Dr. Ibha_Nature & Scope of PM _ Markowitz.pptx

Nature & Scope of Portfolio Management
Markowitz Model

1. Portfolio Management Meaning of Portfolio management- Scope and nature of portfolio management, calculation of return on portfolio and risk on portfolio, traditional and modern portfolio theory- Markowitz theory By Dr. Ibha Rani Kristu Jayanti College ( Autonomous)

2. Portfolio Management A  portfolio’s is a collection of financial assets and investment tools that are held by an individual, a financial institution or an investment firm. PM : The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance.

3. SCOPE OF PORTFOLIO MANAGEMENT Monitoring the performance of portfolio by incorporating the latest market conditions. Identification of the investor’s objective, constraints and preferences. Making an evaluation of portfolio income (comparison with targets and achievement). Making revision in the portfolio. Implementation of the strategies in tune with investment objectives.

4. NATURE OF PORTFOLIO MANAGEMENT Stable Current Return Marketability Tax Planning Appreciation in the value of capital Liquidity Safety of the investment

5. MODERN PORTFOLIO THEORY ( MPT) Harry Markowitz “Do not put all your eggs in one basket”

6. Harry Markowitz Model The Harry Markowitz Model was introduced in 1952 & he also won Nobel Prize for his contribution in 1990. The Markowitz model is a method of maximizing returns within a calculated risk and risk can be minimized through diversification. It is called the Markowitz portfolio theory or modern portfolio theory (MPT) , It is also called  mean - variance  model due to the fact that it is based on expected returns and the  standard deviation  (variance) of the various portfolios .

7. Assumptions: The market is efficient and all investors have in their knowledge all the facts about the stock market • All investors before making any investments have a common goal • An Investor has certain amount of capital and wants to invest over a single time horizon • The investors base their decisions on the expected rate of return of an investment • An investor should be able to get higher return for each level of risk • The investor can reduce his risk by diversification. The investor is only willing to accept a higher risk if he or she gets a higher expected return. •

8. Expected return (Mean) R p= R 1 W 1 +R 2 W 2………..n R p = the expected return on Portfolio R 1 = the estimated return in Security 1 R 2 = the estimated return in Security 2 W 1 = Proportion of security 1 occurring in the port folio W 2 = Proportion of security 2 occurring in the port folio Expected return (Mean) Standard deviation (variance) Co-efficient of Correlation Tools for Selection of HM Model

9. Co-efficient of Correlation The Correlation coefficient is simply covariance divided the product of standard deviations. The correlation coefficient can vary between -1.0 and +1.0 -1.0 1.0 Perfectly negative Opposite direction Move in Tandem No Correlation Cov AB =Covariance between security A and B r AB =Co-efficient correlation between security A and B

10. Optimal Portfolio The optimal portfolio concept falls under the modern portfolio theory. The theory assumes that investors fanatically try to minimize risk while striving for the highest return possible.

11. Advantages of MPT/HM Model Diversification: Risk-Return Tradeoff Quantitative approach Dis-advantages: Assumptions: Historical data: Ignoring market factors: Complexity