Portfolio Management

Portfolio Management
The act or practice of making investment decisions in order to make the largest possible return. Portfolio
management takes two basic forms: active and passive. Active management involves using technical,
fundamental, or some other analysis to make trades on a fairly regular basis. For example, one may sell
stock A in order to buy stock B. Then, a few days or weeks later, one may sell stock B to buy bond C.
Passive management, on the other hand, involves buying an index, an exchange-traded fund, or some
other investment vehicle with securities the investor does not directly choose. For example, one may buy
an exchange-traded fund that holds all the stocks on the S&P 500. See also: Asset management,
Investment adviser.

What Does Portfolio Management Mean?

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.

Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt
vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the
attempt to maximize return at a given appetite for risk.

Investopedia explains Portfolio Management

In the case of mutual and exchange-traded funds (ETFs), there are two forms of portfolio management:
passive and active. Passive management simply tracks a market index, commonly referred to as indexing
or index investing. Active management involves a single manager, co-managers, or a team of managers
who attempt to beat the market return by actively managing a fund's portfolio through investment
decisions based on research and decisions on individual holdings. Closed-end funds are generally
actively managed

portfolio insurance

portfolio insurance
Definition
A strategy of hedging a stock portfolio against market risk by selling stock index futures
short or buying stock index put options.

Management is used to select a portfolio of new product development projects to achieve th following
goals:
• Maximize the profitability or value of the portfolio
• Provide balance
• Support the strategy of the enterprise
Portfolio Management is the responsibility of the senior management team of an organization or business
unit. This team, which might be called the Product Committee, meets regularly to manage the product
pipeline and make decisions about the product portfolio. Often, this is the same group that conducts the
stage-gate reviews in the organization.
A logical starting point is to create a product strategy - markets, customers, products, strategy approach,
competitive emphasis, etc. The second step is to understand the budget or resources available to balance
the portfolio against. Third, each project must be assessed for profitability (rewards), investment
requirements (resources), risks, and other appropriate factors.
The weighting of the goals in making decisions about products varies from company. But organizations
must balance these goals: risk vs. profitability, new products vs. improvements, strategy fit vs. reward,
market vs. product line, long-term vs. short-term. Several types of techniques have been used to support
the portfolio management process:
• Heuristic models
• Scoring techniques
• Visual or mapping techniques
The earliest Portfolio Management techniques optimized projects' profitability or financial returns using
heuristic or mathematical models. However, this approach paid little attention to balance or aligning the
portfolio to the organization's strategy. Scoring techniques weight and score criteria to take into account
investment requirements, profitability, risk and strategic alignment. The shortcoming with this approach
can be an over emphasis on financial measures and an inability to optimize the mix of projects. Mapping
techniques use graphical presentation to visualize a portfolio's balance. These are typically presented in
the form of a two-dimensional graph that shows the trade-off's or balance between two factors such as
risks vs. profitability, marketplace fit vs. product line coverage, financial return vs. probability of success,
etc.
Project Portfolio Management (PPM) is a term used by project managers and project
management (PM) organizations to describe methods for analyzing and collectively managing a
group of current or proposed projects based on numerous key characteristics. The fundamental
objective of PPM is to determine the optimal mix and sequencing of proposed projects to best
achieve the organization's overall goals - typically expressed in terms of hard economic
measures, business strategy goals, or technical strategy goals - while honoring constraints
imposed by management or external real-world factors. Typical attributes of projects being
analyzed in a PPM process include each project's total expected cost, consumption of scarce
resources (human or otherwise) expected timeline and schedule of investment, expected nature,
magnitude and timing of benefits to be realized, and relationship or inter-dependencies with
other projects in the portfolio.
The key challenge to implementing an effective PPM process is typically securing the mandate
to do so. Many organizations are culturally inured to an informal method of making project
investment decisions, which can be compared to political processes observable in the U.S.
legislature.[citation needed] However this approach to making project investment decisions has led
many organizations to unsatisfactory results, and created demand for a more methodical and
transparent decision making process. That demand has in turn created a commercial marketplace
for tools and systems which facilitate such a process.
Some commercial vendors of PPM software emphasize their products' ability to treat projects as
part of an overall investment portfolio. PPM advocates see it as a shift away from one-off, ad hoc
approaches to project investment decision making. Most PPM tools and methods attempt to
establish a set of values, techniques and technologies that enable visibility, standardization,
measurement and process improvement. PPM tools attempt to enable organizations to manage
the continuous flow of projects from concept to completion.
Treating a set of projects as a portfolio would be, in most cases, an improvement on the ad hoc,
one-off analysis of individual project proposals. The relationship between PPM techniques and
existing investment analysis methods is a matter of debate. While many are represented as
"rigorous" and "quantitative", few PPM tools attempt to incorporate established financial
portfolio optimization methods like modern portfolio theory or Applied Information Economics,
which have been applied to project portfolios, including even non-financial issues.[1][2][3][4]

Portfolio (finance)
In finance, a portfolio is an appropriate mix or collection of investments held by an institution or
an individual.
Holding a portfolio is a part of an investment and risk-limiting strategy called diversification. By
owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets
in the portfolio could include Bank accounts; stocks, bonds, options, warrants, gold certificates,
real estate, futures contracts, production facilities, or any other item that is expected to retain its
value.
In building up an investment portfolio a financial institution will typically conduct its own
investment analysis, whilst a private individual may make use of the services of a financial
advisor or a financial institution which offers portfolio management services.

