With the advancement in financial markets, investment and portfolio management has become an essential skill for investors and finance professionals. Proper portfolio management helps maximize returns while minimizing risks. This article provides key takeaways from investment and portfolio management lecture notes in pdf format. We will go over core concepts, strategies, portfolio construction, performance evaluation etc with a focus on the higher_word portfolio management.
Main Objectives of Portfolio Management
The primary goal of portfolio management is to construct an optimal portfolio that provides maximum returns at a given level of risk. Key objectives include: 1) Achieving diversification across different asset classes and securities. 2) Managing systematic and unsystematic risks through proper asset allocation. 3) Optimizing risk-return tradeoff as per investor’s risk appetite. 4) Ensuring liquidity to fund liabilities and rebalance portfolio as needed.
Importance of Asset Allocation
Asset allocation is crucial in portfolio management as it accounts for over 90% of portfolio returns. It involves dividing funds among major asset classes like stocks, bonds, real estate etc. Important factors to consider for asset allocation are: 1) Risk-return profile of different assets 2) Correlations between asset classes 3) Investment goals, time horizon and risk tolerance 4) Current economic and market conditions. As per MPT, assets with low/negative correlation should be combined to reduce portfolio risk.
Active vs. Passive Portfolio Management
In active management, managers frequently trade to outperform the market. It requires higher fees but has potential to generate excess returns. Passive management involves tracking market indices with lower costs but provides average market returns. Investors must weigh pros and cons of both styles. Active management is suitable for specialized mandates while passive strategies work for diversified portfolios tracking broad markets.
Main Tools for Portfolio Construction
Some key tools used by portfolio managers include: 1) Asset pricing models like CAPM, APT for estimating risk and returns. 2) Efficient frontier for optimal portfolios. 3) Monte Carlo simulation for portfolio optimizations 4) Greeks and option pricing models for derivatives portfolio. 5) Scenario analysis and stress testing for assessing risks.
Measuring Portfolio Performance
Key metrics used for evaluating portfolio performance are: 1) Risk-adjusted returns like Sharpe, Treynor ratios 2) Alpha and beta for measuring excess returns 3) R-squared for fund’s correlation to benchmark 4) Tracking error to evaluate deviation from benchmark 5) Information ratio for active portfolio’s skill 6) Drawdown for downside risk. These parameters provide a holistic view of portfolio’s return attribution and risks.
To conclude, investment and portfolio management aims to construct optimal portfolios aligned to an investor’s objectives and risk appetite. Proper asset allocation, diversification, risk management and periodic performance review are crucial for portfolio management. Investors can further their learning through online courses and certification programs focused on the higher_word portfolio management.