies the acceptable sulphur content and API specific gravity. The grade of the deliverable. In the case of bonds. Hedgers typically include producers and consumers of a commodity or the owner of an asset or assets subject to certain influences such as an interest rate.the location where delivery must be made. who have an interest in the underlying asset (which could include an intangible such as an index or interest rate) and are seeking to hedge out the risk of price changes. so that they can plan on a fixed cost for feed. and speculators. who seek to make a profit by predicting market moves and opening a derivative contract related to the asset "on paper".[PORTFOLIO MANAGEMENT SOFTWARE] the notional amount of the deposit over which the short term interest rate is traded. • • • The delivery month. the investor is seeking exposure to the asset in a long futures or the opposite effect via a short futures contract. this specifies which bonds can be delivered. In other words. this specifies not only the quality of the underlying goods but also the manner and location of delivery. For example. Similarly. in traditional commodity markets. In the case of physical commodities. For example. while they have no practical use for or intent to actually take or make delivery of the underlying asset. etc. "producers" of interest rate swaps or equity derivative products will use financial futures or equity index futures to reduce or remove the risk on the swap. farmers often sell futures contracts for the crops and livestock they produce to guarantee a certain price. In modern (financial) markets. livestock producers often purchase futures to cover their feed costs. as well as the pricing point -.

SWAPS In finance. the two counterparties agree to exchange one stream of cash flows against another stream. foreign exchange rate. the benefits in question can be the periodic interest (or coupon) payments associated with the bonds. When it is economically feasible (an efficient amount of shares of every individual position within the fund or account can be purchased). swaps can be in cash or collateral.[PORTFOLIO MANAGEMENT SOFTWARE] An example that has both hedge and speculative notions involves a mutual fund or separately managed account whose investment objective is to track the performance of a stock index such as the S&P 500 stock index. equity price or commodity price. Consequently. The swap agreement defines the dates when the cash flows are to be paid and the way they are calculated. or to speculate on changes in the expected direction of underlying prices. the portfolio manager can close the contract and make purchases of each individual stock. INDIAN INSTITUTE OF FINANCE Page 93 . These streams are called the legs of the swap. Specifically. This gains the portfolio exposure to the index which is consistent with the fund or account investment objective without having to buy an appropriate proportion of each of the individual 500 stocks just yet. from a hedger to a speculator. This also preserves balanced diversification. The social utility of futures markets is considered to be mainly in the transfer of risk. The cash flows are calculated over a notional principal amount. in the case of a swap involving two bonds. for example. For example. which is usually not exchanged between counterparties. maintains a higher degree of the percent of assets invested in the market and helps reduce tracking error in the performance of the fund/account. Usually at the time when the contract is initiated at least one of these series of cash flows is determined by a random or uncertain variable such as an interest rate. Swaps can be used to hedge certain risks such as interest rate risk. a swap is a derivative in which counterparties exchange certain benefits of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved. The Portfolio manager often "equitizes" cash inflows in an easy and cost effective manner by investing in (opening long) S&P 500 stock index futures. and increased liquidity between traders with different risk and time preferences.

Interest rate swaps A is currently paying floating. engineered the first swap transaction according to "When Genius Failed: The Rise and Fall of Long-Term Capital Management" by Roger Lowenstein. according to International Swaps and Derivatives Association. In return for matching the two parties together. Today. the net result is that each party can 'swap' their existing obligation for their desired obligation. a Yale Ph. David Swensen. but wants to pay fixed. in order of their quantitative importance. swaps are among the most heavily traded financial contracts in the world: the total amount of interest rates and currency swaps outstanding is more thаn $426. each sets up a separate swap with a financial intermediary such as a bank. but rather. credit swaps. at Salomon Brothers. are: interest rate swaps. currency swaps.[PORTFOLIO MANAGEMENT SOFTWARE] The first swaps were negotiated in the early 1980s. INDIAN INSTITUTE OF FINANCE Page 94 . the bank takes a spread from the swap payments. commodity swaps and equity swaps. By entering into an interest rate swap. B is currently paying fixed but wants to pay floating.D.7 trillion in 2009. Normally the parties do not swap payments directly. There are also many other types. TYPES OF SWAPS The five generic types of swaps.

The vast majority of commodity swaps involve crude oil. such as LIBOR. For example. Currency swaps A currency swap involves exchanging principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal loan in another currency. INDIAN INSTITUTE OF FINANCE Page 95 . party B makes periodic interest payments to party A based on a variable interest rate of LIBOR +70 basis points.the currency swaps also are motivated by comparative advantage. In reality. Just like interest rate swaps. Commodity swaps A commodity swap is an agreement whereby a floating (or market or spot) price is exchanged for a fixed price over a specified period.[PORTFOLIO MANAGEMENT SOFTWARE] The most common type of swap is a “plain Vanilla” interest rate swap.e. The reason for this exchange is to take benefit from comparative advantage. It is the exchange of a fixed rate loan to a floating rate loan. When companies want to borrow they look for cheap borrowing i. because it is reset at the beginning of each interest calculation period to the then current reference rate. from the market where they have comparative advantage. However this may lead to a company borrowing fixed when it wants floating or borrowing floating when it wants fixed. The payments are calculated over the notional amount. This is where a swap comes in. The life of the swap can range from 2 years to over 15 years. The first rate is called variable. Party A in return makes periodic interest payments based on a fixed rate of 8. A swap has the effect of transforming a fixed rate loan into a floating rate loan or vice versa.65%. the actual rate received by A and B is slightly lower due to a bank taking a spread. Some companies may have comparative advantage in fixed rate markets while other companies have a comparative advantage in floating rate markets.

These provide one party with the right but not the obligation at a future time to enter into a swap. or a stock index. plus any interest or dividend payments. then party A receives this amount from party B. The profit or loss of party B is the same for him as actually owning the underlying asset.typically a bond or loan . a basket of stocks. CDS contracts have been compared with insurance. in exchange.goes into default (fails to pay). but you do not have any voting or other rights that stock holders do have. Compared to actually owning the stock. • A total return swap is a swap in which party A pays the total return of an asset. Other variations There are myriad different variations on the vanilla swap structure. without having to hold the underlying assets.[PORTFOLIO MANAGEMENT SOFTWARE] Equity Swap An equity swap is a special type of total return swap. Note that if the total return is negative. The total return is the capital gain or loss. • An option on a swap is called a swaption. where the underlying asset is a stock. INDIAN INSTITUTE OF FINANCE Page 96 . receives a sum of money if one of the events specified in the contract occur. the credit event that triggers the payoff can be a company undergoing restructuring. Credit default swaps A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and. receives a payoff if a credit instrument . Unlike an actual insurance contract the buyer is allowed to profit from the contract and may also cover an asset to which the buyer has no direct exposure. and party B makes periodic interest payments. Less commonly. because the buyer pays a premium and. bankruptcy or even just having its credit rating downgraded. which are limited only by the imagination of financial engineers and the desire of corporate treasurers and fund managers for exotic structures. in this case you do not have to pay anything up front. in return. The parties have exposure to the return of the underlying stock or index.

perhaps at a rate tied to the prepayment of a mortgage or to an interest rate benchmark such as the LIBOR. Stated in plain language. Credit derivatives are bilateral contracts between a buyer and seller under which the seller sells protection against the credit risk of the reference entity. a CMS. This entity is known as the reference entity and may be a corporate. and the reference entity is the thing being wagered on. where the person placing the bet does not own the horse or the track or have anything else to do with the race. A small handful of investors anticipated the credit crunch of 2007/8 and made billions placing "bets" via this method. the credit risk is on an entity other than the counterparties to the transaction itself. it evolved into a freestanding investment strategy. CREDIT DERIVATIVES A credit derivative is a securitized derivative whose value is derived from the credit risk on an underlying bond.[PORTFOLIO MANAGEMENT SOFTWARE] • A variance swap is an over-the-counter instrument that allows one to speculate on or hedge risks associated with the magnitude of movement. He or she simply believes that there is a good chance that the bond or collateralized debt obligation (CDO) in question will default (go to zero value). The cost might be as low as 1% per year. • An Amortising swap is usually an interest rate swap in which the notional principal for the interest payments declines during the life of the swap. In this way. Originally conceived as a kind of insurance policy for owners of bonds or CDO's. a sovereign or any other form of legal entity which has incurred debt. If the buyer of the derivative believes the underlying bond will go bust within a year (usually an extremely unlikely event) the buyer stands to reap a 100 fold profit. The parties will select which credit events apply to a transaction and these usually consist of one or more of the following: INDIAN INSTITUTE OF FINANCE Page 97 . the person buying the credit derivative doesn't necessarily own the bond (the reference entity) that is the object of the wager. is a swap that allows the purchaser to fix the duration of received flows on a swap. Similar to placing a bet at the racetrack. loan or any other financial asset. a credit derivative is a wager.

which allows investors to take different slices of credit risk according to their risk appetite.e. Unfunded credit derivative products include the following products: INDIAN INSTITUTE OF FINANCE Page 98 . single tranche CDOs.. to name a few.[PORTFOLIO MANAGEMENT SOFTWARE] • • bankruptcy (the risk that the reference entity will become bankrupt) failure to pay (the risk that the reference entity will default on one of its obligations such as a bond or loan) obligation default (the risk that the reference entity will default on any of its obligations) obligation acceleration (the risk that an obligation of the reference entity will be accelerated e..g. This synthetic securitization process has become increasingly popular over the last decade. If the credit derivative is entered into by a financial institution or a special purpose vehicle (SPV) and payments under the credit derivative are funded using securitization techniques. transactions are often rated by rating agencies. In funded credit derivatives. credit linked notes. • Where credit protection is bought and sold between bilateral counterparties. a bond will be declared immediately due and payable following a default) • • • repudiation/moratorium (the risk that the reference entity or a government will declare a moratorium over the reference entity's obligations) restructuring (the risk that obligations of the reference entity will be restructured). A funded credit derivative involves the protection seller (the party that assumes the credit risk) making an initial payment that is used to settle any potential credit events. Credit derivatives are fundamentally divided into two categories: funded credit derivatives and unfunded credit derivatives. this is known as an unfunded credit derivative. The advantage of this to the protection buyer is that it is not exposed to the credit risk of the protection seller. payments of premiums and any cash or physical settlement amount) itself without recourse to other assets. such that a debt obligation is issued by the financial institution or SPV to support these obligations. where each party is responsible for making its payments under the contract (i. with the simple versions of these structures being known as synthetic CDOs. An unfunded credit derivative is a bilateral contract between two counterparties. this is known as a funded credit derivative.

debt and equity. unlike a share of stock (equity) the holder has a 'known' cash flow. unlike a fixed interest security (debt) there is an option to convert to the underlying equity. and. INDIAN INSTITUTE OF FINANCE Page 99 . at which point the holder has a number of options including converting the securities into the underlying share. Therefore. More common examples include convertible and converting preference shares.[PORTFOLIO MANAGEMENT SOFTWARE] • • • • • • • • • • • Credit default swap (CDS) Total return swap Constant maturity credit default swap (CMCDS) First to Default Credit Default Swap Portfolio Credit Default Swap Secured Loan Credit Default Swap Credit Default Swap on Asset Backed Securities Credit default swaption Recovery lock transaction Credit Spread Option CDS index products Funded credit derivative products include the following products: • • • • Credit linked note (CLN) Synthetic Collateralised Debt Obligation (CDO) Constant Proportion Debt Obligation (CPDO) Synthetic Constant Proportion Portfolio Insurance (Synthetic CPPI) HYBRID SECURITIES Hybrid securities are a broad group of securities that combine the elements of the two broader groups of securities. Hybrid securities pay a predictable (fixed or floating) rate of return or dividend until a certain date.

others behave more like the underlying shares into which they convert. e. Although each has individual characteristics. e. 5% the conversion ratio is into a dollar amount of shares. (The extent of the co-relation is sometimes referred to as a delta. effectively giving the holder a put and call option if the share price reaches a certain prices. some of these securities include minimum and maximum conversion terms. typically: • • • • they have a set dividend until conversion the conversion might occur at a number of dates they are usually issued at a similar price to the underlying share they convert at a set ratio. and these typically have a delta of between 0.g. and they therefore behave • • INDIAN INSTITUTE OF FINANCE Page 100 . $100 worth of the underlying equity Note: This 'variable' conversion ratio means the price of these hybrids does not react to the movement in the share price. typically: • • • they have a set dividend rate for a 5 year period ('reset' period) are issued at $100 the holder has the ability to take the new 'reset' terms. Although each has individual characteristics. TRADITIONAL HYBRIDS Traditional hybrids were usually structured in a way that leads the securities to react to the underlying share price.g. 1 hybrid converts into 1 underlying share Note: This fixed conversion ratio means the price of these hybrids react to the movement in the underlying share price.5 and 1) In addition. LATEST HYBRIDS Most of the hybrid securities issued recently are very bond-like.g.[PORTFOLIO MANAGEMENT SOFTWARE] A hybrid security is structured differently and while the price of some securities behave more like fixed interest securities. redeem the face value or convert the holder can convert into the shares at a discount to the current ordinary share price e.

If the transaction is properly structured and the pool performs as expected. The buyers invest in the success and/or failure of the unit. Securitization is designed to reduce the risk of bankruptcy and thereby obtain lower interest rates from potential lenders. In most securitized investment structures. As a portfolio risk backed by amortizing cash flows . Securitization is similar to a sale of a profitable business ("spinning off") into a separate entity. and receive a premium (usually in the form of interest) for doing so. for present cash. if improperly structured. STRUCTURED FINANCE SECURITIZATION Securitization is a structured finance process that distributes risk by aggregating assets in a pool (often by selling assets to a special purpose entity). the credit risk of all tranches of structured debt improves. then issuing new securities backed by the assets and their cash flows.and structure-dependent.24 trillion in the United States and $2.25 trillion INDIAN INSTITUTE OF FINANCE Page 101 .the credit quality of securitized debt is non-stationary due to changes in volatility that are time. A credit derivative is also sometimes used to change the credit quality of the underlying portfolio so that it will be acceptable to the final investors. Securitization has evolved from its tentative beginnings in the late 1970s to a vital funding source with an estimated outstanding of $10. The previous owner trades its ownership of that unit.and unlike general corporate debt . while junior tranche investors assume a higher risk in return for higher interest. The securities are sold to investors who share the risk and reward from those assets. and all the profit and loss that might come in the future. the investors' rights to receive cash flows are divided into "tranches": senior tranche investors lower their risk of default in return for lower interest payments.[PORTFOLIO MANAGEMENT SOFTWARE] in a similar way to fixed interest securities (this lack of co-relation with the underlying shares is sometime referred to as a zero delta). the affected tranches will experience dramatic credit deterioration and loss.

During the accumulation period. INDIAN INSTITUTE OF FINANCE Page 102 . but credit card-backed receivables usually pay off much more quickly. For example. This can cause issues with how the seller controls the terms and conditions of the accounts. During the amortization period. there is language written into the securitization to protect the investors. an originator of credit card receivables transfers a pool of those receivables to the trust and then the trust issues securities backed by these receivables.[PORTFOLIO MANAGEMENT SOFTWARE] in Europe as of the 2nd quarter of 2008. One risk is that timing of cash flows promised to investors might be different from timing of payments on the receivables. After this transaction. To solve this issue these securities typically have a revolving period. There are various risks involved with master trusts specifically. but the seller (originator) owns the accounts. typically the originator would continue to service the receivables. Typically to solve this. credit card-backed securities can have maturities of up to 10 years. an accumulation period. In a typical master trust transaction. and has the flexibility to handle different securities at different times. SPECIAL TYPES OF SECURITIZATION Master trust A master trust is a type of SPV particularly suited to handle revolving credit card balances. Often there will be many tranched securities issued by the trust all based on one set of receivables. and an amortization period.455 billion in the US and $652 billion in Europe. In 2007. new payments are passed through to the investors. During the revolving period. All three of these periods are based on historical experience of the receivables. A second risk is that the total investor interests and the seller's interest are limited to receivables generated by the credit cards. ABS issuance amounted to $3. these payments are accumulated in a separate account. in this case the credit cards. principal payments received on the credit card balances are used to purchase additional receivables.

