You are on page 1of 15

Portfolio Management

:
Portfolio management deals with the analysis of individual securities as well as with the theory and practices of optimally combining securities into portfolios. Portfolio management is a process encompassing many activities aim at optimizing the investment of ones funds. Five phases can be identified in this process. 1. Securities analysis 2. Portfolio analysis 3. Portfolio selection 4. Portfolio revision 5. Portfolio evaluation

. This step consists of examining the risk-return characteristics of individual securities. Portfolio Analysis: The process of blending together the broad asset classes so as to obtain optimum return with minimum risk is called portfolio analysis/construction.Security Analysis: Security analysis is the phase of the portfolio management process.

=Proportion of total investment invested in ith asset. =Number of securities in a given portfolio. Where. =Expected Rate of return as ith Securities. Rp Wi Ri n .+WnRn OR n Rp =∑WiRi i =1 =Expected Rate of Return in a Portfolio. Rp =WaRa+WbRb+……………….Portfolio Risk & Return: Expected return on portfolio: The expected return on a portfolio is simply the weighted average of the expected returns of the individual securities in the given portfolio.

. Optimal portfolio selection : 1)Establishing efficient portfolios (minimum risk for a given expected return)comprising broad of asset lends itself to the mean –variance methodology by Markowitz.Portfolio Selection: The process of finding the optimal portfolio is described as portfolio selection. 2)Determining efficient portfolios within an asset class can be achieved with the single index model proposed by sharp. It provides highest return at a given level of risk.

ii) Derives the relationship between the expected return and risk of individual securities and portfolios. c)The investor can sell short any amount of any shares. Assumption of CAPM: a)Investors make their investment decision on the basis of risk-return assessment measured in term of expected returns and standard deviation of returns. . b)The purchase / sales of a security can be undertaken in infinitely divisible unit.Capital Asset Pricing Model: Relationship between risk and return establish by security market line known as capital asset pricing model. i) Extension of portfolio theory of Markowitz.

R e Ri Rf σe =Risk / Return =Effective portfolio =Return on riskily portfolio =The risk free borrowing rate which would be the same as risk free lending rate. namely the return on the riskless asset.Capital Market Line: Efficient frontier line formed by the action of all investors mixing the market portfolio with the risk free asset is known as capital market line. Ri = Rf +ᵝi(Rm –Rf) .Rf Ri =Rf + σm Where. Rm. Security Market Line: A straight line joining expected return and beta of securities is called security market line. The relationship between the expected return and risk for all securities and all portfolios can be determined graphically .

)+D1] Ri = P. =Current market price P1 =Estimated market of 1 year D1 =Anticipated dividend for 1 year . P.Rm M Rf Expected return of security =Risk free return +ᵝ(risk premium into market) ᵝ Pricing Of Securities In Capital: The capital asset pricing model can be used for evaluating the price of securities. [(P1-P. Where.

Need of Revision Availability of additional funds for investment.maximum emphasis is placed on portfolio analysis and selection which leads to the construction of the optimal portfolio. In portfolio management . Change in risk tolerance Change in the investment goals  .

Portfolio Evaluation: It is a evaluation of the performance of the portfolio. It essentially comprises the functions. 1)Performance measurement 2)Performance evaluation .

Mutual Funds: Definition: According to Frank Reilly defines mutual funds as “financial intermediaries which bring a wide variety within the reach of the most modest of investors” .

iii)It is managed by a team of investment professionals and other services provider .Characteristics Of Mutual Funds : i)The ownership is in the hands of the investors who have pooled in their funds. ii) The pool of funds is invested in a portfolio of marketable investments.

Structure Of Mutual Funds: a)Sponsor b)Trustees c)Custodians d)Asset management company .

Types/Classification Of Mutual: a)General classification i)Open-ended scheme ii)Close ended scheme iii)Interval scheme b)Broad classification i)Equity funds ii)Money market iii)Debt/ Income funds .