Identification: Portfolio Management Flashcards
refers to a collection of investment tools such as stocks, shares, mutual funds, bonds, cash and so on depending on the investor’s income, budget, and convenient time frame.
Portfolio
refers to the various assets of an investor which are to be considered as a unit.
Investment porfolio
The art and science of making decision about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk vs. performance.
Portfolio Management
Security not only involves keeping the principal sum intact but also keeping intact its purchasing power intact.
Security/Safety of Principal
To facilitate planning more accurately and systematically the reinvestment consumption of income is important.
Consistency of returns
Guarantees the growth of capital by reinvesting in growth securities or by the purchase of the growth securities.
Capital growth
It is the case of which a security can be bought or sold
Marketability
It is desirable to investor so as to take advantage of attractive opportunities upcoming in the market
Liquidity
The basic objective of building a portfolio is to reduce risk of loss of capital and/or income by investing in various types of securities and over a wide range of industries
Diversification of portfolio
The portfolio manager needs to evaluate the client’s portfolio from time to time and revise the ratio of investment in different assets (volatile and stable assets) to avail of high value
Rebalancing
the combination of volatile and non-volatile assets in which an investor is willing to invest
Asset allocation
requires a high level of expertise about the markets
Active Portfolio Management
Aims to generate better market returns than the market
Active portfolio management
it requires a constant evaluation of the market to buy assets when they are undervalued and sell them when they exceed the norm
Active portfolio management
isn’t concerned with beating the market because its proponents subscribe to the efficient market hypothesis
Passive portfolio mgt
Believe that fundamentals will always be reflected in the value of the underlying asset (investors who seek to minimize risk often prefer
Passive portfolio management/passive strategy
the portfolio manager can merely advise the client what is good and bad for him, but the client reserves full right to take his own decisions
Non-discretionary
They will give you the pros and cons of investing in a particular market or strategy but won’t execute it without your permission
Non-discretionary
Is an integrated compilation of steps implemented in a consistent way to create and manage a suitable portfolio of assets to achieve client’s specified goals.
Portfolio Management Process
Get to know the client’s goals. The first thing a portfolio manager will do when taking on a new client is to gain an understanding of that client’s goals
Planning
the investment policy statement and the capital market expectations are combined to determine the long-term weights of the target asset classes
Strategic asset allocation
any short-term changes in the portfolio strategy as a result of the change in circumstances of the investor or the market expectations is
Tactical asset allocation
Construct the portfolio. The manager integrates investment strategies with capital market expectations to select the specific assets for the portfolio (the portfolio selection/composition decision)
Execution
the expectation of the capital markets is combined with decided investment allocation strategy to choose specific assets for the investor’s portfolio
Portfolio selection
once the portfolio composition is finalized, the portfolio is executed
Portfolio implementation
Monitor and evaluate the portfolio’s performance. Once the manager has put the plan into action, they’ll continue to keep an eye on its progress. This step also includes any rebalancing that the manager does down the road.
Feedback
the portfolio manager needs to monitor and evaluate risk exposures of the portfolio and compares it with the strategic asset allocation
Monitoring and rebalancing
the investment performance of the portfolio must be evaluated regularly to measure the achievement of objectives and the skill of the portfolio manager
Performance evaluation
The process of selling certain issues in portfolio and purchasing new ones to replace them
Portfolio Revision
Involves determining periodically how the portfolio performed in terms of not only the return earned, but also the risk experienced by the investor
Portfolio performance evaluation
is a process encompassing many activities of investment in assets and securities. It is a crucial component in investing. It is a dynamic and flexible concept and involves regular and systematic analysis, judgment and action.
Portfolio Management
Does no trade on an exchange
Mutual fund
Traded on an exchange
ETF - Exchange Traded Funds
Based on NAV at the end of the day
Mutual fund (Net Asset Value)
Determined throughout the day by buyers and sellers on the exchange
ETF
Pooled funds from high-net-worth clients
Cannot be sold to the general public
Has fewer reporting requirements as compared to mutual funds
Different from hedging
Hedge Funds
The new approach to investing
Modern Portfolio Theory
Developed by Harry Markowitz in 1952
Incorporates risk management into security selection
Considers the trade-off between risk and return
Modern Portfolio Theory
Degree of risk aversion = Degree of required return per level or risk
A risk that affects the entire financial market
Cannot be diversified away
Systemic risk
A risk that only affects a certain company or industry
Nonsystematic risk
Risk Capacity + Risk Attitude = Risk Tolerance
Net Worth
= Assets - Liabilities
P/E of stock is higher vs. benchmark – Overvalued
P/E of stock is lower vs. benchmark – Undervalued
requires strategically buying and selling stocks and other assets in an effort to beat the performance of the broader market.
- Active portfolio management
seeks to match the returns of the market by mimicking the makeup of an index or indexes.
- Passive portfolio management
requires clear long-term goals, clarity from the IRS on tax legislation changes, understanding of investor risk tolerance, and a willingness to study investment options.
- Portfolio management
Closed-end funds are generally actively managed
Those who build indexed portfolios may use modern portfolio theory (MPT) to help them optimize the mix.
Another word for passive management
Index investing
also referred to as index fund management, aims to duplicate the return of a particular market index or benchmark.
passive portfolio management
is based on the understanding that different types of assets do not move in concert, and some are more volatile than others. A mix of assets provides balance and protects against risk.
Asset allocation
is used to return a portfolio to its original target allocation at regular intervals, usually annually. This is done to reinstate the original asset mix when the movements of the markets force it out of kilter
Rebalancing
