What is Portfolio Management ?

The art of selecting the right investment policy for the

individuals in terms of minimum risk and maximum return is
called as portfolio management.
Portfolio management refers to managing an individual’s
investments in the form of bonds, shares, cash, mutual funds
etc so that he earns the maximum profits within the stipulated
time frame.
Portfolio management refers to managing money of an
individual under the expert guidance of portfolio managers.

Types of Portfolio Management 

In a broader sense, portfolio management can be classified under 4 major

types, namely –

 Active portfolio management

In this type of management, the portfolio manager is mostly concerned

with generating maximum returns. Resultantly, they put a significant share
of resources in the trading of securities. Typically, they purchase stocks
when they are undervalued and sell them off when their value increases.

 Passive portfolio management 

This particular type of portfolio management is concerned with a fixed

profile that aligns perfectly with the current market trends. The managers
are more likely to invest in index funds with low but steady returns which
may seem profitable in the long run.
  Discretionary portfolio management

In this particular management type, the portfolio managers are entrusted

with the authority to invest as per their discretion on investors’ behalf.
Based on investors’ goals and risk appetite, the manager may choose
whichever investment strategy they deem suitable.

Measuring of the performance

HPR= (V1-V0)+C
V0
V1=Ending Value of investment
V0=Beginning Value of investment
C= Current income( interest /Dividend)
2. HPR portfolio= RGC +UGC+C
E0+(NF× ip/12) –(WF ×wp/12)
Where,
RGC=realized capital gain
UGC=Unrealized capital gain
C=dividend/ interest
E0=Initial Equity investment
Nf=New fund
Ip=number of months in portfolio
Wf=withdraw fund
Wp=number of month with draw from portfolio

1.Sharpe's Measure of Portfolio Performance

Sharpe's measure of portfolio performance, developed by
William F. Sharpe, is given after his name.
SP=RP-RF SM=RM-RF
QP QM
 2. Treynor's Measure of Portfolio Performance

Treynor's measure of portfolio performance, developed by

Jack L. Treynor, is also given after his name. This measure is
different from the Sharpe's measure in consideration of
portfolio risk. This measure provides a portfolio performance
index that compares a portfolio's risk premium to the
systematic or non- diversifiable risk associated with the
portfolio.
TP =RP-RF
BP
Where

TP =Treynor's index of portfolio performance measure.

RP = total rate of return on portfolio.
RF = the risk-free rate of return.
BP= the beta coefficient of the portfolio.

3.Jensen's Measure of Portfolio Performance

Jensen's measure of portfolio performance, developed by Michael C. Jensen, is

also called Jensen's Alpha. The theoretical orientation of this measure is similar
to the Treynor's measure because both are based on the capital asset pricing
model. However, calculation aspect of Jensen measure differs significantly from
the Sharpe's measure and Treynor's measure. Jensen's measure calculates the
Jensen's Alpha which is the excess of portfolio return above the required rate of
return on the portfolio. The required rate of return on the portfolio is calculated
using the capital asset pricing model. The Jensen's Alpha is given by:

AP= Rp-[RF+ (RM-RF)ẞP]

Where
AP = Jensen's Alpha
RP = portfolio return
RF = risk-free rate
RM = market return
BP= portfolio beta