PORTFOLIO MANGEMENT BY GURU PRASAD
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Transcript of PORTFOLIO MANGEMENT BY GURU PRASAD
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Portfolio policy Portfolio policy should consider the
following issues:-
Selection of proper asset classes
The mix of the assets
The range allowed for each assetmix
Risk level of the securities in theasset class
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Different types of investors
Individual investors- treat riskas possibility of losing moneyInstitutional investors- Definerisk as standard deviation or
variability of returnsInd-categorized on theirpsychology like aggressive,confident, uncertain, extrovertIns-categorized on the basis ofbeneficiaries like pension fund orprovident fund
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investors
Ind- investment policies of the investorscan be laid down base on what theinvestors think is best for them
Ins- the investment polices of theinstitutions are determine to a significantextent based on various legalrequirementsInd- Generally become complex becausethey are subject to taxesIns-Most of the major investment
institution are, or the other hand exemptfrom the tax
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Implementing investment
strategiesTrade Motivation
Assessing the market conditions
Establishing initial tradingstrategies
Trading information
FlexibilityAssess effectiveness
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Motivation According to Jack Treynor, key
motives for trading are value,information and cash- flow. Valuetrades are rarely TIMELY, i.e. only on afew occasions. The value traders canuse time according to theirconvenience so that by extending thetime of trading, they can reduce the
cost of trading. Thus they are lesssensitive to time compared to price.As information is liable to be spread
across the market rapidly it loses value
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Trading recommendations A single trading strategy should not be used at
all time. A trader should prioritize and make
contingency plans. One should consider expected costs for
portfolio decision making. Rationalization of brokerage services are
essentialSimilarly , if the trader trades with severalbrokers m he can quickly realize the differencebetween each of them and apply his skills toselect the best
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Types of Goals Short term high priority goals-HOME
LOAN
Long term high priority goals-RETIREMENTlower priority goals-TOUR TO ABROADMoney making goals-SUBSTANTIAL WEALTH
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Investment Constraints Liquidity- Emergency cash
goal spending
income taxesEstate transfer taxesInvestment Flexibility
Tax considerations in investing
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Determinations of
Investment policies Absence of policyTraditional polices-
Income
Income growth
Growth
Aggressive Growth
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Determinations of
Investment policies Multi asset total return policy
selection of proper asset classes
The mix of the assets
The range allowed for each assetmix
Risk level of the securities in theasset classes
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Classical decision making
theory It revolves around three
assumptions
Asset integration-comparisonbetween two prospectiveinvestments
Risk aversion-people prefer lessrisk
Rational expectation- people take
rational decisions
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Psychology of Risk Reference dependence
Mental accounting
Biased Expectations
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Significance of Behavioral
Finance Standard Finance Vs Behavioral
Finance
Behavioral asset Pricing TheoryRisk PremiumsBehavioral Portfolio Theory
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Behavioral asset pricing
model It was developed by Shefrin and
Statman. It was developed as an
alternative to the Markowitz mean variance Portfolio. The behavioralinvestors build their portfolio in apyramid structured adding on a
subsequent level. Each layer isassociated with particular investmentobjective and also reveals the investorsattitude towards risk
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The Investment
Professionals Financial Advisors
Security analysts
money managersMarket makersSecurity Designers
Investment clubs
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Individual investors
Losing money
Unfamiliar instruments
Previous losses in familiarinvestments
Contrary investment
Risk potential Vs actual
Risk and unfamiliarity
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Contrary investment
The Contrarian approach ofinvestment is doing opposite to
what the other players in themarket place are doing. In otherwords the investor adopting a
contrary investment style sells offhis holding when others are in abuying spree and buys whenothers are selling theirinvestments
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Models of IndividualInvestors
The Barnewall two way model
The Bielard, Biehl and Kaiser Five
way model
The life cycle model
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The life cycle model
The life cycle model describes thestages in life as accumulation
phased, consolidation phase,spending phase and gifting phase.The model further assumes thatthe risk tolerance of the individual
and his ingestible surplus do notremain constant and thepreference of the investor keepschanging during the different lifesta es of the investor
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The Barnewall two way model
Passive investors Active investors
The passive investors do not churn theirportfolio frequently to get the returns ontheir portfolios, whereas the active investorscontinuously rebalance their portfolios tocome up with a return of their satisfaction
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The Bielard, Biehl and Kaiser Five waymodel
Individualist-confident and careful Adventurer- go for big bets Guardian-anxious and careful, go
for investment advisor Celebrity -swayed too much by the
trend, do not have any expertise Straight Arrow-halfway between
complete confidence and anxiety
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The life cycle model
Accumulation Phase
Consolidation phase
Spending phase
Gifting phase
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Institutional Investors
Institutional Investors are thefinancial institutions, which collect
and invest money on a long termbasis on behalf of individuals orcorporate. They include pension
funds, life insurance companieswhich write ling term insurancebusiness, investment trusts, andunit trusts.
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Institutional investors
The major institutional investors in Indiaare Mutual funds, Financial Institutions,
Insurance companies and commercialbanks. The Foreign institutionalinvestors are the most influential in theIndian market due to the volume of
transactions executed by them which ismore than any other transactionexecuted by any other marketparticipant
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Investment management
The process can be broken into two steps
Information process
Implementation process
The former deals with the selection of
the stocks whereas the latter deals withthe proper execution of investmentideas and maintaining the values of thestocks
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Drives of investmentpolicies
Asset liability matching
Regulatory and Legal
considerationsTax considerations
Liquidity needs
Unique needs, circumstances andpreferences
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Setting Objectives for theInstitutional investors
Stability of principal
Income
Growth of income
Capital appreciation
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Investment policies ofinstitutional investors
Pension and employee benefitfunds
Endowment funds Insurance funds
Commercial banks
Mutual funds
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Commercial banks
A large part of the funds collectedby the banks in India are invested
n the central governmentsecurities as they are perceived tobe safe as compared to the
investment in the equity andequity linked products
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Mutual funds
During 1999-2000 the Mutualfunds in India managed to show a
tremendous return owing to thesurge in FMCG stocks and otherConvergence stocks
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Mutual funds
Income schemes
Growth schemes
Income cum growth schemes
Tax planning schemes
Open end schemes Closed end schemes