Grantor trusts are very similar to pass-through trusts used in the earlier days of Securitization. there is more flexibility in allocating principal and interest received to different classes of issued securities. There are other benefits to an issuance trust: they provide more flexibility in issuing senior/subordinate securities. To prevent this. called an issuance trust. issuance trusts are now the dominant structure used by major issuers of credit card-backed securities.[PORTFOLIO MANAGEMENT SOFTWARE] A third risk is that payments on the receivables can shrink the pool balance and undercollateralize total investor interest. that requires each issued series of securities to have both a senior and subordinate tranche. can increase demand because pension funds are eligible to invest in investmentgrade securities issued by them. which leaves more collateral for the other classes. owner trusts can tailor maturity. and they can significantly reduce the cost of issuing securities. which issues classes of securities backed by these loans. after expenses are taken into account. Grantor trust Grantor trusts are typically used in automobile-backed securities and REMICs (Real Estate Mortgage Investment Conduits). that master trusts sometimes do. which does not have limitations. Because of these issues. both interest and principal due to subordinate securities can be used to pay senior securities. often there is a required minimum seller's interest. Owner trust In an owner trust. An originator pools together loans and sells them to a grantor trust. Issuance trust In 2000. are passed through to the holders of the securities on a pro-rata basis. risk and return profiles of issued securities to investor needs. Usually. Due to this. and if there was a decrease then an early amortization event would occur. Principal and interest received on the loans. any income remaining after expenses is kept in a reserve account up to a specified level and then after that. Citibank introduced a new structure for credit card-backed securities. Owner trusts allow credit risk to be mitigated by over-collateralization by using excess reserves and excess finance income to prepay securities before principal. INDIAN INSTITUTE OF FINANCE Page 103 . In an owner trust. all income is returned to the seller.

As long as the credit risk of the underlying assets is transferred to another institution. for managing credit risk—often by transferring it to an insurance company after paying a premium—and for distributing payments from the securities. royalty payments and movie revenues. A higher credit rating could allow the special purpose vehicle and. called a special purpose vehicle. or originated. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually. a transaction which can improve its credit rating and reduce the amount of capital that it needs. so that they (the banks) INDIAN INSTITUTE OF FINANCE Page 104 . Often a separate institution. Thus. the underlying assets. The pools of underlying assets can include common payments from credit cards. the originating institution to pay a lower interest rate (that is. In this case. is created to handle the securitization of asset backed securities. auto loans. The special purpose vehicle.[PORTFOLIO MANAGEMENT SOFTWARE] ASSET BACKED SECURITY An asset-backed security is a security whose value and income payments are derived from and collateralized (or "backed") by a specified pool of underlying assets. to esoteric cash flows from aircraft leases. and allows the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets. one incentive for banks to create securitized assets is to remove risky assets from their balance sheet by having another institution assume the credit risk. Pooling the assets into financial instruments allows them to be sold to general investors. a credit rating of the asset backed securities would be based only on the assets and liabilities of the special purpose vehicle. The special purpose vehicle is responsible for "bundling" the underlying assets into a specified pool that will fit the risk preferences and other needs of investors who might want to buy the securities. uses the proceeds of the sale to pay back the bank that created. and mortgage loans. the originating bank removes the value of the underlying assets from its balance sheet and receives cash in return as the asset backed securities are sold. which creates and sells the securities. by extension. a process called securitization. charge a higher price) on the asset-backed securities than if the originating institution borrowed funds or issued bonds. and this rating could be higher than if the originating bank issued the securities because the risk of the asset backed securities would no longer be associated with other risks that the originating bank might bear.

Credit card holders may borrow funds on a revolving basis INDIAN INSTITUTE OF FINANCE Page 105 . tainted credited histories. Subprime borrowers will typically have lower incomes. Auto loans The second largest subsector in the ABS market is auto loans. reperforming loans. which may have higher cumulative losses. This allows banks to invest more of their capital in new loans or other assets and possibly have a lower capital requirement. Credit card receivables Securities backed by credit card receivables have been benchmark for the ABS market since they were first introduced in 1987. In addition to first and second-lien loans. Auto finance companies issue securities backed by underlying pools of auto-related loans. Deals can also be structured to pay on a pro-rata or combination of the two. TYPES Home equity loans Securities collateralized by home equity loans (HELs) are currently the largest asset class within the ABS market. While early HELs were mostly second lien subprime mortgages. Investors typically refer to HELs as any nonagency loans that do not fit into either the jumbo or alt-A loan categories.[PORTFOLIO MANAGEMENT SOFTWARE] receive cash in return. Nonprime auto ABS consist of loans made to lesser credit quality consumers. first-lien loans now make up the majority of issuance. nonprime. or open-ended home equity lines of credit (HELOC).which homeowners use as a method to consolidate debt. other HE loans can consist of high loan to value (LTV) loans. Auto ABS are classified into three categories: prime. Owner trusts are the most common structure used when issuing auto loans and allow investors to receive interest and principal on sequential basis. Subprime mortgage borrowers have a less than perfect credit history and are required to pay interest rates higher than what would be available to a typical agency borrower. or both. and subprime: • • • Prime auto ABS are collaterized by loans made to borrowers with strong credit histories. scratch and dent loans.

INDIAN INSTITUTE OF FINANCE Page 106 .S. along with the required minimum monthly payments. The borrowers then pay principal and interest as desired. The delinked structures allow the issuer to separate the senior and subordinate series within a trust and issue them at different points in time. credit card debt does not have an actual maturity date and is considered a nonamortizing loan. performance (other than high cohort default rates in the late 1980s) has historically been very good and investors rate of return has been excellent. 2007 and significantly changed the economics for FFELP loans. The latter two structures allow investors to benefit from a larger pool of loans made over time rather than one static pool. Discrete trusts consist of a fixed or static pool of receivables that are tranched into senior/subordinated bonds. As a result. Federal Family Education Loan Program (FFELP) loans are the most common form of student loans and are guaranteed by the U. The College Cost Reduction and Access Act became effective on October 1. lender special allowance payments were reduced. and faster growing.[PORTFOLIO MANAGEMENT SOFTWARE] up to an assigned credit limit. auto loans and credit card receivables) core asset classes financed through assetbacked securitizations and are a benchmark subsector for most floating rate indices. A master trust has the advantage of offering multiple deals out of the same trust as the number of receivables grows. Department of Education ("DOE") at rates ranging from 95%98% (if the student loan is serviced by a servicer designated as an "exceptional performer" by the DOE the reimbursement rate was up to 100%). Though borrowing limits on certain types of FFELP loans were slightly increased by the student loan bill referenced above. portion of the student loan market consists of non-FFELP or private student loans. essentially static borrowing limits for FFELP loans and increasing tuition are driving students to search for alternative lenders. and the lender paid origination fees were doubled. Because principal repayment is not scheduled. lender insurance rates were reduced. A second. ABS backed by credit card receivables are issued out of trusts that have evolved over time from discrete trusts to various types of master trusts of which the most common is the delinked master trust. each of which is entitled to a pro-rata share of all of the receivables. Student loans ABS collateralized by student loans (“SLABS”) comprise one of the four (along with home equity loans. the exceptional performer designation was revoked.

This can be confusing. equipment leases and loans. INDIAN INSTITUTE OF FINANCE Page 107 . Since its first issuance in 1995. Sallie Mae is now the major issuer of SLABS and its issues are viewed as the benchmark issues. Stranded cost utilities Rate reduction bonds (RRBs) came about as the result of the Energy Policy Act of 1992. The United States Congress created the Student Loan Marketing Association (Sallie Mae) as a government sponsored enterprise to purchase student loans in the secondary market and to securitize pools of student loans. Others There are many other cash-flow-producing assets. and royalties. RRBs offerings are typically large enough to create reasonable liquidity in the aftermarket. These costs are considered nonbypassable and are added to all customer bills. regulators have allowed utilities to recover certain "transition costs" over a period of time. Intangibles are another emerging asset class. trade receivables. and average life extension is limited by a "true up" mechanism. chargeoffs have historically been low. Most bonds backed by mortgages are classified as an MBS. dealer floor plan loans. including manufactured housing loans. MORTGAGE BACKED SECURITY A mortgage-backed security (MBS) is an asset-backed security or debt obligation that represents a claim on the cash flows from mortgage loans through a process known as securitization. which was designed to increase competition in the US electricity market.[PORTFOLIO MANAGEMENT SOFTWARE] Students utilize private loans to bridge the gap between amounts that can be borrowed through federal programs and the remaining costs of education[2]. To distinguish the basic MBS bond from other mortgage-backed instruments the qualifier pass-through is used. aircraft leases. in the same way that "vanilla" designates an option with no special features. because a security derived from an MBS is also called an MBS. To avoid any disruptions while moving from a non-competitive to a competitive market. Since consumers usually pay utility bills before any other.

etc.[13] • A stripped mortgage-backed security (SMBS) where each mortgage payment is partly used to pay down the loan's principal and partly used to pay the interest on it. etc. generally prime borrowers but nonconforming in some way. often lower documentation (or in some other way: vacation home. no verification of income or assets. o A principal-only stripped mortgage-backed security (PO) is a bond with cash flows backed by the principal repayment component of property owner's mortgage payments. full documentation (such as verification of income and assets). strong credit scores. it is a securitization of the mortgage payments to the mortgage originators. These can be subdivided into: o A residential mortgage-backed security (RMBS) is a pass-through MBS backed by mortgages on residential property. A commercial mortgage-backed security (CMBS) is a pass-through MBS backed by mortgages on commercial property.  A net interest margin security (NIMS) is resecuritized residual interest of a mortgage-backed security. of which there are two subtypes: o An interest-only stripped mortgage-backed security (IO) is a bond with cash flows backed by the interest component of property owner's mortgage payments. • Alt-A mortgages are an ill-defined category. with each tranche sold as a separate security. These two components can be separated to create SMBS's. as described in the sections above. o • A collateralized mortgage obligation (CMO) is a more complex MBS in which the mortgages are ordered into tranches by some quality (such as repayment time). Essentially.) • Subprime mortgages have weaker credit scores.[PORTFOLIO MANAGEMENT SOFTWARE] Mortgage-backed security sub-types include: • A pass-through mortgage-backed security is the simplest MBS. INDIAN INSTITUTE OF FINANCE Page 108 . There are a variety of underlying mortgage classifications in the pool: • Prime mortgages are conforming mortgages with prime borrowers. etc.

i. These types are not limited to Mortgage Backed Securities.[PORTFOLIO MANAGEMENT SOFTWARE] • Jumbo mortgages when the size of the loan is bigger than the "conforming loan amount" as set by Fannie Mae. commonly known by the German term Pfandbriefe. The typical structure for the securitization of commercial real estate loans is a Real Estate Mortgage Investment Conduit (REMIC). Interest on the bonds is usually floating. Bonds backed by mortgages.e. based on a benchmark (like LIBOR/EURIBOR) plus a spread. CMBS issues are usually structured as multiple tranches. thanks to the structure of commercial mortgages. a creation of the tax law that allows the trust to be a pass-through entity which is not subject to tax at the trust level. which it wouldn't do if it issued an MBS. The market has been regulated since the creation of a law governing the securities in Germany in 1900. Covered bonds In Europe there exists a type of asset-backed bond called a covered bond. European CMBS issues typically have less prepayment protection. yield maintenance and prepayment penalties to protect bondholders. but are not MBS can also have these subtypes. This means that when a company with mortgage assets on its books issue the covered bond its balance sheet grows. rather than typical residential "pass-through”. although it may still guarantee the securities payments. Covered bonds were first created in 19th century Germany when Frankfurter Hypo began issuing mortgage covered bonds. INDIAN INSTITUTE OF FINANCE Page 109 . COMMERCIAL MORTGAGE BACKED SECURITY Commercial mortgage-backed securities (CMBS) are a type of mortgage-backed security backed by mortgages on commercial rather than residential real estate. Commercial mortgages often contain lockout provisions after which they can be subject to defeasance. Many American CMBSs carry less prepayment risk than other MBS types. similar to CMOs. The key difference between covered bonds and mortgage-backed or asset-backed securities is that banks that make loans and package them into covered bonds keep those loans on their books.

each identified by letter (e. Class B. Class C securities) with different bond credit ratings (ratings). The word tranche is French for slice. Transaction documentation (see indenture) usually defines the tranches as different "classes" of notes. TRANCHING A tranche (often misspelled as traunch or traunche) is one of a number of related securities offered as part of the same transaction. In the financial sense of the word.g. HOW TRANCHING WORKS All the tranches together make up what is referred to as the deal's capital structure or liability structure. where "multi-tranche loans" are commonplace). section.[PORTFOLIO MANAGEMENT SOFTWARE] RESIDENTIAL MORTGAGE BACKED SECURITY Residential mortgage-backed securities (RMBS) are a type of bond commonly issued in American security markets. Use of "tranche" as a verb is limited almost exclusively to this field. They are generally paid sequentially from the most senior to most subordinate (and INDIAN INSTITUTE OF FINANCE Page 110 . but the term's use in structured finance may be singled out as particularly important. They are a type of mortgage-backed security which are backed by mortgages on residential rather than commercial real estate. the Class A. The term "tranche" is used in fields of finance other than structured finance (such as in straight lending. or portion. each bond is a different slice of the deal's risk. series.

The SPV sells 4 tranches of credit linked notes with a waterfall structure whereby: o o o o Tranche A absorbs the first 25% of losses on the portfolio. • • Tranches B. unsecured tranche may be rated BB. The more senior rated tranches generally have higher bond credit ratings (ratings) than the lower rated tranches. However. although certain tranches with the same security may be paid pari passu. Tranches with either a second lien or no lien are often referred to as "junior notes". AA or A. "Market information also suggests that the more junior tranches of structured products are often bought by specialist credit investors. The natural buyers of these securities tend to be hedge funds and other investors seeking higher risk/return profiles. Here is a simplified example to demonstrate the principle: Example • • • A bank transfers risk in its loan portfolio by entering into a default swap with a "ring-fenced" special purpose vehicle (SPV). insurance companies. Tranches with a first lien on the assets of the asset pool are referred to as "senior tranches" and are generally safer investments. Tranche B absorbs the next 25% of losses Tranche C the next 25% Tranche D the final 25%. INDIAN INSTITUTE OF FINANCE Page 111 . Typical investors of these types of securities tend to be conduits. ratings can fluctuate after the debt is issued and even senior tranches could be rated below investment grade (less than BBB). is the least risky. less specialised investor community".[PORTFOLIO MANAGEMENT SOFTWARE] generally unsecured). while the senior tranches appear to be more attractive for a broader. These are more risky investments because they are not secured by specific assets. The SPV buys gilts (UK government bonds). Tranche A is bought by the bank itself. while a junior. senior tranches may be rated AAA. For example. The deal's indenture (its governing legal document) usually details the payment of the tranches in a section often referred to as the waterfall (because the moneys flow down). C and D are sold to outside investors. pension funds and other risk averse investors. is the more risky.

analysts and investors such as Warren Buffett and the IMF's former chief economist Raghuram Rajan warned that CDOs. Many CDOs are valued on a mark to market basis and thus have experienced substantial write-downs on the balance sheet as their market value has collapsed. so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk. A few academics. CDOs securities are split into different risk classes. or tranches. Interest and principal payments are made in order of seniority. other ABSs and other derivatives spread risk and uncertainty about the value of the underlying assets more widely.[PORTFOLIO MANAGEMENT SOFTWARE] COLLETRALIZED DEBT OBLIGATION Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. CONCEPT INDIAN INSTITUTE OF FINANCE Page 112 . rather than reduce risk through diversification. Credit rating agencies failed to adequately account for large risks (like a nationwide collapse of housing values) when rating CDOs and other ABSs. whereby "senior" tranches are considered the safest securities. Following the onset of the 2007-2008 credit crunch. this view has gained substantial credibility.

and finally by the senior securities. skews the incentives of originators in favor of loan volume rather than loan quality.[PORTFOLIO MANAGEMENT SOFTWARE] CDOs vary in structure and underlying assets. Losses are first borne by the equity securities. commercial real estate bonds and corporate loans. Thus investors must understand how the risk for CDOs is calculated. In particular. The senior CDOs are paid from the cash flows from the underlying assets before the junior securities and equity securities. • The SPE issues bonds (CDOs) in different tranches and the proceeds are used to purchase the portfolio of underlying assets. like all asset-backed securities. and only indirectly on the underlying assets. A CDO is a type of asset-backed security. next by the junior securities. INDIAN INSTITUTE OF FINANCE Page 113 . The issuer of the CDO. The risk and return for a CDO investor depends directly on how the CDOs and their tranches are defined. To create a CDO. earns a commission at time of issue and earns management fees during the life of the CDO. Common underlying assets held include mortgage-backed securities. but the basic principle is the same. typically an investment bank. CDOs. A CDO is constructed as follows: • A special purpose entity (SPE) acquires a portfolio of underlying assets. the investment depends on the assumptions and methods used to define the risk and return of the tranches. coupled with the absence of any residual liability. enable the originators of the underlying assets to pass credit risk to another institution or to individual investors. The ability to earn substantial fees from originating and securitizing loans. a corporate entity is constructed to hold assets as collateral and to sell packages of cash flows to investors.

