(Portfolio Management Software) : Indian Institute of Finance

[PORTFOLIO MANAGEMENT SOFTWARE]
INTRODUCTION
Portfolio management is the discipline of planning, organizing, securing and managing

resources to bring about the successful completion of specific project goals and objectives. It
is sometimes conflated with program management, however technically a program is actually
a higher level construct: a group of related and somehow interdependent projects. A project is
a temporary endeavor, having a defined beginning and end (usually constrained by date, but
can be by funding or deliverables), undertaken to meet unique goals and objectives, usually to
bring about beneficial change or added value. The temporary nature of projects stands in
contrast to business as usual (or operations), which are repetitive, permanent or semi-
permanent functional work to produce products or services. In practice, the management of
these two systems is often found to be quite different, and as such requires the development
of distinct technical skills and the adoption of separate management.
OBJECTIVES OF THE PROJECT
• Learning and Understanding the concept of Portfolio.
• Understanding the Models of Portfolio Management.
• Learning about the Instruments in Portfolio.
• Advantages and Diadvantages of Portfolio management
• Application of Computer in Portfolio.
• Understanding the operation of the Software used in Portfolio.
• Advantages of Software used and it limitations.
INDIAN INSTITUTE OF FINANCE Page 1

RESEARCH METHODOLOGY
• PRIMARY DATA
Primary source is a term used in a number of disciplines to describe source material

that is closest to the person, information, period, or idea being studied.
• SECONDARY DATA
Secondary source is a document or recording that relates or discusses information

originally presented elsewhere. A secondary source contrasts with a primary source,
which is an original source of the information being discussed. Secondary sources
involve generalization, analysis, synthesis, interpretation, or evaluation of the original
information. Primary and secondary are relative terms, and some sources may be
classified as primary or secondary, depending on how it is used.
LIMITATIONS
• Project is based on Secondary data.
• Time constraint
Portfolio Management
Most investors leave the more technical aspects of portfolio management to their financial
consultants. However, this need not be the case. The average educated person can certainly
gain a grasp of the topic sufficient enough to make his or her own investment decisions. The
key to learning is gaining the knowledge and then practice applying it to your own portfolio
in small amounts until you feel confident enough to manage it completely on your own. This
article will briefly describe some of the concepts behind portfolio theory as well as some
general techniques applied by portfolio managers. There are many good books that can give
more in depth information if you feel this is something you would like to know more about.
The first important facet of portfolio management is understanding the two main decisions,
which are related but completely separate for purposes of practicality. These two decisions
are
1) Broad-based asset allocation and
2) Specific security selection
The most important thing an investor can do is go through the in-depth process of
determining a portfolio asset mix at the very onset of each year and again anytime there is a
significant change to their portfolio. It is only after this mix is determined that the process of
choosing individual investments should be made. Asset classes are by far a bigger factor in
overall performance than individual security selection as time invested increases. Or to put
this in a more pragmatic way, it doesn’t matter in a 10-year period of time which stock you
chose as much as it matters that you chose stock. This doesn’t mean an individual security
can’t make a difference. It just means that it becomes less important over a period of five
years or so since all securities of a given class tend to move toward an average performance
which balances out extreme movements in specific periods of time.
Another important facet of portfolio management is that one makes analytical decisions and
not make decisions based on hunches or emotion. This kind of pragmatic and analytical
approach will keep the average investor from making decisions to move money completely in
or out of a security or an asset class based upon the latest market rumors or the five o’clock
news. Regardless of what insight we feel inclined to follow, the numbers and the data of
past performance gives us clear indications that moving in and out of asset classes or
individual securities during adverse periods hurts more than it helps in the long run. And if a
decision is made to divest out of a specific security, it is always advised to dollar-cost

average out of the investment in the same manner that one should have dollar-cost averaged
“in”.
Dollar cost averaging is a technique by which an investor divides the given investment over a
period of time and invests that amount on a regular basis as opposed to buying in all at once.
This technique is covered in more detail in a previous article.
The simple concepts above can help you to begin making decisions like a professional. Of
course there are many other aspects of portfolio management that go in depth into both of the
above investment decisions. Look for those more detailed articles elsewhere on this website.
Portfolio management is the discipline of planning, organizing, securing and managing

resources to bring about the successful completion of specific project goals and objectives. It
is sometimes conflated with program management, however technically a program is actually
a higher level construct: a group of related and somehow interdependent projects. A project is
a temporary endeavor, having a defined beginning and end (usually constrained by date, but
can be by funding or deliverables), undertaken to meet unique goals and objectives, usually to
bring about beneficial change or added value. The temporary nature of projects stands in
contrast to business as usual (or operations), which are repetitive, permanent or semi-
permanent functional work to produce products or services. In practice, the management of
these two systems is often found to be quite different, and as such requires the development
of distinct technical skills and the adoption of separate management.
The primary challenge of project management is to achieve all of the project goals[4] and
objectives while honoring the preconceived project constraints.[5] Typical constraints are

scope, time, and budget.[1] The secondary—and more ambitious—challenge is to optimize the
allocation and integration of inputs necessary to meet pre-defined objectives.
History
Roman Soldiers Building a Fortress, Trajan's Column 113 ad.
Project management has been practiced since early civilization. Until 1900 civil engineering
projects were generally managed by creative architects and engineers themselves, among
those for example Vitruvius (1st century BC), Christopher Wren (1632–1723) , Thomas

Telford (1757-1834) and Isambard Kingdom Brunel (1806–1859). It was in the 1950s that
organizations started to systematically apply project management tools and techniques to
complex projects.
Henry Gantt (1861-1919), the father of planning and control techniques.
As a discipline, Project Management developed from several fields of application including

construction, engineering, and defense activity. Two forefathers of project management are
Henry Gantt, called the father of planning and control techniques[9], who is famous for his use
of the Gantt chart as a project management tool; and Henri Fayol for his creation of the 5
management functions which form the foundation of the body of knowledge associated with
project and program management.[10] Both Gantt and Fayol were students of Frederick
Winslow Taylor's theories of scientific management. His work is the forerunner to modern
project management tools including work breakdown structure (WBS) and resource
allocation.
The 1950s marked the beginning of the modern Project Management era. Project
management became recognized as a distinct discipline arising from the management
discipline.[11] In the United States, prior to the 1950s, projects were managed on an ad hoc
basis using mostly Gantt Charts, and informal techniques and tools. At that time, two
mathematical project-scheduling models were developed. The "Critical Path Method" (CPM)
was developed as a joint venture between DuPont Corporation and Remington Rand
Corporation for managing plant maintenance projects. And the "Program Evaluation and
Review Technique" or PERT, was developed by Booz-Allen & Hamilton as part of the
United States Navy's (in conjunction with the Lockheed Corporation) Polaris missile

