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CHAPTER8 - BOND AND EQUITY PORTFOLIO MANAGEMENT STRATEGY - Coggle Diagram
CHAPTER8 - BOND AND EQUITY PORTFOLIO MANAGEMENT STRATEGY
Bond Portfolio Management Strategy
Passive Portfolio Strategy
Buy-and-Hold Strategy
Indexing Strategy
Active Portfolio Strategy
Credit Analysis
Yield Spread Analysis
Valuation Analysis
Bond Swaps
Interest Rate Anticipation
Index Fund Construction Techniques
Full Replication
The need to buy many securities will increase transaction costs that will detract from performance
The reinvestment of dividends will result in high commissions when firms pay small dividends at different time in year.
All the securities in the index are purchased in proportion to their weights in the index
Sampling
The reinvestment of dividend cash flows will be less problematic because fewer securities need to be purchased to rebalance the portfolio
Disadvantage - portfolio returns will almost certainly not track the returns fir the benchmark index as closely as with full replication
A portfolio manager would only need to buy a representative sample of stocks that comprise the benchmark index.
Quadratic Optimization
A problem with this technique is that it relies on historical price changes and correlation
If these factors change over time, the portfolio may experience very large tracking errors
Historical information on prices changes and correlations between securities are input to a computer program that determines the composition of a portfolio that will minimise tracking error with the benchmark,
Asset Allocation Strategies
The Integrated Asset Allocation
It gives nearly equal importance to future portfolio returns and portfolio risk tolerance.
The investing preferences are changed to get desired short-term or long-term portfolio return and risk tolerance
The evaluation/comparison between the optimal portfolio's actual performance and managers original expectations.
The Strategic Asset Allocation
The basic idea is to diversify the investments and limit the portfolio volatility.
This strategy requires long-term anticipation and forecasting
A portfolio management strategy which includes periodical adjustments of investments with respect to the long-term goal.
The Tactical Asset Allocation
The basic idea is to diversify investments and limit risks, investment preferences are given to different asset classes with respect to short-term yield predictions.
A moderately active portfolio management strategy which includes adjustments of investments with respect to short-term goals.
It requires good money management and ability to interpret and predict short-term trends
The Insured Asset Allocation
When the total portfolio value is above base value, the investor practices active portfolio management strategies such as investing in high-profit high-risk instruments like equities to maximise the portfolio growth.
It assumes that expected returns and risks are constant over time while the investor's objectives and constraints change as his or her wealth position change.
A fairly active portfolio management strategy which is ideal for investors with low-risk tolerance but who need active portfolio management.