Introduction

Portfolio management may refer to: portfolio is a combination of securities such

as bonds stocks and other instruments. for example if i have purchase 100 shares of
reliance, one lot of gold and one lot of silver along with few bonds and debenture,
all the above securities comprise my portfolio. PORTFOLIO CONSTRUCTION:
the process of blending together the broad assets classes so as to obtain optimum
return with minimum risk called portfolio construction. There are two approaches
of portfolio construction:- Traditional approach. Modern approach.
We all dream of beating the market and being super investors and spend an
inordinate amount of time and resources in this endeavor. Consequently, we are
easy prey for the magic bullets and the secret formulae offered by eager
salespeople pushing their wares. In spite of our best efforts, most of us fail in our
attempts to be more than average investors. Nonetheless, we keep trying, hoping
that we can be more like the investing legends another Warren Buffett or Peter
Lynch. We read the words written by and about successful investors, hoping to
find in them the key to their stock-picking abilities, so that we can replicate them
and become wealthy quickly.
In our search, though, we are whipsawed by contradictions and anomalies.
In one corner of the investment townsquare, stands one advisor, yelling to us to
buy businesses with solid cash flows and liquid assets because thats what worked
for Buffett. In another corner, another investment expert cautions us that this
approach worked only in the old world, and that in the new world of technology,
we have to bet on companies with solid growth prospects. In yet another corner,
stands a silver tongued salesperson with vivid charts and presents you with
evidence of his capacity to get you in and out of markets at exactly the right times.
It is not surprising that facing this cacophony of claims and counterclaims that we
end up more confused than ever.
The art and science of making decisions about investment mix and policy,
matching investments to objectives, asset allocation for individuals and
institutions, and balancing risk against performance.
Portfolio management is all about strengths, weaknesses, opportunities and threats
in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and
many other tradeoffs encountered in the attempt to maximize return at a given
appetite for risk.
In the case of mutual and exchange-traded funds (ETFs), there are two forms of
portfolio management: passive and active. Passive management simply tracks a
market index, commonly referred to as indexing or index investing. Active
management involves a single manager, co-managers, or a team of managers who
attempt to beat the market return by actively managing a fund's portfolio through
investment decisions based on research and decisions on individual holdings.
Closed-end funds are generally actively managed

Portfolio Management - Technical vs. Fundamental Analysis
There are two schools of thought about how a stock will behave relative to the
market, and like any investment strategy or philosophy, both have their advocates
and adversaries.
Technical analysis, which involves detecting patterns in security prices, goes
on the assumption that the price of a stock - like the price of everything else
- is a matter of supply and demand. Technical analysts, or technicians,
generate and interpret charts of the price and volume histories of stocks to
predict movement in stock prices according to perceived trends.
Fundamental analysis, which examines the earning potential of the company
issuing a stock, goes on the assumption that a share of ownership of a
company has an intrinsic value that is a function of the underlying value of
the company as a whole. Fundamental analysts report which shares are
undervalued by the investor community and which are overvalued, then trust
the market to make corrections.
In the world of stock analysis, fundamental and technical analysis are on
completely opposite sides of the spectrum. Earnings, expenses, assets and
liabilities are all important characteristics to fundamental analysts, whereas
technical analysts could not care less about these numbers. Which strategy works
best is always debated, and many volumes of textbooks have been written on both
of these methods. We'll discuss each in turn.










Portfolio Management - Technical Analysis
Technical analysis is all about trends. Here is a simplified chart showing the
movement of a stock price over 18 months, as well as a trend line:
Figure 12.2


Trends
Figure 12.2 is not intended to be a particularly useful chart for analytical purposes;
however, it demonstrates what a trend line looks like against the day-to-day
changes in a stock price. Specifically, it shows a downtrend; if the stock had
started the period at $18 then risen to $22, it would show an uptrend.

One reason the trend line above is not especially useful from an analytical
standpoint is that it is simply a linear, straight-arrow bullet path. In technical
analysis, trend lines have to be far subtler than that. Technical analysis searches not
only for trends, but also for reversals of trends.
Using a polynomial trend curve, a technician may see a different pattern emerge, as
shown on Figure 3:
Figure 12.3

Saucer
As you can see above, the data line is exactly the same, but at this point a
technician might see a saucer shape, which suggests a trend reversal. A saucer
bottom indicates the stock price has reached its support level, the lowest price at
which it is likely to trade, and it has nowhere to go but up. A saucer top signals
exactly the opposite: the stock has reached its resistance level, the highest price at
which it is likely to trade. The band between the support and resistance levels is
called the trading channel.