submarine program;[12] These mathematical techniques quickly spread into many private
enterprises.
PERT network chart for a seven-month project with five milestones
At the same time, as project-scheduling models were being developed, technology for project
cost estimating, cost management, and engineering economics was evolving, with pioneering
work by Hans Lang and others. In 1956, the American Association of Cost Engineers (now
AACE International; the Association for the Advancement of Cost Engineering) was formed
by early practitioners of project management and the associated specialties of planning and
scheduling, cost estimating, and cost/schedule control (project control). AACE continued its
pioneering work and in 2006 released the first integrated process for portfolio, program and
project management (Total Cost Management Framework).
The International Project Management Association (IPMA) was founded in Europe in 1967,
[13]
as a federation of several national project management associations. IPMA maintains its
federal structure today and now includes member associations on every continent except
Antarctica. IPMA offers a Four Level Certification program based on the IPMA Competence
Baseline (ICB).[14] The ICB covers technical competences, contextual competences, and
behavioral competences.
In 1969, the Project Management Institute (PMI) was formed in the USA.[15] PMI publishes A
Guide to the Project Management Body of Knowledge (PMBOK Guide), which describes
project management practices that are common to "most projects, most of the time." PMI also
offers multiple certifications.
The AAPM American Academy of Project Management International Board of Standards

1996 was the first to institute post-graduate certifications such as the MPM Master Project

Manager, PME Project Management E-Business, CEC Certified-Ecommerce Consultant, and

CIPM Certified International project Manager. The AAPM also issues the post-graduate
standards body of knowledge for executives.
Approaches
There are a number of approaches to managing project activities including agile, interactive,
incremental, and phased approaches.
Regardless of the methodology employed, careful consideration must be given to the overall
project objectives, timeline, and cost, as well as the roles and responsibilities of all
participants and stakeholders.
The traditional approach
A traditional phased approach identifies a sequence of steps to be completed. In the

"traditional approach", we can distinguish 5 components of a project (4 stages plus control) in
the development of a project:
Typical development phases of a project
• Project initiation stage;

• Project planning or design stage;
• Project execution or production stage;
• Project monitoring and controlling systems;
• Project completion.
Not all the projects will visit every stage as projects can be terminated before they reach
completion. Some projects do not follow a structured planning and/or monitoring stages.
Some projects will go through steps 2, 3 and 4 multiple times.
Many industries use variations on these project stages. For example, when working on a brick
and mortar design and construction, projects will typically progress through stages like Pre-

Planning, Conceptual Design, Schematic Design, Design Development, Construction

Drawings (or Contract Documents), and Construction Administration. In software
development, this approach is often known as the waterfall model[16], i.e., one series of tasks
after another in linear sequence. In software development many organizations have adapted
the Rational Unified Process (RUP) to fit this methodology, although RUP does not require
or explicitly recommend this practice. Waterfall development works well for small, well
defined projects, but often fails in larger projects of undefined and ambiguous nature. The
Cone of Uncertainty explains some of this as the planning made on the initial phase of the
project suffers from a high degree of uncertainty. This becomes especially true as software
development is often the realization of a new or novel product. In projects where
requirements have not been finalized and can change, requirements management is used to
develop an accurate and complete definition of the behavior of software that can serve as the
basis for software development[17]. While the terms may differ from industry to industry, the
actual stages typically follow common steps to problem solving — "defining the problem,
weighing options, choosing a path, implementation and evaluation."
Critical Chain Project Management
Critical Chain Project Management (CCPM) is a method of planning and managing projects
that puts more emphasis on the resources (physical and human) needed in order to execute
project tasks. It is an application of the Theory of Constraints (TOC) to projects. The goal is
to increase the rate of throughput (or completion rates) of projects in an organization.
Applying the first three of the five focusing steps of TOC, the system constraint for all
projects is identified as are the resources. To exploit the constraint, tasks on the critical chain
are given priority over all other activities. Finally, projects are planned and managed to
ensure that the resources are ready when the critical chain tasks must start, subordinating all
other resources to the critical chain.
Regardless of project type, the project plan should undergo Resource Leveling, and the
longest sequence of resource-constrained tasks should be identified as the critical chain. In
multi-project environments, resource leveling should be performed across projects. However,
it is often enough to identify (or simply select) a single "drum" resource—a resource that acts

as a constraint across projects—and stagger projects based on the availability of that single
resource.
Planning and feedback loops in Extreme Programming (XP) with the time frames of the multiple
loops.
Extreme Project Management
In critical studies of Project Management, it has been noted that several of these
fundamentally PERT-based models are not well suited for the multi-project company
environment of today.[citation needed] Most of them are aimed at very large-scale, one-time, non-
routine projects, and nowadays all kinds of management are expressed in terms of projects.
Using complex models for "projects" (or rather "tasks") spanning a few weeks has been
proven to cause unnecessary costs and low maneuverability in several cases[citation needed].
Instead, project management experts try to identify different "lightweight" models, such as
Agile Project Management methods including Extreme Programming for software
development and Scrum techniques.
The generalization of Extreme Programming to other kinds of projects is extreme project

management, which may be used in combination with the process modeling and management
principles of human interaction management.
Event chain methodology
Event chain methodology is another method that complements critical path method and
critical chain project management methodologies.
Event chain methodology is an uncertainty modeling and schedule network analysis

technique that is focused on identifying and managing events and event chains that affect
project schedules. Event chain methodology helps to mitigate the negative impact of
psychological heuristics and biases, as well as to allow for easy modeling of uncertainties in
the project schedules. Event chain methodology is based on the following principles.