The data made available to the rating agencies for analyzing the underlying private equity assets of CFOs are typically less comprehensive than the data for analyzing the underlying assets of other types of structured finance securitizations. layering several tranches of debt ahead of the equity holders. Leverage levels vary from one transaction to another.[PORTFOLIO MANAGEMENT SOFTWARE] COLLETRALIZED FUND OBLIGATION A collateralized fund obligation (CFO) is a form of securitization involving private equity fund or hedge fund assets. These differences tend to relate to the amount of equity sold through the structure as well as to the leverage levels. INDIAN INSTITUTE OF FINANCE Page 114 . including corporate bonds and mortgage-backed securities. The various CFO structures executed in recent years have had a variety of different objectives resulting in a variety of different structures. similar to collateralized debt obligations. CFOs are a structured form of financing for diversified private equity portfolios. although leverage of 50% to 75% of a portfolio's net assets has historically been common.

S. hedge funds. This article focuses primarily on CMO bonds as traded in the United States of America. government agencies. called a pool. Legally. The term collateralized mortgage obligation refers to a specific type of legal entity. the bonds are tranches (also called classes). The First Boston team was led by Dexter Senft). and structure are collectively referred to as the deal. while the structure is the set of rules that dictates how money received from the collateral will be distributed. (The Salomon Brothers team was lead by Gordon Taylor. the mortgages themselves are termed collateral. collateral. Investors in a CMO buy bonds issued by the CMO. mutual funds. insurance companies. and they receive payments according to a defined set of rules. INDIAN INSTITUTE OF FINANCE Page 115 . The entity is the legal owner of a set of mortgages. pension funds.[PORTFOLIO MANAGEMENT SOFTWARE] COLLETRALIZED MORTGAGE OBLIGATION A collateralized mortgage obligation (CMO) is a type of financial debt vehicle that was first created in 1983 by the investment banks Salomon Brothers and First Boston for U. but investors also frequently refer to deals issued using other types of entities such as REMICs as CMOs. a CMO is a special purpose entity that is wholly separate from the institution(s) that create it. mortgage lender Freddie Mac. With regard to terminology. The legal entity. Investors in CMOs include banks. and most recently central banks.

After Lehman Brothers. the investors receive a recovery rate. betting on its own credit worthiness. The Italian dairy products giant. It is structured as a security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors. The issuer is not obligated to repay the debt if a specified event occurs. In case of default. filed for bankruptcy in September 2008. many retail investors of INDIAN INSTITUTE OF FINANCE Page 116 . the trust will pay the dealer par minus the recovery rate. The purpose of the arrangement is to pass the risk of specific default onto investors willing to bear that risk in return for the higher yield it makes available. The trust will also have entered into a default swap with a dealer. such as U. This eliminates a third-party insurance provider.[PORTFOLIO MANAGEMENT SOFTWARE] CREDIT LINKED NOTES A credit linked note (CLN) is a form of funded credit derivative. Parmalat. In the case of default.S. designed to offer investors par value at maturity unless the referenced entity defaults. the major issuer of minibond in Hong Kong and Singapore. in exchange for an annual fee which is passed on to the investors in the form of a higher yield on their note. The CLNs themselves are typically backed by very highly-rated collateral. Treasury securities. notoriously dressed up its books by creating a credit-linked note for itself. credit-linked notes have been marketed as "minibonds" and sold to individual investors. In Hong Kong and Singapore. It is issued by a special purpose company or trust.

[PORTFOLIO MANAGEMENT SOFTWARE] minibonds claim that banks and brokers mis-sold minibonds as low-risk products. If company XYZ goes bankrupt. Many banks accepted minibonds as collateral for loans and credit facilities. XYZ. the bank is obligated to pay the notes in full. the unsecured creditors will have a general claim on the assets of the borrower after the specific pledged assets have been assigned to the secured creditors. The interest rate on the notes is determined by the credit risk of the company XYZ. In some legal systems. Fannie Mae. and due to their creation from these particular corporations that are sponsored by the INDIAN INSTITUTE OF FINANCE Page 117 . and at the time of loan issues credit-linked notes bought by investors. The funds the bank raises by issuing notes to investors are invested in bonds with low probability of default. In the event of the bankruptcy of the borrower. These securities are backed by mortgage loans. although the unsecured creditors will usually realize a smaller proportion of their claims than the secured creditors. AGENCY SECURITY Agency securities are specific securities that are issued by either Ginnie Mae. UNSECURED DEBT In finance. which actually puts the unsecured creditor with a matured liability to the debtor in a pre-preferential position. unsecured creditors who are also indebted to the insolvent debtor are able (and in some jurisdictions. EXAMPLE A bank lends money to a company. The bank in turn gets compensated by the returns on less-risky bond investments funded by issuing credit linked notes. the note-holders/investors become the creditor of the company XYZ and receive the company XYZ loan. Freddie Mac or the Federal Home Loan Banks. required) to set-off the debts. unsecured debt refers to any type of debt or general obligation that is not collateralised by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation. If company XYZ is solvent.

etc. Not surprisingly. the technology managers in the top 20% are given a 4. senior managers are given the value of 4. INDIAN INSTITUTE OF FINANCE Page 118 . Government in the case of Ginnie Mae securities. Importance of Portfolio Management Portfolio management is viewed as a very important task in the business.S.[PORTFOLIO MANAGEMENT SOFTWARE] U. or an implicit guarantee from the U. They are followed by senior management overall and then by corporate executives Of the 20 percent top performing firms. broken down by executive function.2 on the 5-point scale. Due to the expectation of federal backing. they enjoy credit protection based on an explicit guarantee from the U.S.) are evaluated as giving portfolio management the highest importance ratings of all functions (see ‘technology management’ with a score of 4. provides the mean importance ratings of portfolio management.1 out of 5. VPs of R&D. where 5 = critically important).6 out of 5. Government in the case of Fannie Mae and Freddie Mac. senior managers in technology (CTOs.S. these securities historically hold the highest credit rating possible. government.

These eight reasons were uncovered in part by asking managers to rate possible reasons why portfolio management might be important in their businesses. 3. Seven possible reasons were suggested. consistent with the business’s goals. to achieve financial goals.[PORTFOLIO MANAGEMENT SOFTWARE] Why So Critical? Consider these eight key reasons cited by senior management who took part in the study: 1. and to resource the “great” projects. 4. 7. 5. To properly and efficiently allocate scarce resources. it must support the strategy. and ratings on each one were sought INDIAN INSTITUTE OF FINANCE Page 119 . Financial – to maximize return. to maximize R&D productivity. and high risk and low risk ones. 8. To achieve focus – not doing too many projects for the limited resources available. To achieve balance – the right balance between long and short term projects. To forge the link between project selection and business strategy: the portfolio is the expression of strategy. 6. both vertically and horizontally. To provide better objectivity in project selection – to weed out bad projects. To maintain the competitive position of the business – to increase sales and market share. 2. To better communicate priorities within the organization.

. but it is indeed interesting to note how much the financial concerns dominate the discussion on why the business undertakes portfolio management. because we must continue to meet our growth targets” and “. Financial: Not surprisingly.... INDIAN INSTITUTE OF FINANCE Page 120 .. because it [portfolio management] improves and maximizes R&D productivity” and “. and so on. 2.. The types of comments offered include “.[PORTFOLIO MANAGEMENT SOFTWARE] 1. the most frequently mentioned reasons by far for why portfolio management is so vital are financial – making the most money. Many of these financial reasons obviously are closely related to maintaining the competitive position of the business and to effective resource allocation. to get the best return on investment” are typical here.. Maintaining (or improving) the competitive position of the business – the number one rated item in Figure 3 – is echoed in the “top of mind” comments as a reason why portfolio management is important. bang for buck.. because we must depend on new products to grow”. Comments such as “.

allocating these scarce resources is more vital than ever.[PORTFOLIO MANAGEMENT SOFTWARE] 3. Thus. and is rated an important reason why portfolio management is critical (see Figure 3). the realization is that strategy begins when one starts spending money. and faster than ever. hence the increasing importance of portfolio management. Strategic issues is another major “top of mind” theme (see Figure 4). Today’s business is called upon to develop and launch more new products. But resources have not increased. is the number three rated reason for the importance of portfolio management in Figure 3. In the same vein. INDIAN INSTITUTE OF FINANCE Page 121 . and so resource allocation to projects is how strategy is implemented. Comments such as “portfolio management is the tangible expression of strategy” and “portfolio management is critical because it provides the basis for meeting defined business objectives” are common. A typical comment is that “portfolio management focuses resources on projects that matter most to the business”. “portfolio management is important to ensure that the limited number of new product projects we can do and our limited development resources are aimed at parts of the business that need them most and can maximize their value”. which coincidently. 4. Increasingly. Properly and efficiently allocating scarce resources is a key issue for managements.

“Portfolio management makes sure that where resources are spent is consistent with short term and long term business goals” and “portfolio management helps to balance short term and long term goals” are typical comments. Some communication is vertical and for visibility reasons: “portfolio management is a very effective communication tool between executive management and divisional management” and “portfolio management provides visibility for all projects so that INDIAN INSTITUTE OF FINANCE Page 122 ... 7. The desire to achieve better focus – not doing too many projects for the resources available – is also a highly rated reason.. 6. we wish to resource the great ones!” and “we want to make sure that the resources are focused on the right ones” characterize the desire for focus. “We have too many projects .[PORTFOLIO MANAGEMENT SOFTWARE] 5. between high risk and low risk) is yet another highly rated reason (see Figure 3). between long term and short term. Improved communication within the organization is a frequently-mentioned “top of mind” reason for viewing portfolio management as important (see Figure 4). The goal of the right balance of projects (e.g. and emerges in the “top of mind” comments as well (see Figures 3 and 4).

. Horizontal communication – across functions – is also a frequently cited “top of mind” reason for adopting portfolio management: Comments are that “portfolio management promotes communication between R&D and Commercial” and “.... to maintain uniform priorities [of projects] across functions”. to ensure that projects do not take on a life of their own – that older projects which have outlived their usefulness can be killed and replaced by others.” Popular Portfolio Management Methods Used INDIAN INSTITUTE OF FINANCE Page 123 . Providing better objectivity in project selection is the final reason for the importance accorded portfolio management management “greatly reduces the tendency for ‘pet projects’ to enter the system – projects that cannot really be justified” and that effective portfolio management must be in place “.[PORTFOLIO MANAGEMENT SOFTWARE] people understand why we are working on a certain project” are comments heard here. 8.

That is. Financial methods dominate portfolio management and project selection approaches.4 percent of businesses rely on financial approaches as the dominant portfolio method. A total of 77. the ECV approach. See Figure 7 for a disguised example of one strategic method as used in a major INDIAN INSTITUTE OF FINANCE Page 124 .[PORTFOLIO MANAGEMENT SOFTWARE] 1. such as NPV. For instance. money is allocated across different types of projects and into different envelopes or buckets. and the rating and ranking of projects is based on this financial number or index! 2. The popular Productivity Index method is yet another but similar approach here [13. Projects are then ranked or rated within buckets. RONA. having decided the business’s strategy. project selection and the composition of the portfolio of projects boils down to a financial calculation. See Figure 6 for an example of a typical financial method. The business’s strategy as the basis for allocating money across different types of projects is the second most popular portfolio approach. ROI or payback period.20].3 percent of businesses use a financial approach in portfolio management and project selection – see Figure 5 – while 40. Financial methods include various profitability and return metrics.

INDIAN INSTITUTE OF FINANCE Page 125 . for 26.8 percent of businesses use a strategic approach to select their portfolio of projects.[PORTFOLIO MANAGEMENT SOFTWARE] materials company – we labelled it the Strategic Buckets approach A total of 64.6 percent of businesses. this is the dominant method.

Projects are categorized according to the zone or quadrant they are in (e. articles and software. etc. Here. A total of 40.g. projects are plotted on an X-Y plot or map. These bubble diagrams resemble the original portfolio models – Stars. however. – except that the axes are quite different. and bread-andbutter projects) – see Figure 8 for an example. Cash Cows. oysters. only 5. INDIAN INSTITUTE OF FINANCE Page 126 . Dogs. and projects rather than business units are plotted [12].3 percent of businesses use this as their dominant method.. white elephants. pearls.[PORTFOLIO MANAGEMENT SOFTWARE] 3. much like bubbles or balloons. Bubble diagrams or portfolio maps have received much hype and exposure in recent books.6 percent of businesses use portfolio maps.

3 percent.9 percent of businesses use scoring models. This addition is done in a simple or a weighted fashion (certain questions are weighted more heavily. which becomes the criterion used to make project selection and/or ranking decisions. Figure 9 provides a sample of the scoring model used in a major chemical company [6]. reflecting greater importance). The ratings on each scale are then added to yield a Total or Project Score.[PORTFOLIO MANAGEMENT SOFTWARE] 4. A total of 37. projects are rated or scored on a number of questions or criteria (for example. Scoring models: Here. or 1-5 or 0-10 scales). in 13. this is the dominant decision method. low-medium-high. INDIAN INSTITUTE OF FINANCE Page 127 .

[PORTFOLIO MANAGEMENT SOFTWARE] INDIAN INSTITUTE OF FINANCE Page 128 .

g.[PORTFOLIO MANAGEMENT SOFTWARE] 5. That is. Only 20. and in only 2. project types) and even let their strategy drive the choice of individual projects. or a certain number of Yes answers to proceed. for example:  any businesses that responded “other method” describe a strategically driven M process. A closer scrutiny of these “other” methods reveals that most are variants or hybrids of the above models and methods. they let their business’s strategy drive the spending splits (e. product types.9 percent of businesses use check lists. 6. across buckets such as markets. Each project must achieve either all Yes answers.. Others: Twenty-four percent of businesses indicate that they use some “other method”– other than the ones described above.7 percent is this the dominant method. much like the strategic method above. INDIAN INSTITUTE OF FINANCE Page 129 . Check lists: Projects are evaluated on a set of Yes/No questions. The number of Yes’s is used to make Go/Kill and/or prioritization (ranking) decisions.

either multiplied together. Some businesses use probabilities of commercial and technical success. or multiplied by various financial numbers (EBIT. strategic. the black bars show mean values). suggesting major differences between the best and worst performers. How Sound Are Their Portfolios? Portfolio management appears to be working in a moderately satisfactory fashion on average in our sample of businesses. But averages don’t tell the whole story here: there are broad distributions of responses on these six performance metrics. INDIAN INSTITUTE OF FINANCE Page 130 . but not disastrous either – although there are some major differences across performance metrics (see Figure 17.[PORTFOLIO MANAGEMENT SOFTWARE] A number of businesses use multiple criteria – profitability. NPV) – a variant of the financial methods (#1 above). customer appeal – but not necessarily in a formal scoring model format (as in method 4 above). Mean scores across the six performance metrics are typically in the mid-range area – not stellar.

To gain insights into best practices. the top performers – the Best – achieve dramatically better portfolio performance results across all six performance metrics (Figure 17. and their portfolios contain very high value projects. based on the six individual metrics in Figure 175. their portfolios are aligned with the business’s objectives and R&D spending mirrors the business’s strategy. As might be expected. and compare their results and practices to the bottom 20 percent of businesses – the Worst. we developed a single performance gauge. we separated the top 20 percent of businesses – the Best – measured by their portfolio performance on this gauge. INDIAN INSTITUTE OF FINANCE Page 131 .[PORTFOLIO MANAGEMENT SOFTWARE] The Best Versus the Rest This large performance spread begs the question: Who are these better performers? And what is it that they are doing differently than the poor performers? To answer the questions. For example. the pairs of shaded bars).

Both are areas where the average business performs fairly weakly. the two areas where the Best really excel are:  portfolio balance – achieving the right balance of projects. projects not strategically aligned with the business strategy. This translates into a lack of stellar. high reward projects. while the few really good projects are starved for resources – they take too long. The end result is a scattergun R&D and new product effort that does not support the company’s strategy. many of the ailments that plague businesses’ new product efforts can be directly or indirectly traced to ineffective portfolio management. and may fail to achieve their full potential. and  having the right number of projects for the resources available.[PORTFOLIO MANAGEMENT SOFTWARE] However. modifications. INDIAN INSTITUTE OF FINANCE Page 132 . expect serious negative consequences in your total new product efforts. many strategically unimportant projects in the portfolio. and R&D spending that does not reflect strategic priorities of the business. Many of these are marginal value projects to the business.  Low value projects: Poor portfolio management means deficient Go/Kill and project selection decisions. according to the mangers we interviewed in the exploratory phase of the investigation (see box):  Strategic: One negative side of poor portfolio management is that strategic criteria are missing in project selection. Indeed. which in turn leads to many mediocre projects in the pipeline – too many extensions. This translates into no strategic direction to projects selected. enhancements and short-term projects. Reasons for Portfolio Managements Failure When portfolio management wrong.

