Portfolio mgmt

Question 1

3 financial objectives

Answer 1

1. safety and security of the fund invested
2. profitability (through interest, dividend and capital appreciation
3. liquidity (convertibility into cash as and when required)

Question 2

to achieve the 3 objectives, what is needed?

Answer 2

diversification and favourable tax status (tax incentives)

Question 3

diversification

Answer 3

the basic objective of building a portfolio is to reduce risk of loss of capital/income by investing in various types of securities or asset classes

Question 4

Two types of investment portfolio mgmt

Answer 4

active and passive

Question 5

Passive portfolio

Answer 5

• holding securities in the portfolio for relatively long periods with small and infrequent changes
• investors act as if the security markets are relatively efficient. the portfolios they hold may be surrogates for the market portfolio (index funds)
• passive investors do not try outperforming their designated benchmark

Question 6

Active portfolio

Answer 6

• active investors believe that from time to time there are mispriced securities or groups of securities in the market
• do not act as if they believe that security markets are efficient
• their forecast of risk and return differ from consensus opinion