• Probabilistic moment of risk: An activity (task) in most real life processes is not a continuous
uniform process. Tasks are affected by external events, which can occur at some point in the
middle of the task.
• Event chains: Events can cause other events, which will create event chains. These event
chains can significantly affect the course of the project. Quantitative analysis is used to
determine a cumulative effect of these event chains on the project schedule.
• Critical events or event chains: The single events or the event chains that have the most
potential to affect the projects are the “critical events” or “critical chains of events.” They can
be determined by the analysis.
• Project tracking with events: Even if a project is partially completed and data about the
project duration, cost, and events occurred is available, it is still possible to refine information
about future potential events and helps to forecast future project performance.
• Event chain visualization: Events and event chains can be visualized using event chain
diagrams on a Gantt chart.
PRINCE2
The PRINCE2 process model
PRINCE2 is a structured approach to project management, released in 1996 as a generic

project management method.[18] It combined the original PROMPT methodology (which
evolved into the PRINCE methodology) with IBM's MITP (managing the implementation of
the total project) methodology. PRINCE2 provides a method for managing projects within a
clearly defined framework. PRINCE2 describes procedures to coordinate people and
activities in a project, how to design and supervise the project, and what to do if the project
has to be adjusted if it does not develop as planned.
In the method, each process is specified with its key inputs and outputs and with specific
goals and activities to be carried out. This allows for automatic control of any deviations from

the plan. Divided into manageable stages, the method enables an efficient control of
resources. On the basis of close monitoring, the project can be carried out in a controlled and
organized way.
PRINCE2 provides a common language for all participants in the project. The various
management roles and responsibilities involved in a project are fully described and are
adaptable to suit the complexity of the project and skills of the organization.
Process-based management
Capability Maturity Model, predecessor of the CMMI Model
Also furthering the concept of project control is the incorporation of process-based

management. This area has been driven by the use of Maturity models such as the CMMI
(Capability Maturity Model Integration) and ISO/IEC15504 (SPICE - Software Process
Improvement and Capability Estimation).
Agile Project Management approaches based on the principles of human interaction

management are founded on a process view of human collaboration. This contrasts sharply
with the traditional approach. In the agile software development or flexible product
development approach, the project is seen as a series of relatively small tasks conceived and
executed as the situation demands in an adaptive manner, rather than as a completely pre-
planned process.
Processes
This section relies largely or entirely upon a single source. Please help improve this article by

introducing appropriate citations of additional sources. (August 2010)
Traditionally, project management includes a number of elements: four to five process

groups, and a control system. Regardless of the methodology or terminology used, the same
basic project management processes will be used.
The project development stages[19]
Major process groups generally include:
• Initiation
• Planning or development
• Production or execution
• Monitoring and controlling
• Closing
In project environments with a significant exploratory element these stages may be

supplemented with decision points (go/no go decisions) at which the project's continuation is
debated and decided. An example is the Stage-Gate model.

Initiation
Initiating Process Group Processes[19]
The initiation processes determine the nature and scope of the project. If this stage is not
performed well, it is unlikely that the project will be successful in meeting the business’
needs. The key project controls needed here are an understanding of the business
environment and making sure that all necessary controls are incorporated into the project.
Any deficiencies should be reported and a recommendation should be made to fix them.
The initiation stage should include a plan that encompasses the

following areas:
• Analyzing the business needs/requirements in measurable goals

• Reviewing of the current operations
• Financial analysis of the costs and benefits including a budget
• Stakeholder analysis, including users, and support personnel for the project
• Project charter including costs, tasks, deliverables, and schedule
Planning and design
Planning Process Group Activities[19]

After the initiation stage, the project is planned to an appropriate level of detail. The main
purpose is to plan time, cost and resources adequately to estimate the work needed and to
effectively manage risk during project execution. As with the Initiation process group, a
failure to adequately plan greatly reduces the project's chances of successfully accomplishing
its goals.
Project planning generally consists of
• determining how to plan (e.g. by level of detail or rolling wave);

• developing the scope statement;
• selecting the planning team;
• identifying deliverables and creating the work breakdown structure;
• identifying the activities needed to complete those deliverables and networking the activities
in their logical sequence;
• estimating the resource requirements for the activities;
• estimating time and cost for activities;
• developing the schedule;
• developing the budget;
• risk planning;
• gaining formal approval to begin work.
Additional processes, such as planning for communications and for scope management,
identifying roles and responsibilities, determining what to purchase for the project and
holding a kick-off meeting are also generally advisable.
For new product development projects, conceptual design of the operation of the final
product may be performed concurrent with the project planning activities, and may help to
inform the planning team when identifying deliverables and planning activities.

Executing
Executing Process Group Processes[19]
Executing consists of the processes used to complete the work defined in the project
management plan to accomplish the project's requirements. Execution process involves
coordinating people and resources, as well as integrating and performing the activities of the
project in accordance with the project management plan. The deliverables are produced as
outputs from the processes performed as defined in the project management plan.
Monitoring and controlling
Monitoring and controlling consists of those processes performed to observe project

execution so that potential problems can be identified in a timely manner and corrective
action can be taken, when necessary, to control the execution of the project. The key benefit
is that project performance is observed and measured regularly to identify variances from the
project management plan.
Monitoring and Controlling Process Group Processes[19]
Monitoring and Controlling includes:
• Measuring the ongoing project activities ('where we are');

• Monitoring the project variables (cost, effort, scope, etc.) against the project management
plan and the project performance baseline (where we should be);
• Identify corrective actions to address issues and risks properly (How can we get on track
again);
• Influencing the factors that could circumvent integrated change control so only approved
changes are implemented
In multi-phase projects, the monitoring and controlling process also provides feedback
between project phases, in order to implement corrective or preventive actions to bring the
project into compliance with the project management plan.
Project Maintenance is an ongoing process, and it includes:
• Continuing support of end users

• Correction of errors
• Updates of the software over time
Monitoring and Controlling cycle
In this stage, auditors should pay attention to how effectively and quickly user problems are
resolved.
Over the course of any construction project, the work scope may change. Change is a normal
and expected part of the construction process. Changes can be the result of necessary design
modifications, differing site conditions, material availability, contractor-requested changes,
value engineering and impacts from third parties, to name a few. Beyond executing the
change in the field, the change normally needs to be documented to show what was actually
constructed. This is referred to as Change Management. Hence, the owner usually requires a
final record to show all changes or, more specifically, any change that modifies the tangible
portions of the finished work. The record is made on the contract documents – usually, but
not necessarily limited to, the design drawings. The end product of this effort is what the
industry terms as-built drawings, or more simply, “as built.” The requirement for providing
them is a norm in construction contracts.

