Portfolio Management Assignment Help

A number of colleges and institutions across the world offer portfolio management courses which are designed to create an understanding of the different concepts related to investment analysis and portfolio management. The courses cover Portfolio risks and returns, portfolio planning and its construction and many more things.

Our finance expert with immense expertise in the field of banking and finance is going to deliver you a clear understanding of portfolio management (PM). By the end of this article you will know what the word ‘portfolio’ means, the concept of Portfolio Management, who can be referred to as a portfolio manager, what does Portfolio Management service consist of, what are the various types of Portfolio Management, objectives with which portfolios are made, and the importance of Portfolio Management. For more such content, visit Assignmenthelp.net.

Without further ado, let’s begin... Shall we?

So, what do you understand by the term PORTFOLIO?

A portfolio can be referred to as a group of different investible instruments like shares, FDs, bonds and other cash equivalents. All the instruments consolidated together, particularly based on the income of the investor, the amount he can afford to invest, his appetite for risk and the convenient time frame he wants to hold it for. It is built in a manner that it balances the probability of bad performance of one or more investments with the good performance of other investments.

To put it simply, a person who owns more than one security is said to have a portfolio of investments. The major aim of the person owning the portfolio is to maximize profitability from the portfolio by a selection of investible instruments that have the potential to give decent returns.

According to the theory of modern portfolio, the investment risk reduces considerably when various kinds of securities are included in a diversified portfolio.

Have look at some facts on Portfolio.

  • A portfolio consists of many investment vehicles with the inherent risks involved.
  • A variety of choices related to buy or sell of shares, mutual funds, and/or other securities is involved in the framing of a portfolio. Also, the investors are required to take decisions related to the number of units and the timing of transactions and the same needs to be determined beforehand.

PORTFOLIO MANAGEMENT

Portfolio Management is known as the science and art of selecting the apt combination of investible instruments and policies in the right proportion, matching investments to goals, allocation of assets for individuals and institutions, to generate optimum returns while stabilizing the investment risk against investment performance.

In a layman’s language, in portfolio management, a person gives a portfolio manager their money to invest in diverse assets and use their expert knowledge to manage it in a way so that the overall capital is maximized with the aim of maximizing return in accordance with the investor’s appetite for risk.

Portfolio management must be done in a manner in which the ratio of risk-return of the investor is perfectly adhered to with respect to the profit that will be earned and the period of holding of the investment instruments.

UNDERSTANDING PORTFOLIO MANAGEMENT

Portfolio management is the most important skill required for the management of investments efficiently and effectively. In portfolio management, the distinct feature of each investment avenue is inspected and analyzed. Funds are allotted in various investment alternatives with respect to the goals of the investment.

Investment in more and more assets, with different characteristics, facilitates diversification of the risk and thereby maximizes the returning appetite of the portfolio. Diversification of risk does not necessarily imply that the risk associated will be completely eliminated.

However, the most optimal portfolio isn’t devoid of market risk, one can only reduce risk. As there is a decrease in the degree of risk, there is a reduction in the expected returns as well.

The optimum portfolio management method works on the concept of balancing risk by minimizing risk and maximizing returns within the investor’s holding span of time.

THE KEY COMPONENTS OF PORTFOLIO MANAGEMENT

  • Allocation of Asset:

A mixture of assets with long term perspective is fundamental to optimum portfolio management. It must be understood that different volatility rates are associated with different assets. A low correlation is required in the allocation of assets so as to maximize the profile of risk-return of the investor.

In general, the investors who are aggressive go for more volatile investments whereas stable investments are undertaken by investors who have a conservative nature.

  • Diversification of assets:

One primary prudent approach in investing is to make a collection of securities that will give a wide impact within the class of an asset as the determination of winners and losers in a consistent manner isn’t possible. The distribution of risk and reward within the category of an asset is termed as diversification. Diversification facilitates the capturing of potential returns of all the subsets of an asset class. Proper diversification is necessary as it is tricky to find which specific subcategory of an asset class has the probability of outperforming another asset.

  • Rebalancing

It is a method used to align the returns of a portfolio to the target for which was initially determined for it, at regular periods of time. Retainment of the security mix is of significant importance as it best reflects the profile of risk and return of the concerned investor and reduces the risk of exposure of the portfolio to the movements of the market which can lead to a higher risk or a lesser probability of return.

For instance, a portfolio has an initial asset mix of debt-equity in 30/70 ratio but because of the movements in the market, the allocation shifted to a ratio of 80/20 that surpasses the risk tolerance level of the investor.

Rebalancing nearly always calls for the exclusion of costly but less worthy security and the inclusion of the low-priced but cheap or out-of-favor security. This process of annual repetition which rebalances provides investors the opportunity to tap on gains and extend the investment in assets sectors towards classes that show higher potential for increased growth and simultaneously maintain the portfolio of the investor well aligned with the respective risk and return measurement.

KINDS OF PORTFOLIO MANAGEMENT

There are mainly the following kinds of portfolio management:

  • Passive management involves the creation of a fixed portfolio in alignment with the market trends.
  • Active management refers to the active management of the funds of a portfolio by an individual manager or a group of managers on the basis of hard-core research of the investment avenues.
  • Discretionary portfolio management refers to giving complete authority to the portfolio manager to invest the corpus of funds according to his understanding on behalf of the investor. The manager is responsible for all the investment requirements, documents, paperwork, filing, etc.
  • Non-discretionary portfolio management is the method in which a portfolio manager can just suggest his client what’s right and what’s not, what’s advantageous or disadvantageous for him, but the ultimate decision depends on the client. However, the investor himself is thus responsible for the profit or loss so incurred, while the portfolio manager just gets a commission for rendering his respective service.