Head and Shoulders
Another sign of a trend reversal is the head-and-shoulders pattern:
Figure 12.4


You do not need a trend line for this: the data line tells the story. The stock price
glided up until it formed its first shoulder in May 2001, then it dropped off; then it
surged to form a higher peak - its head - in December. It then fell off again and
surged one more time - weakly - to form the second shoulder in March 2002.
Technicians consider this a bearish chart. An inverted head-and-shoulders would
be bullish.
Breakout
Technicians have an old saying: "The trend is your friend - 'til it comes to an end."
That end is signaled by a breakout, which happens when a stock penetrates through
a support or resistance level. If a stock price breaks out through a resistance level
and is accompanied by higher-than-usual trading volumes, technicians consider
this a bullish indicator. It means, according to technical analysis, that the stock is
now looking for a new resistance level, and it may be able to continue climbing on
momentum for quite some time.



Moving Average
One other type of trend line that technicians consider is the moving average, which
shows changes in the average share price over a given period. Technicians believe
that a stock price is likely to regress back to that average - good news to anyone
who bought the stock below that line:
Figure 12.5


In this example, anyone who bought the stock in July 2001, when it was trading
below its four-month moving average, would have been amply rewarded later on.
Accumulation/Distribution Line
Stock price is just one component of technical analysis. Volume is also important
because, according to technicians, changes in volume precede changes in price.
Right before a stock price gains, there may be a period of increased volume. One
key volume indicator is the accumulation/distribution line, which identifies
divergences between stock price and volume flow.
If the price is declining but the volume is increasing, it is a bullish sign.
When price gains while volumes decrease, it is bearish.

Overbought and Oversold
Technical analysis is as much an art as a science. Sometimes a stock will be
trading higher than technicians can account for using their price and volume charts.
They will then call the stock "overbought" rather than say "I'm wrong."

The theory is that if all investors who want to buy the stock have already bought it,
then there are only sellers left in the market, and so the price must drop. Similarly,
a stock that is trading lower than can be accounted for by technical analysis is said
to be oversold and is expected to rise in price.
Can Technical Analysis Boost Portfolio Returns?
A recent white paper authored by David Smith, Christophe Faugre, and Ying
Wang, entitled, Head and Shoulders above the Rest? The Performance of
Institutional Portfolio Managers who Use Technical Analysis, may help to change
the way technical analysis is thought of in the world of asset management. In a
broad-based study examining two decades worth of returns, the authors found that
fund managers who employed technical analysis, which relies on the study of price
and volume data to predict the future direction of stocks and other financial
instruments, delivered higher returns than those who did not.
Technical analysis has long been treated with a certain degree of scorn or at
least skepticism by the stock market cognoscenti. Perhaps it is the suggestion
implicit in technical analysis that something other than rigorous fundamental
analysis is behind all the buying and selling. Chartists, as they are known, see
asset prices as a function of supply and demand, and while technical analysts
generally agree with the efficient market hypothesis (EMH) insofar as markets
quickly reflect all available information, it is at this point that the disciplines part
ways. Technicians believe that price patterns tend to repeat over time and, as a
result, are somewhat predictable. The repetitive behavior of markets is a result of
the irrationality of investors. This irrationality mainfests itself in behavioral biases
that are, in the view of technicians, exploitable.
Past studies of the efficacy of technical analysis came to a range of conclusions
and no firm consensus. Eugene Fama and Marshall Blume, in Filter Rules and
Stock Market Trading (1966), found that technical analysis did not beat simple
buy-and-hold strategies after transaction costs. More recent studies, including a
paper by William Brock, Josef Lakonishok, and Blake LeBaron entitled Simple
Technical Trading Rules and the Stochastic Properties of Stock Returns (1991),
suggest some benefit from trading on technical indicators, including moving
averages and trading range breaks.
Smith, Faugre, and Wang all professors at the School of Business at the State
University of New York at Albany take a different, more holistic approach than
prior studies. Rather than testing individual technical trading rules, they simply
relied on portfolio managers assertions about whether or not, and to what extent,
they employed technical analysis in their investment process. The authors sample
includes 10,452 actively managed US equity, global equity, US balanced, and
global balanced portfolios. They find that technical analysis was utilized to some
degree by about one-third of the managers surveyed, with US equity fund
managers the most avid users and US balanced fund managers the least frequent
users. There were no notable differences in the use of technical analysis by market
capitalization of holdings.
Examining performance between 1993 and 2012, the authors considered several
different performance metrics and found mean and median alpha values, as well as
volatility, to be consistently higher for those funds using technical analysis. They
conclude:
[The] cross-section of portfolios managed using technical analysis shows
remarkably elevated skewness and kurtosis values relative to portfolios that do not
use technical analysis. In the presence of the former, the latter can be
advantageous.
While the paper suggests that technical analysis may indeed boost portfolio
returns, it is not clear whether it also extends careers. Over the course of their
study, the authors found that 55% of those disavowing the use of charts were still
in business, while only 48% of those managers who rated technical analysis as
very important had survived. Although the authors convincingly demonstrate
that fund managers might enhance their portfolios performance through the use of
technical analysis, they dont tell us which trading rules are most effective. And for
those who have successfully employed technical analysis, the incentives to divulge
their secret sauce are few.
