When changes are introduced to the project, the viability of the project has to be re-assessed.
It is important not to lose sight of the initial goals and targets of the projects. When the
changes accumulate, the forecasted result may not justify the original proposed investment in
the project.
Closing
Closing Process Group Processes.[19]
Closing includes the formal acceptance of the project and the ending thereof. Administrative
activities include the archiving of the files and documenting lessons learned.
This phase consists of:
• Project close: Finalize all activities across all of the process groups to formally close the
project or a project phase
• Contract closure: Complete and settle each contract (including the resolution of any open
items) and close each contract applicable to the project or project phase.
Project control systems
Project control is that element of a project that keeps it on-track, on-time and within budget.
Project control begins early in the project with planning and ends late in the project with post-
implementation review, having a thorough involvement of each step in the process. Each
project should be assessed for the appropriate level of control needed: too much control is too
time consuming, too little control is very risky. If project control is not implemented
correctly, the cost to the business should be clarified in terms of errors, fixes, and additional
audit fees.
Control systems are needed for cost, risk, quality, communication, time, change,
procurement, and human resources. In addition, auditors should consider how important the
projects are to the financial statements, how reliant the stakeholders are on controls, and how

many controls exist. Auditors should review the development process and procedures for how
they are implemented. The process of development and the quality of the final product may
also be assessed if needed or requested. A business may want the auditing firm to be involved
throughout the process to catch problems earlier on so that they can be fixed more easily. An
auditor can serve as a controls consultant as part of the development team or as an
independent auditor as part of an audit.
Businesses sometimes use formal systems development processes. These help assure that
systems are developed successfully. A formal process is more effective in creating strong
controls, and auditors should review this process to confirm that it is well designed and is
followed in practice. A good formal systems development plan outlines:
• A strategy to align development with the organization’s broader objectives

• Standards for new systems
• Project management policies for timing and budgeting
• Procedures describing the process
• Evaluation of quality of change
Topics
Project managers
A project manager is a professional in the field of project management. Project managers can
have the responsibility of the planning, execution, and closing of any project, typically
relating to construction industry, engineering, architecture, computing, or
telecommunications. Many other fields in the production, design and service industries also
have project managers.
A project manager is the person accountable for accomplishing the stated project objectives.
Key project management responsibilities include creating clear and attainable project
objectives, building the project requirements, and managing the triple constraint for projects,
which is cost, time, and scope.

A project manager is often a client representative and has to determine and implement the
exact needs of the client, based on knowledge of the firm they are representing. The ability to
adapt to the various internal procedures of the contracting party, and to form close links with
the nominated representatives, is essential in ensuring that the key issues of cost, time, quality
and above all, client satisfaction, can be realized.
Project Management Triangle
The Project Management Triangle.
Like any human undertaking, projects need to be performed and delivered under certain
constraints. Traditionally, these constraints have been listed as "scope," "time," and "cost".[1]
These are also referred to as the "Project Management Triangle", where each side represents a
constraint. One side of the triangle cannot be changed without affecting the others. A further
refinement of the constraints separates product "quality" or "performance" from scope, and
turns quality into a fourth constraint.
The time constraint refers to the amount of time available to complete a project. The cost
constraint refers to the budgeted amount available for the project. The scope constraint refers
to what must be done to produce the project's end result. These three constraints are often
competing constraints: increased scope typically means increased time and increased cost, a
tight time constraint could mean increased costs and reduced scope, and a tight budget could
mean increased time and reduced scope.
The discipline of Project Management is about providing the tools and techniques that enable
the project team (not just the project manager) to organize their work to meet these
constraints.

Work Breakdown Structure
Example of a Work breakdown structure applied in a NASA reporting structure.[20]
The Work Breakdown Structure (WBS) is a tree structure, which shows a subdivision of
effort required to achieve an objective; for example a program, project, and contract. The
WBS may be hardware, product, service, or process oriented.
A WBS can be developed by starting with the end objective and successively subdividing it
into manageable components in terms of size, duration, and responsibility (e.g., systems,
subsystems, components, tasks, subtasks, and work packages), which include all steps
necessary to achieve the objective.[17]
The Work Breakdown Structure provides a common framework for the natural development
of the overall planning and control of a contract and is the basis for dividing work into
definable increments from which the statement of work can be developed and technical,
schedule, cost, and labor hour reporting can be established.[20]
Project Management Framework

Example of an IT Project Management Framework.[19]
The Program (Investment) Life Cycle integrates the project management and system
development life cycles with the activities directly associated with system deployment and
operation. By design, system operation management and related activities occur after the
project is complete and are not documented within this guide.[19]
For example, see figure, in the US United States Department of Veterans Affairs (VA) the
program management life cycle is depicted and describe in the overall VA IT Project
Management Framework to address the integration of OMB Exhibit 300 project (investment)
management activities and the overall project budgeting process. The VA IT Project
Management Framework diagram illustrates Milestone 4 which occurs following the
deployment of a system and the closing of the project. The project closing phase activities at
the VA continues through system deployment and into system operation for the purpose of
illustrating and describing the system activities the VA considers part of the project. The
figure illustrates the actions and associated artifacts of the VA IT Project and Program
Management process.[19]
International standards
There have been several attempts to develop Project Management standards, such as:
• Capability Maturity Model from the Software Engineering Institute.

• GAPPS, Global Alliance for Project Performance Standards- an open source standard
describing COMPETENCIES for project and program managers.
• A Guide to the Project Management Body of Knowledge
• HERMES method, Swiss general project management method, selected for use in
Luxembourg and international organizations.
• The ISO standards ISO 9000, a family of standards for quality management systems, and the
ISO 10006:2003, for Quality management systems and guidelines for quality management in
projects.
• PRINCE2, PRojects IN Controlled Environments.
• Team Software Process (TSP) from the Software Engineering Institute.
• Total Cost Management Framework, AACE International's Methodology for Integrated
Portfolio, Program and Project Management)

• V-Model, an original systems development method.

• The Logical framework approach, which is popular in international development
organizations.
• IAPPM, The International Association of Project & Program Management, guide to Project
Auditing and Rescuing Troubled Projects.
Project portfolio management
An increasing number of organizations are using, what is referred to as, project portfolio
management (PPM) as a means of selecting the right projects and then using project
management techniques[21] as the means for delivering the outcomes in the form of benefits to
the performing private or not-for-profit organization.
Project management methods are used 'to do projects right' and the methods used in PPM are
used 'to do the right projects'. In effect PPM is becoming the method of choice for selection
and prioritising among resource inter-related projects in many industries and sectors.
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]
Contents
• 1 Controversy over the "investment discipline" of PPM

