By:-
Yogesh dundoo (29)
Angad singh (1)
Aditya (20)
Khaleem (38)
Construction of a Portfolio
What is a Portfolio.?A portfolio is an appropriate mix of
collection of investments held by institutions or a private Individual.
The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts.
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FOR MORE INFO...
What is Portfolio management
Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions.
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Strategy used by the portfolio managers
Many strategies have been developed to form a portfolio.
1.equally-weighted portfolio An equally weighted portfolio would have
the same amount of money invested in each unique stock. Therefore, the number of shares of each stock would be different, with more shares of cheaper stocks
2.capitalization-weighted portfolio Long-term financing used by a firm
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Strategy used by the portfolio managers
price-weighted portfoliooptimal portfolio (for which the
Sharpe ratio is highest). Minimize Risk & Maximizing Return
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Building a portfolio from specifications
Matching the client with the markets
A dynamic flow
Investor objectives and constraints
Economic & social conditions
Portfolio policies, strategy
Capital market ex-pectations
Build the optimal portfolio
Investment results.
Portfolio Performance
Is the world changing?
Good enough?
Top - down
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Three step process
Economic & social conditions
Capital market ex-pectations
Macroeconomy, big picture
Three step process
Three step process
Industries, sectors
Company & Stock
The Investor
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If she wants high growth, high returns … portfolio policy will be aggressive. Buy stocks and venture capital, risky assets.
If she wants safety and security,… portfolio policy will stress low-risk assets, invest in bonds and cash.
Investor objectives and constraints
Portfolio policies, strategy
Style: ACTIVE, trade often
Style: PASSIVE. Just buy and hold, for years
The Investor
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Who should be an aggressive investor, by necessity?
(who wants money to grow fast)
Who should stick to low-risk assets, invest in bonds and cash.
(who doesn’t want any losses?)
Investor objectives and constraints
Portfolio policies, strategy
Style: ACTIVE, trade often
Style: PASSIVE. Just buy and hold, for years
Optimize or maximize?
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The investor’s objectives could be aggressive: thus maximize the RETURNS.
If the investor wants to be safe, you minimize the RISK.
Most investors are in between, they want maximum return for no risk.
Unrealistic. Dreamers.
Build the optimal portfolio
Study the results
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Good enough? Maintain policyNot good? Rethink policy. Not necessarily
“change” … just evaluate if still relevant.Measure performance: as good as
expected? Better than expected? Better than the market as a whole? Better than other investors?
Investment results. Portfolio performance.
Investment results. Portfolio performance.
What the client can buy
Investable instruments
Risk-return tradeoff
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Risk-return tradeoffRisk-return tradeoffRisk-return tradeoffRisk-return tradeoff
Low risk . . . . . . . . . . . . . . . . . High risk
High
..
..
..
..
LowRet
urn
s in
Per
cen
t %
T-BillsBonds
StocksFutures
Venture capital
New ideas !
??
??
IF Client is conservative
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Pension fundUniversity endowmentHospital retirement fundTeachers’ benefit fundCooperative’s savingsCommunity chestSavings & Loan association
Pension fund segments
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Stocks30%
Bonds60%
Cash10%
Looks conversative
to me ...
Client is Daring?
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Dashing, debonaireFoolish, spendthriftTotally aggressiveYoung and restlessDabbles in futures for thrill
Aggressive
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High-flying stocks target 100% returns, junk bonds yield over 20%, futures zoom ...
Hi-Yield Bonds
30%
Hi-flying stocks
60%
Futures10%
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All kinds of thingsAll kinds of things
Low risk . . . . . . . . . . . . . . . . . . . . High risk
High
..
..
..
..
LowRet
urn
s in
Per
cen
t %
T-BillsBonds
StocksReal estate
Venture capCollectibles
??
??
FuturesBiotech
Dot.Coms
Long-term expectations
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May not hold true, in short-termHighest to lowest returns...
Venture CapitalStocks Real EstateBondsMoney-market / cash
Major Markets, 1986-’94Major Markets, 1986-’94
Pacific Basin
10 15 20 25 30 35 40 45 % St.Dev.
Rate of return %
18
16
14
12
10
8
6Canada
USA
Europe
Italy
Spain
Japan
Australia
U.K.
France
World
Europe & Pacific
“Ideal” assets in this sector are elusive, hard to find.
There’s plenty down here that you don’t want to buy...
Exam question: why is it wise to confine your search to the efficient frontier?
www.fundmetrics.com
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Review course for Chartered Financial Analysis exams, levels 1, 2, 3. Manila, Jakarta, Sydney
Review courses in Manila for US CPA review Customized training courses for banks, brokers,
insurance companies, etc. Development of e-Learning modules for corporate
training. See www.fundmetrics.com
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