Portfolio Management Fundamentals

Portfolio Management

Definition

• Portfolio management is the process of selecting and managing a group of investments to achieve a specific financial goal
• It involves creating and maintaining an optimal mix of investments to maximize returns while minimizing risk

Importance

• Portfolio management helps investors to:
  • Diversify risk
  • Increase potential returns
  • Achieve financial goals
  • Make informed investment decisions

Key Concepts

• Asset Allocation: The process of dividing investments among different asset classes (e.g. stocks, bonds, cash) to achieve an optimal mix
• Diversification: Spreading investments across different asset classes and industries to reduce risk
• Risk Tolerance: The level of risk an investor is willing to take on
• Return Expectations: The expected rate of return on an investment
• Time Horizon: The length of time an investor has to achieve their financial goal

Portfolio Management Strategies

• Active Management: Actively buying and selling securities to beat the market
• Passive Management: Investing in a fixed portfolio with minimal changes
• Core-Satellite Approach: Combining a core of passive investments with actively managed satellite investments
• Tactical Asset Allocation: Adjusting the asset allocation based on market conditions

Portfolio Management Process

1. Goal Setting: Determining the investor's financial goals and risk tolerance
2. Asset Allocation: Determining the optimal asset mix
3. Security Selection: Selecting individual securities within each asset class
4. Portfolio Construction: Creating the portfolio based on the selected securities
5. Ongoing Monitoring: Regularly reviewing and rebalancing the portfolio as needed

Portfolio Management

Definition and Purpose

• Portfolio management is a process that aims to achieve a specific financial goal by selecting and managing a group of investments.
• It involves creating and maintaining an optimal mix of investments to maximize returns while minimizing risk.

Importance and Benefits

• Portfolio management helps investors diversify risk, increasing potential returns and achieving financial goals.
• It enables investors to make informed investment decisions.

Key Concepts

Asset Allocation and Diversification

• Asset allocation involves dividing investments among different asset classes (e.g., stocks, bonds, cash) to achieve an optimal mix.
• Diversification spreads investments across different asset classes and industries to reduce risk.

Risk and Return Expectations

• Risk tolerance is the level of risk an investor is willing to take on.
• Return expectations are the expected rate of return on an investment.

Time Horizon

• The time horizon is the length of time an investor has to achieve their financial goal.

Portfolio Management Strategies

Active and Passive Management

• Active management involves actively buying and selling securities to beat the market.
• Passive management involves investing in a fixed portfolio with minimal changes.

Hybrid Approaches

• The core-satellite approach combines a core of passive investments with actively managed satellite investments.
• Tactical asset allocation adjusts the asset allocation based on market conditions.

Portfolio Management Process

Step 1: Goal Setting

• Determine the investor's financial goals and risk tolerance.

Step 2: Asset Allocation

• Determine the optimal asset mix based on the investor's goals and risk tolerance.

Step 3: Security Selection

• Select individual securities within each asset class.

Step 4: Portfolio Construction

• Create the portfolio based on the selected securities.

Step 5: Ongoing Monitoring

• Regularly review and rebalance the portfolio as needed.

Learn about the process of selecting and managing investments to achieve financial goals, including diversification, risk management, and asset allocation.