Friday 28 April 2017

PORTFOLIO MANAGEMENT

Portfolio of securities may offer equivalent expected returns with lower volatility of returns (lower risk) compared to individual securities.

The composition of the portfolio is an important determinant of the overall level of risk inherent in the portfolio.

By varying the weights of the individual securities, investors can arrive at a portfolio that offers the same return as an equally weighted portfolio, but with a lower standard deviation (risk).


Steps in the Portfolio Management Process

1.  Planning:

  • The investment objectives - Understanding the investor's needs and constraints
  •  Developing an investment policy statement (IPS) - The IPS is a written document that    describes the objectives and constraints of the investor.

2.  Execution:  

  • Asset allocation - distribution of investable funds between various asset classes e.g., equities, fixed-income securities, alternative investments, etc.)
  • Security Analysis - Analysis of companies and the industry to identify investments that offer the most attractive risk return characteristics from within each asset class.
  • Portfolio construction - Constructing the portfolio, after determining the target asset allocation and conducting security analysis, in line with the objectives outlined in the IPS.

3.  Feedback

  • Portfolio monitoring and rebalancing - The portfolio must be regularly monitored.  Changes in fundamental factors and investor's circumstances may require changes in the portfolio's composition.  Rebalancing may be required when changes in security prices cause a significant change in weight of assets in the portfolio.
  • Performance measurement and reporting - This step involves measuring the performance (absolute or relative performance) of the portfolio stated in the IPS.


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