The result is a lack of focus – too many projects. for example.  The wrong projects: Poor portfolio management means that often the wrong projects are selected. opinion and emotion . and decreased success rates. poor quality of execution.. decisions are not based on facts and objective criteria. It was rated as the weakest area in new product management in a recent benchmarking study Management confessed to no serious Go/Kill decision points in their new product process. poor project prioritization. and projects just get added to active list. “pet” projects of some senior executive. no criteria for making the Go/Kill decision..[PORTFOLIO MANAGEMENT SOFTWARE]  No focus: Another outcome of poor portfolio management is a strong reluctance to kill projects: there are no consistent criteria for Go/Kill decisions. This in turn leads to increased times to market. With no formal selection method. but rather on politics. and too many projects for the limited resources available. Many of these emotionally-selected projects fail. Portfolio management is typically very poorly handled. How to identify the best portfolio INDIAN INSTITUTE OF FINANCE Page 133 . and resources thinly spread. however.

explicit portfolio management process have any impact on performance? Definitely yes.[PORTFOLIO MANAGEMENT SOFTWARE] Importance of Portfolio Management Senior managements in the Best companies consistently and significantly view portfolio management as much more important than do managements in the Worst (see Figure 18. Consider INDIAN INSTITUTE OF FINANCE Page 134 . This is true regardless of functional area.6 out of 5 in importance. technology managers score by far the highest here. however. Thus. with senior technology management in the Best businesses rating portfolio management a very high 4. and the portfolio results it achieves. there appears to be a direct link between whether senior management in a business recognizes portfolio management to be important. the pairs of shaded bars). according to the results of the survey. Once again. even among the Best businesses. Marketing/Sales and Operations/Production managements continue to be perceived as seeing portfolio management as less vital. Explicit Portfolio Method Does having a consistently applied.

established method for portfolio management. Only 10.  It treats projects as a portfolio (considers all projects together and treats them as a portfolio). Poor performers lack this! Portfolio Methods Used The Best have decided preferences for which portfolio model or method dominates their decision process (see Figure 20):  The Best tend to rely much less on financial models and methods as the dominant portfolio tool than does the average business.[PORTFOLIO MANAGEMENT SOFTWARE] the major and significant differences between the Best and the Worst in Figure 19: The Best. high value portfolio.5 percent of the Best. The clear message is this: Businesses that achieve positive portfolio results – a balanced. and  It is consistency applied across all appropriate projects. By contrast. whereas 56.9 percent of the Best rely on financial models as their dominant method. strategically aligned. the Worst place much more emphasis on financial tools.3 percent of the Worst use the business’s strategy as the dominant method. when compared to the Worst  Have an explicit. only 35.  Where management buys into the method. These differences between Best and Worst are consistent and major. with the right numbers of projects and good times-to-market (no gridlock) – boast a clearly defined. For example. all-project. business strategy methods are the number one method for the INDIAN INSTITUTE OF FINANCE Page 135 . compared to 38.  The method has clear rules and procedures. Indeed. and supports it through their actions. consistently applied portfolio management process which management endorses.4 percent of the Worst use this as their dominant portfolio method. explicit.  The Best let the business strategy allocate resources and decide the portfolio much more so than do the Worst.

[PORTFOLIO MANAGEMENT SOFTWARE] Best. Multiple Methods Used The Best tend to reply on multiple methods for portfolio management – that is. check lists. while almost half of the Best (47. For example. they appear to acknowledge that no one method gives the correct results.43 different portfolio management techniques per business to select projects and manage their portfolio. the Best on average use 2. used even more so than the popular financial approaches as the dominant decision tool here – see Figure 20. bubble diagrams – as the dominant approach is too infrequent to allow meaningful comparison of Best versus Worst (Figure 20). The use of other methods – scoring models.5%) use INDIAN INSTITUTE OF FINANCE Page 136 .

Challenges Remaining Although most businesses in the study recognize the need for and importance of portfolio management. Thus. culture and buy-in for their portfolio method.3% of the Worst use only one portfolio approach). a key issue in any new process is the need to obtain organizational buy-in. we asked managers to identify what are the most significant challenges ahead The most common challenge identified is the need to create a positive climate. there are still many issues that need to be addressed.34 per business). INDIAN INSTITUTE OF FINANCE Page 137 .83 methods per business. The Worst tend to rely on far fewer or even one portfolio method more so (1. the portfolio management process becomes a difficult sell. on average). with almost half of the Worst focusing on a single method only (46.[PORTFOLIO MANAGEMENT SOFTWARE] three or more methods! Even the average business uses multiple methods (2. As might be expected. Without total senior executive support.

The most common complaint cited by managers is the abundance of short term. obtaining linkages to strategy and achieving balance – and to the tools needed to obtain the needed information to be able to make disciplined decisions. Executives are concerned that the need for quick hits in the market is placing longer term projects at risk. Is Portfolio Management worth an Investment ? A number of benefits have been derived from implementing portfolio management aside from the obvious goals of obtaining better financial returns. People are too busy working on these types of projects to be able to devote the time and energy needed to develop the next generation of “big winners” for the company. Figure 22 lists the “top of the mind” near-term benefits that managers expect to reap from their efforts in portfolio management.[PORTFOLIO MANAGEMENT SOFTWARE] Other challenges and issues pertain to achieving the primary goals of portfolio management – achieving business objectives. low risk projects in the pipeline. INDIAN INSTITUTE OF FINANCE Page 138 .

Managers also expect to obtain better focus.[PORTFOLIO MANAGEMENT SOFTWARE] The most frequently cited benefit is the expectation of achieving a common basis for discussion. Consistency in evaluations across projects is the result. By putting discipline into the process and providing a consistent basis of comparison. Implications for Management Action Here then are our conclusions and suggestions – a call to action: INDIAN INSTITUTE OF FINANCE Page 139 . By being better able to focus their resources. people are able to compare projects and to assess them from the same base of information and using the same criteria. balance and strategic alignment – to target projects that are better and are more closely aligned to strategy. and to obtain the right mix between short and long term projects. they expect to be in a position to reduce time to market and have the resources to seek the projects that will make a significant difference to the organization.

management buyin. we offer you our list of eight key reasons why other businesses and their senior managements see portfolio management as so important 3. scoring models and bubble diagrams are also popular. 2. and can easily be used in INDIAN INSTITUTE OF FINANCE Page 140 . explicit portfolio management system – one with clear rules and procedures. There is no one right portfolio management method – so try a hybrid approach. best handled by technology management people. They seem to be the least in tune with the importance of portfolio management. Perhaps the toughest sell will be to the senior Marketing/Sales and Operations Management people. many others are not – perhaps out of ignorance. formal and rigorous portfolio management system or process in your business. Portfolio management works! Those businesses that have gone to the trouble of installing a systematic. the right number of projects. But there is great diversity of approaches as well: strategic approaches. and 40 percent relying on them as the dominant portfolio decision tool. Finally. or perhaps because they think that project selection and portfolio management is “an R&D thing”. The message is clear: Step #1 is to make a commitment to installing a systematic. and so on. that is consistently applied across all appropriate projects and treats all projects as a portfolio. Certainly financial models and methods are the most popular. As ammunition.[PORTFOLIO MANAGEMENT SOFTWARE] 1. while many senior managements are well aware of the importance of portfolio management. Further. better balance.10]. those businesses where portfolio management is accorded great importance are also doing the best – their portfolios are in great shape! So there is a strong link here between perceived importance. Sell all senior management on the importance of portfolio management. a strategically aligned portfolio. and which management buys into – are the clear winners [8. Management buy-in is one of the key challenges identified in the study. and doing well. Their portfolios outperform the rest on all six performance metrics: higher value projects. with 77 percent of businesses using them.

but the data inputs are often based on flimsy market and costs analyses). by product line. and in concert with each other. and splitting resources into INDIAN INSTITUTE OF FINANCE Page 141 . especially by an over-zealous project team 5. no one method has a monopoly on strengths and positive performance. namely a financial tool. 4. Businesses that rely principally on strategic methods for portfolio management outperform the rest. and while certain portfolio methods do yield superior portfolio results. precisely when the financial data are the least accurate! A final reason is that financial projections are fairly easy to “rig”. Look to Figure 11 for a list of the popular bucket categories: by market. Productivity Index and even probabilistic models such as At Risk and Crystal Ball6. when used in conjunction with other methods. Strategic approaches. Indeed. by project type.[PORTFOLIO MANAGEMENT SOFTWARE] conjunction with financial models. yet achieved exactly the opposite outcomes. Finally. strengths and weaknesses were offered in verbal comments for all methods. such as Strategic Buckets. in order to maximize returns and performance. Those businesses that use financial methods as the dominant portfolio selection method end up with the worst and poorest performing portfolios! This is ironic: these businesses adopted what appeared to be a rigorous approach to project evaluation. andinclude ECV. can be used to allocate resources or funds into different buckets.A second reason is that the key Go/Kill and prioritization decisions must be made fairly early in the life of a project. and by technology type. Rather. Recall that 39 percent of the Best businesses use strategic approaches as the dominant portfolio method. Why? One reason is that the sophistication of financial tools often far exceed the quality of the data inputs (These sophisticated tools can be quite elegant.43 portfolio methods per business. while only 10 percent of the Worst do. Beware an over-reliance on financial methods and models. by project size. the results are even better. the Best businesses tend to use a combination or hybrid approach – an average of 2. consciously or unconsciously. So first consider electing one or more of these dimensions. Look more to strategic approaches as the way to manage your portfolio.

and then move to resource splits Remember: strategy begins when you start spending money! INDIAN INSTITUTE OF FINANCE Page 142 . vision and strategy. Begin with your business’s new product goals.[PORTFOLIO MANAGEMENT SOFTWARE] buckets.

and build these into a scoring model for your own use. categorize your projects according to buckets. but also consider the often-used project evaluation criteria in Figure 14. You can consider financial methods or perhaps scoring models to do the ranking within buckets. as in Figure 7. and Factors 2 and 3 are both strategic factors). The users of scoring models have great praise for them. INDIAN INSTITUTE OF FINANCE Page 143 .[PORTFOLIO MANAGEMENT SOFTWARE] Next. Consider a scoring model as an effective prioritization tool. This strategic method will ensure that your R&D spending reflects your business’s strategy 6. and see them as effective and efficient decision tools for portfolio management. the first two criteria are financial ones. Use the sample in Figure 9. and then rank order your projects by bucket. Scoring models have the advantage that they combine the popular financial criteria with the desirable strategic criteria (Note that in the sample scoring model in Figure 9.

and utilize the project scores to help make prioritization decisions at periodic portfolio review meetings.[PORTFOLIO MANAGEMENT SOFTWARE] Employ scoring models at gate meetings to make Go/Kill and prioritization decisions. who very strongly recommend their use to others. INDIAN INSTITUTE OF FINANCE Page 144 . Do look at the list of possible bubble diagrams: the majority of users plot the traditional risk-reward diagram (as in Figure 8). yielding correct portfolio decisions. discussing each and gaining closure on each criterion. and are also able to display portfolio balance. The real value is the process of decision-makers walking through the criteria. rather than dwelling on the score itself! 7. A word of caution: don’t use the project score mechanistically. but Figure 15 shows some other axes that you should consider for your bubble diagrams. Bubble diagrams have the advantage that they portray the entire portfolio in visual format. Moreover they are thought to be an effective decision tool. Bubble diagrams must also be part of your repertoire of portfolio models. They receive very high praise from management.

or other financial instruments to buy. including whether to invest in modifying them. Organizations regard these applications as investments because they require development (or acquisition) costs and incur continuing maintenance costs. what and when to sell. Your goal is to increase the portfolio's value by selecting investments that you believe will go up in price. • Over time. organizations must constantly make financial decisions about new and existing software applications. bonds. you can reduce your investment risk by creating a diversified portfolio that includes enough different types. Owning a portfolio involves making choices -. or other investments. bonds. deciding what additional stocks. other industry sectors have adapted and applied these ideas to other types of "investments. and so forth. when to buy. you have an investment portfolio. or classes. the specific goal is to increase the value.that is. Also. Making such decisions is a form of management. In a business context. For an investment portfolio. This refers to the practice of managing an entire group or major subset of software applications within a portfolio." including the following: Application portfolio management.[PORTFOLIO MANAGEMENT SOFTWARE] UNDERSTANDING PORTFOLIO MANAGEMENT A good way to begin understanding what portfolio management is (and is not) may be to define the term portfolio. we can look to the mutual fund industry to explain the term's origins. According to modern portfolio theory. Morgan Stanley's Dictionary of Financial Terms offers the following explanation: If you own more than one security. of securities so that at least some of them may produce strong returns in any economic climate. • The management of a portfolio is goal-driven. mutual funds. Managing a portfolio involves inherent risks. You build the portfolio by buying additional stocks. INDIAN INSTITUTE OF FINANCE Page 145 . • • A portfolio contains many investment vehicles.

and which to reject or discontinue. weaknesses. or product line. safety. These efforts are goal-driven. and when to "sell" -. Businesses group major products that they develop and sell into (logical) portfolios. product. What Does Portfolio Management Mean? The art and science of making decisions about investment mix and policy. growth vs. international. domestic vs. Project or initiative portfolio management.e. A group of people who are responsible for executing the initiative and use resources. selecting those that best support and enable diverse business goals (i. opportunities and threats in the choice of debt vs. they diversify investment risk). is a body of work with: • • A specific (and limited) collection of needed results or work products. A defined beginning and end. Managers must continually choose among competing initiatives (i.e. and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk. spin off or divest).an obsolete software application. manage the organization's investments). matching investments to objectives. organized by major line-of-business or business segment. • Managers can group a number of initiatives into a portfolio that supports a business segment. and balancing risk against performance. INDIAN INSTITUTE OF FINANCE Page 146 . Such portfolios require ongoing management decisions about what new products to develop (to diversify investments and investment risk) and what existing products to transform or retire (i.[PORTFOLIO MANAGEMENT SOFTWARE] whether to buy additional applications. in the simplest sense. which to continue. retire -. An initiative. equity.e. such as funding. that is. asset allocation for individuals and institutions.that is. they support major goals and/or components of the enterprise's business strategy... Portfolio management is all about strengths. Product portfolio management. They must also manage their investments by providing continuing oversight and decision-making about which initiatives to undertake..

customers. meets regularly to manage the product pipeline and make decisions about the product portfolio. strategy fit vs. Passive management simply tracks a market index. reward. this is the same group that conducts the stage-gate reviews in the organization. products. risks. profitability. The second step is to understand the budget or resources available to balance the portfolio against. improvements. But organizations must balance these goals: risk vs. Third. investment requirements (resources). or a team of managers who attempt to beat the market return by actively managing a fund's portfolio through investment decisions based on research and decisions on individual holdings. competitive emphasis. short-term. The weighting of the goals in making decisions about products varies from company. A logical starting point is to create a product strategy . Several types of techniques have been used to support the portfolio management process: • • • Heuristic models Scoring techniques Visual or mapping techniques Page 147 INDIAN INSTITUTE OF FINANCE . Often. which might be called the Product Committee. each project must be assessed for profitability (rewards). product line.markets.[PORTFOLIO MANAGEMENT SOFTWARE] Investopedia explains Portfolio Management In the case of mutual and exchange-traded funds (ETFs). Closed-end funds are generally actively managed. This team. there are two forms of portfolio management: passive and active. Portfolio Management is used to select a portfolio of new product development projects to achieve the following goals: • • • Maximize the profitability or value of the portfolio Provide balance Support the strategy of the enterprise Portfolio Management is the responsibility of the senior management team of an organization or business unit. etc. long-term vs. and other appropriate factors. co-managers. strategy approach. market vs. commonly referred to as indexing or index investing. new products vs. Active management involves a single manager.

this approach paid little attention to balance or aligning the portfolio to the organization's strategy. financial return vs. risk and strategic alignment. profitability. profitability. However. marketplace fit vs. Scoring techniques weight and score criteria to take into account investment requirements. product line coverage. These are typically presented in the form of a two-dimensional graph that shows the trade-off's or balance between two factors such as risks vs. Mapping techniques use graphical presentation to visualize a portfolio's balance. The horizontal axis is Net Present Value. The shortcoming with this approach can be an over emphasis on financial measures and an inability to optimize the mix of projects. The chart shown above provides a graphical view of the project portfolio risk-reward balance.[PORTFOLIO MANAGEMENT SOFTWARE] The earliest Portfolio Management techniques optimized projects' profitability or financial returns using heuristic or mathematical models. INDIAN INSTITUTE OF FINANCE Page 148 . probability of success.neither too risky nor conservative and appropriate levels of reward for the risk involved. etc. It is used to assure balance in the portfolio of projects .