Portfolio Management - Fundamental Analysis
Fundamental analysis is a very different approach. The analysts in your broker-
dealer's equity research department rely more on quarterly and annual reports
provided by companies.

Key Financial Statements
Annual and quarterly reports contain two key financial statements:
Balance sheet: It shows assets, or what a company owns, and liabilities, or
what it owes. The amount by which assets exceed liabilities is called
shareholders' equity. A balance sheet is a snapshot of the company's
solvency as of a given date, usually the last date in the fiscal quarter.
Income statement: It shows revenue, or the money coming in, and expenses,
or the money going out. The amount by which income exceeds expenses is
called earnings. Generally, expenses related to costs of goods sold and to
selling, general and administrative purposes are subtracted from revenue
first. The result is earnings before interest and taxes (EBIT). Then interest
expense is taken out and the result is earnings before taxes (EBT). Then tax
expense is taken out and what is left is net profit,which can be distributed to
shareholders as dividends or reinvested in the business. An income statement
reflects a company's earnings for a period of time - every three months for
all U.S.-headquartered companies












Here's what the top half of a balance sheet - the part that focuses on assets - looks
like:

JKL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(US$ MILLIONS)
YEARS ENDED DECEMBER 31, 2004 AND 2005

2005 2004
ASSETS
Current assets
Cash and cash equivalents 10 12
Accounts receivable 44 49
Inventory
1
19 28
Total current assets 73 89
Property, plan and equipment, 600 600
Less accumulated depreciation
2
(240) (200)
Net property 360 400
Intangible assets, less amortization 180 200
Total assets 613 689

The astute reader will be looking for footnotes to go with those superscript
numbers on the "Inventory" and "Less accumulated depreciation" lines. If that's
you, then you might have a future as a fundamental analyst. Nevertheless, you can
stop looking - those superscript numbers are for demonstration purposes only. Still,
you need to know what could be in those footnotes and why they are crucial to
fundamental analysis.






Fundamental analysis of a business involves analyzing its financial statements
and health, its management and competitive advantages, and its competitors and
markets. When applied to futures and forex, it focuses on the overall state of the
economy, and considers factors including interest rates, production, earnings,
employment, GDP, housing, manufacturing and management. When analyzing a
stock, futures contract, or currency using fundamental analysis there are two basic
approaches one can use; bottom up analysis and top down analysis.
[1]
The term is
used to distinguish such analysis from other types of investment analysis, such as
quantitative analysis and technical analysis.
Fundamental analysis is performed on historical and present data, but with the goal
of making financial forecasts. There are several possible objectives:
to conduct a company stock valuation and predict its probable price
evolution,
to make a projection on its business performance,
to evaluate its management and make internal business decisions,
to calculate its credit risk.















