1. introduction to portfolio management
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This document discusses traditional and modern approaches to portfolio construction. The traditional approach involves determining objectives, analyzing investor constraints like income needs and liquidity, determining the objective such as current income or capital appreciation, and selecting securities and their weights to minimize risk and maximize return. It involves four to six steps including analyzing constraints, determining objectives, selecting the portfolio, and considering factors like asset mix, growth, capital appreciation, safety, and diversification. The modern approach exemplified by Markowitz focuses more on risk and return analysis to minimize risk and maximize profit without considering individual needs.
1. introduction to portfolio management
- 2. Introduction Portfolio is a combination of securities such as bonds stocks and other instruments. For example if I have purchased 100 shares of reliance, one lot of gold and one lot of silver along with few bonds and debentures, all the above securities comprise my portfolio.
- 3. Portfolio construction The process of blending together the broad assets classes so as to obtain optimum return with minimum risk called portfolio construction. There are two approaches of portfolio • Traditional approach construction • Modern approach
- 4. Traditional approach The traditional • Determining the objectives of portfolio approach • Selection of securities to deals with be included in portfolio. basically two major decisions.
- 5. Normally • Investors constraints are analyzed this is • On their basis securities are selected • Risk and return of securities is studied carried • Try to minimize the risk with more out in return • Compromise with the risk factor four to • Selection of securities with their weight in portfolio six steps.
- 6. Analysis of constraints (I)Income needs (a)Need for current income (b)Need for constant income (ii) Liquidity (iii) Safety (iv) Time horizon (v) Tax consideration (vi) Temprament
- 7. Determination of objective Current income Growth income Capital appreciation Preservation of capital
- 8. Selection of portfolio (i) Objectives and asset mix (ii) Growth of income and asset mix (iii) Capital appreciation and asset mix (iv) Safety of principal and asset mix (v) Risk and return analysis (vi) Diversification
- 9. Modern approach An example of modern approach is Markowitz approach. It does not takes individual needs into consideration but risk and return analysis is done to minimize the risk and maximize the profit or return. We will discuss it in the next chapter.