Managing a Stock

Portfolio: A Worldwide
Issue
(Chapter # 11)
A Global Perspective
In todays investing world, investors cross borders
more and more and the investing has became more
sophisticated.

Now, we truly are in the age of globalization.

Investors increasingly recognize that they should
take a global perspective. So, in recent years,
investors portfolio in foreign securities has largely
increased.

Foreign markets are not same, emerging markets

are generally much more risky than developed
economies.
The Impact of the
Overall Market on Stock
Aggregate market movement remain the
largest single factor explaining fluctuations
in both individual stock price and portfolio
stocks.

The impact of the market on every investor

in common stocks is pervasive and
dominant, and must be fully appreciated
by investors if they are to be successful.
Building Stock Portfolios
Investors often consider the investment decision
based on objectives, constraints and preferences.
It is consisting of two steps:

1. Asset Allocation
2. Security selection

Asset Allocation: Refers to allocating total

portfolio to various assets classes.
Security selection: Refers to choice of specific
securities within each asset class.
Investors Investment
Strategies

There are two common investment

strategies are adopted by the investors:

1. Passive Management Strategy

2. Active Management Strategy
Passive Management
Strategy
A strategy whereby investors do not actively
seek out trading possibilities in an attempt to
outperform the market. Its simply aim to do as
well as market.

Passive investment management does not try

to find undervalues stock, nor does it try time
the market. Instead, passive investment is
concerned with achieving the returns
available in various market sectors at
minimum cost.
Passive Management
Strategy
Buy-and-hold Strategy: An investor buy
stocks and basically holds them until some
future time in order to meet some objectives.

The emphasis is on avoiding transaction costs

and additional search cost.

The investor believes that such a strategy will,

over some period of time, produce results as
good as alternatives that require active
management.
Passive Management
Strategy
Index fund: An increasing amount of mutual
fund and pension fund assets can be
described as passive equity investment.

A stock-index fund may consists of all the

stock in a well known market average such as
the S&P 500 composite stock index.

In index fund, expenses are kept minimum

and can be run efficiently by a small staff.
Active Management Strategy
A strategy designed to provide additional
return by trading activities.

Active management strategy assumes that

investors possess analytical or judgmental
skills, superior information, or the ability or
willingness to do what others are unable to
do.
Active Management
Strategy
There are three components of the active
approach to stock selection and management.

1. Security Selection
2. Sector Analysis
3. Market Timing
Security Selection
Security selection: Refers to choice of
specific securities within each asset class.

Anactive portfolio managementtechnique

that focuses on advantageous selection of
particularstock rather than on broad asset
allocation choices.
Earning per share in Stock
Selection
Investors should carefully study a companys
earning, and estimated of earnings, before
investing.

On the most important component of stock

selection is the forecast of earnings per share
for particular companies because of the
widely perceived linkage between expected
EPS and stock return.
Growth Stock and
Value Stock
Value Stocks: Stocks whose prices are
considered cheap relative to earnings, book
value and other measures thought indicative
of values.

Growth Stocks: Stocks that emphasize

expectations about future growth in earnings.
Security Analyst and
Stock Selection
Security Analyst: A financial professional
who studies various industries and companies,
providing research and valuation reports, and
making buy, sell, and hold recommendations.
Sell side analyst: Asell-side analystworks
for a brokerage firm and evaluates companies
for future earnings growth and other
investment criteria.
Buy-sideAnalyst: Is a term used in
investment banking to refer to advising
institutions concerned withbuyinginvestment
services.
Problem with Security
Analyst
Conflicts of Interest
1. Analyst Compensation: Analyst
compensation is associated with the
performance that their ratings generate.
2. Ownership: analysts and employees of the
investment bank may own the very stocks
that they are recommending.
Sector Rotation
An active strategy that is similar to stock
selection is group or sector rotation.

This strategy involves shifting sector weights

in the portfolio in order to take advantage of
those sectors that are expected to do relative
better, and avoid or deemphasize those
sectors that are expected to do relatively
worse.
Market Timing
Market timing is the act of moving in and out of
the market or switching between asset classes
based on using predictive methods such
astechnical indicatorsor economic data.

Considerable research now suggests that the

biggest risk of market timing is that investors will
not be in the market at critical times, thereby
significantly reducing their overall returns.
Why Market Timing is so Risky ?
Research shows that, if an investor remained
fully invested in the Standard & Poors 500
Index from 1995 through 2014, he would have
earned a 9.85% annualized return. However, if
he missed only 10 of the best days in the
market, his return would have been 6.1%.
Some of the biggest upswings in the market
occur during a volatile period when many
investors flee the market.