OBJECTIVES OF PORTFOLIO MANAGEMENT

While framing a portfolio, the portfolio manager must make a note of the investor’s expectations. The selection of one or more of these is dependent on the individual preferences of the investor.

  • Portfolio managers cater to the tailored and customized investment needs of the investors.
  • Portfolio management provides investment alternatives to people in accordance with their income, budget, age, time frame and risk tolerance.
  • Portfolio management works on the principle of risk reduction through diversification.
  • Portfolio management schemes facilitate both tax planning and tax saving.
  • Diversification of funds helps in both capital appreciation and safeguard of the principal amount invested.
  • Portfolio management offers liquidity, marketability, diversification and consistent returns.

Let us now understand who a portfolio manager is and what work needs to be done in portfolio management.

PORTFOLIO MANAGER

A portfolio manager is a professional person who grasps the financial requirements of his client and accordingly frames an investment plan for him which is subject to his earning and risk appetite. The portfolio manager makes all the investments on behalf of his vested client and thus his role is considered to be a challenging, responsible and answerable one.

Portfolio manager decides the assets in which investment has to be made, then matches investments to their respective goals, allocates those class of assets to both individual people and companies, and tries to balance the risk of assets against their performance. All the aforementioned steps are done by him with the help of a skilled team of analysts and researchers.

PROCESS OF PORTFOLIO MANAGEMENT

So how is Portfolio Management done?

Market survey is done by the fund managers on various schemes and their past performances. They also make use of their experience and knowledge and accordingly chip in the available funds. These facilities can be availed through financial institutions, banking institutions, and fund managers.

Portfolio management is not a one-time thing. The portfolio needs to be managed on a regular basis. Also, the client needs to be given regular updates regarding the changes in the market as well as in the fund. Portfolio management essentially involves the following stages:

  1. Security Analysis is the first step for creating a portfolio where the factors of risk and return of individual securities are assessed. It also involves calculating how correlated they are.
  2. Portfolio Analysis: In this step, analysis of the prospective investment securities is done and portfolio managers try to figure out how many portfolios that can be made. The selected portfolio will be known as a feasible portfolio.
  3. Portfolio Selection: From the group of feasible portfolios, the one which aligns with the risk appetite of the client is sorted by the portfolio manager. The selected portfolio will be termed as an optimal portfolio.
  4. Portfolio Revision: After the selection of the optimum portfolios, a close watch is kept on the performance of the portfolio by the fund manager to be sure of decent returns.
  5. Portfolio Evaluation: This is the final phase of portfolio management where the portfolio’s performance is evaluated for a predetermined time frame, in the context of the returns earned and the risk associated with the portfolio.

Now that you have understood what is a portfolio and how it is managed, let us try to understand the working of portfolio management with the help of the model mentioned below, which is followed by an example.

MODEL

One of the primary management tools is the Capital Asset Pricing Model (CAPM) which was developed by Harry Markovitz, an American economist in the 1950s. The following formula of CAPM is used to calculate the potential return percentage of an investment tool based on its vested risk appetite:

er = rf + β (rm - rf)

where, rm = Expected market returns

er = Expected Returns

β = Risk measure

rf = Risk free rate

Let’s look at an example.

Sara is an experienced and active portfolio manager with a remarkable track record in fund investing, and she is working in a prominent fund management firm. Sara tracks the historical data of the feasible portfolios to be included in her clients’ portfolios. She believes that simply tracking an investment index won’t add any significant value to the portfolio and she prefers to follow the market trends and implement the apt investment strategy according to the investment needs of each investor.

PORTFOLIO VALUE

INITIAL INVESTMENT

PERCENTAGE

PRICE

SHARES

VALUE

CLOS-ENDED FUNDS

Close-ended fund 1

5

42

196,856

82,67,952

Close-ended fund 2

12

60

406,445

2,43,86,700

Close-ended fund 3

8

37

797,140

2,94,94,180

NET CLOSE-ENDED FUNDS

25

14,00,441

6,21,48,832

ETFs

ETF A

2

25

13,591

3,39,775

ETF B

10

19

5,406

1,02,714

ETF C

27

21

4,435

93,135

ETF D

13

9

4,629

41,661

TOTAL ETFs

52

28,061

5,77,285

STOCKS

Stock 1

11

99

12,772

12,64,428

Stock 2

12

53

16,200

8,58,600

TOTAL STOCKS

23

28,972

21,23,028

NET PORTFOLIO VALUE

100.00

6,48,49,145

Furthermore, as Sara is an aggressive portfolio manager she likes to invest in securities and diversify her clients’ portfolios by the allocation of risk over riskier investment avenues. One of her current portfolios has a total value of around $6,48,49,145; out of which Sara invests $6,21,48,832 in closed-end funds, $5,77,285 in ETFs, and $21,23,028 in stocks.

This is an example of an aggressive portfolio as there isn’t any investment in mutual funds and bonds. Only in the cases that Sara has risk-aversive clients, she would select to shift stocks for bonds and consequently lower the percentage of stock holding in the given portfolio.

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