• 2 Optimizing for payoff
• 3 Resource allocation
• 4 Pipeline management

• 5 Organizational applicability
• 6 References
• 7 Further reading
• 8 See also
Controversy over the "investment discipline" of PPM
Developers of PPM tools see their solutions as borrowing from the financial investment
world. However, other than using the word "portfolio", few can point to any specific portfolio
optimization methods implemented in their tools.
A project can be viewed as a composite of resource investments such as skilled labour and
associated salaries, IT hardware and software, and the opportunity cost of deferring other
project work. As project resources are constrained, business management can derive greatest
value by allocating these resources towards project work that is objectively and relatively
determined to meet business objectives more so than other project opportunities. Thus, the
decision to invest in a project can be made based upon criteria that measures the relative
benefits (eg. supporting business objectives) and its relative costs and risks to the
organization.
In principle, PPM attempts to address issues of resource allocation, e.g., money, time, people,
capacity, etc. In order for it to truly borrow concepts from the financial investment world, the
portfolio of projects and hence the PPM movement should be grounded in some financial
objective such as increasing shareholder value, top line growth, etc. Equally important, risks
must be computed in a statistically, actuarially meaningful sense. Optimizing resources and
projects without these in mind fails to consider the most important resource any organization
has and which is easily understood by people throughout the organization whether they be IT,
finance, marketing, etc and that resource is money.
While being tied largely to IT and fairly synonymous with IT portfolio management, PPM is
ultimately a subset of corporate portfolio management and should be exportable/utilized by
any group selecting and managing discretionary projects.[citation needed] However, most PPM

methods and tools opt for various subjective weighted scoring methods, not quantitatively
rigorous methods based on options theory, modern portfolio theory, Applied Information
Economics or operations research.
Beyond the project investment decision, PPM aims to support ongoing measurement of the
project portfolio so each project can be monitored for its relative contribution to business
goals. If a project is either performing below expectations (cost overruns, benefit erosion) or
is no longer highly aligned to business objectives (which change with natural market and
statutory evolution), management can choose to decommit from a project and redirect its
resources elsewhere. This analysis, done periodically, will "refresh" the portfolio to better
align with current states and needs.
Historically, many organizations were criticized for focusing on "doing the wrong things
well." PPM attempts to focus on a fundamental question: "Should we be doing this project or
this portfolio of projects at all?" One litmus test for PPM success is to ask "Have you ever
canceled a project that was on time and on budget?" With a true PPM approach in place, it is
much more likely that the answer is "yes." As goals change so should the portfolio mix of
what projects are funded or not funded no matter where they are in their individual lifecycles.
Making these portfolio level business investment decisions allows the organization to free up
resources, even those on what were before considered "successful" projects, to then work on
what is really important to the organization.
Optimizing for payoff
One method PPM tools or consultants might use is the use of decision trees with decision
nodes that allow for multiple options and optimize against a constraint. The organization in
the following example has options for 7 projects but the portfolio budget is limited to
$10,000,000. The selection made are the projects 1, 3, 6 and 7 with a total investment of
$7,740,000 - the optimum under these conditions. The portfolio's payoff is $2,710,000.

Presumably, all other combinations of projects would either exceed the budget or yield a
lower payoff. However, this is an extremely simplified representation of risk and is unlikely
to be realistic. Risk is usually a major differentiator among projects but it is difficult to
quantify risk in a statistically and actuarially meaningful manner (with probability theory,
Monte Carlo Method, statistical analysis, etc.). This places limits on the deterministic nature
of the results of a tool such as a decision tree (as predicted by modern portfolio theory).
Resource allocation
Resource allocation is a critical component of PPM. Once it is determined that one or many
projects meet defined objectives, the available resources of an organization must be evaluated
for its ability to meet project demand (aka as a demand "pipeline" discussed below). Effective
resource allocation typically requires an understanding of existing labor or funding resource
commitments (in either business operations or other projects) as well as the skills available in
the resource pool. Project investment should only be made in projects where the necessary
resources are available during a specified period of time.

Resources may be subject to physical constraints. For example, IT hardware may not be
readily available to support technology changes associated with ideal implementation
timeframe for a project. Thus, a holistic understanding of all project resources and their
availability must be conjoined with the decision to make initial investment or else projects
may encounter substantial risk during their lifecycle when unplanned resource constraints
arise to delay achieving project objectives.
Beyond the project investment decision, PPM involves ongoing analysis of the project
portfolio so each investment can be monitored for its relative contribution to business goals
versus other portfolio investments. If a project is either performing below expectations (cost
overruns, benefit erosion) or is no longer aligned to business objectives (which change with
natural market and statutory evolution), management can choose to decommit from a project
to stem further investment and redirect resources towards other projects that better fit
business objectives. This analysis can typically be performed on a periodic basis (eg.
quarterly or semi-annually) to "refresh" the portfolio for optimal business performance. In
this way both new and existing projects are continually monitored for their contributions to
overall portfolio health. If PPM is applied in this manner, management can more clearly and
transparently demonstrate its effectiveness to its shareholders or owners.
Implementing PPM at the enterprise level faces a challenge in gaining enterprise support
because investment decision criteria and weights must be agreed to by the key stakeholders of
the organization, each of whom may be incentivised to meet specific goals that may not
necessarily align with those of the entire organization. But if enterprise business objectives
can be manifested in and aligned with the objectives of its distinct business unit sub-
organizations, portfolio criteria agreement can be achieved more easily. (Assadourian 2005)
From a requirements management perspective Project Portfolio Management can be viewed

as the upper-most level of business requirements management in the company, seeking to
understand the business requirements of the company and what portfolio of projects should
be undertaken to achieve them. It is through portfolio management that each individual
project should receive its allotted business requirements (Denney 2005).
Pipeline management

In addition to managing the mix of projects in a company, Project Portfolio Management

must also determine whether (and how) a set of projects in the portfolio can be executed by a
company in a specified time, given finite development resources in the company. This is
called pipeline management. Fundamental to pipeline management is the ability to measure
the planned allocation of development resources according to some strategic plan. To do this,
a company must be able to estimate the effort planned for each project in the portfolio, and
then roll the results up by one or more strategic project types e.g., effort planned for research
projects. (Cooper et al. 1998); (Denney 2005) discusses project portfolio and pipeline
management in the context of use case driven development.
Organizational applicability
The complexity of PPM and other approaches to IT projects (e.g., treating them as a capital
investment) may render them not suitable for smaller or younger organizations. An obvious
reason for this is that a few IT projects doesn't make for much of a portfolio selection. Other
reasons include the cost of doing PPM—the data collection, the analysis, the documentation,
the education, and the change to decision-making processes.
Portfolio Management Services
Gone are the days when an investor could directly participate in the capital markets, for they
have not only become far more complex in terms of compliances, methodologies, effects and
analysis but also need a constant tracking mechanism. As is the case globally, the Indian
investor has also realized the advantages of seeking professional advice in order to not only
manage but also augment his portfolio.
We at Unicon in our constant endeavor to bring to our esteemed clients global methodology
have developed a proprietary model that has enabled us to outperform all major indices with
a fair degree of consistency, over the longer term. We continue to be positive of both our
approach and the Indian capital markets in general and especially so after UPA’s landslide
mandate to guide the country over the next 5 years. However, we believe that the out-
performance is more stock-specific and the major indices only provide a barometer for

