File Name: breif and short notes and calculated examples on portfolio analysis and revision .zip
- Portfolio Revision: Meaning, Objectives, Need, Strategies, Constraints
- Stock market index
- Portfolio Management
A stock index , or stock market index , is an index that measures a stock market , or a subset of the stock market, that helps investors compare current price levels with past prices to calculate market performance.
In portfolio management, the maximum emphasis is placed on portfolio analysis and selection which leads to the construction of the optimal portfolio. Portfolio revision is important as portfolio analysis and selection. The financial markets are continually changing.
Portfolio Revision: Meaning, Objectives, Need, Strategies, Constraints
Diversification involves avoiding too much exposure to a single asset or asset type. Diversifying the risks of a portfolio helps reduce downside risk without necessarily decreasing the expected rate of return.
Portfolio risk is measured by the standard deviation of returns, and the correlations between different assets can lead to decreased overall risk when combined. There are two broad categories of investors: individuals and institutions. These include groups such as pension funds, endowments, banks, investments funds, and even charities. Employees of public and private companies have retirement savings managed in accounts that can be either defined benefit or defined contribution.
The final amounts available for retirement will depend on the performance of financial markets. This financial obligation means that the portfolio risk must be managed much more closely by the employer. Asset Allocation : The portfolio manager needs to develop a view on the risk and return expectations of various asset classes. This analysis step can be top-down starting from high-level macroeconomic factors or bottom-up starting from company-specific information.
Decisions are made as to the optimal allocation of the portfolio assets among available asset classes. Security Analysis : Specific securities are chosen for purchase that fit into the asset classes chosen in the previous step. Portfolio Construction : The information from the previous steps is used to create an investment portfolio.
Securities are purchased and trades are executed. The portfolio is monitored and rebalanced periodically to keep its exposures in line with the Investment Policy Statement. Performance is also tracked and reported to the client at regular intervals.
Asset managers can either be Active or Passive. Active asset managers attempt to outperform benchmarks through fundamental and quantitative research. Passive managers simply try to replicate the returns of a market index. There can also be either Traditional or Alternative managers.
Traditional managers focus on creating diversified portfolios for their clients by using long stocks and bonds. Alternative asset managers use leverages, derivatives, etc. In addition to building a portfolio of specific investment assets, there are also pooled investment vehicles that can be purchased. Closed-End Funds , on the other hand, do not create new shares to allow for investors to enter or exit the fund. There are a fixed number of shares in the fund and any new investor that wishes to purchase must buy existing shares from a current owner.
Funds can be classified as Load or No-Load funds depending on whether there is a fee that must be paid to buy or sell shares of the fund. No-Load funds typically charge an annual management fee that is a percentage of total fund assets. Mutual funds are categorized by the assets in which they invest. Funds can be managed either actively or passively, with passive funds trying to closely match a given index through a buy-and-hold approach and active funds doing more buying and selling to try and maximize performance results.
A new investor in a mutual fund buys shares at the end of day Net Asset Value directly from the mutual fund provider, while a new investor in an ETF buys shares on the exchange like they would do for a regular stock. They can be customized to fit any manner of investment or tax strategy. They usually require high minimum investments and have liquidity restrictions on invested assets. There are a number of different types of returns included in the curriculum.
This is simply the total investment gains as a percentage of the starting amount:. This will give you the return for a single holding period, but you will also need to know how to combine multiple return periods. Remember to convert all percentages to decimal values when calculating the geometric mean. One limitation of the arithmetic and geometric means is that they do not take into account the money invested in the portfolio over time. For example, if a portfolio experiences large growth early when its asset base is low and then lower returns in later years after attracting large new cash flows, its performance will look much better than what is experienced by most of the investors who were not around for the earliest years.
Money-Weighted Returns take into account these flows by using the fund in- or out-flows to create a weighted average return. The IRR of a fund can also be useful in this regard. Similar to how it was used in the Quantitative Methods section, the Internal Rate of Return is the discount rate that sets the present value of the cumulative cash flows to zero. It is the discount rate at which. Since this method involves finding the PV of each cash flow, it is sensitive to when funds are invested or removed from the portfolio.
By combining each holding period return into a geometric mean, the TWRR method gives a more robust return figure that is not influenced by the timing of cash flows.
You will sometimes need to compare returns for time periods of varying lengths. Annualizing a return essentially compounds it by the number of times it takes for that period to equal one year. For example, to annualize a monthly return, you would compound it 12 times:. Questions around this calculation typically give you the portfolio components and ask you to calculate the total return. All you do is multiply each component by its weight in the portfolio and add up the results. All of the returns discussed so far do not factor in adjustments that must often be made when dealing with real investments and portfolios.
Net returns are after all fees have been subtracted. Taxes are also relevant to most investments. Post-tax returns are what is left after taxes have been paid. The effects of inflation also impact investor returns. For US equity securities, the smaller the company is, the higher the average return and variance of returns are. In fixed income securities, the longer the maturity of the security, the higher the average return yield and variance of return.
Corporate bonds also return more with higher variance than government bonds of the same maturity. The primary concept to grasp when looking at the risk and return characteristics of different asset classes is that a higher average return with higher variance means that you can not expect to get that increased performance consistently.
