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Addiye Assignment

The document outlines the principles of portfolio evaluation and management, emphasizing the importance of assessing performance against investor objectives. It contrasts active and passive management strategies, as well as strategic and tactical asset allocation, highlighting their advantages and disadvantages. Additionally, it details factors for monitoring portfolios, risk-adjusted performance measures, and steps for portfolio managers to evaluate and adjust portfolios effectively.

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hworkineh76
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6 views4 pages

Addiye Assignment

The document outlines the principles of portfolio evaluation and management, emphasizing the importance of assessing performance against investor objectives. It contrasts active and passive management strategies, as well as strategic and tactical asset allocation, highlighting their advantages and disadvantages. Additionally, it details factors for monitoring portfolios, risk-adjusted performance measures, and steps for portfolio managers to evaluate and adjust portfolios effectively.

Uploaded by

hworkineh76
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1: Principles of Portfolio Evaluation and Management

1. Portfolio Evaluation

Portfolio evaluation involves assessing the performance of an investment portfolio to determine if it


aligns with the investor's objectives (e.g., risk tolerance, return expectations). It includes analyzing
returns, risks, and diversification effectiveness.Importance: It ensures the portfolio remains optimal over
time, identifies underperforming assets, and informs decisions for rebalancing or revising strategies to
meet evolving goals.

2. Active vs. Passive Portfolio Management

- Active Management:

- Definition: Seeks to outperform the market by exploiting mispriced securities through frequent trading
and deviant predictions.

- Advantages: Potential for higher returns, flexibility in market inefficiencies.

- Disadvantages: Higher costs (taxes, turnover),

reliance on accurate forecasts, and psychological stress.

- Passive Management:

- Definition: Mimics a market index with minimal changes, assuming market efficiency.

- Advantages: Lower costs, tax efficiency, simplicity.


- Disadvantages: Limited upside potential, no protection during market downturns.

3.Strategic vs. Tactical Asset Allocation

- Strategic Asset Allocation:

- Long-term, fixed allocation across asset classes (e.g., 35% stocks, 45% bonds) based on investor goals.

- Focuses on maintaining target weights despite market fluctuations.

- Tactical Asset Allocation:

- Short-term adjustments to asset weights (e.g., increasing stocks if undervalued) to exploit market
conditions.

Retains long-term goals but adapts to temporary opportunities.

4. Factors in Monitoring and Revising Portfolios

- Market Conditions: GDP growth, interest rates, inflation, sector trends.

- Investor Circumstances: Changes in wealth, time horizon, liquidity needs, tax status.

- Rebalancing Needs: To maintain strategic allocation (e.g., constant proportion or Beta adjustments).

5. Risk-Adjusted Performance Measures


- Sharpe Ratio: Measures excess return per unit of total risk (standard deviation).

- Treynor Ratio: Measures excess return per unit of systematic risk (Beta).

- Role: These metrics help compare portfolios by evaluating returns relative to the risks taken, ensuring
efficient risk management.

6. Strategic vs. Tactical Allocation Comparison

| Aspect

| Strategic Allocation

| Tactical

Allocation

| Objective |

Long-term goals

| Short-term

market opportunities |
| Risk Tolerance | Stable, conservative

Adaptable, higher risk appetite |

| Market Condition| Suitable for efficient markets |

Used in volatile/inefficient markets |

7. Portfolio Manager's Evaluation Steps

- Step 1:Compare portfolio performance against benchmarks (e.g., market index)

.- Step 2: Assess risk-adjusted returns (Sharpe/Treynor Ratios).

- Step 3: Review asset allocation for deviations from strategic targets.

- Step 4: Analyze market trends and economic indicators for tactical opportunities.

- Step 5: Consider investor circumstances (e.g., liquidity needs).

- Step 6: Rebalance using methods like constant proportion or Beta adjustments.

- Step 7: Document revisions and communicate changes to stakeholders.

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