[PORTFOLIO MANAGEMENT SOFTWARE] the vertical axis is Probability of Success. it can't prioritize projects. headcount. a portfolio is: INDIAN INSTITUTE OF FINANCE Page 149 . The scoring method uses a set of criteria (potentially different for each stage of the project) as a basis for scoring or evaluating each project. It may also breakdown the R&D investment into types of development.. Basic concepts and components for portfolio management Now that we understand some of the basic dynamics and inherent challenges organizations face in executing a business strategy via supporting initiatives. etc. technology development. The size of the bubble is proportional to the total revenue generated over the lifetime sales of the product.g. With multiple business units. and upgrades/enhancements/line extensions. platform development. and related sales expected from new products. geographic areas. some mix of these techniques is appropriate to support the Portfolio Management Process. Our recommended approach is to start with the overall business plan that should define the planned level of R&D investment. markets. Therefore. product lines or types of development. etc. We favor use of the development productivity index (DPI) or scores from the scoring method.). let's look at some basic concepts and components of portfolio management practices. Once this is done. resources (e. While this visual presentation is useful. By dividing this result by the development cost remaining. e. It factors the NPV by the probability of both technical and commercial success. we recommend a strategic allocation process based on the business plan. This mix is often dependent upon the priority of the goals. we can now introduce a definition of portfolio that relates more directly to the context of our preceding discussion.. This strategic allocation should apportion the planned R&D investment into business units. etc.g. The portfolio First. product lines. then a portfolio listing can be developed including the relevant portfolio data. In the IBM view. The development productivity index is calculated as follows: (Net Present Value x Probability of Success) / Development Cost Remaining. new products. it places more weight on projects nearer completion and with lower uncommitted costs.

[PORTFOLIO MANAGEMENT SOFTWARE] One of a number of mechanisms. approved. If you have a product-oriented portfolio structure. should align with significant planning and results boundaries. for example. initiatives within the portfolio. then you would have a separate portfolio for each major product or product group. constructed to actualize significant elements in the Enterprise Business Strategy. which contribute to the achievement of goals or goal components identified in the Enterprise Business Strategy. If you have several portfolios within your portfolio structure. The basis for constructing a portfolio should reflect the enterprise's particular needs. The portfolio manager enables periodic decision making about the future direction of individual initiatives. then you will likely need a portfolio manager for each one. A portfolio manager is responsible for continuing oversight of the contents within a portfolio. and conformance to expectations for. collection of Initiatives which are aligned with the organizing element of the Portfolio. 1 but the basics are as follows: • • • One portfolio manager oversees one portfolio. For example. a portfolio structure identifies and contains a number of portfolios. and with business components. The portfolio manager periodically reviews the performance of. • • INDIAN INSTITUTE OF FINANCE Page 150 . The exact range of responsibilities (and authority) will vary from one organization to another. It contains a selected. The portfolio structure As we noted earlier. and continuously evolving. The portfolio manager This is a new role for organizations that embrace a portfolio management approach. The portfolio manager ensures that data is collected and analyzed about each of the initiatives in the portfolio. This structure. business segment. or separate business unit within a multinational organization. Each portfolio would contain all the initiatives that help that particular product or product group contribute to the success of the enterprise business strategy. you might choose to build a portfolio around initiatives for a specific product. like the portfolios within it. The portfolio manager provides day-to-day oversight. and.

A significant aspect of oversight is setting multiple decision points for each initiative. including both tactical elements (e. organization managers specify the frequency and contents for these periodic reviews. and resource allocation) and strategic elements (e. support for business strategy goals and delivery of expected organizational benefits). and delineating boundaries among work efforts and collections. needs. expected benefits. the roles. so that managers can periodically evaluate data and decide whether to continue the work. These "continue/change/discontinue" decisions should be driven by an understanding (developed via the periodic reviews) of a given initiative's continuing value. and strategic contribution. exercise of control and oversight. The IBM view of governance is: An abstract. and performance.g. Governance Implementing portfolio management practices in an organization is a transformation effort that typically involves developing new capabilities to address new work efforts. and individual portfolio managers oversee their planning and execution. and the responsibilities of those who exercise this oversight and decision-making. continuing direction. and oversight and control for all portfolios and the initiatives they encompass. Implementing portfolio management also requires creating a structure to provide planning. INDIAN INSTITUTE OF FINANCE Page 151 .[PORTFOLIO MANAGEMENT SOFTWARE] Portfolio reviews and decision making As initiatives are executed. The reviews should be multi-dimensional. collective term that defines and contains a framework for organization.. adherence to plan.g. budget. together with the definition of the functions. defining (and filling) new roles to identify portfolios (collections of work to be done). and decision-making authority. Typically. and within which actions and activities are legitimately and properly executed.. That is where the notion of governance comes into play. Making these decisions at multiple points in the initiative's lifecycle helps to ensure that managers will continually examine and assess changing internal and external circumstances. the organization should conduct periodic reviews of actual (versus planned) performance and conformance to original expectations.

Each of these dimensions requires an owner -. Providing initiatives. in the Middle Ages. and exercise control through periodic assessment and review of conformance to expectations. Reviewing and approving business cases that propose the creation of new initiatives. They applied this principle all across the Roman Empire. continuously adjust direction. The complexities of governance structures extend well beyond the scope of this article.either an individual or a collective -. A good governance structure decomposes both the types of work and the authority to plan and oversee work. It defines individual and collective roles.to develop and approve plans. suffice it to say that it is worth investing time and effort to create a sound and flexible governance structure before you attempt to implement portfolio management practices. Policies that are collectively developed and agreed upon provide a framework for the exercise of governance. These concepts are useful until they become obsolete. and decision-making for all ongoing • • • Ownership of portfolios and their contents. Portfolio management essentials Every practical discipline is based on a collection of fundamental concepts that people have identified and proven (and sometimes refined or discarded) through continuous application. projects. they would last longer. supplanted by newer and more effective ideas. etc. Then. So that became the new standard for bridge construction. and links them to an authority scheme.[PORTFOLIO MANAGEMENT SOFTWARE] Portfolio management governance involves multiple dimensions. in Roman times. INDIAN INSTITUTE OF FINANCE Page 152 . including: • • Defining and maintaining an enterprise business strategy. For now. Many organizations turn to experts for help in this area because it is so critical to the success of any business transformation effort that encompasses portfolio management.). oversight. Defining and maintaining a portfolio structure containing all of the organization's initiatives (programs. engineers discovered that if the upstream supports of a bridge were shaped to offer little resistance to the current of a stream or river. For example. control. engineers discovered that such supports would last even longer if their downstream side was also shaped to offer little resistance to the current.

based on our experiences with clients who have implemented portfolio management practices and on our research into the discipline. in turn. we can derive an essential statement: Initiative value changes and requires continuous monitoring over the life of the initiative.. so continuous value monitoring is necessary. But what about an initiative that is a large program effort. we have started to shape an IBM view of fundamental ideas around portfolio management. it is possible to quantify an anticipated value contribution. grouped around a small collection of portfolio management themes. From this. like bridge-building. We are beginning to express this view as a collection of "essentials" that are. When an initiative is in the proposal stage. The portfolio management process steps include:  Portfolio Management Process • • • • • Identification Categorization Evaluation Selection Prioritization Page 153 INDIAN INSTITUTE OF FINANCE . Recently. Portfolio Management Process The Processes on Demand portfolio management process is a best practice for management of the projects and programs of the portfolio. one of these themes is initiative value contribution. is a discipline. On this basis (in part) the proposed initiative becomes an approved initiative. It suggests that the value of an initiative (i. For example. and a number of authors and practitioners have documented fundamental ideas about its exercise. These assessments determine (in part) whether the initiative warrants continued support. This theme encompasses the notion that initiative value changes over time. and then assessed periodically on the basis of the initiative's contribution to the goals and goal components in the enterprise business strategy. a program or project) should be estimated and approved in order to start work.e. with a two-year duration? It is highly unlikely that the program's expected value will remain static during the entire two-year period.[PORTFOLIO MANAGEMENT SOFTWARE] Portfolio management.

The outcome of the process of the portfolio management is evaluated with the performance graph of the organization. INDIAN INSTITUTE OF FINANCE Page 154 . ranging from financial methods to scoring models. The project portfolio management gives an analytical approach to the decisions over the sets of portfolio. A variety of methods are used to achieve this maximization goal. Portfolio management is the best process or making planned decisions and also for determining the expenditures of the business. loss and the risks regarding the business. The enterprise portfolio management gives information regarding the amount of finance to be spent over the business and the requirement of the enterprise architecture. They are the enterprise portfolio management process and the project portfolio management process. An effective way of portfolio management ensures the growth of the organization and also the other business establishments of the organization.[PORTFOLIO MANAGEMENT SOFTWARE] • • • •  Balancing Authorization Review and Reporting Strategic Change Consultation Preparation Selection Status Summary View Gantt View Cost View Risk view Governance Process • • •  Portfolio Management Dashboards • • • • The process of portfolio management provides a better understanding about the benefits. Value Maximization Allocate resources to maximize the value of the portfolio via a number of key objectives such as profitability. ROI. and acceptable risk. 1. The portfolio management is differentiated into two major types.

4. short-term versus long-term. high value activity: • • • • • • • Maximizes the return on your product innovation investments Maintains your competitive position Achieves efficient and effective allocation of scarce resources Forges a link between project selection and business strategy Achieves focus Communicates priorities Achieves balance Page 155 INDIAN INSTITUTE OF FINANCE . Sufficiency Ensure the revenue (or profit) goals set out in the product innovation strategy are achievable given the projects currently underway. The goal is to avoid pipeline gridlock (too many projects with too few resources) at any given time. Typically this is conducted via a financial analysis of the pipeline’s potential future value.[PORTFOLIO MANAGEMENT SOFTWARE] 2. Pipeline Balance Obtain the right number of projects to achieve the best balance between the pipeline resource demands and the resources available. histograms and pie charts. Portfolio Management is a high impact. and across various markets. A typical approach is to use a rank ordered priority list or a resource supply and demand assessment. business arenas and technologies. Balance Achieve a desired balance of projects via a number of parameters: risk versus return. What are the benefits of Portfolio Management? When implemented properly and conducted on a regular basis. 5. Business Strategy Alignment Ensure that the portfolio of projects reflects the company’s product innovation strategy and that the breakdown of spending aligns with the company’s strategic priorities. Typical methods used to reveal balance include bubble diagrams. bottomup (effective gate keeping and decision criteria) and top-down and bottom-up (strategic check). The three main approaches are: top-down (strategic buckets). 3.

Cooper and Dr. Edgett. According to benchmarking studies conducted by Dr. Many of the problems that plague new product development initiatives in businesses can be directly traced to ineffective portfolio management. Models INDIAN INSTITUTE OF FINANCE Page 156 . and The pipeline has too many low value projects Portfolio Management is about doing the right projects. Why is it so important? Companies without effective new product portfolio management and project selection face a slippery road downhill. the result is an enviable portfolio of high value projects: a portfolio that is properly balanced and most importantly.[PORTFOLIO MANAGEMENT SOFTWARE] • Enables objective project selection Top performers emphasize the link between project selection and business strategy. If you pick the right projects. some of the problems that arise when portfolio management is lacking are: • • • • • Projects are not high value to the business Portfolio has a poor balance in project types Resource breakdown does not reflect the product innovation strategy A poor job is done in ranking and prioritizing projects There is a poor balance between the number of projects underway and the resources available Projects are not aligned with the business strategy • As a result too many companies have: • • • • Too many projects underway (often the wrong ones) Resources are spread too thin and across too many projects Projects are taking too long to get to market. supports your business strategy.

MPT models an asset's return as a normally distributed (or more generally as an elliptically distributed random variable). prices in the bond market often increase. MPT is a mathematical formulation of the concept of diversification in investing. For example. But diversification lowers risk even if assets' returns are not negatively correlated—indeed. even if they are positively correlated. A collection of both types of assets can therefore have lower overall risk than either individually. By combining different assets whose returns INDIAN INSTITUTE OF FINANCE Page 157 . and management of portfolios include:   others       Modern portfolio theory (MPT) is a theory of investment which tries to maximize portfolio expected return for a given amount of portfolio risk. and vice versa. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel prize for the theory. That this is possible can be seen intuitively because different types of assets often change in value in opposite ways. in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics. More technically. defines risk as the standard deviation of return. or equivalently minimize risk for a given level of expected return. by carefully choosing the proportions of various assets. and models a portfolio as a weighted combination of assets so that the return of a portfolio is the weighted combination of the assets' returns. stock selection. with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. when prices in the stock market fall. given an acceptable level of risk Modern portfolio theory—a model proposed by Harry Markowitz among The single-index model of portfolio variance Capital asset pricing model The Jensen Index The Treynor Index The Sharpe Diagonal (or Index) model Value at risk model of Valuation.[PORTFOLIO MANAGEMENT SOFTWARE]  Arbitrage pricing theory Some of the financial models used in the process Maximizing return.

and that correlations between asset classes are not fixed but can vary depending on external events (especially in crises). These include the fact that financial returns do not follow a Gaussian distribution or indeed any symmetric distribution. Ri is the return on asset i and wi is the weighting of component asset i (that is.[PORTFOLIO MANAGEMENT SOFTWARE] are not perfectly positively correlated. In general. MPT explains how to select a portfolio with the lowest possible risk (the targeted expected return cannot be more than the highest-returning available security. many theoretical and practical criticisms have been leveled against it. Investing is a tradeoff between risk and expected return.) MPT is therefore a form of diversification. of course. Further. For a given amount of risk. Or. MPT describes how to select a portfolio with the highest possible expected return. for a given expected return. Under certain assumptions and for specific quantitative definitions of risk and return. the share of asset i in the portfolio). Since then. The fundamental concept behind MPT is that the assets in an investment portfolio cannot be selected individually. each on their own merits. MPT seeks to reduce the total variance of the portfolio return. In general:  Expected return: where Rp is the return on the portfolio. there is growing evidence that investors are not rational and markets are not efficient. Rather. MPT also assumes that investors are rational and markets are efficient. assets with higher expected returns are riskier. unless negative holdings of assets are possible. MPT was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. INDIAN INSTITUTE OF FINANCE Page 158 . MPT explains how to find the best possible diversification strategy. it is important to consider how each asset changes in price relative to how every other asset in the portfolio changes in price.

[PORTFOLIO MANAGEMENT SOFTWARE]  Portfolio return variance: where ρij is the correlation coefficient between the returns on assets i and j. where ρij = 1 for i=j. Alternatively the expression can be written as: .  Portfolio return volatility (standard deviation): For a two asset portfolio:  Portfolio return:  Portfolio variance: For a three asset portfolio:   Portfolio return: Portfolio variance: The single-index model (SIM) is a simple asset pricing model commonly used in the finance industry to measure risk and return of a stock. Mathematically the SIM is expressed as: INDIAN INSTITUTE OF FINANCE Page 159 .

e. or abnormal return βi is the stocks's beta. and conducting event studies. rmt − rf the excess return on the market εit is the residual (random) return. given that asset's non-diversifiable risk. as well as the expected return of the market and the expected return of a theoretical risk-free asset.[PORTFOLIO MANAGEMENT SOFTWARE] where: rit is return to stock i in period t rf is the risk free rate (i. For individual securities. if that asset is to be added to an already welldiversified portfolio. evaluating stock selection skills. Each stock's performance is in relation to the performance of a market index (such as the All Ordinaries). The CAPM is a model for pricing an individual security or a portfolio.b) and Jan Mossin (1966) independently. Markowitz and Merton Miller jointly received the Nobel Memorial Prize in Economics for this contribution to the field of financial economics. William Sharpe (1964). The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk). Security analysts often use the SIM for such functions as computing stock betas. the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset. or responsiveness to the market return Note that rit − rf is called the excess return on the stock. the interest rate on treasury bills) rmt is the return to the market portfolio in period t αi is the stock's alpha. has a firm specific expected value (alpha) and firm-specific unexpected component (residual). John Lintner(1965a. building on the earlier work of Harry Markowitz on diversification and modern portfolio theory. Sharpe. often represented by the quantity beta (β) in the financial industry. which is assumed normally distributed with mean zero and standard deviation σi These equations show that the stock return is influenced by the market (beta). we make use of the security market line (SML) and its relation to expected return INDIAN INSTITUTE OF FINANCE Page 160 . 1962). The model was introduced by Jack Treynor (1961. In finance.