2.3.2 The Market Portfolio

From the Separation Theorem we can see that in equilibrium,
every security
must be part of the investor's risky portion of the portfolio. The
reason is that
if a security isn't in T, no one is investing in it, meaning that its
prices will fall,
causing the expected returns of it to rise until the resulting
tangency portfolio
has a nonzero proportion associated with them.
When all the price adjusting stops, the market will have been
brought into
equilibrium.
_ Each investor will want to hold a certain positive amount of each
risky
security.
_ The current market price of each security will be at a level
where the
number of shares demanded equals the number of shares
outstanding.
_ The riskfree rate will be at a level where the total amount of
money
borrowed equals the total amount of money lent.
This gives rise to the following de_nition of the market portfolio:
De_nition 1 The market portfolio is a portfolio consisting of all securities
where the proportion invested in each security correspons to its relative
market
value. The relative market value of a security is simply equal to the
aggreagte
market value of the security divided by the sum of the aggregate market
values
of all securities

Introduction
A good way to begin understanding what portfolio management is (and is not) may be to define
the term portfolio. In a business context, we can look to the mutual fund industry to explain the
term's origins. Morgan Stanley's Dictionary of Financial Terms offers the following explanation:
If you own more than one security, you have an investment portfolio. You build the portfolio by
buying additional stocks, bonds, mutual funds, or other investments. Your goal is to increase the
portfolio's value by selecting investments that you believe will go up in price.

According to modern portfolio theory, you can reduce your investment risk by creating a
diversified portfolio that includes enough different types, or classes, of securities so that at least
some of them may produce strong returns in any economic climate.
Note that this explanation contains a number of important ideas:
• A portfolio contains many investment vehicles.
• Owning a portfolio involves making choices -- that is, deciding what additional stocks,
bonds, or other financial instruments to buy; when to buy; what and when to sell; and so
forth. Making such decisions is a form of management.
• The management of a portfolio is goal-driven. For an investment portfolio, the specific
goal is to increase the value.
• Managing a portfolio involves inherent risks.
Over time, other industry sectors have adapted and applied these ideas to other types of
"investments," including the following:
Application portfolio management . This refers to the practice of managing an entire group or
major subset of software applications within a portfolio. Organizations regard these
applications as investments because they require development (or acquisition) costs and incur
continuing maintenance costs. Also, organizations must constantly make financial decisions
about new and existing software applications, including whether to invest in modifying them,
whether to buy additional applications, and when to "sell" -- that is, retire -- an obsolete
software application.
Product portfolio management. Businesses group major products that they develop and sell into
(logical) portfolios, organized by major line-of-business or business segment. Such portfolios
require ongoing management decisions about what new products to develop (to diversify
investments and investment risk) and what existing products to transform or retire (i.e., spin off
or divest).
Project or initiative portfolio management . An initiative, in the simplest sense, is a body of
work with:
• A specific (and limited) collection of needed results or work products.
• A group of people who are responsible for executing the initiative and use resources,
such as funding.
• A defined beginning and end.
Managers can group a number of initiatives into a portfolio that supports a business segment,
product, or product line. These efforts are goal-driven; that is, they support major goals and/or
components of the enterprise's business strategy. Managers must continually choose among
competing initiatives (i.e., manage the organization's investments), selecting those that best
support and enable diverse business goals (i.e., they diversify investment risk). They must also
manage their investments by providing continuing oversight and decision-making about which
initiatives to undertake, which to continue, and which to reject or discontinue.
The article will focus primarily on initiative portfolio management. Let's begin by looking at how
most businesses decide what initiatives to fund and pursue

Basic concepts and components for portfolio

management
Now that we understand some of the basic dynamics and inherent challenges organizations face
in executing a business strategy via supporting initiatives, let's look at some basic concepts and
components of portfolio management practices.
The portfolio
First, we can now introduce a definition of portfolio that relates more directly to the context of
our preceding discussion. In the IBM view, a portfolio is:
... one of a number of mechanisms, constructed to actualize significant elements in the Enterprise
Business Strategy.

