PORTFOLIO MANAGEMENT

By NISHI THAKUR
 PHASES OF PORTFOLIO

 Security analysis Portfolio

 Analysis Portfolio
Selection Portfolio
 Revision Portfolio
Evaluation
 MEANING OF PORTFOLIO ANALYSIS
MEANING-

A collection of investment tools such as stocks, mutual funds, bonds, cash etc.
depending on the investor’s income, budget & convenient time frame. Portfolio Analysis
is the process of reviewing or assessing the elements of the entire
portfolio of securities or products in a business. The review is done for careful analysis of
risk and
return. Portfolio analysis conducted at regular intervals helps the investor to make
changes in the
portfolio allocation and change them according to the changing market and different
circumstances.
 TOOLS FOR PORTFOLIO ANALYSIS
1) BCG

1) The BCG matrix helps businesses analyze their

products based on market growth and market share. It
has four quadrants: Stars (high growth, high share),
Cash Cows (low growth, high share), Question Marks
(high growth, low share), and Dogs (low growth, low
share). For example, a smartphone with a strong market
presence in a growing market is a Star, while an out
dated product that still sells well might be a Cash Cow.
 2) G 9 CELL MATRIX
The G Nine Cell Matrix is an extension of the BCG matrix,
adding more nuance by incorporating additional dimensions for
evaluating a company’s product portfolio. It helps in strategic
decision-making by categorizing products based on their market
position and potential.
Structure of the G Nine Cell Matrix:
Growth Potential: High or Low
Market Share: High or Low
Competitive Advantage: Strong or Weak
 THE 9 CELLS:
1)High Growth, High Share, Strong Advantage:
Stars: Products that dominate the market and have significant growth potential.
Example: A leading tech product with strong sales and a growing market.
2) High Growth, High Share, Weak Advantage:
High Potentials: Products with good market share but facing competition.
Example: A new software tool that is popular but has similar competitors.
3) High Growth, Low Share, Strong Advantage:
Question Marks: Potential winners; need investment to grow market share.
Example: An innovative startup product that is gaining interest.
4) High Growth, Low Share, Weak Advantage:
Wild Cards: Uncertain potential; may struggle without investment.
Example: A niche product with some traction but limited resources.

5)Low Growth, High Share, Strong Advantage:

Cash Cows: Established products that generate steady revenue.
Example: A well-known beverage brand that dominates its category.

6)Low Growth, High Share, Weak Advantage:

Cash Traps: Products with solid sales but facing declining growth.
Example: A traditional media product with dwindling demand.
7) Low Growth, Low Share, Strong Advantage:
Turnaround Opportunities: Products that can be revitalized with effort.
Example: A product that once had a strong market presence but needs
reinvention.
8)Low Growth, Low Share, Weak Advantage:
Dogs: Poor-performing products that drain resources.
Example: An outdated tech gadget with little market relevance.
Questionable Position:
9)Uncertain Products: Need further analysis; lack clear positioning.
Example: A product in development that hasn’t yet proven itself
 3) SWOT

SWOT analysis is a strategic planning tool used to identify a company's Strengths, Weaknesses,
Opportunities, and Threats.
Components:
Strengths: Internal advantages, like strong brand loyalty or financial resources.
Example: A company with high customer satisfaction ratings.
Weaknesses: Internal limitations, such as out dated technology or high debt levels.
Example: A firm with low market presence in key regions.
Opportunities: External factors that could benefit the company, like emerging markets or
regulatory changes.
Example: A growing demand for eco-friendly products.
Threats: External challenges that could harm the business, such as economic downturns or
increased competition.
Example: New competitors entering the market with lower prices.
 PORTFOLIO SELECTION
Portfolio selection is the process of choosing a mix of investment assets to achieve
specific financial goals while managing risk. It typically involves balancing different asset
classes, such as stocks, bonds, and real estate, based on their expected returns and
risks.
Key Steps:
1) Define Objectives: Determine your financial goals, time horizon, and risk tolerance.
2) Asset Allocation: Decide how to distribute investments among various asset classes.
3) Diversification: Include a variety of investments to reduce risk.
4) Performance Monitoring: Regularly review and adjust the portfolio based on market
changes and personal goals
 MARKOWITZ MODEL

The Markowitz model, also known as

Modern Portfolio Theory (MPT), focuses on
maximizing returns for a given level of risk
through optimal asset allocation. It
emphasizes diversification to reduce
portfolio risk while achieving the desired
return.
Key Concepts:
Efficient Frontier: A curve that represents the best possible
expected return for a given level of risk.
Risk-Return Tradeoff: Investors must balance potential returns
against the risk of losses.
Portfolio Diversification: Combining different assets to minimize
risk without sacrificing returns.
Example:
If an investor has a choice between stocks and bonds, the
Markowitz model helps identify the ideal mix to achieve the best
return for their risk tolerance
 PORTFOLIO MANAGEMENT

