Portfolio Management

The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against. performance.

Traditional Theory Parameters of investment avenues are risk

and return Correlation between securities is not

considered Risk is considered in total but as

systematic /unsystematic Selection of securities- risk & return Diversification is done on the basis of class

of securities.

Steps for Portfolio Creation (TPT)

Portfolio objectives and constraints Diversification Allocation of funds Execution of funds

Modern Portfolio Theory

Harry Markowitz Stresses – creation of a portfolio depends

upon the correlation of securities. Favour the concept of Efficient Frontier. EF-Contains all Efficient Portfolios EP- which gives max return or minimum

risk.

Principles of MPT

Principle of Risk

Principle of Diversification

Principle of portfolio effect (Never put all eggs in one basket)

Principle of Dominance (more return / less risk when compared with other Portfolio)

Principle of Market risk (systematic risk)

Principle of Beta

Principle of trade off between risk and return

Principle of Avoidance ( unsystematic risk)

Markowitz Portfolio Theory Selection of securities and construction of

portfolio is based on 2 factors1. Mean return2. variance return

Under this method expected mean return for each unit of risk is considered for the identification of efficient Portfolio.

Also called as “Mean –variance Criterion of Markowitz”.

Identifies the relationship between different securities in portfolio through the concept of Correlation

Introduces the concept of Diversification Correlation is + = securities move in

same direction Correlation is - = securities move in

opposite direction

Assumptions of MPT Only 2 attributes ;mean and variance Risk averse behaviour of investors( behaviour of either avoiding risk or covering

it). Higher the risk, higher the returns Investors are utility Maximizers (deriving

optimum satisfaction (return) by assuming a particular level of risk).

Correlation between the securities

Diversification can reduce risk.