Note 1: the expected market rate of return is usually estimated by measuring the Geometric Average of the historical returns on a market portfolio (e.[PORTFOLIO MANAGEMENT SOFTWARE] and systematic risk (beta) to show how the market must price individual securities in relation to their security risk class. where:   is the expected return on the capital asset is the risk-free rate of interest such as interest arising from government bonds  (the beta) is the sensitivity of the expected excess asset returns to the expected excess market returns. Restated. or also   . in terms of risk premium. INDIAN INSTITUTE OF FINANCE Page 161 . S&P 500).g. we find that: which states that the individual risk premium equals the market premium times β. thus: The market reward-to-risk ratio is effectively the market risk premium and by rearranging the above equation and solving for E(Ri). when the expected rate of return for any security is deflated by its beta coefficient. is the expected return of the market is sometimes known as the market premium or risk premium (the difference between the expected market rate of return and the risk-free rate of return). we obtain the Capital Asset Pricing Model (CAPM). The SML enables us to calculate the reward-to-risk ratio for any security in relation to that of the overall market. Therefore. the reward-to-risk ratio for any individual security in the market is equal to the market reward-to-risk ratio.

by model. The model-derived rate of return will then be used to price the asset correctly .  zero. that has become influential in the pricing of stocks. INDIAN INSTITUTE OF FINANCE Page 162 . bjk is the sensitivity of the jth asset to factor k. The APT model Risky asset returns are said to follow a factor structure if they can be expressed as: where    E(rj) is the jth asset's expected return. Fk is a systematic factor (assumed to have mean zero).[PORTFOLIO MANAGEMENT SOFTWARE] Note 2: the risk free rate of return used for determining the risk premium is usually the arithmetic average of historical risk free rates of return and not the current risk free rate of return. Arbitrage pricing theory (APT). For the full derivation see Modern portfolio theory. in finance. also called factor and εj is the risky asset's idiosyncratic random shock with mean loading. Idiosyncratic shocks are assumed to be uncorrelated across assets and uncorrelated with the factors.the asset price should equal the expected end of period price discounted at bring it the back rate into implied line. APT holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices. If the price by diverges. is a general theory of asset pricing. where sensitivity to changes in each factor is represented by a factor-specific beta coefficient. arbitrage should The theory was initiated the economist Stephen Ross in 1976.

Jensen's alpha (or Jensen's Performance Index. the risk-free rate of return. ex-post alpha) is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return. riskier assets will have higher expected returns than less risky assets. The CAPM return is supposed to be 'risk adjusted'. The CAPM for instance uses beta as a multiplier. If an asset's return is even higher than the risk adjusted return. Note that there are some assumptions and requirements that have to be fulfilled for the latter to be correct: There must be competition in the market. most commonly the Capital Asset Pricing Model (CAPM) model. and Page 163 INDIAN INSTITUTE OF FINANCE . In finance. The security could be any asset. The theoretical return is predicted by a market model. that asset is said to have "positive alpha" or "abnormal returns". bonds. such as stocks. calculating alpha requires the following inputs:    the realized return (on the portfolio). the expected return of an asset j is a linear function of the assets sensitivities to the n factors. rf is the risk-free rate. the market return. After all. Investors are constantly seeking investments that have higher alpha. That is. In the context of CAPM. which means it takes account of the relative riskyness of the asset. The market model uses statistical methods to predict the appropriate risk-adjusted return of an asset. Jensen's alpha was first used as a measure in the evaluation of mutual fund managers by Michael Jensen in 1968. or derivatives. and the total number of factors may never surpass the total number of assets (in order to avoid the problem of matrix singularity).[PORTFOLIO MANAGEMENT SOFTWARE] The APT states that if asset returns follow a factor structure then the following relation exists between expected returns and the factor sensitivities: where   RPk is the risk premium of the factor.

[PORTFOLIO MANAGEMENT SOFTWARE]  the beta of the portfolio. the effective Alpha for investors is negative. The Treynor ratio (sometimes called the reward-to-volatility ratio or Treynor measure). where Treynor ratio. risk free rate Portfolio i's beta Like the Sharpe ratio.. many academics believe financial markets are too efficient to allow for repeatedly earning positive Alpha. unless by chance. To the contrary. of active portfolio management. Treynor. A ranking of portfolios based on INDIAN INSTITUTE OF FINANCE Page 164 .) Nevertheless. however. the Treynor ratio (T) does not quantify the value added. Alpha is still widely used to evaluate mutual fund and portfolio manager performance. The higher the Treynor ratio. (These results also explain why passive investing is increasingly popular. It is a ranking criterion only. However. the better the performance of the portfolio under analysis. finding positive Alpha. per each unit of market risk assumed. often in conjunction with the Sharpe ratioand the Treynor ratio. systematic risk is used instead of total risk. is a measurement of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk (e. if any. they also show that after fees and expenses are deducted. The Treynor ratio relates excess return over the risk-free rate to the additional risk taken. portfolio i's return. Treasury Bills or a completely diversified portfolio). empirical studies of mutual funds spearheaded by Russ Wermers usually confirm managers' stockpicking talent. named after Jack L. Jensen's alpha = Portfolio Return − [Risk Free Rate + Portfolio Beta * (Market Return − Risk Free Rate)] Since Eugene Fama.g.

which makes it true only for parametric VaR. Informally.” "Given some confidence level not larger than (1 − α)" the VaR of the portfolio at the confidence level α is given by the smallest number l such that the probability that the loss L exceeds l is The left equality is a definition of VaR. but different total risk. Nassim Taleb has labeled this assumption. they do not accept results based on the assumption of a welldefined probability distribution. if a portfolio of stocks has a one-day 5% VaR of $1 million. Therefore. there is a 0. The right equality assumes an underlying probability distribution. VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level. either because markets are closed or illiquid. But the portfolio with a higher total risk is less diversified and therefore has a higher unsystematic risk which is not priced in the market. Risk managers typically assume that some fraction of the bad events will have undefined losses.[PORTFOLIO MANAGEMENT SOFTWARE] the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a broader. they will rank portfolios identically. probability and time horizon.05 probability that the portfolio will fall in value by more than $1 million over a one day period. A loss which exceeds the VaR threshold is termed a “VaR break. assuming markets are normal and there is no trading. An alternative method of ranking portfolio management is Jensen's alpha. Page 165 INDIAN INSTITUTE OF FINANCE . As they two both determine rankings based on systematic risk alone. will be rated the same. which quantifies the added return as the excess return above the security in the capital asset pricing model. For example. In financial mathematics and financial risk management. For a given portfolio. portfolios with identical systematic risk. a loss of $1 million or more on this portfolio is expected on 1 day in 20. fully diversified portfolio. or because the entity bearing the loss breaks apart or loses the ability to compute accounts. If this is not the case. Value at Risk (VaR) is a widely used risk measure of the risk of loss on a specific portfolio of financial assets.

" On the other hand. Here. I discuss the structure of each type of program. the relative ease of learning the software. the advantages and disadvantages of each strategy. although they often reflect the developerís style or are constrained by the limits of the software structure. Some very good commercial electronic portfolio programs are on the market. many academics prefer to assume a well-defined distribution. This point has probably caused more contention among VaR theorists than any other. and related issues. the level of technology required. using off-the-shelf software or generic strategies. The seven generic types of software are: INDIAN INSTITUTE OF FINANCE Page 166 .[PORTFOLIO MANAGEMENT SOFTWARE] "charlatanism. Many educators who want to develop electronic portfolios tend to design their own. albeit usually one with fat tails. Software used in Portfolio management Mprofit portfolio management software details describes the electronic portfolio development process further and covers seven different software and hardware tools for creating portfolios.

ETFs. Silver. World Wide Web (HTML) pages 5. Multimedia authoring software 4. Gold. FDs.  Asset Allocation reports with graphs.  Annualised Returns (XIRR) report. CAMS/ KARVY. Property. Hypermedia "card" software 3. Art and many more. excel templates and online portals. Adobe Acrobat (PDF files) 6. Video (digital and analog) It helps us to maintain following attributes: Manage an unlimited number of portfolios and groups..  Summary & detailed transaction wise Capital Gain Tax reports for Stocks & MFs. MFs.[PORTFOLIO MANAGEMENT SOFTWARE] 1.ULIPs. Mutual Fund NAVs and ETFs. INDIAN INSTITUTE OF FINANCE Page 167 . Bonds.  Tax Calculator. Relational databases 2. PPF.  Import data from contract notes.  Online update of BSE stock prices.  Quick Summary view with multiple sorting options by name or current value.  Manage assets like Stocks. Insurance Policies. Private Equity.. Multimedia slideshows 7.

 Daily Gain.  Support for bonuses. redemptions & dividend reinvestment entries of mutual funds. It can also manage your investments such as ULIPs.  Again very helpful in finding the following: Keep track of your purchase & sale transactions of stocks in a simple and familiar contract note format as well as subscription. dividend reinvestment and addition of bonus units (value for such bonus units is zero). mutual funds and ETFs. sell (redeem).  Mutual Fund transactions can be entered to buy (subscribe).  Auto generate past SIP (Systematic Investment Plan) entries for mutual funds.  Keep track of mutual funds schemes with folio numbers.[PORTFOLIO MANAGEMENT SOFTWARE]  Online update for newly listed stocks.  Support for adding multiple buy and sell transactions in one contract note form. splits. merger & demerger transactions (closing balances and capital gain calculations are adjusted based on these corporate actions as per the income tax rules).  Manage transactions related to short selling in stocks..  Lock-In Period and reminder alert for MFs (very useful for ELSS tax saving schemes. Overall Gain. The features for ULIPs and insurance policies are:INDIAN INSTITUTE OF FINANCE Page 168 . Current Value for Stocks and MFs.insurance policies and your Private Equity holdings.  Transactions related to Exchange Traded Funds (ETFs).

[PORTFOLIO MANAGEMENT SOFTWARE]

Keep track of all the details associated with your ULIP and insurance plans. Information such as:  Policy Number, Sum Assured, Name of the nominee, Premium Term, Lock-in Date and Maturity Date.  Reminder alert for the premium, lock-in date and maturity date.  Complete record of premium and withdrawals.  Keep track of funds associated with ULIP plans.  Manage units quantity and NAV values for ULIP funds.  Option to set ULIP policy value based on funds values or manually as per the policy statement. In the Private Equity category you can list transactions related to unlisted/delisted stocks as well as shares of Private Limited companies. It can manage other asset classes as well such as FDs,bonds, PPF/EPF, gold, silver, jewellry, property, art and many othersI The features for FDs/Bonds/Deposits/Loans/PPF/EPF and Post Office Schemes are:  Calculation of current value and maturity values  Display of daily gain in terms of accrued (accumulated) interest  Interest in PPF/EPF category is calculated based on PPF rules

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[PORTFOLIO MANAGEMENT SOFTWARE]
 Interest calculation is based on reducing balance method in case of loans, deposits and Post Office schemes  Current value can be set based on interest rate or market value for bonds  Track income received from rental income and other sources

It allows you to import your financial data from a wide variety of data sources. We have 4 categories of file types we support:

Oynckjxcvsdnkfvnsdkjnfvsjdknvkjfdnvkjfdnvkjnrkjge4ut58598546845585ndng jdfngkjdfngkjdf
 Brokerage digital contract notes - we support brokers such as Kotak, MF Global,

Motilal Oswal, Reliance Securities, Way2Wealth and many others brokers, we are constantly adding new brokers to the list.
 CAMS/KARVY mutual fund files - we support Karvy 201/221, Karvy personal file,

CAMS WBR2 and CAMS personal files.
 Predefined Excel formats - using the templates provided you can import your stock

and mutual fund Transactions.
 Online portals - we currently support Value Research Online and NJ Fundz. This

allows you to keep a backup of your financial data on your computer and also aggregate all your financial data.

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[PORTFOLIO MANAGEMENT SOFTWARE]
The power of our software is via the reports that can be generated.These reports allow you to view your portfolio and understand where and how your investments are performing. Features include:  Provides various reports that can be easily understood and customized per your needs.  Choose from various report types, such as Capital Gains, Transaction, Analytical, Accounting and Miscellaneous Reports  Investors can review the diversification and performance of their portfolios through Asset Allocation and Realised/Unrealised gains reports.
 Asset Allocation reports can display either a pie chart or bar chart. Portfolio Summary

Reports can also be customised for printing of any single asset type, for e.g. Portfolio summary for only Stocks, MFs, ULIPs, etc.  Detailed contract notes view for stock transactions.  Annualised Returns (XIRR) report.  Long Term, Short Term and Intra-day Profit/Loss reports in a variety of formats like Summary, Transaction  one date) are available.  Categorised into stocks, equity mutual funds and debt mutual funds.  Reports are adjusted for bonuses, splits, merger & demerger transactions as per income tax rules.  It has many features that allow you to take control of your investments and analyze your portfolio. Some of the other features are: Wise and Detailed Transaction Wise (where multiple purchased quantities of different dates are sold on

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[PORTFOLIO MANAGEMENT SOFTWARE]
 Online update of BSE stock prices, mutual fund NAVs and ETFs  Automated weekly/monthly data backups to a local hard drive or USB pen drive.  Database update for newly listed stocks, mutual funds, ETFs and company name change updates.  Balloon notification of Annualised Returns (XIRR) for a single asset, an asset category or all assets for a particular portfolio or group  Software updates as we keep improving the functionality and adding new features and reports  Instant display of details like folio number, lock-in period, maturity date, agent name, reference name for various assets via balloon notification  Instant display of details for ULIP and Insurance products like policy numbers, maturity date and lock-in date via balloon notification  Password feature for owner (full access) and user (can only enter transactions and can’t see current prices and values)  Support for internet proxy settings (helpful in corporate office networks)  Various reminder alerts such as due dates for insurance premiums, maturity of FDs, deposits and insurance  policies, and for other investments can be set

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Digital Contract Notes • • • • • • • • • • • • • • Anagram Securities Atlas Integrated Finance Eastern Financiers ENAM Securities Guiness Securities IL&FS Invest smart ISE Securities Kotak Securities Lalkar Securities MF Global-Sify Motilal Oswal Networth Stock Broking Reliance Securities Way2Wealth . Page 173 INDIAN INSTITUTE OF FINANCE . Excel templates and online portals.Excel • • Templates MProfit stock template MProfit mutual fund template .[PORTFOLIO MANAGEMENT SOFTWARE] Import Your Data MProfit allows you to import your data from a wide variety of data sources including digital contract notes. CAMS/KARVY files.CAMS/KARVY • • • • CAMS Online CAMS WBR2 file KARVY Online KARVY 201 and 221 file .

When we designed MProfit we took a look at the India Family Office concept and made it a central part of the software via our Groups feature. Other family (group) features: • • Consolidated view of entire family (group) networth Create and manage multiple family (group) portfolios in various combinations of your individual portfolios Group Annualised Return (XIRR) for any asset. it takes just one click to generate the report. The Grouping feature is very powerful when you create reports within MProfit. Although we don’t call them Family Office’s in India. MProfit is actually a Family Office software solution for Indian households and our easy to use interface is the perfect way to manage all your assets. Without the Grouping feature you would have to manually figure out each individual’s stock allocation and the add them together in Excel…not very efficient or easy.[PORTFOLIO MANAGEMENT SOFTWARE] Online Portals • NJ Fundz Software Features The Family Office is a concept from the West where the management and investment decisions for a single wealthy family occur centrally. maturity and lock-in • • • • INDIAN INSTITUTE OF FINANCE Page 174 . asset category or family portfolio Group Holding report which gives you detailed holdings for group members Asset Allocation report for the entire family (group) Due Date report for the entire family (group) for insurance premium payment. With MProfit. This single group view is similar to how most Indian families view their portfolios as a single portfolio and not just individual portfolios. Our grouping feature allows you to aggregate all your individual personal portfolios into a single group view. with this report you can easily see where you major stock holdings are for your entire family. Overall. One example is the Group Asset Allocation report for Stocks. most families are run like Family Office’s since the investment decisions affect the entire extended family.

Transaction. MProfit has 5 main categories for reports: Analytical.[PORTFOLIO MANAGEMENT SOFTWARE] Overview of Reports We have updated our Reporting Overview video to reflect the new reports and the changes to some existing reports. Capital Gains. Accounts and Miscellaneous. INDIAN INSTITUTE OF FINANCE Page 175 .

de-merger and split and bonus. Capital gains reports are listed separately for equity mutual funds and debt mutual funds.mprofit. Capital Gain Calculations for Shares (Stocks) http://www. if you have any intra-day profits/losses for stocks you will have to calculate those gains as well. Also. MProfit provides a summary as well as transaction wise capital gains reports.in/2009/07/capital-gain-calculations-for-shares-stocks/ Capital Gain Calculations for Mutual Funds (MF) http://www. MProfit follows the First In First Out (FIFO) method for calculating capital gains.in/2009/07/capital-gain-calculations-for-mutual-funds-mf/ INDIAN INSTITUTE OF FINANCE Page 176 .[PORTFOLIO MANAGEMENT SOFTWARE] Capital Gains Calculations The financial year 2009-10 is over and in the next several months most of us will be filing our income tax returns. MProfit provides various simplified reports for capital gains calculations.mprofit. Below are several articles which explain in detail how MProfit handles capital gains calculations. you will need to prepare the capital gains calculations for your short-term and long-term gains for stocks and mutual funds. If you invest in stocks and/or mutual funds. MProfit calculates and adjusts capital gains calculations based on corporate actions such as merger.

