CH3: Introduction to Portfolio Management
1. What is a Portfolio?
Portfolio refers to investing in a group of securities rather than investing in a single
security. “Don’t Put all your eggs in one basket”
Portfolio help in reducing risk without sacrificing return.
2. Portfolio Management
Portfolio Management is the process of creation and maintenance of investment
portfolio.
Portfolio management is a complex process which tries to make investment activity
more rewarding and less risky.
3. Major tasks involved with Portfolio Management
Taking decisions about investment mix and policy
Matching investments to objectives
Asset allocation for individual institution
Balancing risk against performance
4. Phases of Portfolio Management
Portfolio management is a process of many activities that aim to optimize investment.
Five phases can be identified in the process:
1. Security Analysis.
2. Portfolio Analysis.
3. Portfolio Selection.
4. Portfolio revision.
5. Portfolio evaluation.
Each phase is essential and the success of each phase is depend on the efficiency in
carrying out each phase.
1. Security Analysis.
Security analysis is the initial phase of the portfolio management process. There are
many types of securities available in the market including equity shares, preference
shares, debentures and bonds. It forms the initial phase of the portfolio management
process and involves the evaluation and analysis of risk return features of individual
securities. The basic approach for investing in securities is to sell the overpriced
securities and purchase under priced securities. The security analysis comprises of
Fundamental Analysis and technical Analysis.
2.Portfolio Analysis
A portfolio refers to a group of securities that are kept together as an investment.
Investors make investment in various securities to diversify the investment to make it
risk averse. A large number of portfolios can be created by using the securities from
desired set of securities obtained from initial phase of security analysis.By selecting
the different sets of securities and varying the amount of investments in each security,
various portfolios are designed. After identifying the range of possible portfolios, the
risk-return characteristics are measured and expressed quantitatively. It involves the
mathematically calculation of return and risk of each portfolio.
3. Portfolio Selection
During this phase, portfolio is selected on the basis of input from previous phase
Portfolio Analysis. The main target of the portfolio selection is to build a portfolio that
offer highest returns at a given risk. The portfolios that yield good returns at a level of
risk are called as efficient portfolios. The set of efficient portfolios is formed and from
this set of efficient portfolios, the optimal portfolio is chosen for investment. The
optimal portfolio is determined in an objective and disciplined way by using the
analytical tools and conceptual framework provided by Markowitz’s portfolio theory.
4. Portfolio Revision
After selecting the optimal portfolio, investor is required to monitor it constantly to
ensure that the portfolio remains optimal with passage of time. Due to dynamic
changes in the economy and financial markets, the attractive securities may cease to
provide profitable returns. These market changes result in new securities that
promises high returns at low risks. In such conditions, investor needs to do portfolio
revision by buying new securities and selling the existing securities. As a result of
portfolio revision, the mix and proportion of securities in the portfolio changes.
5. Portfolio Evaluation
This phase involves the regular analysis and assessment of portfolio performances in
terms of risk and returns over a period of time. During this phase, the returns are
measured quantitatively along with risk born over a period of time by a portfolio. The
performance of the portfolio is compared with the objective norms. Moreover, this
procedure assists in identifying the weaknesses in the investment processes.