evaluation. This view is expected to only be enhanced going forward, with larger players
entering the markets with globally fine-tuned analytical tools.
The Portfolio Management Schemes of the Company offer Discretionary Schemes (Unicon
Optimizer & Unicon Growth) for Individuals, Corporate Bodies, Partnership firms,
Proprietors, Non Resident Indians etc. The Company is registered with SEBI enabling it to
undertake Portfolio Management activities under a specific license.
The Schemes, duly approved by SEBI, are managed by a highly competent team comprising
of portfolio managers and equity strategists, backed by a team of fundamental, technical and
derivatives analysts. The principle objectives are to identify investment opportunities through
globally recognized analytical methodologies, given pre-defined risk parameters construct
portfolios to incorporate client objectives periodically review of portfolios in order to
consistently deliver returns surpassing the benchmarked index and tailor-make portfolios to
incorporate a judicious mix of equity, quazi-equity, money market instruments and derivate
products.
PMS is a very personalized service wherein each portfolio has to be specifically constructed
in order to reflect the objective and risk appetite of a particular client. Our qualified managers
are constantly evolving methodologies and financial models that provide them with a
composite mix of:
1. Medium term comprising of value investing and other fundament tools
2. Short term comprising primarily of technical analysis and tools
3. Hedging strategies comprising of derivative products
Along with this water tight investment evaluation strategy we have up in place an equally
foolproof client servicing and feedback methodology. All Investment advisors are hand
picked and trained on a gamut of Wealth product, this ensures that he is in a very good
position to deliver a wholesome wealth experience to the client.
UNICON PMS provides following benefits:
Strong Research Team
Profile based investment solution
Professional Fund Management
Strict Risk Management
Timely performance reporting
Periodic reviews & rebalancing
Dedicated relationship manager

ANALYSIS OF PORTFOLIO MANAGEMENT:-
Portfolio analysis involves quantifying the operational and financial impact of the portfolio. It
is vital to evaluate the functioning of investments and timing the returns effectively.
The analysis of a portfolio extends to all classes of investments such as bonds, equities,
indexes, commodities, funds, options and securities. Portfolio analysis gains importance
because each asset class
has peculiar risk factors and returns associated with it. Hence, the composition of a portfolio
impacts the rate of return on the overall investment.
Portfolio analysis is broadly carried out for each asset at two levels:
 Risk aversion: This method analyzes the portfolio composition while considering the risk
appetite of an investor. Some of the investors may prefer to play safe and accept low profits
rather than invest in risky assets generating high returns.
 Analyzing returns: While performing portfolio analysis, prospective returns are calculated
through the average and compound return methods. An average return is simply the
arithmetic average of returns from individual assets. However, compound return is the
arithmetic mean that considers the cumulative effect on overall returns.
The next step in portfolio analysis involves determining dispersion of returns. It is the
measure of volatility or standard deviation of returns for a particular asset. Simply put,
dispersion refers is the difference between the real interest rate and the calculated average
return. Measuring the recovery period after a negative market cycle is equally

Several specialized portfolio analysis software’s are available in the market to ease the task
for an investor. These application tools can analyze and predict future trends for almost every
investment asset. They provide essential data for decision making on the allocation of assets,
calculation of risks and attainment of investment objectives.
It is still advisable to hire professional experts for highly sophisticated portfolio compositions
as they can offer direct assistance to help their clients earn good returns.
MODERN PORTFOLIO THEORY:-
Modern portfolio theory (MPT) is a theory of investment which tries to maximize portfolio
expected return for a given amount of portfolio risk, or equivalently minimize risk for a given
level of expected return, by carefully choosing the proportions of various assets. Although
MPT is widely used in practice in the financial industry and several of its creators won a
Nobel prize for the theory, in recent years the basic assumptions of MPT have been widely
challenged by fields such as behavioral economics.
MPT is a mathematical formulation of the concept of diversification in investing, with the

aim of selecting a collection of investment assets that has collectively lower risk than any
individual asset. That this is possible can be seen intuitively because different types of assets
often change in value in opposite ways. For example, when prices in the stock market fall,
prices in the bond market often increase, and vice versa[citation needed]. A collection of both types
of assets can therefore have lower overall risk than either individually. But diversification
lowers risk even if assets' returns are not negatively correlated—indeed, even if they are
positively correlated.
More technically, MPT models an asset's return as a normally distributed (or more generally
as an elliptically distributed random variable), defines risk as the standard deviation of return,
and models a portfolio as a weighted combination of assets so that the return of a portfolio is
the weighted combination of the assets' returns. By combining different assets whose returns

are not perfectly positively correlated, MPT seeks to reduce the total variance of the portfolio
return. MPT also assumes that investors are rational and markets are efficient.
MPT was developed in the 1950s through the early 1970s and was considered an important
advance in the mathematical modeling of finance. Since then, many theoretical and practical
criticisms have been leveled against it. These include the fact that financial returns do not
follow a Gaussian distribution or indeed any symmetric distribution, and that correlations
between asset classes are not fixed but can vary depending on external events (especially in
crises). Further, there is growing evidence that investors are not rational and markets are not
efficient.[1][2]
Concept
The fundamental concept behind MPT is that the assets in an investment portfolio cannot be
selected individually, each on their own merits. Rather, it is important to consider how each
asset changes in price relative to how every other asset in the portfolio changes in price.
Investing is a tradeoff between risk and expected return. In general, assets with higher
expected returns are riskier. For a given amount of risk, MPT describes how to select a
portfolio with the highest possible expected return. Or, for a given expected return, MPT
explains how to select a portfolio with the lowest possible risk (the targeted expected return
cannot be more than the highest-returning available security, of course, unless negative
holdings of assets are possible.)[3]
MPT is therefore a form of diversification. Under certain assumptions and for specific
quantitative definitions of risk and return, MPT explains how to find the best possible
diversification strategy.
Mathematical model
In some sense the mathematical derivation below is MPT, although the basic concepts behind
the model have also been very influential.[3]
This section develops the "classic" MPT model. There have been many extensions since.
Risk and expected return
MPT assumes that investors are risk averse, meaning that given two portfolios that offer the
same expected return, investors will prefer the less risky one. Thus, an investor will take on
increased risk only if compensated by higher expected returns. Conversely, an investor who
wants higher expected returns must accept more risk. The exact trade-off will be the same for
all investors, but different investors will evaluate the trade-off differently based on individual
risk aversion characteristics. The implication is that a rational investor will not invest in a
portfolio if a second portfolio exists with a more favorable risk-expected return profile – i.e.,
if for that level of risk an alternative portfolio exists which has better expected returns.
Note that the theory uses standard deviation of return as a proxy for risk. There are problems
with this, however; see criticism.
Under the model:
• Portfolio return is the proportion-weighted combination of the constituent assets' returns.

