Portfolio Analysis and Marko

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Portfolio ManagementPortfolio Management

Presented by

ITISHRIRegid-10807976

Roll no.A27



ContentsContents

PORTFOLIO ANALYSIS &SELECTION

jPortfoliojTypes of Portfolios.

jPortfolio Analysis

jPortfolio Management Process

jCalculation of Portfolio return & portfoliorisk.

jMethods of Reducing Risk

jTop Mutual Funds & their Portfolios.



Portfolio ManagementPortfolio Management

jPortfolio is a combination of securities

irrespective of their nature, maturity,

profitability or risk characteristics.jExpected return of the portfolio depends on

the expected return of each of the security

contained in the portfolio.

jBut you may recall that expected return fromindividual securities carries some degree of

Risk



Why Portfolio?

The simple fact that securities carrying different

levels of risk thus leads an investor to invest into

various securities at the same time i.e. in Portfolio of

securities«

It is an attempt of Not putting all the eggs into one

basket



TYPES OF PORTFOLIOSTYPES OF PORTFOLIOS

jTo add a broader perspective to portfolio

investment we have considered 3 types of

investors:

AGGRESSIVE

MODERATE AGGRESSIVE

CONSERVATIVE



Portfolio AnalysisPortfolio Analysis

j Portfolio Analysis provides detailed portfolio

information in an easy-to-read visual format to help

investors understand what they own and how well their investments are diversified across equity and fixed-

income holdings.

j Portfolio Analysis gives investors a snapshot of their

current portfolio1

to help them make informed decisionsabout their investing strategy.



K EY FEATURES/BENEFITSK EY FEATURES/BENEFITS

Portfolio Analysis provides in-depth information on

current holdings to customers, including:

jAsset Allocation. Offers a quick read on a

portfolio's current mix of stocks, bonds and short-

term investments to help investors align their asset

allocation with their financial goals. Investors also

can review how a similar hypothetical portfolio may

have performed in historical bear and bull markets.



Cont..Cont..

j Equity Profile. Allows investors to compare the

diversification of their domestic stock portfolio

against the Equity Index. The analysis uncoverswhether the portfolio is overweighted or

underweighted in a specific industry; where its

investment "style" falls in the spectrum of growth,

value and blend stocks.



Cont..Cont..

jHypothetical Trade. Illustrates how a change to a

portfolio's composition from buying or selling aspecific investment could affect its asset allocation.

j Fixed-Income Profile. Compares the credit ratings

and sector allocations of domestic bond holdings tohelp investors determine how well diversified they

are in the fixed-income portion of their portfolio.�



PORTFOLIO MANAGEMENTPORTFOLIO MANAGEMENT

PROCESSPROCESSSpecificationof investment

objectives

Choice of Asset mix

Formulation of portfoliostrategy

Selection of securities

PortfolioExecution

PortfolioRevision

PortfolioEvaluation



Objectives:

jReturn Requirements

jRisk Tolerance

Constraints & preferences:

jLiquidity

jInvestment horizon

jtaxes



Selection of Asset MixSelection of Asset Mix

Stocks

Bonds

Cash

Precious Metals

Real estate

Others



Formulation of Portfolio StrategyFormulation of Portfolio Strategy

1) Active Portfolio Strategy:

jMarket Timing

jSector RotationjSecurity Selection

2) Passive Portfolio Strategy



Calculate Return and Risk Calculate Return and Risk

jPortfolio Returns

These are weighted returns of all securities

constituting the portfolio.

Where w= weights

r= return of the securities

r

Ewr

E i

N

1i i p

§!

!



PORTFOLIO RETURNSPORTFOLIO RETURNS

Security No. of Shares Current Price

per Share

Current Value Expected End

Period Return

Total End

Value

A 100 15 1500 20 2000

B 150 20 3000 25 3750

C 200 40 8000 42 8400

12500 14150

So expected holding period return is= 14150-12500

12500

= 13.2%

r Eweightr E i

N

1i

i p §!

!



Portfolio Risk Portfolio Risk

jPortfolio risk is not a simple average of the

risk of all the securities (as is the case of returns) but it considers standard deviations

together with the co-variance between the

securities. Co-variance measures the

movement of assets together



PORTFOLIO RISK PORTFOLIO RISK

PORTFOLIO TOTAL RISK

UNSYSTEMATIC RISK (Company related/controllable)

SYSTEMATIC

RISK (market related/uncontrollable)

Market Risk

Purchasing Power Risk

Interest Rate Risk

Business Risk

Financial Risk

+



Business and Industry Risk Business and Industry Risk

There might be a industry-wide slowdown, or even a

global economic recession Or the business might

see its earnings dropping significantly say, due to

management ineptitude/wrong decisions. The lower

earnings (due to any of the above) may cause the

company¶s stock to fall



Inflation Risk Inflation Risk

j With the rise in inflation there is reduction of

purchasing power , hence this is also referred to as

purchasing power risk and affects all securities.

j The money you earn today is always worth more

than the same amount of money at a future date. This

is because goods and services usually cost more inthe future, due to inflation. So its important that your

investment return beats the inflation rate.



Market Risk

j Market Risk is about the uncertainity faced in the

stock market. Several macro and micro economic

details singularly or plurally can spook the market.

Interest Rate Risk

j It is the variability in a security¶s return resultingfrom changes in the level of interest rates. Other

things being equal, security prices move inversely

to the interest rates.



