Cfa Review Course The Portfolio Management Process Sandy G 1227785626204616 8

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By:- Yogesh dundoo (29) Angad singh (1) Aditya (20) Khaleem (38) Construction of a Portfolio

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Transcript of Cfa Review Course The Portfolio Management Process Sandy G 1227785626204616 8

Page 1: Cfa Review Course The Portfolio Management Process Sandy G 1227785626204616 8

By:-

Yogesh dundoo (29)

Angad singh (1)

Aditya (20)

Khaleem (38)

Construction of a Portfolio

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What is a Portfolio.?A portfolio is an appropriate mix of

collection of investments held by institutions or a private Individual.

The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts.

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FOR MORE INFO...

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What is Portfolio management

Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions.

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Strategy used by the portfolio managers

Many strategies have been developed to form a portfolio.

1.equally-weighted portfolio An equally weighted portfolio would have

the same amount of money invested in each unique stock. Therefore, the number of shares of each stock would be different, with more shares of cheaper stocks

2.capitalization-weighted portfolio Long-term financing used by a firm

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Strategy used by the portfolio managers

price-weighted portfoliooptimal portfolio (for which the

Sharpe ratio is highest). Minimize Risk & Maximizing Return

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Building a portfolio from specifications

Matching the client with the markets

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A dynamic flow

Investor objectives and constraints

Economic & social conditions

Portfolio policies, strategy

Capital market ex-pectations

Build the optimal portfolio

Investment results.

Portfolio Performance

Is the world changing?

Good enough?

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Top - down

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Three step process

Economic & social conditions

Capital market ex-pectations

Macroeconomy, big picture

Three step process

Three step process

Industries, sectors

Company & Stock

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The Investor

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If she wants high growth, high returns … portfolio policy will be aggressive. Buy stocks and venture capital, risky assets.

If she wants safety and security,… portfolio policy will stress low-risk assets, invest in bonds and cash.

Investor objectives and constraints

Portfolio policies, strategy

Style: ACTIVE, trade often

Style: PASSIVE. Just buy and hold, for years

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The Investor

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Who should be an aggressive investor, by necessity?

(who wants money to grow fast)

Who should stick to low-risk assets, invest in bonds and cash.

(who doesn’t want any losses?)

Investor objectives and constraints

Portfolio policies, strategy

Style: ACTIVE, trade often

Style: PASSIVE. Just buy and hold, for years

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Optimize or maximize?

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The investor’s objectives could be aggressive: thus maximize the RETURNS.

If the investor wants to be safe, you minimize the RISK.

Most investors are in between, they want maximum return for no risk.

Unrealistic. Dreamers.

Build the optimal portfolio

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Study the results

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Good enough? Maintain policyNot good? Rethink policy. Not necessarily

“change” … just evaluate if still relevant.Measure performance: as good as

expected? Better than expected? Better than the market as a whole? Better than other investors?

Investment results. Portfolio performance.

Investment results. Portfolio performance.

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What the client can buy

Investable instruments

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Risk-return tradeoff

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Risk-return tradeoffRisk-return tradeoffRisk-return tradeoffRisk-return tradeoff

Low risk . . . . . . . . . . . . . . . . . High risk

High

..

..

..

..

LowRet

urn

s in

Per

cen

t %

T-BillsBonds

StocksFutures

Venture capital

New ideas !

??

??

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IF Client is conservative

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Pension fundUniversity endowmentHospital retirement fundTeachers’ benefit fundCooperative’s savingsCommunity chestSavings & Loan association

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Pension fund segments

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Stocks30%

Bonds60%

Cash10%

Looks conversative

to me ...

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Client is Daring?

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Dashing, debonaireFoolish, spendthriftTotally aggressiveYoung and restlessDabbles in futures for thrill

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Aggressive

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High-flying stocks target 100% returns, junk bonds yield over 20%, futures zoom ...

Hi-Yield Bonds

30%

Hi-flying stocks

60%

Futures10%

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All kinds of thingsAll kinds of things

Low risk . . . . . . . . . . . . . . . . . . . . High risk

High

..

..

..

..

LowRet

urn

s in

Per

cen

t %

T-BillsBonds

StocksReal estate

Venture capCollectibles

??

??

FuturesBiotech

Dot.Coms

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Long-term expectations

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May not hold true, in short-termHighest to lowest returns...

Venture CapitalStocks Real EstateBondsMoney-market / cash

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Major Markets, 1986-’94Major Markets, 1986-’94

Pacific Basin

10 15 20 25 30 35 40 45 % St.Dev.

Rate of return %

18

16

14

12

10

8

6Canada

USA

Europe

Italy

Spain

Japan

Australia

U.K.

France

World

Europe & Pacific

“Ideal” assets in this sector are elusive, hard to find.

There’s plenty down here that you don’t want to buy...

Exam question: why is it wise to confine your search to the efficient frontier?

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