An Introduction to Portfolio
Management
Markowitz Portfolio
Theory
Markowitz Portfolio Theory
Developed by Harry
Markowitz in the 1950s
Won a Nobel Prize for his
work
Markowitz Portfolio Theory
Basic portfolio model derived
the expected rate of return

Requirements of Portfolio Manager
Performance
Ability to derive above average returns for
a given risk class.
Ability to diversify the portfolio completely
to eliminate all unsystematic risk, relative
to the portfolios benchmark.
Requirements of Portfol

Traditional Investment Management Organization
Security Analysts
Economists
Technicians
Market
Experts
Portfolio
Managers
Approved
List
Investment
Committee
Model
Portfolio
Rationale for Portfolio Management
Portfolios need maintenance and periodic
revis

Bond Valuation
Par Bond
A bond matures in four years, has a coupon rate of 10%,
discount rate of 10% and has a maturity value of Php 100. What
is its value?
Year
Cash Flow (Php)
1
10
2
10
3
10
4
10
Present Value of Cash Flows
Year 1 - Present Value1 = 10

Performance Attribution Analysis
Attempts to distinguish which factors like
selecting securities or market timing is the
source of the portfolios overall
performance.
Compares portfolios total return to the
return of the benchmark and decompose
the diff

Active vs Passive Management
A passive equity management strategy is
one where the portfolio is mainly left alone
An active management policy is one
where the composition of the portfolio is
dynamic and where the portfolio manager
periodically changes:

Requirements of Portfolio Manager
Performance
Ability to derive above average returns for
a given risk class.
Ability to diversify the portfolio completely
to eliminate all unsystematic risk, relative
to the portfolios benchmark.
Requirements of Portfol

Bond Duration
Types of Duration
Macaulay Duration
Original mathematical measure of interest rate risk
based on the average term to maturity of a bonds
cash flows.
N
D = [Ct / (1 + R)t ] x t
t=1
P
where:
D = duration
Ct = cash flow at time t
R = yield to

Historical Rates of Return
Holding Period Return (HPR)
Example:
Marie Cruz invested P 1,000 at the beginning of the year and got
back P 1,100 at the end of the year. What is her return for the
period?
HPR = Ending Value of Investment
Beginning Value of I

An Introduction to Portfolio
Management
Some Background
Assumptions
Assumptions of Portfolio Theory
Investors are rational
Assumptions of Portfolio Theory
Investors are
basically risk
averse
Assumptions of Portfolio Theory
Investors wants to
maximize t