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CHAPTER 8 BOND & EQUITY PORTFOLIOS MANAGEMENT STRATEGIES - Coggle…
CHAPTER 8
BOND & EQUITY PORTFOLIOS
MANAGEMENT STRATEGIES
ASSET ALLOCATION
The Strategic allocation is the proportion of wealth the investor decides to place in each of these asset classes. The investor's long- term normal allocation because it is presumed to be the "baseline" allocation that will remain in place until the investor's life circumstances change appreciably.
Tactical
Active Strategy
Figure out short term opportunities
Invest in higher returning assets
Used to develop short-term strategies to exploit changes in market conditions.
Strategic
Used to develop along-term policy allocation
Buy &Hold
Infrequent Rebalancing
Factor To Consider
Investment objective (e.g., retirement)
Time horizon for a goal (e.g. life expectancy for retirement)
Amount of money you have to invest
Your risk tolerance and experience
Your age and net worth
Asset Allocation Strategies
Dynamic
Active Strategy based on Market Conditions.
• Buy Low Sell High.
Constant Weight
Set Target term Opportunities
Frequent Rebalancing
Insured
For Risk-averse Investors
Base Portfolio Value (BPV)
Active Management, if PV >BPV
Risk-free, if PV <BPV
BOND PORTFOLIO
MANAGEMENT STRATEGIES
Passive Portfolio Strategies
Contingent Procedures (Structured Active Management)
Active Portfolio Strategies
Matched Funding Technique
EQUITY PORTFOLIO
MANAGEMENT STRATEGIES
Equity portfolio management styles fall into either a passive or an active category.
No middle ground exists between active and passive equity management strategies.
Passive Equity Portfolio Management
it is Long term buy and hold strategy.
The manager of an equity index portfolio will try to minimize the deviation between portfolio and index returns.
-for example - tracking error
stocks are purchase so the portfolio return will track those of an index over time.
3 Basic technique for constructing a passive index portfolio:-
Full replication
All the securities in the index are purchased in proportion to their weights in the index.
Sampling
A portfolio manager would only need to buy a representative sample of stocks that comprise the benchmark index.
The reinvestment of dividend cash flows will be less problematic because fewer securities need to be purchased to rebalance the portfolio.
Quadratic Optimization
The computer program uses historical price data and correlations to determine the portfolio composition that minimizes tracking error with the benchmark.
Relying solely on historical price and correlation data for portfolio optimization can lead to significant tracking errors if future market dynamics differ from the past, undermining the portfolio's ability to closely track the benchmark.
Active Equity Portfolio Management
Attempt by the manager to outperform a passive benchmark portfolio.
A benchmark Portfolio - a passive portfolio whose average characteristic including such as factor as beta, dividend yield, and firm size that match the risk return objective of the client.
the stock picking skill of the portfolio manager
the optimal allocation to indexing declines as managerial skill increase.