Portfolio Management is 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. The art of selecting the
right investment policy for
the individuals in terms of minimum risk and maximum return is
called as portfolio
management.
 TYPES OF PORTFOLIO
a) Market Portfolio : The market portfolio is a theoretical bundle of investments that
includes every type of asset available in the investment universe, with each asset
weighted
in proportion to its total presence in the market. The expected return of a market portfolio
is identical to the expected return of the market as whole.
b) Zero Investment Portfolios : A portfolio of assets formed where the group of
investments collectively forms a zero net value. Such an investment portfolios can be
achieved by simultaneously purchasing securities and selling equivalent securities
resulting to a net zero
 TYPES OF PORTFOLIO MANAGEMENT :
a) Active Portfolio Management:
As the name suggests, in an active portfolio management service, the portfolio managers
are actively involved in buying and selling of securities to ensure maximum profits to
individuals.
The aim of active portfolio management is to outperform the benchmark. (For example,
BSE-
SENSEX, NSE-NIFTY50, etc.).
b) Passive Portfolio Management:
In a passive portfolio management, the portfolio manager deals with a fixed portfolio
designed to match the current market scenario. Discretionary Portfolio management
services an
individual authorizes a portfolio manager to take care of his/her financial needs on his/her
behalf.
WHAT IS RISK
In finance, risk refers to the uncertainty
associated with the potential for financial loss or
variability in returns on an investment. It
encompasses the possibility that an investment's
actual returns will differ from expected returns,
which can lead to losses.
 TYPE OF RISK
1. Market Risk: The risk of losses due to changes in market prices, such
as stock market fluctuations.
2. Credit Risk: The risk that a borrower will default on their obligations,
leading to losses for lenders.
3. Liquidity Risk: The risk that an asset cannot be quickly sold or
converted into cash without a significant price reduction.
4. Operational Risk: The risk of loss resulting from inadequate or failed
internal processes, systems, or external events.
5. Interest Rate Risk: The risk that changes in interest rates will
negatively affect the value of investments, particularly bonds.
 WHAT IS RETURN
In finance, return refers to the gain or loss generated from an investment
over a specific period, usually expressed as a percentage of the initial
investment. It includes both income (like dividends or interest) and capital
appreciation (the increase in the asset's value).
Key Types of Return:
1) Total Return: The overall return from an investment, combining income
and capital gains.
2)Annualized Return: The average yearly return over a specific time frame,
useful for comparing different investments.
3)Risk-Adjusted Return: A measure that considers the level of risk taken to
achieve a return, often assessed using metrics like the Sharpe ratio.
Understanding return helps investors evaluate the performance of their
investments and make informed decisions
CAPM Formula and Calculation
CAPM is calculated according to the following formula:
Where:
Ra = Expected return on a security
Rrf = Risk-free rate
Ba = Beta of the security
Rm = Expected return of the market
Note: “Risk Premium” = (Rm – Rrf)
The CAPM formula is used for calculating the expected returns of an asset. It
is based on the idea of systematic risk (otherwise known as non-diversifiable
risk) that investors need to be compensated for in the form of a risk premium.
A risk premium is a rate of return greater than the risk-free rate. When
investing, investors desire a higher risk premium when taking on more risky
investments.
 Expected Return
The “Ra” notation above represents the expected return of a capital
asset over time, given all of the other variables in the equation.
“Expected return” is a long-term assumption about how an
investment will play out over its entire life.
Risk-Free Rate
The “Rrf” notation is for the risk-free rate, which is typically equal to
the yield on a 10-year US government bond. The risk-free rate
should correspond to the country where the investment is being
made, and the maturity of the bond should match the time horizon
of the investment.
 Beta
The beta (denoted as “Ba” in the CAPM formula) is a measure of a stock’s risk (volatility of
returns) reflected by measuring the fluctuation of its price changes relative to the overall
market. In other words, it is the stock’s sensitivity to market risk. For instance, if a company’s
beta is equal to 1.5 the security has 150% of the volatility of the market average. However, if
the beta is equal to 1, the expected return on a security is equal to the average market
return.

Market Risk Premium

From the above components of CAPM, we can simplify the formula to reduce “expected
return of the market minus the risk-free rate” to be simply the “market risk premium”. The
market risk premium represents the additional return over and above the risk-free rate, which
is required to compensate investors for investing in a riskier asset class.
ARBITRAGE PRICING THEORY
 WHAT IS THE ARBITRAGE PRICING THEORY (APT)?

Arbitrage theory is a financial concept that involves

taking advantage of price differences in different markets
to earn a risk-free profit. It assumes that if two identical
assets are priced differently, traders will buy the cheaper
asset and sell the more expensive one until prices
converge.
Key Points:
Risk-Free Profit: Arbitrage aims to exploit discrepancies without exposure to
risk.
Market Efficiency: The theory is based on the idea that markets are
efficient, meaning price discrepancies are quickly eliminated by arbitrageurs.
Types of Arbitrage:
Spatial Arbitrage: Buying and selling an asset in different locations.
Temporal Arbitrage: Taking advantage of price changes over time.
Statistical Arbitrage: Using statistical models to identify mispricings.
Arbitrage plays a crucial role in ensuring market efficiency by aligning prices
across different markets.
 ARBITRAGE PRICING THEORY FORMULA
Arbitrage Pricing Theory Formula
In the APT model, an asset's or a portfolio's returns follow a factor intensity
structure if the returns could be expressed using this formula: ri = ai + βi1 * F1
+ βi2 * F2 + ... + βkn * Fn + εi, where ai is a constant for the asset; F is a
systematic factor, such as a macroeconomic or company-specific factor; β is
the sensitivity of the asset or portfolio in relation to the specified factor; and εi
is the asset's idiosyncratic random shock with an expected mean of zero, also
known as the error term.
The APT formula is E(ri) = rf + βi1 * RP1 + βi2 * RP2 + ... + βkn * RPn, where
rf is the risk-free rate of return, β is the sensitivity of the asset or portfolio in
relation to the specified factor and RP is the risk premium of the specified
factor.
THANK YOU