Liquidity Risk Liquidity Risk

j This risk is associated with the secondary market in

which the particular security is traded. A security

which can be bought or sold quickly withoutsignificant price concessions is considered liquid.

The greater the uncertainty about the time element

and the price concession, the, greater the liquidity

risk.

j Sometimes you are not able to get out of your

investment conveniently, and at a reasonable price.

For example in 2008, you may have found it was

tough to sell your house at a price you wanted



Measurement of Portfolio Risk Measurement of Portfolio Risk

iE i F

Covxy =

N

R R R R y y

N

i

x x §!1

Covariance measures how returns of 2 securities move

together. If the returns of the two securities move in

the same direction consistently, the covariance would

be positive, if they move in opposite direction thecovariance would be negative. If the movements of

returns are independent of each other covariance

would be close to zero.



jcovariance divided by product of the

standard deviation of each security gives a

standardized measure called coefficient of

correlation

y x

xy

xy

Cov

W W

V !

y x

xy

xy

Cov

W W V !



Covariance and CorrelationCovariance and Correlation

Coefficient RevisitedC

oefficient RevisitedjCovarianceij = WiW j Vij

± Where Vij is the correlation coefficient between

two variables, i and j

jMost assets within a country exhibit positive

covariance

± For instance, in the U.S. during a bear (bull)

market, all NYSE stocks tend to fall (rise)



jThus mixing of securities which are not perfectly correlated is the essence of

modern portfolio theory



If A and B haveIf A and B have V V = +1= +1

j When combining two assets with perfect positive

correlation, the result is a straight line

j The lower the degree of positive correlation, the

greater is the amount of risk reduction that isossible.



If A and B haveIf A and B have V V = 0= 0

j Substantial risk reduction can be achieved by combining assetswith V = 0

± SD portfolio becomes much smaller because the last term reduces to

zero

]

ZERO

ZERO

xx2xxSD ABB AB A

2

B

2

B

2

A

2

Ap!



If A and B haveIf A and B have V V == --11

j When V = -1 the last term of the SD portfolio equation reaches its

maximum negative value

j Zero risk can be achieved because

Losses from one asset are exactly offset by gains from another

1-xx2xxSD B AB A2B

2B

2 A

2 Ap

!



Risk DiversificationRisk Diversification

Risk diversification is the key to the management of

portfolio risk, because it allows investors to significantly

lower the portfolio risk without adversely affecting

return.



Methods of reducing risk Methods of reducing risk

Simple

Diversification

Diversifying

acrossIndustries

EfficientDiversification MarkowitzDiversification



1.Simple Diversification1.Simple Diversification

j Simplest diversification is based on random

selection.

j It refers to the act of randomly diversifying without

regard to relevant investment characteristics such as

expected return and industry classification. An

investor simply selects relatively large number of securities randomly.



Cont«Cont«

j Unfortunately, in such case, the benefits of randomdiversification do not continue as we add moresecurities, the reduction becomes smaller andsmaller.



Number of securities

Non-diversifiable risk

(Systematic)

.......................

.

Diversifiable risk (Non-

systematic risk )

3333

Risk



DIVERSIFICATION ACROSS INDUSTRIESDIVERSIFICATION ACROSS INDUSTRIES

jThe ability to opportunistically allocate to

different sectors also allows the Fund to behighly diversified. By diversifying across a

range of debt securities and sectors, the

impact of default is minimised.



Efficient diversificationEfficient diversification

j Efficient diversification takes place in an efficient

portfolio that has the smallest portfolio risk for a

given level of expected return or the largest expected

return for a given level of risk. Investors can specifya portfolio risk level they are willing to assume and

maximize the expected return on the portfolio for

this level of risk.

j Rational investors look for efficient portfolios,

because these portfolios are optimized on the two

dimensions of most importance to investors- return

and risk.



EFFICIENT PORTFOLIOEFFICIENT PORTFOLIO



MARKOWITZ MODELMARKOWITZ MODEL

j Harry M. Markowitz is credited with introducing

new concepts of risk measurement and their

application to the selection of portfolios.

j He started with the idea of risk aversion¶ of averageinvestors and their desire to maximize the expected

return with the least risk.

j Markowitz generated a number of portfolios within a

given amount of money or wealth and given preferences of investors for risk and return.



Cont«Cont«

� Individuals vary widely in their risk tolerance and

asset preferences. Their means, expenditures and

investment requirements vary from individual to

individual.

� Given the preferences, the portfolio selection is not a

simple choice of anyone security or securities, but a

right combination of securities.

� The greater the variability of returns in the portfolio,

the greater is the risk.



4) Markowitz Diversification4) Markowitz Diversification

jHarry M.Markowitz (origin of modern

portfolio approach).

jIt is possible to decrease portfolio risk belowthat obtained via simple diversification

± Use Markowitz diversification

� Select stocks with negative correlation

jIf two stocks have perfect negativecorrelation ( V = -1) it is possible to create a

portfolio with zero risk

± Gains on one stock exactly offset losses from

another



Cont«Cont«

j Assumptions:

1. Investor has a sum of money to invest at

the present time.

2. Money will be invested at for a particular

length of time known as holding period.

3. After the set time he will sell and consume

the proceeds/reinvest/both.



Top performing Mutual funds andTop performing Mutual funds and

their Portfolios :their Portfolios :

jBirla Sun life

jHDFC

jReliance Regular Saving Fund

Portfolio Analysis and Marko

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