An Introduction to Portfolio Management

1. An Introduction To
Portfolio Management
Mercy A. Medalla
Mercy A. Medalla
BSBA-IV
An Introduction To Portfolio Management Mercy A. Medalla

2. • Portfolio management is 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.
An Introduction To a Portfolio Management Mercy A.Medalla

3. • Portfolio management is all about determining
strengths,weaknesses,opportunities and threats in
the choice of debt vs.equity,domestic
vs.international,growth vs.safety,and many other
trade-offs encountered in the attempt to maximize
return at a given appetite for risk.
An Introduction To a Portfolio Management Mercy A. Medalla

4. • Portfolio management refer to managing an
individual’s investments in the form of
bonds,shares,cash,mutual funds etc so that it
earn the maximum profits within the stipulated
time frame.
An Introduction To a Portfolio Management Mercy A.Medalla

5. • A probability or threat
of damage, injury, liabi
lity, loss, or any other
negative occurrence
that is caused by
external or
internal vulnerabilities,
and that may be
avoided through
preemptive action.
An Introduction To a Portfolio Management Mercy A.Medalla

6. • Risk averse is a
description of an
investor who, when
faced with two
investments with a
similar expected
return (but different
risks), will prefer the
one with the lower
risk.
An Introduction To a Portfolio Management Mercy A. Medalla

7. 1. Market
Portfolio
2. Zero
Investment
Portfolio
An Introduction To a Portfolio Management Mercy A.Medalla

8. • A market portfolio is
theoretical bundle of
investments that includes
every types of asset available
in the world financial
market, with each asset
weighted in proportion to its
total presence in the market.
•What is
Market
Portfolio?
An Introduction To a Portfolio Management Mercy A.Medalla

9. • A group of investments
which, when combined,
create a zero net value. Zero
investment portfolio can be
achieved by simultaneously
purchasing securities and
selling equivalent securities.
This will achieved lower
risk/gains compared to only
purchasing or selling the
same securities.
An Introduction To a Portfolio Management Mercy A. Medalla
•What is Zero
Investment
Portfolio?

10. • Active Portfolio
Management.
• Passive Portfolio
Management.
• Discretionary
Portfolio
Management
Services.
• Non-Discretionary
Portfolio
Management
Services.
An Introduction To a Portfolio Management Mercy A.Medalla

11. • In an active portfolio
management service, the
portfolio managers are
actively involved in
buying and selling of
securities to ensure
maximum profits of
individuals.
An Introduction To a Portfolio Management Mercy A. Medalla

12. • In a passive
portfolio
management,
the portfolio
manager deals
with a fixed
portfolio
designed to
match the
current market
scenario.
An Introduction To a Portfolio Management Mercy A. Medalla

13. • In discretionary
portfolio
management
services, an
individual
authorizes a
portfolio
manager to take
care of his
financial needs
on his behalf.
An Introduction To a Portfolio Management Mercy A.Medalla

14. • In Non-Discretionary
Portfolio Management
Services, the portfolio
manager can merely a
the advise the client what
is good and bad for him
but the client reserves
full right to take his own
decisions.
An Introduction To a Portfolio Management Mercy A. Medalla

15. • There are numerous
potential measures of
risk.
1. This measure is
somewhat intuitive.
2. It is correct and widely
recognized risk measure.
3. It has been used in the
most of the theoretical
asset pricing models.
An Introduction To a Portfolio Management Mercy A.Medalla

16. Probability Possible Rate of
Return (percent)
Expected Security
Return (percent)
0.35 0.08 0.0280
0.30 0.10 0.0300
0.20 0.12 0.0240
0.15 0.14 0.0210
E(R)=0.1030
An Introduction To Portfolio Management Mercy A.Medalla

17. Weight(w₁)
(percent of portfolio)
Expected Security
Return(R₁)
Expected Portfolio
Return(w₁ x R₁)
0.20 0.10 0.0200
0.30 0.11 0.0330
0.30 0.12 0.0360
0.20 0.13 0.0260
E(Rport)=0.1150
An Introduction To Portfolio Management Mercy A.Medalla

18. • Portfolio variance is the measurement of how
the actual returns of a group of securities
making up a portfolio fluctuate.
Portfolio variance looks at the standard
deviation of each security in the portfolio as
well as how those individual securities
correlate with the others in the portfolio. In
other words, portfolio variance looks at
the covariance or correlation coefficient for
the securities in the portfolio.
An Introduction To a Portfolio Management Mercy A.Medalla

19. Possible Rate
of Return
(R₁)
Expected
Security
Return E(R₁)
R₁-
E(R₁)
[R₁-E(R₁)
]2
P₁ [R₁-E(R₁)2P₁
0.08 0.103 -0.023 0.0005 0.35 0.000185
0.10 0.103 -0.003 0.0000 0.30 0.000003
0.12 0.103 0.017 0.0003 0.20 0.000058
0.14 0.103 0.037 0.0014 0.15 0.000205
0.000451
An Introduction To Portfolio Management Mercy A.Medalla

20. Two basic concepts
in statistics:
1. Covariance
2. Correlation
An Introduction To a Portfolio Management Mercy A. Medalla

21. •Covariance is a measure of
the degree to which returns
on two risky assets move in
tandem. A positive covariance
means that asset returns
move together, while a
negative covariance means
returns move inversely.
Covariance is calculated by
analyzing at return surprises
(standard deviations from
expected return), or by
multiplying the correlation
between the two variables by
the standard deviation of each
variable.An Introduction To a Portfolio Management Mercy A. Medalla

22. •Correlation is a statistical
measure that indicates the
extent to which two or more
variables fluctuate together.
A positive correlation
indicates the extent to which
those variables increase or
decrease in parallel; a
negative correlation
indicates the extent to which
one variable increases as the
other decreases.
An Introduction To a Portfolio Management Mercy A.Medalla

23. • Portfolio standard
deviation is the
standard deviation of
a portfolio of
investments. It is a
measure of variability
of the expected
returns from a
portfolio.
•Standard
Deviation of a
Portfolio
An Introduction To a Portfolio Management Mercy A.Medalla

24. •The efficient frontier is the
set of optimal portfolios that
offers the highest expected
return for a defined level of
risk or the lowest risk for a
given level of expected
return. Portfolios that lie
below the efficient frontier
are sub-optimal, because
they do not provide enough
return for the level of risk.
Portfolios that cluster to the
right of the efficient frontier
are also sub-optimal,
because they have a higher
level of risk for the
defined rate of return.
An Introduction To a Portfolio Management Mercy A.Medalla