Questions and Answers
What is a portfolio?
A collection of investment instruments like shares, mutual funds, bonds, and cash equivalents.
What type of risk cannot be eliminated by an optimum portfolio?
What is the first task in the planning stage of the portfolio management process?
Identification of Objectives and Constraints
What is an Investment Policy Statement?
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Which of the following asset classes has shares from companies with a market capitalization above $10 billion?
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Diversifying risk means that there will be an elimination of risk.
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What is Tactical Asset Allocation?
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The two types of risk associated with investments are __________ risk and __________ risk.
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Study Notes
Portfolio Management Overview
- Portfolio consists of a collection of investment instruments such as shares, mutual funds, bonds, fixed deposits, and other cash equivalents.
- Portfolio management aims to select the right investment tools in appropriate proportions to maximize returns while balancing risk.
- Diversification of risk is possible through a well-structured portfolio, which cannot eliminate risk but can reduce unique (diversifiable) risk.
- Two types of risk associated with investments:
- Diversifiable (unique/unexplained/unsystematic) risk
- Undiversifiable (market/explained/systematic) risk
Portfolio Management Process
- An ongoing process designed to manage a client's asset portfolio tailored to meet investment objectives.
- Key components of the process include identifying investment objectives, planning strategies, execution, and feedback.
Planning Stage
- Identifying objectives and constraints is crucial for laying a foundation for effective portfolio management.
- Investment Policy Statement (IPS) outlines the client's investment objectives and established constraints.
- Capital Market Expectations involve forecasting risk and return of various asset classes for informed portfolio choices.
Asset Allocation Strategy
- Asset allocation means spreading investments across diverse asset classes to optimize risk-return balance.
- Two approaches to asset allocation:
- Strategic Asset Allocation: Establishing long-term investment weights based on the IPS and market expectations.
- Tactical Asset Allocation: Adjusting the portfolio strategy based on short-term market or personal circumstances; can evolve into a new strategic allocation if changes persist.
Asset Classes
- Broad categories include stocks, bonds, and cash/money market securities with subdivisions:
- Large-cap Stocks: Market capitalization above $10 billion.
- Mid-cap Stocks: Market capitalization between $2 billion and $10 billion.
- Small-cap Stocks: Market capitalization below $2 billion, typically have higher risk due to lower liquidity.
- International Securities: Issued by foreign companies, diversify geographical risk.
Feedback and Evaluation
- Monitoring and Rebalancing: Ongoing management of the portfolio to align it with the client's objectives and market conditions.
- Performance Evaluation: Assessing the effectiveness of the portfolio management strategies implemented.
Conclusion
- Effective portfolio management combines understanding diverse investment tools, risk assessment, and strategic planning to meet investor objectives. This requires an adaptable approach that considers both long-term and short-term market conditions.
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Description
Test your knowledge on portfolio management and investment analysis with this quiz. Covering key concepts from risk and returns to asset classes, this will challenge your understanding of the essential aspects of managing a portfolio.