• Portfolio volatility is a function of the correlations ρij of the component assets, for all asset
pairs (i, j).
In general:
• Expected return:
where Rp is the return on the portfolio, Ri is the return on asset i and wi is the weighting of
component asset i (that is, the share of asset i in the portfolio).
• Portfolio return variance:

where ρij is the correlation coefficient between the returns on assets i and j. Alternatively the
expression can be written as:
where ρij = 1 for i=j.
• Portfolio return volatility (standard deviation):
For a two asset portfolio:
• Portfolio return:
• Portfolio variance:
For a three asset portfolio:
• Portfolio return:
• Portfolio variance:
Diversification
An investor can reduce portfolio risk simply by holding combinations of instruments which
are not perfectly positively correlated (correlation coefficient -1 <= ρij < 1)). In other words,
investors can reduce their exposure to individual asset risk by holding a diversified portfolio
of assets. Diversification may allow for the same portfolio expected return with reduced risk.
If all the asset pairs have correlations of 0—they are perfectly uncorrelated—the portfolio's
return variance is the sum over all assets of the square of the fraction held in the asset times
the asset's return variance (and the portfolio standard deviation is the square root of this sum).

The efficient frontier with no risk-free asset
Efficient Frontier. The hyperbola is sometimes referred to as the 'Markowitz Bullet', and is the
efficient frontier if no risk-free asset is available.
As shown in this graph, every possible combination of the risky assets, without including any
holdings of the risk-free asset, can be plotted in risk-expected return space, and the collection
of all such possible portfolios defines a region in this space. The left boundary of this region
is a hyperbola,[6] and the upper edge of this region is the efficient frontier in the absence of a
risk-free asset (sometimes called "the Markowitz bullet"). Combinations along this upper
edge represent portfolios (including no holdings of the risk-free asset) for which there is
lowest risk for a given level of expected return. Equivalently, a portfolio lying on the efficient
frontier represents the combination offering the best possible expected return for given risk
level.
Matrices are preferred for calculations of the efficient frontier. In matrix form, for a given
"risk tolerance" , the efficient frontier is found by minimizing the following

expression:
wTΣw − q * RTw
where
• w is a vector of portfolio weights and

wi = 1.
∑
• (The weights can be negative, which means investors can short a security.);
• Σ is the covariance matrix for the returns on the assets in the portfolio;
• is a "risk tolerance" factor, where 0 results in the portfolio with minimal risk
and results in the portfolio infinitely far out the frontier with both expected return
and risk unbounded; and
• R is a vector of expected returns.
• wTΣw is the variance of portfolio return.
• RTw is the expected return on the portfolio.
The above optimization finds the point on the frontier at which the inverse of the slope of the
frontier would be q if portfolio return variance instead of standard deviation were plotted
horizontally. The frontier in its entirely is parametric on q.
Many software packages, including Microsoft Excel, MATLAB, Mathematics and R, provide
optimization routines suitable for the above problem.
An alternative approach to specifying the efficient frontier is to do so parametrically on

expected portfolio return RTw. This version of the problem requires that we minimize
wTΣw
subject to
RTw = μ
for parameter μ. This problem is easily solved using a Lagrange multiplier.
The two mutual fund theorem
One key result of the above analysis is the two mutual fund theorem.[6] This theorem states
that any portfolio on the efficient frontier can be generated by holding a combination of any
two given portfolios on the frontier; the latter two given portfolios are the "mutual funds" in

the theorem's name. So in the absence of a risk-free asset, an investor can achieve any desired
efficient portfolio even if all that is accessible is a pair of efficient mutual funds. If the
location of the desired portfolio on the frontier is between the locations of the two mutual
funds, both mutual funds will be held in positive quantities. If the desired portfolio is outside
the range spanned by the two mutual funds, then one of the mutual funds must be sold short
(held in negative quantity) while the size of the investment in the other mutual fund must be
greater than the amount available for investment (the excess being funded by the borrowing
from the other fund).
The risk-free asset and the capital allocation line

Main article: Capital allocation line
The risk-free asset is the (hypothetical) asset which pays a risk-free rate. In practice, short-
term government securities (such as US treasury bills) are used as a risk-free asset, because
they pay a fixed rate of interest and have exceptionally low default risk. The risk-free asset
has zero variance in returns (hence is risk-free); it is also uncorrelated with any other asset
(by definition, since its variance is zero). As a result, when it is combined with any other
asset, or portfolio of assets, the change in return is linearly related to the change in risk as the
proportions in the combination vary.
When a risk-free asset is introduced, the half-line shown in the figure is the new efficient
frontier. It is tangent to the hyperbola at the pure risky portfolio with the highest Sharpe ratio.
Its horizontal intercept represents a portfolio with 100% of holdings in the risk-free asset; the
tangency with the hyperbola represents a portfolio with no risk-free holdings and 100% of
assets held in the portfolio occurring at the tangency point; points between those points are
portfolios containing positive amounts of both the risky tangency portfolio and the risk-free
asset; and points on the half-line beyond the tangency point are leveraged portfolios
involving negative holdings of the risk-free asset (the latter has been sold short—in other
words, the investor has borrowed at the risk-free rate) and an amount invested in the tangency
portfolio equal to more the 100% of the investor's initial capital. This efficient half-line is
called the capital allocation line (CAL), and its formula can be shown to be

