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Portfolio Analysis Report 1

The document provides an overview of portfolio analysis, which is essential for assessing the performance of a collection of investments based on risk tolerance and investment objectives. It outlines the steps involved in portfolio analysis, advantages, and different portfolio models such as passive and active investing. Additionally, it discusses the traditional and modern approaches to portfolio construction, emphasizing the importance of diversification and risk management.

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John Jerber Labis
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38 views19 pages

Portfolio Analysis Report 1

The document provides an overview of portfolio analysis, which is essential for assessing the performance of a collection of investments based on risk tolerance and investment objectives. It outlines the steps involved in portfolio analysis, advantages, and different portfolio models such as passive and active investing. Additionally, it discusses the traditional and modern approaches to portfolio construction, emphasizing the importance of diversification and risk management.

Uploaded by

John Jerber Labis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Portfolio Analysis,

zPorfolio Model and

Portfolio
Construction
z

What is Portfolio
 Portfolio is a financial term denoting a collection
of investments held by an investment company,
hedge fund, financial institution or individual. The
term portfolio refers to any collection of financial
assetssuch as stocks, bonds, and cash. Portfolios
may be held by individual investors and or
managed by financialprofessionals, hedge funds,
banks and other financialinstitutions. It is a
generally accepted principle that a portfoliois
designed according to the investor's risk
tolerance, timeframe and investment objectives.
z What is Portfolio
Analysis
Portfolio Analysis is one of the areas of investment
management that enable market participants to
analyze and assess the performance of a portfolio
(equities, bonds, alternative investments, etc.),
intending to measure performance on a relative and
absolute basis along with its associated risks.
z
Example

Shine Shoes manufactures and markets 55 models of women shoes. The


General Manager realized that sales increased but profitability steadily
decreased over the past two years. He did not know what happened and he
asked a consultant to conduct a portfolio analysis. The study provided some
interesting results. The top five models represented 17% of total sales.
However, those five were not profitable at all because production costs were
too high.At the same time other models were highly profitable but their sales
were negligible within the overall portfolio. The Manager decided that higher
investment in marketing and sales effort should be made in the most
profitable models and thus to push the overall profit up. The results were
positive and the company improved notably its finances thanks to the
insights obtained by the portfolio analysis.
z Steps to Portfolio
Analysis
1. Understanding Investor Expectation and Market
Characteristics
2. Defining an Asset Allocation and Deployment
Strategy
3. Evaluating Performance and Making Changes
if Required
z Advantages
 It helps investors to assess the performance periodically and make
changes to their investment strategies if such analysis warrants.
 This helps in comparing the portfolio against a benchmark for
return perspective and understanding the risk undertaken to earn
such return, enabling investors to derive the risk-adjusted return.
 It helps realign the investment strategies with the changing
investment objectives of the investor.
 It helps in separating underperformance and outperformance, and
accordingly, investments can be allocated.
z
Portfolio Model

A Portfolio Model is a strategy for investing


in a diverse range of assets, aiming to balance
risk and return. It involves allocating your
investment capital across different asset
classes, such as stocks, bonds, real estate,
and commodities, based on your financial
goals, risk tolerance, and time horizon.
Key
z
Features:
 Diversification: Spreading investments across different asset
classes reduces the overall risk of portfolio
 Risk Management: Portfolio models helps to manage risk by
adjusting the allocation of assets based on market conditions
and individual risk tolerance.
 Goal alignment: A well-constructed portfolio model aligns with
your financial goals, such as retirement planning, education
savings or wealth preservation.
 Performance Tracking: Portfolio models allow you to track the
performance of your investment and make adjustment as
needed.
z Types of Portfolio
Models
1. Passive Investing – Focuses on low-cost index funds or exchange-
traded funds (ETFs) that track a specific market index, aiming to
match market returns.
2. Active Investing – Involves actively managing your portfolio based
on market research, economic analysis and individual stock
selection.
3. Strategic Asset Allocation – Emphasizes long-term asset allocation
based on historical market trends and expected future returns.
4. Tactical Asset Allocation – Involves making short-term adjustments
to asset allocation based on current market conditions and
economic forecast
z
Portfolio Construction
Portfolio construction is the process of strategically
combining a diversified mix of assets to achieve specific
investment goals within an acceptable level of risk. It
involves several aspects such as establishing the
correlation between different assets such as equities,
bonds, property and cash, selecting an appropriate
benchmark that the portfolio’s performance (and in some
cases risk) will be measured against, determining the
weights of assets/sectors and individual securities and
selecting those securities.
z Approaches in Portfolio Construction

 Traditional Approach:The traditional Approach deal


with two major decisions:

 1.Determining the objectives of the portfolio


 2. Selection of securities to be included in the
portfolio.
z
Steps in Traditional
approach
1. Analysis of Constrains

2. Determination of objective

3. Selection of portfolio

4. Assesment of risk and return

5. Diversification
z
1. Analysis of constraints
- Income

- Liquidity

- Safety of the principal

- Time horizon

- Tax consideration

- Tempermanent of Investor
z

2. Determination of objective
- Current income

- Growth in income

- Capital appreciation

- Preservation of capital

3. Selection of portfolio
- Objectives and asset mix

- Growth in income and asset mix

- Capital appreciation and asset mix


z

4. Risk and return analysis


- Tradition approach has some basic assumption like
the investor prefers larger to smaller return from
securities which requires taking risk.
- The risk are namely interest rate risk, purchasing
power risk, financial risk and market risk.
z
5. Diversification

- Selection of Industries
- Selection of company
in industry
Determining the size
of participation.
z
Markowitz Efficient Frontier Approach or Modern Approach

 Markowitz Model-Model identifies an investors unique


risk-return preferences, namely utilities
 Assumptions:

 ✔Investors are risk Averse

 Investors are utility maximizers than return maximizers

 All investors have the same time period as the


investment horizon
z
-Markowitz introduced the term Risk Penalty to
state the portfolio
selection rule.
-A security will be selected into a portfolio if the
risk adjusted rate of return is high compared to
other available securities.
-This risk adjusted rate of return is computed as
Risk adjusted return utility = Expected return-
Risk penalty
Risk Penalty Risk squared/ Risk tolerance
Thank You For
Listening!
Charlen Joyce Maniago
z
Stephanie Dela Cruz
Christine Joy Tarong

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