M B A 1 0 4Topics1.Portfolio Management2.Return Objectives and Investment Constraints3.Portfolio Calculation4. Covariance5.Rate of Return Basics6.Capital Market Theory7.Capital Asset Pricing Model8.Risk Premium9.Risk Management Process
M B A 1 0 4Portfolio ManagementIs the process an investor takes to aid him in meeting his investment goals.The procedure is as follows:1.Create a Policy Statement-A policy statement is the statement that contains the investor'sgoals and constraints as it relates to his investments.2.Develop an Investment Strategy-This entails creating a strategy that combines theinvestor's goals and objectives with current financial market and economic conditions.3.Implement the Plan Created-This entails putting the investment strategy to work,investing in a portfolio that meets the client's goals and constraint requirements.4.Monitor and Update the Plan-Both markets and investors' needs change as time changes.As such, it is important to monitor for these changes as they occur and to update the plan toadjust for the changes that have occurred.
M B A 1 0 4Portfolio Management Cont.Policy StatementA policy statement is the statement that contains the investor'sgoals and constraints as it relates to his investments. This could beconsidered to be the most important of all the steps in the portfoliomanagement process. The statement requires the investor to considerhis true financial needs, both in the short run and the long run. It helpsto guide the investment portfolio manager in meeting the investor'sneeds.
M B A 1 0 4Portfolio Management Cont.Expressing Investment Objectives in Terms of Risk and ReturnReturn objectives are important to determine. They helptofocusaninvestoronmeetinghisfinancialgoalsandobjectives. However, risk must be considered as well. Aninvestor may require a high rate of return. A high rate ofreturnistypicallyaccompaniedbyahigherrisk.
M B A 1 0 4Portfolio Management Cont.Factors Affecting Risk ToleranceAn investor's risk tolerance can be affected by many factors:•Age- an investor may have lower risk tolerance as they get older andfinancial constraints are more prevalent.•Family situation- an investor may have higher income needs if theyare supporting a child in college or an elderly relative.•Wealth and income- an investor may have a greater ability to investin a portfolio if he or she has existing wealth or high income.•Psychological- an investor may simply have a lower tolerance for riskbased on his personality.
M B A 1 0 4Return Objectives and InvestmentConstraintsReturn objectives can be divided into the following needs:•Capital Preservation-Capital preservation is the need to maintain capital. To accomplishthis objective, the return objective should, at a minimum, be equal to the inflation rate.