85. Portfolio Management: Overvew Flashcards
Portfolio perspective
Evaluating individual investments by their contribution to risk and return to portfolio
Modern portfolio theory
Extra risk from holding single security is not rewarded with higher expected returns
Diversification ratio
Risk of equally weighted n securities / Risk of single security selected randomly from the n amount
Diversification ratio = 1
No diversification benefits
Diversification ratio < 1
Risk-reduction benefit exists from diversification
Limitations of diversification
- Equal weighted portfolios are not always the optimal ones
- Portfolio diversification works best when markets are operating normally
Steps of Portfolio Management
Planning: Analysis of risk tolerance, return objectives, time, tax, liquidity, income, unique circumstances that leads to IPS
Execution: Analysis of various asset classes and allocation
Feedback: Rebalancing portfolios periodically to changing demands
Top-down analysis
Examining economic conditions, forecasts and identify attractive asset classes
Individual investors
- Planning for house purchase, children or retirement
- Often subject to tax benefits
Endowment
Fund dedicated to providing financial support for specific purpose (ex - universities)
Foundation
Fund established for charitable purposes
Banks
Earn more on loans and investments than the deposit payments
Insurance companies
Invest premiums to fund customer claims as they occur
Mutual funds
Manage pooled funds in particular styles like index investing, growth investing
Sovereign wealth funds
Pool of assets owned by governments
Defined contribution pension plan
Company contributes a sum each period to retirement account
Defined benefit pension plan
Make periodic payments to employees after retirement
Full service asset managers
Managers that offer a variety of investment styles and asset classes
Specialist asset managers
Focus on particular investment styles
Multi-boutique
Holding company that includes a number of different specialist asset managers
Active management
Outperform benchmark through manager skill
Passive management
Replicate performance of chosen benchmark index
Mutual funds
Pooled investments where each investor owns share - ownership of overall portfolio
Open-end fund
Investors can buy newly issued shares - meaning they can invest additional capital
Investors may also redeem shares
NAV (net asset value)
Total net value of assets in fund / Number of shares
No-load funds
No additional fees for purchasing shares or for redeeming
Load funds
Charge up-front fees / redemption fees or both
Closed-end funds
Professionally managed money that does not take new investments / does not allow redemption of shares
Money market funds
Short term debt securities and provide interest income with very low risk of change
Bond mutual
Invest in fixed-income securities differentiated by maturities, credit ratings, issuers and types
Stock mutual bonds
Index funds - passively managed (portfolio is constructed to match index)
Actively managed - management selects individual securities to return greater than index
ETFs
Closed-end funds where purchases and sales are made in the market rather than the fund
