PORTFOLIO

MANAGEMENT: AN
OVERVIEW
Portfolio Approach to Investing
• Evaluating individual investments by their contribution to the risk &
return to an investor’s portfolio
• Alternative is to examine risk & return of individual investments in
isolation

Put simply, an investor holding a single stock because it offers high

return, is not taking a portfolio prespective and shall not get higher
return because the risk it has can be diversified away
• Prof Henry Markovitz’, Treynor, Sharpes work proved that risk is
reduced when more securities are added to portfolio.

This is ‘Diversification’ !
Diversification Ratio = Avg S.D of a security from equally weighted portfolio/ S.D of individual security

Remember, diversification is only useful at times when markets are

operating normally and not under crisis or contagion effect!
Types of Investors
• Individuals & Institutions are the two broadest types.
• Individual investor’s investment ambitions are dissimilar, however for
institutions they are largely the same and can be grouped.
• Within Institutions, we have;
• Endowments
• Foundations
• Banks
• Insurance companies
• Investment companies/mutual funds
• Sovereign wealth funds
• Defined Benefit/Contribution plans
Defined Contribution & Defined
Benefit plans
• Defined contribution, the employer firms contribute a particular amount to
employee’s retirement account with no liability or promise on the
final/terminal value of the assets. Investments are choosen by the employee.

• Defined Benefit, employer is liable for the final/terminal value of the

employee plan assets. Investments are dependent on the employer.

E.g. stated retirement benefit = 2% of last annual salary for each year of
service after retirement until death.
If final salary is 100,000; he will receive 100,000 x 2% x 20 = 40,000
Steps in Portfolio Management
Process
• Planning (Investment Policy Statement a.k.a IPS)
• Should specify objective benchmark for performance management
• Should be updated every few years or whenever investor circumstances change

• Execution
• Analysis of available investment opportunities; asset classes.
• Top Down Analysis and Bottom’s up Analysis

• Feedback
• Monitoring of portfolio performance and rebalancing
• Rebalancing will occur if a) risk/return characteristics of asset classes change; b) investor
circumstances change; c) actual weights of assets change due to their change in prices