Managing your Mutual Funds A continuing series that describes how MProfit handles specific asset classes and how you can benefit from it. We have 5 main categories for reports: Analytical.[PORTFOLIO MANAGEMENT SOFTWARE] A video tutorial on Capital Gains Reports http://www. Reporting Capabilities One the biggest benefits of using MProfit is our reporting capabilities. Some of the features are below: • NAVs are automatically updated via the internet and reflected in your mutual funds holdings Capital Gain tax reports are printed separately for Equity MF and Debt MF Transactions in MF are categorised as subscription (buy). Whether you have equity or debt mutual funds…we can manage it. With our unique Group view.mprofit. you can aggregate and view your entire family’s portfolio. MProfit has a feature called Tax Calculator. Transaction. Capital Gains. There are many product that manage Mutual Funds. Exchange Traded Funds (ETFs) and Fixed Maturity Plans (FMPs) to manage. Accounts and Miscellaneous. dividend reinvestment and bonus units • • INDIAN INSTITUTE OF FINANCE Page 177 . but none are as powerful as MProfit. The Tax Calculator can help you determine your short-term and long-term capital gains and the amount of tax payable before you decide to sell your stocks or mutual funds. We provide over 45 types of reports and are adding new ones based on customer feedback. You can choose from the 1000s of mutual funds. MProfit not only calculates capital gains post sale. redemption (sale). You may find other services available on the internet but most cannot compete with it comes to reporting.in/2010/03/capital-gains-reports/ Lastly.

there is more. • • • • • • Reports Wait. purchase value and current value. sale and dividend re-investment transactions Short term capital gain reports for equity and debt MFs in various formats Closing balance report for MFs to reconcile with books of accounts • • • • • INDIAN INSTITUTE OF FINANCE Page 178 . lock-in period. You can view the details of how many family members are holding one particular fund with details like quantity. asset allocation in mutual funds. lock-in period and Agent name (when your mouse is rolled over the MF name) Tax Calculator to help identify short-term and long-term gain and calculate the tax liability before you redeem (sell) MF units Generate past SIP entries through one form MF holdings can be viewed alphabetically or by current values Group (Family) portfolio will give you the consolidated view your entire family’s MF holdings. The Group (Family) portfolio reports such as MF portfolio summary. group holding reports and annualised returns (XIRR) are very important reports to help you make the right investment decisions. scheme wise as well as buy.[PORTFOLIO MANAGEMENT SOFTWARE] • Provision for details like folio number. Where MProfit really shines is it’s reporting engine (it’s like a Ferrari!). agent name and reminder alert for lock-in period Record for dividend pay-out for MFs Balloon notification displays folio number. the report feature list is quite impressive: • • MF portfolio pummary with overall gain percentage gain Asset allocation with pie chart showing percent holding with respect to MF assets and overall assets Annualised return (XIRR) reports for individual scheme as well as for all your MFs Realised and unrealised gain for MF schemes Various transaction reports such as Date wise. Overall.

The accrued interest up to 31st March can be passed as a cumulative interest entry in MProfit. INDIAN INSTITUTE OF FINANCE Page 179 . Investors may want to pass this entry for tax calculation purposes. The current and maturity values for bonds are calculated based on the interest rate. The terms related to interest rate. This balance cost will match with the balance in your books of accounts. frequency of interest pay-out. The current and maturity values of remaining bonds will be adjusted when you sell some bonds from your total holdings. which will not have any affect on the current or maturity values. frequency of interest payout and cumulative or payout option. This transaction is helpful in computing the total gain from the investment and when calculating your annualised returns (XIRR). You can decide to calculate the values of bonds based on two options: 1) 2) Set the value based on the interest rate Set the value by manually adding the bond price The option to add cumulative interest is provided via the bonds transactions screen. cumulative or pay-out options and maturity value will remain the same as original first investment. The closing balance of bonds will be calculated based on the original purchase price and the remaining quantity. There is also an option to add transactions related to interest payout.[PORTFOLIO MANAGEMENT SOFTWARE] Asset Class: Bond’s A continuing series that describes how MProfit handles specific asset classes and how you can benefit from it. You can add transactions to your existing bond investments. The current values and maturity values will be adjusted based on subsequent purchases.

The current value and maturity value of bank fixed deposit’s (FDs) are calculated based on the interest rate. Lastly. so as to tally the balance with the books of accounts. Unit Linked Insurance Plans (ULIPs) and Pension Plans INDIAN INSTITUTE OF FINANCE Page 180 . The assumption is that the bank pays out interest on this partial withdrawal. you will need to enter the principal amount as well as the interest payout (optional) on this withdrawal. you can set the alert for the lock-in period (if any) as well as the maturity date for FDs created in MProfit. MProfit has provided the option to enter transactions for partial withdrawals to take care of FDs which are linked to your bank accounts. MProfit will calculate daily gain. After a partial withdrawal. Asset Class: Fixed Deposit’s A continuing series that describes how MProfit handles specific asset classes and how you can benefit from it. frequency of interest payout and cumulative or payout option. Although. banks do not show this entry in their FD statement. Usually bank gives less interest for partial withdrawal as opposed to holding the FD till full maturity.[PORTFOLIO MANAGEMENT SOFTWARE] MProfit is designed in such a way that there will not be any difference in current and maturity values of bonds even if you pass the cumulative entry at the end of any period. investors may want to pass this entry for the tax calculation purposes. If partial withdrawal has occured. MProfit is designed in such a way that there will not be any difference in current and maturity value of this FD even if you pass the cumulative entry at the end of any period. MProfit has provided the option to add cumulative interest in terms of FDs. overall gain. The accrued interest up to 31st March can be passed as cumulative interest entry in MProfit. current and maturity value based on your balance principal amount with the same terms of your original FD.

You do not need to enter the fund details and this is the simplest method to capture your policy value to be included in your net worth. ULIP holder can switch between the funds and the units are reduced to recover the mortality charges and other charges. The policy value will be calculated based on these data. You can directly enter the policy value periodically (say monthly) based on the statement of your ULIP policy and this will be reflected in your net worth of your portfolio (Use Set Current Value feature). There are more than 25 insurance companies and each has many ULIP products and each ULIP product has 4 to 8 associated funds. We will try to incorporate the same in future if we find it feasible. Go to Transaction list of ULIP product and Click on the Set Current Value button and choose the appropriate option.[PORTFOLIO MANAGEMENT SOFTWARE] Unit Linked Insurance Plans (ULIPs) are very complex products from the data management perspective. Once you create the ULIP plan manually. We believe that each investor would have one or two ULIP products to manage in his portfolio. You can create the funds as per the plan you have chosen. fill out all the details about your policy (one time) and you can create the associated funds by going into Edit Fund Allocation. b) Second option is to calculate the policy value as per the total premium paid – withdrawal (Use Set Current Value feature) c) Third option is to set the policy value manually. a) Periodically. we have tried to provide the complete ULIP management module in MProfit. We currently do not provide the NAV of each ULIP product. In spite of the complexity. (suggested monthly). There are couple of ways you can set the current policy value to be reflected in your net worth summary. How data should be entered and managed for ULIP products in MProfit is explained below in details. you can go to Transaction List and Click on Other Transactions and click on Edit Fund Allocation and change the Quantity of units and NAV of your funds. INDIAN INSTITUTE OF FINANCE Page 181 .

during the year. All Gold ETFs fall under Debt MF category. amounting to 65 per cent or more. A Mutual Fund/ETF scheme is classified as an equity-oriented scheme if it has holdings in the equity of domestic companies. which will be without insurance details. Adding Exchange Traded Funds (ETFs) in MProfit You can add all Exchange Traded Funds (ETFs) in MProfit.[PORTFOLIO MANAGEMENT SOFTWARE] ULIP products are very long term in nature and we recommend them to update the policy value every month as per the statement of your ULIP policy based on your choice of setting. ETFs fall under the category of Mutual Funds. on an average. You can manage the Unit Linked Pension Plans in the same manner. you can almost capture the true value of your ULIP investments in your net worth summary. Some of the ETFs listed in MProfit are • • • • • • • • • • • Gold Benchmark Exchange Traded Scheme (Gold BeES) Reliance Gold Exchange Traded Fund-Dividend Payout Option SBI GOLD EXCHANGE TRADED SCHEME UTI GOLD Exchange Traded Fund Liquid Benchmark Exchange Traded Scheme (Liquid BeES) Nifty Benchmark Exchange Traded Scheme.Nifty BeES Nifty Junior Benchmark Exchange Traded Scheme (Junior BeES) Sensex ICICI Prudential Exchange Traded Fund PSU Bank Benchmark Exchange Traded Scheme (PSU Bank BeES) Banking Index Benchmark Exchange Traded Scheme (Bank BeES) Reliance Banking Exchange Traded Fund-Dividend Option Comparing Portfolio Values for Different Periods INDIAN INSTITUTE OF FINANCE Page 182 . A scheme that does not fulfil this condition is considered as a debt-oriented scheme. By doing this.

by highlighting a specific area of the summary screen we provide instant balloon notification of Annualised Returns (XIRR) for a single asset. You can then always compare your portfolio values of past and current date. Once you do that. In stead of printing this report. You need to go to Analytical Reports and select Asset Allocation Reports. Name1-NetWorth-31-Mar-2009. an asset category or all assets for an individual portfolio or group portfolio. Name2-NetWorth-30-Jun-2009.g. INDIAN INSTITUTE OF FINANCE Page 183 . Please let me know if you have any suggestions or better ideas. Also.[PORTFOLIO MANAGEMENT SOFTWARE] Many of the users have asked us how they can compare their own individual portfolios as well as family (group) portfolios for different periods.03: • • • An income module Reports relating to annualized returns (XIRR) Group holding reports With our new Income Module. for e. One of the easiest way to do this is to save asset allocation reports for individual portfolios and group portfolios in pdf or excel format. Select the format in which you want to save your reports and save it with the appropriate name ending with date. Software Updates As part of our continuous effort to improve MProfit we have added several new features based on customer feedback to MProfit v4. it would be extremely easy to compare your net worth reports for different dates. you can track a variety of income related transactions: • • • • Dividends received from any stock or mutual fund Rental income from property you own Other income from your other assets Bonus (accrued and pay-out) in case of insurance plans A new feature that many of you have requested is finally here – reports relating to annualised returns (XIRR). you need to click the ‘Save’ button on the top panel of your report window. say monthly or quarterly. With our new Annualized Returns report you can see how your specific investments are performing.

developed the following definition of portfolio. My definition of electronic portfolio includes the use of electronic technologies that allow the portfolio developer to collect and organize artifacts in many INDIAN INSTITUTE OF FINANCE Page 184 .03. How Do I Get The Update? When using MProfit you will be prompted about the availability of v4. and evidence of student selfreflection. Electronic Portfolios.[PORTFOLIO MANAGEMENT SOFTWARE] In addition. we have introduced new reports for group holdings. People develop portfolios at all phases of the lifespan. progress. this version fixes some minor bugs. You will need to accept and allow the installation to enjoy the latest features of MProfit. Educators in the Pacific Northwest (Northwest Evaluation Association. Also. the criteria for selection. When you accept. Please make sure that you have internet connectivity during this process and your antivirus software and/or firewall is not blocking the download to allow the installation of the MProfit update. 1990). Why Portfolios? Portfolio assessment has become more commonplace in schools because it allows teachers to assess student development over periods of time. You can view the performance of your group holdings by stocks. the criteria for judging merit. sometimes across several years. A portfolio is a purposeful collection of student work that exhibits the studentís efforts. and achievements in one or more areas. The collection must include student participation in selecting contents. the update will be downloaded and installed on your desktop. equity MFs or debt MFs or a combined view of all your asset classes.

(See the online supplement at www. the terms electronic portfolio and digital portfolio are used interchangeably. 3. Defining the Portfolio Decide.  It consists of Five Stages I have created a process for developing an electronic portfolio based on the general portfolio and multimedia development processes (Table 1). all artifacts have been transformed into computer-readable form. However. graphics.[PORTFOLIO MANAGEMENT SOFTWARE] formats (audio. I make a distinction: an electronic portfolio contains artifacts that may be in analog (e. Table 1: Stages of Electronic Portfolio Development Portfolio Stages of Electronic Multimedia Development Portfolio Development Development Purpose & 1.. When developing an electronic portfolio.. The Working Portfolio Design. Context & Goals 2.g. a digital scrapbook or multimedia presentation) but rather a reflective tool that demonstrates growth over time. Assess Audience Collect. Reflect. A standards-based electronic portfolio uses hypertext links to organize the material to connect artifacts to appropriate goals or standards. equal attention should be paid to these complimentary processes. Plan Develop Page 185 Interject Select. In a digital portfolio. video.e.iste. videotape) or computer-readable form. Often. Electronic Portfolio Development Electronic portfolio development brings together two different processes: multimedia project development and portfolio development. as both are essential for effective electronic portfolio development.org/L&L for a complete discussion of these processes. An electronic portfolio is not a haphazard collection of artifacts (i. and text). The Reflective Portfolio INDIAN INSTITUTE OF FINANCE .

and stored in electronic folders on a 2 hard drive. Then it is converted to digital INDIAN INSTITUTE OF FINANCE Page 186 . CD-R/W. 0 All documents are in paper format. artifacts. Publish Portfolio Differentiating the Levels of Electronic Portfolio Implementation. or LAN. floppy disk. Portfolio data is entered into a structured format. Documents are translated into HTML. floppy disk. Portfolio is organized with a multimedia authoring program. Some portfolio data may be 1 stored on videotape. Table 2 presents different levels for electronic portfolio development. Connect Respect (Celebrate) 5.[PORTFOLIO MANAGEMENT SOFTWARE] Direct Inspect. Zip. and reflections using Adobe Acrobat Exchange and stored on a hard drive. Table 2. there are developmental levels in digital portfolio development. In addition to the stages of portfolio development. using a Web authoring 5 program and posted to a Web server. such as a database or HyperStudio template or slide show (such as PowerPoint or 3 AppleWorks) and stored on a hard drive. All documents are in digital file formats. which are closely aligned with the technology skills of the portfolio developer. Jaz. Levels of electronic portfolio software strategies based on ease of use. complete with hyperlinks between standards. Documents are translated into Portable Document Format with hyperlinks between standards. The 4. or LAN server. or 4 LAN server. and reflections. Perfect. incorporating digital sound and video. Evaluate Presentation Present. The Connected Portfolio Implement. using word processing or other commonly used software. there appear to be at least five levels of electronic portfolio development. Zip. Just as there are developmental levels in student learning. artifacts.

What is the assessment context. I offer a few items to consider as you make this software selection. including the purpose of the portfolio? Is it based on learner outcome goals (which should follow from national. What resources are available for electronic portfolio development? What hardware and software do you have and how often do students have access to it? What are the technology skills of the students and teachers? Some possible options are outlined in Tables 3 & 4. Stage 1: Defining the Portfolio Context and Goals (Keywords: Purpose. Technology skill levels. Assess). and Internet browsing. or local standards and their associated evaluation rubrics or observable behaviors)? Setting the assessment context frames the rest of the portfolio development process. can enter data into a predesigned database Level 2 plus able to build a simple hypertext (nonlinear) document Page 187 INDIAN INSTITUTE OF FINANCE .[PORTFOLIO MANAGEMENT SOFTWARE] format and pressed to CD-R/W or posted to the Web in streaming format. basic e-mail. 1 Limited experience with desktop computers but able to use mouse 2 3 and menus and run simple programs Level 1 plus proficient with a word processor. state. Decide. Based on these levels and stages. Audience. Table 3.

output computer screens to a VCR. no AV 3 4 input/output One or two computers with 32 MB RAM. scan images. 500 MB HD. can also create QuickTime movies live or from tape. Technology Available 1 No computer 2 Single computer with 16 MB RAM. Choose a format the audience will most likely have access to (e. a home computer. one of which has 64+ MB RAM. or employer? The primary audience for the portfolio affects the decisions made about the format and storage of the presentation portfolio. or the Web). VCR. scanner. video camera. high-density 5 floppy (such as a Zip drive) Level 4 and CD-ROM recorder. simple AV input (such as QuickCam) Three or four computers.g. able to program a relational database Table 4. at least two computers with 128+ MB RAM.[PORTFOLIO MANAGEMENT SOFTWARE] with links using a hypermedia program such as HyperStudio or 4 5 Adobe Acrobat Exchange or an HTML WYSIWYG editor Level 3 plus able to record sounds. professor. 1+ GB HD. 2+GB HD. parent. digital video editing hardware and software. and design an original database Level 4 plus multimedia programming or HTML authoring.. You will know you are ready for the next stage when you have: INDIAN INSTITUTE OF FINANCE Page 188 . VCR. AV input and output. Extra Gb+ storage (such as Jaz drive) Who is the audience for the portfolioóstudent.