Investors may use fundamental analysis within different portfolio management
styles.
Buy and hold investors believe that latching onto good businesses allows
the investor's asset to grow with the business. Fundamental analysis lets
them find 'good' companies, so they lower their risk and probability of wipe-
out.
Managers may use fundamental analysis to correctly value 'good' and 'bad'
companies. Eventually 'bad' companies' stock goes up and down, creating
opportunities for profits.
Managers may also consider the economic cycle in determining whether
conditions are 'right' to buy fundamentally suitable companies.
Contrarian investors distinguish "in the short run, the market is a voting
machine, not a weighing machine".
[2]
Fundamental analysis allows you to
make your own decision on value, and ignore the market.
Value investors restrict their attention to under-valued companies, believing
that 'it's hard to fall out of a ditch'. The value comes from fundamental
analysis.
Managers may use fundamental analysis to determine future growth rates for
buying high priced growth stocks.
Managers may also include fundamental factors along with technical factors
into computer models (quantitative analysis).















5 Important Elements in Fundamental Analysis
What is fundamental analysis?
Why use fundamental analysis?
The true value of a stock?
5 key factors to look for
Buying at the right price
Fundamental analysis is critical component in stock analysis. It is quite accessible,
extremely valuable and you actually don't need a finance degree to get a basic
understanding of it. The problem of fundamental analysis is however that it can
very easily get quite complicated, but it doesn't have to be.

What is a Fundamental Analysis?
A fundamental analysis is all about getting an understanding of a company, the
health of its business and its future prospects. It includes reading and analyzing
annual reports and financial statements to get an understanding of the company's
comparative advantages, competitors and its market environment.

Why use fundamental analysis?
Fundamental analysis is built on the idea that the stock market may price a
company wrong from time to time. Profits can be made by finding underpriced
stocks and waiting for the market to adjust the valuation of the company. By
analyzing the financial reports from companies you will get an understanding of
the value of different companies and understand the pricing in the stock market.
After analyzing these factors you have a better understanding of whether the price
of the stock is undervalued or overvalued at the current market price. Fundamental
analysis can also be performed on a sectors basis and in the economy as a whole.
The true value of a stock?
For a fundamental analyst, the market price of a stock tends to move towards its
'intrinsic value', which is the 'true value' of a company as calculated by its
fundamentals. If the market value does not match the true value of the company,
there is an investment opportunity.
Example of this is that if the current market price of a stock is lower than the
intrinsic price, the investor should purchase the stock because he expects the stock
price to rise and move towards its true value. Alternatively, if the current market
price is above the intrinsic price, the stock is considered overbought and the
investor sells the stock because he knows that the stock price will fall and move
closer to its intrinsic value. To determine the true price of the company's stock, the
following factors need to be considered.
5 key factors to look for
1. Earnings
The key element all investors look after is earnings. Before investing in a
company you want to know how much the company is making in profits. Future
earnings are a key factor as the future prospects of the company's business and
potential growth opportunities are determinants of the stock price.
Factors determining earnings of the company are such as sales, costs, assets and
liabilities. A simplified view of the earnings is earnings per share (EPS). This is a
figure of the earnings which denotes the amount of earnings for each outstanding
share.

2. Profit Margins
Amount of earnings do not tell the full story, increasing earnings are good but if
the cost increases more than revenues then the profit margin is not improving. The
profit margin measures how much the company keeps in earnings out of every
dollar of their revenues. This measure is therefore very useful for comparing
similar companies, within the same industry.

Higher profit margin indicates that the company has better control over its costs
than its competitors. Profit margin is displayed in percentages and a 10 percent
profit margin denotes that the company has a net income of 10 cents for each dollar
of their revenues.
To get better understanding of profit margins it is good to compare two companies
with alternative margins, see table below.



3. Return on Equity (ROE)
Return of equity (ROE) is a financial ratio that does not account for the stock
price. Since it ignores the price entirely it is by many thought of as THE most
important financial measure. It can basically be thought of as the parent ratio that
always needs to be considered.
This ratio is a measure of how efficient a company is in generating its profits. It is
a ratio of revenue and profits to owners' equity (shareholders are the owners).
Specifically it is:

An easy example of this is that if company A and company B both generate net
profits of $1 Million but company A has equity of $10 Million but company B has
equity of $100 Million. Their ROE would be 10% and 1% respectively meaning
that company A is more efficient as it was able to produce the same amount of
earnings with 10 times less equity.



