Definition of 'Portfolio Insurance'

1. A method of hedging a portfolio of stocks against the market risk by short selling stock index futures. Portfolio Revision The art of changing the mix of securities in a portfolio is called as portfolio revision. The process of addition of more assets in an existing portfolio or changing the ratio of funds invested is called as portfolio revision Need :

An individual at certain point of time might feel the need to invest more. The need for portfolio revision arises when an individual has some additional money to invest. Change in investment goal also gives rise to revision in portfolio. Depending on the cash flow, an individual can modify his financial goal, eventually giving rise to changes in the portfolio i.e. portfolio revision. Financial market is subject to risks and uncertainty. An individual might sell off some of his assets owing to fluctuations in the financial market.

Constant Ratio An asset allocation strategy in which assets are assigned a fixed percentage in a portfolio and readjusted to their target weights periodically. The readjustment allows the portfolio to remain properly weighted, and forces the sale of outperforming assets and purchase of underperforming assets.

Efficient-Market Hypothesis (EMH) In finance, the efficient-market hypothesis (EMH), or the joint hypothesis problem, asserts that financial markets are "informationally efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made. There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". Portfolio Management Process 1. Create a Policy Statement -A policy statement is the statement that contains the investor's goals and constraints as it relates to his investments.

2. Develop an Investment Strategy - This entails creating a strategy that combines the investor's goals and objectives with current financial market and economic conditions. 3. Implement the Plan Created -This entails putting the investment strategy to work, investing in a portfolio that meets the client's goals and constraint requirements. 4. Monitor and Update the Plan -Both markets and investors' needs change as time changes. As such, it is important to monitor for these changes as they occur and to update the plan to adjust for the changes that have occurred.

Definition of 'Capital Asset Pricing Model - CAPM'

A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).

Portfolio Risks - Measuring Portfolio Risks

One of the concepts used in risk and return calculations is standard deviation, which measures the dispersion of actual returns around the expected return of an investment. Since standard deviation is the square root of the variance, variance is another crucial concept to know. The standard deviation of an investment's expected return is considered a basic measure of risk. If two potential investments had the same expected return, the one with the lower standard deviation would be considered to have less potential risk. Risk measures There are three other risk measures used to predict volatility and return:

Beta - This measures stock price volatility based solely on general market movements. Alpha - This measures stock price volatility based on the specific characteristics of the particular security.

Sharpe ratio - This is a more complex measure that uses the standard deviation of a stock or portfolio to measure volatility.

Markowitz Approach Markowitz put forward this model in 1952. It assists in the selection of the most efficient by analyzing various possible portfolios of the given securities. By choosing securities that do not 'move' exactly together, the HM model shows investors how to reduce their risk. The HM model is also called Mean-Variance Model due to the fact that it is based on expected returns (mean) and the standard deviation (variance) of the various portfolios. Harry Markowitz made the following assumptions while developing the HM mode. 1. Risk of a portfolio is based on the variability of returns from the said portfolio. 2. An investor is risk averse. 3. An investor prefers to increase consumption. 4. The investor's utility function is concave and increasing, due to his risk aversion and consumption preference. 5. Analysis is based on single period model of investment. 6. An investor either maximizes his portfolio return for a given level of risk or maximizes his return for the minimum risk. 7. An investor is rational in nature. Jenson Measure A risk-adjusted performance measure that represents the average return on a portfolio over and above that predicted by the capital asset pricing model (CAPM), given the portfolio's beta and the average market return. This is the portfolio's alpha. In fact, the concept is sometimes referred to as "Jensen's alpha." Portfolio Evaluation Portfolio Assessment is in direct contrast to what is known as performance evaluation, traditional assessment, standardized assessment or summative assessment. Alternative assessment is also known under various other terms, including Authentic assessment Integrative assessment Holistic assessment Assessment for learning

Formative assessment

Formula plan of Portfolio Revision Formula plans are mechanical methods of portfolio management that try to take advantage of price changes in securities that result from cyclical price movements. Formula plans, part of a conservative strategy, are designed primarily for investors who do not wish to take excessive risk but wish to quickly and favorably adjust their portfolio in response to cyclical security price changes.