Portfolio Management

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					     Portfolio Management- Asset
1.    Objective
2.    Know Your Limitations
        Risk Tolerance
3.    Have an Investment Philosophy
       Some portfolio managers have inherit bias
       toward small growth-comparisons; some
       try to play the ‘cycle’; some buy based on
       strong fundamentals.
     •Play relative Earnings Growth: Firms earnings
        growing faster than the overall industry;
    Play Relative P/E Ratio.

4.   Develop an Investment Strategy- Essential to
     implementation of investment philosophy
    For an investment strategy, need to know the
     ‘character of the economy’, such as:
              •Inflation forecasts – high or low
              •Productivity gains/loss
              •Segment of economy that is strong

• Should the portfolio be weighed by capital
     growth or be skewed from Cyclical Stocks?

5.   Construction of Portfolio:
       Risk/Return Analysis
6.   Revision and Portfolio Performance

    2. Portfolio Management of Stocks

Return accruing to an individual stock is
  derived from:
1) Overall market effect
2) Affiliation to the industry
3) Unique characteristics of individual security
 Corresponding Risk
1) Market risk
2) Extra market covariance/group risk
3) Specific or residual risk

  3. Portfolio Management Style
a) Passive
b) Disciplined Stock Selection
c) Active
d) Asset Allocation Schemes
e) Modern Portfolio Theory

Active Strategy can be applied with respect to

I)   Market Component – Market timer.
     Organization will forecast rising market,
     raise ß by moving from 1) cash to equity,
     or 2) high ß assets.
    Forecast declining market, opposite . . .
    Passive for market timer, maintain ß in
     line with portfolio objective, regardless
     of market forecast.
II)   Active strategy with respect to industry:
      Group Rotation - under-weighting or
      over-weighting depending on the
      industry, favorable or unfavorable
     Tech Sector, Drug Sector, etc., over time;
     Passive Strategy: Organization that
      believes that it has no capability to
      forecast in this respect would set
      portfolio weight with respect to broad
      market sector and major industries in line
      with their weighting in the market index.
III) Active strategy with respect to individual
   stocks: Stocks identified as most attractive will
   have more weight relative to market index, and
   less attractive will weigh less relative to market
 Organizations hold many stocks because their
   forecasts about individual stock is imperfect,
   known as diversification.
 Passive strategy with respect to Individual
   Stocks: Index Fund
A) Disciplined stock selection:
Several critical elements must be present
1) Must have predictive capability with respect to
    individual stocks
   Fundamental analysis
   Quantitative analysis
   Technical analysis
2) Systematic Portfolio Construction Process
3) Routine Portfolio Rebalancing/ Transaction Cost

4.     Asset Allocation
Asset Allocation: Purpose is to put assets together in
   such a way as to maximize return at a level of risk
   consistent with investor’s objectives.
Process involves 4 key elements:
1) Investors need to determine the assets that are
   eligible for the portfolio.
2) Necessary to determine E(R) for these eligible
   assets over a holding period.

3) Once returns have been estimated and risk
  accessed, optimization technique is used.
4) Choose portfolio from efficient frontier,
  provides maximum return, minimal risk.

    Approaches to Asset Allocation
 Three approaches to Asset allocation:
Fixed Weight: Fixed percentage of the portfolio to
  each asset category – 3 to 5 in total. Fixed does
  not mean equal weight.
Common Stock              30%
Bonds                     50
Foreign Securities        15
Short term Securities      5
Allocation does not change over time, may be
  adjusted after a major market move to keep the
  desired fixed allocation
Flexible Weight - also known as strategic asset
  allocation: Weight changes on the basis of market
  analysis. Favorable domestic inflation forecast
  compared to foreign may result in revised
Common Stock           30% to 45%
Bonds                  50 to        40
Foreign Securities     15 to        10
Short term Securities 5      to     5
Weights are changed to capture greater returns in
  changing market.
Tactical Asset Allocation: Form of market timing
  that uses stock index futures and bond futures to
  change a portfolio’s asset allocation.
Stocks are forecasted to be less attractive than bonds,
  sell stock index futures and buy bond futures.
Bonds are forecasted to be less attractive than stocks,
  buy stock index futures and sell bond futures.
Requires sophisticated technique, large portfolio,
  quantitative modeling.
Appropriate for large institutional investors.


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