The reason for why this measure is so important is because it contains information
about several factors, such as:
Leverage (which is the debt of the company)
Revenue, profits and margins
Returning values to shareholders
Good approximation is that ROE should be 10-40% greater than its peer.

4. Price-to-Earnings (P/E)
When taking the current market price into consideration, the most popular ratio is
the Price-to-Earnings (P/E) ratio. As the name suggest it is the current market price
divided by its earnings per share (EPS). It is an easy way to get a quick look of a
stock's value.
A high P/E indicates that the stock is priced relatively high to its earnings, and
companies with higher P/E therefore seem more expensive. However, this
measure, as well as other financial ratios, needs to be compared to similar
companies within the same sector or to its own historical P/E. This is due to
different characteristics in different sectors and changing markets conditions.
This ratio does not tell the full story since it does not account for growth.
Normally, companies with high earnings growth are traded at higher P/E values
than companies with more moderate growth rate. Accordingly, if the company is
growing rapidly and is expected to maintain its growth in the future this current
market price might not seem so expensive. This is the reasoning for the existence
of different investment styles; Value vs. Growth stocks.
Example
While some sectors normally have low P/E measures, other sectors commonly
have higher ratios. For example, utilities commonly have P/E ranging from 5 to 10
while technology companies commonly have a P/E ratio ranging from 15 to 20 or
above. This is due to expectations in the market about the sector and its earnings-
growth possibilities. The utility sector has stable earnings and is not expected to
grow rapidly while technology companies are expected to grow faster and tend to
need less capital for its growth.
In order to simplify, the following table illustrates four companies in two
sectors with alternative figures.

It is not very appropriate to compare Apple with GDF Suez as Apple has a growth
rate of 11 times more than GDF. It is more appropriate to compare Apple with
Google. In that relation, Apple seems cheaper than Google by the look of the P/E.
Now you should ask why that could be? -is this bargain or are some other reason
why Apple is priced lower than Google. One suggestion might be that the market
expects Google to have more earnings-growth in the coming future and Apple's
previous earnings growth is not expected to grow much further.

In order to account for growth, the P/E ratio can be modified into the
Price/Earnings to Growth (PEG) ratio. A PEG ratio is calculated by dividing the
stock's P/E ratio by its expected 12 month growth rate. A common rule of thumb is
that the growth rate ought to be roughly equal to the P/E ratio and thus the PEG
ratio should be around 1. A relatively low PEG ratio indicates an undervalued
stock and a PEG ratio much greater than 1 indicates an overvalued stock.
The PEG ratio can be very informative figure, especially for fast growing and
cyclical companies. In this one ratio you get an understanding of the company's
earnings, growth expectations and whether it is trading at a reasonable price
relative to its fundamentals.

5. Price-to-Book (P/B)
A price-to-book (P/B) ratio is used to compare a stock's market value to its book
value. It can be calculated as the current share price divided to the book value per
share, according to previous financial statement. In a broader sense, it can also be
calculated as the total market capitalization of the company divided by all the
shareholders equity.
This ratio gives certain idea of whether you are paying too high price for the stock
as it denotes what would be the residual value if the company went bankrupt today.
A higher P/B ratio than 1 denotes that the share price is higher than what the
company's assed would be sold for. The difference indicates what investors think
about the future growth potential of the company.


Buying at the right price?
In the long run the stock price should reflect its fundamental true value. However
in the short run a stock might have great fundamentals but still be moving in wrong
direction. This can be due to other factors, such as news releases and changes in
future outlook, which also have effect on the price. Trends in the market and
investors emotions also effect the short-term fluctuation in stock prices resulting in
the current market price deviating from its true value.
One question that is important to consider is: "What is the difference between a
great business and a great investment?" -the answer is "price". If you pay too high
price for even the best stock in the world, you will never make a good return on
your investment. Therefore, a great investment does not likely have a high price.
The point of this question is that the price you pay for a stock does matter
enormously; it is the most important factor in your return. Accordingly, doing your
fundamental analysis (thoroughly) is of a great importance when making your
investments.
When determining whether a company's stock is a good investment, fundamental
analysis is a great toolbox to reach a conclusion.