A higher variance means you will see wide fluctuations in returns between different years. The primary measurement of the variation of returns is in standard deviations, which are the square root of variance. These are based on a set of common data points that should look familiar from the Quantitative Methods section. Assets that move very differently provide diversification benefits to the portfolio when added together.
Each investor will differ in how they view risk as part of their investment portfolio. When it comes to risk in the portfolio, the calculation is a bit more complex and you should know it, because you will probably get a question on this in your CFA level 1 exam.
To calculate the standard deviation of a 2-asset portfolio, the formula is as follows:. Since there is an infinite number of portfolios you could build based on different weights of asset classes, we need a way to determine what characteristics a portfolio needs to have to meet the needs of a specific investor. By choosing the portfolio with the least risk that meets the necessary return requirements, we ensure that an investor is maximizing their chances of meeting their investment goals.
This is based on the principle of the two-fund separation theorem, which posits that all investors will hold a portfolio that combines two assets, one risk-free portfolio and one portfolio of risky assets. Breaking the portfolio into these components allows us to graph a line showing the expected risk and returns as the portfolio weight of the two assets changes. The line represented by this is the CAL.
The formula for this is:. The approach an investor takes can be determined by their level of risk tolerance and belief that they can achieve superior returns to the market. This is a case of the Capital Allocation Line CAL , where the risky asset in the equation represents the entire market portfolio. The risk an investor takes on by buying risky assets can be broken down into two categories: Systematic and Non-Systematic.
It reflects the impacts of things like the business cycle or political uncertainty. This risk cannot be diversified away. It can be diversified away by purchasing assets with low or negative correlations. Investors should try to avoid or diversify away if possible any risk for which they are not compensated by higher returns.
The curriculum describes several models that investors can use to estimate the return of a portfolio based on the assets they plan to include.
These models can use macroeconomic, statistical, or fundamental factors that can be combined in order to develop the most appropriate estimate of expected return.
A common calculation approach is to find a sum of the return attributed to each return factor multiplied by their respective Betas. One of the most common multi-factor models is the three-factor model developed by Fama and French, which was later expanded to four factors. The original three factors they included were relative size of the company, relative book-to-market value of the company, and the market beta.
The fourth factor added later was security momentum. The simplest type of return generating model is the single factor model. A common model of this type is the emarket model, where returns are estimated based on the exposure to the market:.
Multi-factor models build on this concept by including more factors and their respective betas in order to break down the components of the expected return. Calculating the risk of these portfolios the exam typically will most likely ask for risk calculations for single-factor models due to the complexity of multi-factor formulas is similar to other multiple asset portfolios but simplified slightly because the risk and therefore correlation of the risk-free asset is zero.
As a result, the calculated Beta for a single factor portfolio is:. Interpreting beta is the same as correlation was used in the Quantitative Methods section. A positive market beta means the asset moves in the same direction as the market, while a negative value means they move differently.
Unlike correlation, beta values can be more than 1 and less than Since it is is a simplified view, it relies on a series of assumptions about market behaviors that will not always line up with real-world results.
The primary assumptions of the model include that all investors are risk-averse, utility-maximizing, and fully rational. The CAPM also assumes that there are no transactions costs or taxes and that investments are only held for one, uniform-length holding period. The SML can be represented formulaically as:.
This is a crucial concept for your CFA level 1 exam. The returns calculated using the CAPM and other models can be used in a number of ways related to portfolio management.
The data they provide serve as inputs for several important formulas that show up repeatedly on the exam, and also on the level 2 and 3 exams.
Stock market index
Many new investors are eager to start building their portfolio, but what they may not realize is how important regular portfolio analysis will be to their success. It's harder to save and invest profitably if you aren't prudently overseeing your money. Analyzing your portfolio improves the odds of having enough growth to harvest the financial rewards you need. What's more, portfolio analysis can seem daunting until you get the hang of capital allocation. This basic introduction will better prepare you for the task of assessing your portfolio's health or, if you outsource that job to a professional, understanding what questions to ask about your investments.
Investing in corporate securities is profitable as well as exciting. O ne should not forget the element of risks from investing in individual security. Risk arises when there is a possibility of variation around expected return from the security. As all securities carry varying degrees of risks, holding more than one security at a time enables an investor to spread his risks. The investor hopes that even if one security incurs a loss the rest will provide some protection from an extreme loss. Thus, portfolios or combination of securities are thought of as a device to spread risk over many securities. In olden days, the traditional portfolio managers diversified funds over securities of large number of companies based on intuition.
calculate risk and expected return of various investment tools and the financial assets it means, that investor, for example, can buy or sell a small Commercial paper is a name for short-term unsecured promissory notes issued decisions to perform changes in revising portfolio depend, upon other things, in the.
Portfoilo management refers to the art of selecting the best investment plans for an individual concerned which guarantees maximum returns with minimum risks involved. Equity in a business corporation is represented through the ownership of shares. Establishes Flat yield curve: approximately It then becomes necessary to define properly investment and security analysis … Theintactone 25 May 1 Comment. Need for Portfolio Management.
Diversification involves avoiding too much exposure to a single asset or asset type. Diversifying the risks of a portfolio helps reduce downside risk without necessarily decreasing the expected rate of return. Portfolio risk is measured by the standard deviation of returns, and the correlations between different assets can lead to decreased overall risk when combined.
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