Plan). You will want to collect artifacts from different time periods to demonstrate growth and learning achieved over time. or enhance the portfolio development process. Design. Stage 2: The Working Portfolio (Keywords: Collect. and INDIAN INSTITUTE OF FINANCE Page 189 . you will be able to determine the type of materials you will digitize.[PORTFOLIO MANAGEMENT SOFTWARE] • • • identified the purpose and primary audience for your portfolio. speech recordings. Which software tools are most appropriate for the portfolio context and the resources available? This question is the theme of the rest of this article. For example. and video clips of performances. What multimedia materials will you gather to represent a learnerís achievement? Once you have answered the questions about portfolio context and content and addressed the limitations on the available equipment and usersí skills (both teachersí and studentsí). Knowing which standards or goals you are trying to demonstrate should help determine the types of portfolio artifacts to collect. The software used to create the electronic portfolio will control. LAN. Interject. identified the standards or goals you will use to organize your portfolio. CD-ROM)? The type of audience for the portfolio will determine this answer. images of 3-D projects. the Web. and selected your development software and completed the first stage using that software. then examples should reflect studentís writing (scanned or imported from a word processing document) and speaking abilities (sound or video clips). The electronic portfolio software should match the vision and style of the portfolio developer. This can include written work. if the portfolio goal is to demonstrate the standard of clear communication. There are also multiple options. videotape. You will know you are ready for the next stage when you have: • collected digital portfolio artifacts that represent your efforts and achievement throughout the course of your learning experiences. restrict. What is the content of portfolio items (determined by the assessment context) and the type of evidence to be collected? This is where the standards become a very important part of the planning process. depending on the software chosen. Which storage and presentation medium is most appropriate for the situation (computer hard disk.

and other appropriate audiences have access. Direct. It is this process of setting learning goals that turns the portfolio into a powerful tool for long-term growth and development. is an important factor when choosing electronic portfolio development software.[PORTFOLIO MANAGEMENT SOFTWARE] • used the graphics and layout capability of your chosen software to interject your vision and style into the portfolio artifacts. Develop). private reflections of the learner need to be guarded and not published in a public medium. in the form of password protection to control access. and written reflective statements and identified learning goals. Stage 3: The Reflective Portfolio (Keywords: Select. parents. How will you select the specific artifacts from the abundance of the working portfolio to demonstrate achieving the portfolioís goals? What are your criteria for selecting artifacts and for judging merit? Having a clear set of rubrics at this stage will help guide portfolio development and evaluation. Teachersí feedback should also be kept confidential so that only the student. Security. The personal. How will you record teacher feedback on student work and achievement of goals. One challenge in this process is to keep these reflections confidential. Page 190 INDIAN INSTITUTE OF FINANCE . which should inspire goal setting for future learning. How will you record self-reflection on work and achievement of goals? The quality of the learning that results from the portfolio development process may be in direct proportion to the quality of the studentsí self-reflection on their work. when appropriate? Even more critical is the confidential nature of the assessment process. Reflect. You will know you are ready for the next stage when you have: • • selected the artifacts for your formal or presentation portfolio. How will you record goals for future learning based on the personal reflections and feedback? The primary benefit of a portfolio is to see growth over time.

you have inserted the appropriate multimedia artifacts into the document. • • Stage 5: The Presentation Portfolio (Keywords: Respect. Depending on portfolio context. Connect. How will you evaluate the portfolioís effectiveness in light of its purpose and the assessment context? In an environment of continuous improvement. This process brings together instruction and assessment in the most effective way. Evaluate). How will you record the portfolio to an appropriate presentation and storage medium? These will be different for a working portfolio and a presentation portfolio. a portfolio should be viewed as an ongoing learning tool. and you are ready to share your portfolio with others. Present. how will you use portfolio evidence to make instruction/learning decisions? Whether the portfolio is developed with a young child or a practicing professional. and assessment? The choice of software can either restrict or enhance the development process and the quality of the final product. You will know you are ready for the next stage when: • your documents are converted into a format that allows hyperlinks and you can navigate using them. Implement. Celebrate. rubrics. Publish). Will you develop a collection of exemplary portfolio artifacts for comparison purposes? Many portfolio development guidebooks recommend collecting model portfolio artifacts that demonstrate achievement of specific standards. It also provides concrete examples of good work for students to emulate. How will you organize the digital artifacts? Have you selected software that allows you to create hyperlinks between goals. student work samples. I find that the best INDIAN INSTITUTE OF FINANCE Page 191 . Different software packages each have unique characteristics that can limit or expand the electronic portfolio options. Perfect. This provides the audience with a frame of reference to judge a specific studentís work.[PORTFOLIO MANAGEMENT SOFTWARE] Stage 4: The Connected Portfolio (Keywords: Inspect. the artifacts collected along with the self-reflection should help guide learning decisions. and its effectiveness should be reviewed on a regular basis to be sure it is meeting the goals set.

Disadvantages include the size of relational database files (they can become very large and unwieldy). Zip disk. you should be able to find software to fit your audience. and selection guidelines throughout the process online at www. tracking and reporting. they may not be accessible to users who do have the software. which enable learners to share their portfolios with a targeted audience. technology skills. computer hard disk. Software Selection One of the key criteria for software selection should be its capability to allow teachers and students to create hypertext links between goals. or network server.org/L&L). another could include a list of the standards that each student should be achieving. depending on the context.[PORTFOLIO MANAGEMENT SOFTWARE] medium for a working portfolio is videotape. new database management tools have become available that allow teachers to easily create whole-class records of student achievement. Find detailed descriptions. comparison information. A relational database is actually a series of interlinked structured data files linked together by common fields. and various student artifacts (products and projects) displayed in multimedia format. software resources. Relational Databases ( Microsoft Access). whether parents. This is also an opportunity for professionals to share their teaching portfolios with colleagues for meaningful feedback and collaboration in self-assessment. cross-platform capabilities. One data file could include the studentsí names. still another could include portfolio artifacts that demonstrate each studentís achievement of those standards. The purpose of using a relational database is to link together the students with their individual portfolio artifacts and the standards these artifacts should clearly demonstrate. and security. or potential employers. outcomes. and various individual elements. With seven options to choose from. and they require a high level of skill to use effectively. network and Web capabilities. Advantages include flexibility. How will you or your students present the finished portfolio to an appropriate audience? This will be a very individual strategy. The best medium for a formal portfolio is CD-Recordable disc. or videotape. INDIAN INSTITUTE OF FINANCE Page 192 . An emerging strategy is studentled conferences. Web server. addresses. Another is Web accessibility. peers. goals. multimedia. and available equipment (See Table 5 for a comparison of software. In recent years.iste.

Disadvantages include lack of integrated Web accessibility. In recent years. in which a user builds a flow chart to create a presentation. multimedia capable. and increased effort linking artifacts to standards. usually all-inclusive. Hypermedia programs are widely available in classrooms. A hypermedia program allows the integration of various media types in a single file. and SuperLink). Multimedia Authoring Software (e.g. Hypermedia "Card" Programs (e. They are less appropriate for students to use to maintain their own portfolios. without separate player software. Toolbook. INDIAN INSTITUTE OF FINANCE Page 193 . size and resolution constraints. The basic structure of a hypermedia file is described as electronic cards that are really individual screens that can be linked together by buttons the user creates. but they have a steep learning curve.. Digital Chisel. Templates and strategies are widely available to help you begin using your chosen hypermedia tool as a portfolio development and assessment tool. sound. and may not offer the necessary security. require extra effort to link artifacts to standards. and secure.. Macromedia Director or Authorware). They are ideal for CD-ROM publishing. in which the user creates an interactive presentation with a cast and various multimedia elements. They were designed to incorporate multimedia elements. crossplatform. Authorware is an icon-based authoring environment. HyperStudio. They allow teachers to keep track of student achievement at every level. with construction tools for graphics. These programs allow users to create presentations that are self-running. Director is a time-based authoring environment.g. and movies. Hypermedia programs are most appropriate for elementary or middle school portfolios. You may save appropriate pages from the database as PDF files for students to include in their own portfolios. Both programs allow the user to create stand-alone applications that can run on Windows and Macintosh platforms.[PORTFOLIO MANAGEMENT SOFTWARE] Databases are really teacher-centered portfolio tools. multimedia authoring software has emerged from such companies as Macromedia and mTropolis.

However. With wide accessibility to the Web.[PORTFOLIO MANAGEMENT SOFTWARE] Multimedia authoring programs would be most appropriate for high school. the resources available (equipment and technology skills required). Students in upper-elementary grades and beyond can create Web pages. which strategy should you choose? Are different tools more appropriate at different stages of the electronic portfolio development process? These questions can only be answered after addressing some of the questions posed at the beginning of the article. but this type of portfolio is especially appropriate for those who wish to showcase their portfolio for a potential employer.. Web pages require much more file-management skill than other types of portfolio development tools. cross-platform. The advantages of creating Web-based portfolios center on its multimedia. Students convert word processing documents into Web pages with tools built into those programs and create hyperlinks between goals and the artifacts that demonstrate achievement. college. the learning curve is steep.g. An emerging trend in the development of electronic portfolios is to publish them in HTML format. and Web capabilities. Microsoft FrontPage. many schools are encouraging students to publish their portfolios in this format. Any potential viewer simply needs Internet access and a Web browser.dividend payout etc. and where the advantages of the strategy outweigh the disadvantages for your situation. On such portfolio we can perform the following operations of buying. With all of these choices. Netscape Composer). Adobe PageMill. INDIAN INSTITUTE OF FINANCE Page 194 .selling. especially the purpose and audience for the portfolio. Web Pages (e. Claris Home Page. or professional portfolio creation. and the security can be a problem.

Madhu Mehta Company Name ICICI Bank ICICI Bank 3M India Kotak Mahindra Bank Kotak Mahindra Bank ICICI Bank 3i Infotech ICICI Bank Kotak Mahindra Bank Trans Type BUY SELL BUY BONUS BONUS BUY BUY DIV_PAYO UT SELL y 400 200 200 400 400 300 300 Price 500.582 158. 123456 123456 575751 123456 123456 985985 Mehta Growth Option BUY Mr.00 188437. Sapna Mehta Mr.00 166264.0 0 5000.50 385920.1189 0 51.50 337680. Folio Portfolio MF Scheme Name Trans Type Madhu Reliance Growth Quantity Price 12. Growth Option SELL Sapna HDFC Equity Fund Mehta .50 22612.1613 0 55.selling.500 97.589 794. Madhu HDFC Equity Fund Mehta . Madhu Mehta Mr.00 80000.525 216.500 645.50 1025.0 0 12000.0 0 10000. dividend payout etc on the behalf of folio numbers. Madhu Mehta Mrs.0874 0 Amount 10000. Madhu Reliance Growth Mehta Growth Option DIV_REINV Mr.0 0 Number Name Mr.00 400 960.50 12000.00 158.7669 5 A hypothetical portfolio INDIAN INSTITUTE OF FINANCE Page 195 .00 835. Sapna Mehta Mr.50 1680.Dividend Opion BUY 75. Madhu Mehta Mr.00 625.[PORTFOLIO MANAGEMENT SOFTWARE] Quantit Date 01-11-2004 09-12-2006 20-02-2008 28-10-2008 28-11-2008 01-06-2009 15-02-2010 01-03-2010 01-06-2010 Portfolio Name Master Aditya Mehta Master Aditya Mehta Mrs. Madhu Mehta Mr. Madhu Reliance Growth Mehta Mrs.00 75.00 200.00 On such portfolio we can perform the following operations of buying .Dividend Opion BUY Mr.Dividend Opion DIV_PAYOUT Master Aditya HDFC Equity Fund Mehta .00 Amount 200000.3127 5 15.

88 84.52 2.R.52 0.43 0.39 0.7404 15.6783 1.[PORTFOLIO MANAGEMENT SOFTWARE] Value Research Online Portfolio Name : FUNDS Date : 06-Sep-2010 00:12 Fund/Stock/Fixed-Asset NAV (Rs) NAV Date Change From Previous NAV/Price (Rs) (%) Units/ (Nos) DSPBR T.47 0.43 0.87 0.7296 14.63 Page 196 2.35 0.31 0.64 0.2 90.88 41.1 4.53 59.31 0.37 0.5 0.7296 202.6 92.88 41.95 1. Reg-G Franklin India Prima Plus-G Franklin India Prima Plus-G Franklin India Prima-G Franklin India Prima-G Franklin India Taxshield-G Franklin India Taxshield-G Franklin Templeton FTF Ser IV 60 M-G HDFC Equity-G HDFC Prudence-G HDFC Taxsaver-G HDFC Top 200-G ICICI Pru Infrastructure-G Magnum Contra-G Magnum Contra-G Magnum Taxgain-D Magnum Taxgain-D Magnum Taxgain-D Reliance Diversified Power Sector 50.21 0.5486 Retail-G Reliance Diversified Power Sector 84.487 211.46 0.13 0.5 364.718 290.31 0.31 0.13 0.I.4 .86 0.31 0.3 428.E.61 59.6 333.31 0.4 814.882 208.0 1.37 1.752 1.7 323.019 889.5486 Retail-G Reliance Equity Opportunities-G Reliance Equity-G Reliance Growth-G INDIAN INSTITUTE OF FINANCE 1.01 0.21 0.04 0.41 1.35 0.G.7566 290.390 Retail-G Reliance Diversified Power Sector 84.051 30.283 235.5486 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 03-Sep-10 0.64 0.37 0.31 0.00 434.818 4.808 1.8682 277.14 0.566 288.359 1.718 221.45 0.04 0.2269 489.23 1.295 221.248 36.28 580.731 375.3 10.87 0.61 41.7566 202.87 0.13 0.950 245.25 0.3 0.1 0.13 0.87 0.04 3.41 2.0 1.1 0.

7296 35.44 0. online project management software. INDIAN INSTITUTE OF FINANCE Page 197 .4 0.73 03-Sep-10 03-Sep-10 03-Sep-10 0.17 0.248 Advantages There are following advanteges of using portfolio management software:Powerful portfolio analysis and project reporting in Project Insight.06 11.34 0.44 206.303.[PORTFOLIO MANAGEMENT SOFTWARE] Reliance Vision-G Tata Infrastructure-G UTI Infrastructure-G Fund Portfolio Total : Portfolio Total : 277. allows executives to view all the projects in the portfolio in real time.6 3.14 0.95 0.000 4.303.4 4 11.3521 35.4 4 0.

That can be cost-effective. to review the portfolio. You could become complacent and not educate yourself thoroughly before selling investments or buying new ones. Create your own scorecard to weigh projects in the portfolio Use goals. consultants. Remember that no computer program INDIAN INSTITUTE OF FINANCE Page 198 . which will assist in making key financial and business decisions for the projects. Expensive This entails software. hardware. do all customization and end-user training inside. 2. customer or project type. save and share customized reports. usually management or executives within the organisation. Or you can hire a programmer or two as an employee and only buy business consulting from an outside source. etc. critical success factors and key performance indicators to objectively assess project importance Utilize score as an objective way to prioritize projects in the organization View health indicators to know instantly the status of projects • • • • Project portfolio management software enables the user. training. Executives may then create. or even set a portfolio report as their default home page. The objective of project portfolio management is to optimise the results of the project portfolio to obtain benefits the organisation wants. Disadvantages Following are the disadvantages: 1. • Roll up your portfolio of projects by reporting on projects by organization.[PORTFOLIO MANAGEMENT SOFTWARE] Access to real time information empowers project managers and executives to detect projects at risk in order to make timely decisions. implementation.

what you read on your own initiative. don't allow your use of it to coerce you into totally dismissing your stockbroker or investment counselor. Balancing the advice you get from investment professionals. You must be mindful to enter correct figures. you could gain a small fortune or lose a small fortune in a matter of hours or days. INDIAN INSTITUTE OF FINANCE Page 199 . A simple typo could render your investment software program useless depending upon your objective. While software is usually independent of a brokerage. and you should stay on top of trends in your investment sector(s) without becoming obsessive about them. 4. and any software calculations is essential to smart investing. 3. Always remember that investing holds absolutely no guarantees.[PORTFOLIO MANAGEMENT SOFTWARE] or person is infallible.

[PORTFOLIO MANAGEMENT SOFTWARE] Working of Portfolio management software Mutual fund equity INDIAN INSTITUTE OF FINANCE Page 200 .

[PORTFOLIO MANAGEMENT SOFTWARE] Stocks INDIAN INSTITUTE OF FINANCE Page 201 .

[PORTFOLIO MANAGEMENT SOFTWARE] ULIP INDIAN INSTITUTE OF FINANCE Page 202 .

[PORTFOLIO MANAGEMENT SOFTWARE] INSURANCE PLAN INDIAN INSTITUTE OF FINANCE Page 203 .

[PORTFOLIO MANAGEMENT SOFTWARE] FIXED DEPOSITS INDIAN INSTITUTE OF FINANCE Page 204 .

[PORTFOLIO MANAGEMENT SOFTWARE] BONDS INDIAN INSTITUTE OF FINANCE Page 205 .

[PORTFOLIO MANAGEMENT SOFTWARE] BIBLIOGRAPHY • • • • www.altavista.google.investopedia.com www.org www.com INDIAN INSTITUTE OF FINANCE Page 206 .wikipedia.co.in www.

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