UM Panabo College

Department of Business Administration Education

P.N. Arguelles St., San Francisco, Panabo City
Telefax # (084) 628-6437

Metalanguage

The following are terms to be remembered as we go through in studying this unit. Please
refer to these definitions as guide in case you will encounter difficulty of understanding this topic.

 Bond is an instrument used in borrowing typically in a firm or government

 Debt is an amount of money borrowed by one party from another. This is used by many
corporations and individuals as a method of making large purchases that they could not afford
under normal circumstances
 Finance is the body of facts, principles and theories relating to raising and using money by
individuals, businesses, and governments
 Financing is the process of providing funds for any business activities
 Income is a form of return that provides income in the form of periodic payments
 Investment is an asset or item acquired with the goal of maximizing income
 Risk is the unpredicted circumstances in the future
 Securities are investment issued by firms, governments, or other organization that represent a
financial claim on the resources of the issuer
 Shares are portion of an amount divided among a number of people who contributed to the
said amount

Essential Knowledge

Lesson 1 – INTRODUCTION TO PORTFOLIO MANAGEMENT

A life cycle of an investor probably would be spending and earning money. An investor’s
finances rarely balances its desire consumption. Sometimes they want to spend more than they can
afford, and there maybe times they have more money than their desired spending. This will lead them
to either borrow or to save in order to maximize the long-run benefits from their income.

When income exceeds expenses, people would probably save the excess. They might keep it
in their piggy banks or might bury it in their backyard. In the future, when they decided to retrieve the
said savings, they will just get the exact amount they saved. Unlike if they will invest it, the savings
will increase over time.

What is Portfolio Management?

According to Adam Hayes, Portfolio Management is the art and science of choosing and
managing a group of investments that meet the long-term objectives financially and tolerance of risks.
This balances the SWOT (strengths, weaknesses, opportunities and threats) of an investment. So as a
future portfolio managers, you are working on behalf of investors that foresee the future of an
investment, maximize return within appropriate level of risk exposure.

There are basically five (5) phases of Portfolio Management that will play a big part in the
success of an investment. The effectiveness of implementing these phases will affect the outcome of
the investment. These are:

1. Security Analysis. This involves analyzing and evaluating individual securities. Its goal is to
decide if an investor should buy, sell or keep the stock (refer to Bhala, K.T. & et.al.(2016)
International Investment Management: theory, ethics and practice – page 215)
 UM Panabo College
Department of Business Administration Education
P.N. Arguelles St., San Francisco, Panabo City
Telefax # (084) 628-6437

2. Portfolio Analysis. Portfolio is a group of investments that are kept together as one
investment. In security analysis, the goal is to select various securities to diversify the
investment and thus averse the risk. By selecting different sets of securities and formed into
one group, this phase will now measure the risk-return characteristics of the possible
portfolio. This will now involve the mathematically calculation of risk-return of each
portfolio. (refer to Bhala, K.T. & et.al.(2016) International Investment Management: theory,
ethics and practice – page 20)

3. Portfolio Selection. In this phase, the selection of portfolio will be based on the last phase,
the one that offers the highest return at an appropriate level of risk.

4. Portfolio Revision. After the selection of best portfolio, it is not always that the portfolio will
remain optimal due to changes in the market, thus a revision of portfolio must be done.
Revision is made by buying new stocks and selling old ones.

5. Portfolio Evaluation. This phase is the assessment of the regular performance of the
portfolio. This is done by measuring the return on investment along with the risk.

EVOLUTION OF PORTFOLIO MANAGEMENT

Traditional portfolio management evaluates portfolio based on their instincts only. They don’t
really have the knowledge on risk and return management. In 1938, a book called The Theory of
Investment Value was written by John Burr Williams that states the intention of investors is to look for
a good stock and buy it at the optimal price. But during this time, information about portfolio
management is coming slowly. Benjamin Graham was the first to get accurate information and
analyze it to make an investment decisions. But no one considered the risk, not until Harry Markowitz
happened to consider this issue when he read the book of J.B. Williams. This inspired him to write an
article, Journal of Finance, that talks about portfolio selection. But this article contained more on
calculation than discussion, that’s why it took a decade first before it was rediscovered and
appreciated. The article led the people to conclude that risk should be the crux of any portfolio, not
the price. The article/theory gave investors the power to request for the fit risk-return profile of a
portfolio. This theory was developed to give investors a technique to assess advantages and
disadvantages of an investment portfolio.

ROLE OF PORTFOLIO MANAGEMENT

“Don’t put all your eggs in one basket”. Portfolio management involves selecting
various securities to diversify the investment and thus averse the risk. It needs to reduces the risk
without affecting the return, helps investor in decision making and select best investment portfolio.
The following are the objective of Portfolio Management:

- safety of principal amount

- investment of the disposable income
- growth of capital
- marketability
- liquidity
- well-diversified portfolio
- minimal tax burden