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PORTFOLIO MANAGEMENT - Coggle Diagram

- - - - In banks, the risk tolerance is low, investment horizon is short, the liquidity needs is high and income needs pay the interest.
        
        In endowments, the risk tolerance is high, the investment horizon is long, the liquidity needs is low and income needs spending level.
        
        In insurance, the risk tolerance and income needs are low, investment horizon is long- life and liquidity needs is high.
        
        In mutual funds, the risk tolerance, investment horizon, income needs are depends on fund and liquidity needs is high.
  - - - Execution where it construct the client portfolio by determining suitable allocations to various asset classes based on the IPS and on expectation about macroeconomic variables such as inflation, interest rates and GDP growth ( top- down analysis).
        
        Feedback where it monitor and rebalance the portfolio to adjust asset class allocations and securities holdings in response to market performance. Measure and report performance relative to the performance benchmark specified in the IPS.
- - - - Geometric mean return is a compound annual rate. It is when periodic rates of return vary from period to period, the geometric mean return will have a value less than the arithmetic mean return.
        
        Money- weighted rate of return is the internal rate of return on a portfolio based on all of its cash inflows and outflows.
        
        To calculate a money- weighted rate of return, consider the beginning value and additional deposits of cash by the investor to be inflows and consider withdrawals of cash, interest, and dividends (which are additional cash available to be withdrawn) and the ending value to be outflows.
        
        Gross return refers to the total return on a security portfolio before deducting fees for the management and administration of the investment account.
    - - Leverage return refers to a return to an investor that is a multiple of the return on the underlying asset. The leverage return calculated as the gain or loss on the investment as a percentage of an investor’s cash investment.
        
        An examination of the returns and standard deviation of returns for the major investable asset are classes supports the idea of a tradeoff between risk and return.
        
        After- tax nominal return refers to the return after the tax liability is deducted.
        
        Pretax nominal return refers to the return prior to paying taxes. Dividend income, interest income, short term capital gains and long term capital gains may all be taxed at different rates.
        
        Net return refers to the return after these fees have been deducted. Note that commission on trades and other costs that are necessary to generate the investment returns are deducted in both gross and net return measures.
- - - - After-tax nominal return which refers to the return after the tax liability is deducted.
        
        Real return is nominal return that adjusted for inflation and measures the increase in an investor's purchasing power.
        
        Leveraged return refers to a return to that is a multiple of the return on the underlying asset. The leveraged return is calculated as the gain or loss on the investment as a percentage of an investor's cash, and investment.
        
        In describing characteristics of the major asset classes that investors In forming portfolios, an examination of the returns and standard deviation of returns for the major investable asset classes supports the idea of a tradeoff between risk and return.
        
        Liquidity is an additional characteristic to consider when choosing investments because liquidity can affect the price and, therefore, the expected return of a security.
        Liquidity can be a major concern in emerging markets and for securities that trade infrequently, such as low-quality corporate bonds.
        
        Variance (Standard Deviation) of Returns for an Individual Security- In finance, the variance and standard deviation of returns are common measures of investment risk.
        
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    - - How should you interpret the correlation coefficient?
        
        A correlation coefficient of +1 means that from the mean or expected return are always proportional in the same direction. That is, they are perfectly positively correlated.
        
        A correlation coefficient of -I means that deviations from the mean or expected return are always proportion in opposite directions. That is, they are perfectly negatively correlated.
        
        A correlation coefficient means that there is no linear relationship between the two stocks' returns. They are uncorrelated.
- - - - A holding period return - used to measure an investment’s return over specific period of time.
        
        Arithmetic mean return and Geometric mean return differ from each other.
        
        The Arithmetic mean return- is the simple average of a series of periodic returns while in geometric mean return is a compound annual rate.
        
        Money-weighted rate of return- is the IRR calculated using periodic cash flows into and out of an account and is the discount rate that makes the present value of cash inflows equal to the present value of cashflows.
        
        Gross return- talks about the total return after deducting commissions on trades and other costs necessary to generate the returns.
        
        Pretax nominal return- talks about the numerical percentage return of an investment, without considering the effects of taxes and inflations.
        
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- - - - Reasons for a written investment policy statement (IPS)
        
        A written investment policy statement will typically begin with the investor’s goals in terms of risk and return. These should be determined jointly, as the goals of high returns and low risk (while require popular) are likely to be mutually exclusive in practice.
    - - Major components of an IPS:
        
        • Introduction- describe the client.
        
        • Statement of purpose- the intentions of the IPS.
        
        • Statement of Duties and Responsibilities- of the client, the asset custodian, and the investment managers.
        
        • Procedures- relate to keeping the IPS updated and responding to unforeseen events.
        
        • Investment Objectives- the client’s investment needs, specified in terms of required return and risk tolerance.
        
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    - - Risk objectives forms:
        
        Absolute risk objectives- Might be to “have no decrease in portfolio value during any 12- month period” or to “not decrease in value by more than 2% at any point over any 12-month period”.
        
        Low absolute percentage risk objectives - such as these may result in portfolios made up of securities that offer guaranteed returns.
        
        Absolute return objective - maybe stated in nominal terms, such as “an overall return of at least 6% per annum,” or in real returns, such as a “return of 3% more than the annual inflation rate each year.
        
        Relative risk objectives- relate to a specific benchmark and can also be strict, such as, Returns will not be less than12-month euro LIBOR over any 12-month period.
        
        Return objectives - Can be relative to a benchmark portfolio return, such as, “Exceed the return on the S&P 500 index by 2% per annum.
    - - Ability to bear risk - An investor’s ability to bear risk depends on financial circumtances. Longer investment horizons (20 years rather than 2 years), greater assets versus liabilities (more wealth).
        
        Willingness to bear risk - Is based primarily on the investor’s attitudes and beliefs about investment (various asset type).
    - - Investment constraints:
        
        Liquidity - Refers to the ability to turn investment assets into spendable cash in a short period of time without having to make significant price concessions to do so.
        
        Time horizon - in general, the longer an investor’s time horizon, the more risk and less liquidity the investor can accept in the portfolio.
        
        Tax situation- besides an individual’s overall tax rate, the tax treatment of various types of investment accounts is also a consideration in portfolio construction.
        
        Legal and regulatory- In addition to financial market regulations that apply to all investors, more specific legal and regulatory constraints may apply to particular investors.
        
        Unique circumstances
        
        each investor, whether individual or institutional, may have specific preferences or restrictions on which securities and assets may be purchased for the account.
    - - Security selection- refers to deviations from index weights on individual securities within an asset class.
    - - Strategic asset allocation - is developed which specifies the percentage allocations to the included asset classes. In choosing which asset allocation for the account, the correlations of returns within an asset class should be relatively high, indicating that the assets within the class are similar in their investment performance.
        
        Risk budgeting - sets an overall risk limit for the portfolio and budgets (allocates) a portion of the permitted risk to the systematic risk if the strategic asset allocation, the risk from tactical asset allocation, and the risk from security selections.
        
        Active portfolio management two specific issues to consider:
        
        An investor may have multiple managers actively managing to the same benchmark for the same asset class (or may have significant benchmark overlap).
        
        When all managers are actively managing portfolios relative to an index, trading may be excessive overall.
        -to address these issues is to use a core-satellite approach.
        
        Core-satellite approach - the core-satellite approach invests the majority, or core, portion of the portfolio in passively managed indexes and invests a smaller, or satellite, portion in active strategies.