Portfolio Management

Unit – 1Session No.2

Topic: Portfolio Management Process

Session Plan• Recap the Previous Session• What is Portfolio Management Process?• What is Planning Step?– Four Stages in Planning Step– Investor’s Objectives and Constraints– Investment policy Statement– Capital Market Expectations– Strategic Asset Allocation

• What is a Portfolio?• List out the Securities.• What is an Investment?• List out the characteristics of Investment• What is Investment Management?• What are the different types of Investors?• What are the distinguish characteristics of

Investors?

Recap

What is a Portfolio Management Process?• Involves decisions an active or passive

investment approach• Relationships between various investment

alternatives• Investor is to hold an optimal portfolio• Three elements:– Planning Step– Execution Step– Feed back Step

Give elements of Portfolio management process.

What is a Portfolio Management Process?Planning Step• Understanding client

needs• Preparing an

investment policy statement (IPS)

Execution Step• Asset allocation• Security analysis• Portfolio construction

Feedback Step• Portfolio monitoring

and rebalancing• Portfolio measurement

and reporting

What is a Portfolio Management Process?

What is a Planning Step?• Investor related input factors – Investor Objectives– Constraints and, – Preferences

• Economic, Social, political consideration • To attainment of Investor’s Objectives

What is general objective of an investor? What kind constraints generally faced by an

investor?

What is a Planning Step?• Planning Step – Stages:

A. Identification and specifying the Investor’s Objectives and Constraints

B. Creating the Investment Policy StatementC. Forming Capital Market ExpectationD. Creating the Strategic Asset Allocation

What is a Planning Step?A.Identification and specifying the

Investor’s Objectives and Constraints• Investment Objectives – Desired

investment Outcomes• Constraints – Limitations (Internal &

External)• Internal – Client’s Specific Liquidity

needs, time and unique• External – Tax issues and legal &

regulatory requirements

What is a Planning Step?B. Creating the Investment Policy Statement• Governing document for all investment decision

making• Includes –• Brief client description• Purpose of establishing policies and guidelines• Duties and responsibilities of parties• Statement of investment goals, objectives and

constraints• Schedule of review• Performance measures• Guidelines for rebalancing the portfolio on feedback

What is a Planning Step?B.Creating the Investment Policy Statement• Elaboration of Investment Strategy – Clarifies

the basis for investment Decisions.• Three Approaches:

a. Passive Investment Approach – Does not react to changes in Capital market expectations

b. Active Investment Approach – Portfolio manager will respond to changing CME

c. Semi active , risk-controlled active or enhanced index approach

What is a Planning Step?C.Forming Capital Market Expectation• Long run forecast• Risk and return characteristics• Asset classes• Maximize expected return and minimize

risk

What is a Planning Step?D.Creating the Strategic Asset Allocation• Determine target asset class weights• Combine IPS and Capital market

expectations• Specification of risk control mechanism

(Single-period and Multi-period perspectives)• Single period – Advantage of Simplicity• Multi-period – Liquidity and Tax

considerations

Summarizing• What is the need for investment objectives?• Give an example for Internal and External

Constraints.• What is IPS?• How the investment strategies broadly

categorized?• What is the need for the forming capital

expectations?• What is Asset Allocation?