It contains a selected, approved, and continuously evolving, collection of Initiatives which are
aligned with the organizing element of the Portfolio, and, which contribute to the achievement of
goals or goal components identified in the Enterprise Business Strategy.
The basis for constructing a portfolio should reflect the enterprise's particular needs. For
example, you might choose to build a portfolio around initiatives for a specific product, business
segment, or separate business unit within a multinational organization.

The portfolio structure

As we noted earlier, a portfolio structure identifies and contains a number of portfolios. This
structure, like the portfolios within it, should align with significant planning and results
boundaries, and with business components. If you have a product-oriented portfolio structure, for
example, then you would have a separate portfolio for each major product or product group.
Each portfolio would contain all the initiatives that help that particular product or product group
contribute to the success of the enterprise business strategy.
The portfolio manager
This is a new role for organizations that embrace a portfolio management approach. A portfolio
manager is responsible for continuing oversight of the contents within a portfolio. If you have
several portfolios within your portfolio structure, then you will likely need a portfolio manager
for each one. The exact range of responsibilities (and authority) will vary from one organization
to another, 1 but the basics are as follows:
• One portfolio manager oversees one portfolio.
• The portfolio manager provides day-to-day oversight.
• The portfolio manager periodically reviews the performance of, and conformance to
expectations for, initiatives within the portfolio.
• The portfolio manager ensures that data is collected and analyzed about each of the
initiatives in the portfolio.
• The portfolio manager enables periodic decision making about the future direction of
individual initiatives.

Portfolio reviews and decision making

As initiatives are executed, the organization should conduct periodic reviews of actual (versus
planned) performance and conformance to original expectations.
Typically, organization managers specify the frequency and contents for these periodic reviews,
and individual portfolio managers oversee their planning and execution. The reviews should be
multi-dimensional, including both tactical elements (e.g., adherence to plan, budget, and resource
allocation) and strategic elements (e.g., support for business strategy goals and delivery of
expected organizational benefits).
A significant aspect of oversight is setting multiple decision points for each initiative, so that
managers can periodically evaluate data and decide whether to continue the work. These
"continue/change/discontinue" decisions should be driven by an understanding (developed via
the periodic reviews) of a given initiative's continuing value, expected benefits, and strategic
contribution. Making these decisions at multiple points in the initiative's lifecycle helps to ensure
that managers will continually examine and assess changing internal and external circumstances,
needs, and performance

Portfolio management essentials

Every practical discipline is based on a collection of fundamental concepts that people have
identified and proven (and sometimes refined or discarded) through continuous application.
These concepts are useful until they become obsolete, supplanted by newer and more effective
ideas.
For example, in Roman times, engineers discovered that if the upstream supports of a bridge
were shaped to offer little resistance to the current of a stream or river, they would last longer.
They applied this principle all across the Roman Empire. Then, in the Middle Ages, engineers
discovered that such supports would last even longer if their downstream side was also shaped to
offer little resistance to the current. So that became the new standard for bridge construction.
Portfolio management, like bridge-building, is a discipline, and a number of authors and
practitioners have documented fundamental ideas about its exercise. Recently, based on our
experiences with clients who have implemented portfolio management practices and on our
research into the discipline, we have started to shape an IBM view of fundamental ideas around
portfolio management. We are beginning to express this view as a collection of "essentials" that
are, in turn, grouped around a small collection of portfolio management themes.
For example, one of these themes is initiative value contribution. It suggests that the value of an
initiative (i.e., a program or project) should be estimated and approved in order to start work, and
then assessed periodically on the basis of the initiative's contribution to the goals and goal
components in the enterprise business strategy. These assessments determine (in part) whether
the initiative warrants continued support.
This theme encompasses the notion that initiative value changes over time. When an initiative is
in the proposal stage, it is possible to quantify an anticipated value contribution. On this basis (in
part) the proposed initiative becomes an approved initiative. But what about an initiative that is a
large program effort, with a two-year duration? It is highly unlikely that the program's expected
value will remain static during the entire two-year period, so continuous value monitoring is
necessary. From this, we can derive an essential statement:
Initiative value changes and requires continuous monitoring over the life of the initiative.
In a future article, I will provide a more extensive discussion of portfolio management essentials,
as seen from an IBM viewpoint.

Conclusion
As a project-based enterprise, IBM has extensive experience in applying portfolio management
techniques and tools for its company business. In addition, IBM is a significant player in the
portfolio management marketplace, offering the IBM Rational Portfolio Manager along with
related services.
Recently, based on client and internal experiences, a survey of ideas, and research and
development efforts, IBM has developed a model of the types and nature of specific work efforts
that fall within the boundary of portfolio management. IBM is also conducting a variety of
efforts aimed at identifying a body of methods and practices that define, enable, and integrate the
work of portfolio management.
This is the first, in a series of articles that will deal with various aspects of the practice of
portfolio management, as well as the enabling body of definitions, models, and methods that
guide the execution of effective work effort in that space