In this formula P is the sub-portfolio of risky assets at the tangency with the Markowitz
bullet, F is the risk-free asset, and C is a combination of portfolios P and F.
By the diagram, the introduction of the risk-free asset as a possible component of the
portfolio has improved the range of risk-expected return combinations available, because
everywhere except at the tangency portfolio the half-line gives a higher expected return than
the hyperbola does at every possible risk level. The fact that all points on the linear efficient
locus can be achieved by a combination of holdings of the risk-free asset and the tangency
portfolio is known as the one mutual fund theorem,[6] where the mutual fund referred to is
the tangency portfolio.
Asset pricing using MPT
The above analysis describes optimal behavior of an individual investor. Asset pricing theory
builds on this analysis in the following way. Since everyone holds the risky assets in identical
proportions to each other—namely in the proportions given by the tangency portfolio—in
market equilibrium the risky assets' prices, and therefore their expected returns, will adjust so
that the ratios in the tangecy portfolio are the same as the ratios in which the risky assets are
supplied to the market. Thus relative supplies will equal relative demands. MPT derives the
required expected return for a correctly priced asset in this context.
Systematic risk and specific risk
Specific risk is the risk associated with individual assets - within a portfolio these risks can be
reduced through diversification (specific risks "cancel out"). Specific risk is also called
diversifiable, unique, unsystematic, or idiosyncratic risk. Systematic risk (a.k.a. portfolio risk
or market risk) refers to the risk common to all securities - except for selling short as noted
below, systematic risk cannot be diversified away (within one market). Within the market
portfolio, asset specific risk will be diversified away to the extent possible. Systematic risk is
therefore equated with the risk (standard deviation) of the market portfolio.

Since a security will be purchased only if it improves the risk-expected return characteristics
of the market portfolio, the relevant measure of the risk of a security is the risk it adds to the
market portfolio, and not its risk in isolation. In this context, the volatility of the asset, and its
correlation with the market portfolio, are historically observed and are therefore given. (There
are several approaches to asset pricing that attempt to price assets by modelling the stochastic
properties of the moments of assets' returns - these are broadly referred to as conditional asset
pricing models.)
Systematic risks within one market can be managed through a strategy of using both long and
short positions within one portfolio, creating a "market neutral" portfolio.
Capital asset pricing model

Main article: Capital Asset Pricing Model
The asset return depends on the amount paid for the asset today. The price paid must ensure
that the market portfolio's risk / return characteristics improve when the asset is added to it.
The CAPM is a model which derives the theoretical required expected return (i.e., discount
rate) for an asset in a market, given the risk-free rate available to investors and the risk of the
market as a whole. The CAPM is usually expressed:
• β, Beta, is the measure of asset sensitivity to a movement in the overall market; Beta is
usually found via regression on historical data. Betas exceeding one signify more than
average "riskiness" in the sense of the asset's contribution to overall portfolio risk; betas
below one indicate a lower than average risk contribution.
• is the market premium, the expected excess return of the market

portfolio's expected return over the risk-free rate.
This equation can be statistically estimated using the following regression equation:

where αi is called the asset's alpha , βi is the asset's beta coefficient and SCL is the Securities
Characteristics Line.
Once an asset's expected return, E(Ri), is calculated using CAPM, the future cash flows of the
asset can be discounted to their present value using this rate to establish the correct price for
the asset. A riskier stock will have a higher beta and will be discounted at a higher rate; less
sensitive stocks will have lower betas and be discounted at a lower rate. In theory, an asset is
correctly priced when its observed price is the same as its value calculated using the CAPM
derived discount rate. If the observed price is higher than the valuation, then the asset is
overvalued; it is undervalued for a too low price.
(1) The incremental impact on risk and expected return when an additional risky asset, a, is
added to the market portfolio, m, follows from the formulae for a two-asset portfolio. These
results are used to derive the asset-appropriate discount rate.
Market portfolio's risk =
Hence, risk added to portfolio =
but since the weight of the asset will be relatively low,
i.e. additional risk =
Market portfolio's expected return =
Hence additional expected return =
(2) If an asset, a, is correctly priced, the improvement in its risk-to-expected return ratio
achieved by adding it to the market portfolio, m, will at least match the gains of spending that
money on an increased stake in the market portfolio. The assumption is that the investor will
purchase the asset with funds borrowed at the risk-free rate, Rf; this is rational if
Thus:

i.e. :
i.e. :
is the “beta”, β -- the covariance between the asset's return and the
market's return divided by the variance of the market return— i.e. the sensitivity of
the asset price to movement in the market portfolio's value.
Criticism
Despite its theoretical importance, some people question whether MPT is an ideal investing
strategy, because its model of financial markets does not match the real world in many ways.
Assumptions
The mathematical framework of MPT makes many assumptions about investors and markets.
Some are explicit in the equations, such as the use of Normal distributions to model returns.
Others are implicit, such as the neglect of taxes and transaction fees. None of these
assumptions are entirely true, and each of them compromises MPT to some degree.
• Asset returns are (jointly) normally distributed random variables. In fact, it is

frequently observed that returns in equity and other markets are not normally
distributed. Large swings (3 to 6 standard deviations from the mean) occur in the
market far more frequently than the normal distribution assumption would predict.[7]
While the model can also be justified by assuming any return distribution which is
jointly elliptical[8][9], all the joint elliptical distributions are symmetrical whereas asset
returns empirically are not.
• Correlations between assets are fixed and constant forever. Correlations depend
on systemic relationships between the underlying assets, and change when these
relationships change. Examples include one country declaring war on another, or a
general market crash. During times of financial crisis all assets tend to become
positively correlated, because they all move (down) together. In other words, MPT
breaks down precisely when investors are most in need of protection from risk.
• All investors aim to maximize economic utility (in other words, to make as much
money as possible, regardless of any other considerations). This is a key
assumption of the efficient market hypothesis, upon which MPT relies.
• All investors are rational and risk-averse. This is another assumption of the
efficient market hypothesis, but we now know from behavioral economics that market
participants are not rational. It does not allow for "herd behavior" or investors who
will accept lower returns for higher risk. Casino gamblers clearly pay for risk, and it is
possible that some stock traders will pay for risk as well.
• All investors have access to the same information at the same time. This also
comes from the efficient market hypothesis. In fact, real markets contain information
asymmetry, insider trading, and those who are simply better informed than others.
• Investors have an accurate conception of possible returns, i.e., the probability

beliefs of investors match the true distribution of returns. A different possibility is
that investors' expectations are biased, causing market prices to be information ally
inefficient. This possibility is studied in the field of behavioral finance, which uses
psychological assumptions to provide alternatives to the CAPM such as the
overconfidence-based asset pricing model of Kent Daniel, David Hirshleifer, and
Avanidhar Subrahmanyam (2001).[10]
• There are no taxes or transaction costs. Real financial products are subject both to
taxes and transaction costs (such as broker fees), and taking these into account will
alter the composition of the optimum portfolio. These assumptions can be relaxed
with more complicated versions of the model.[citation needed]
• All investors are price takers, i.e., their actions do not influence prices. In reality,
sufficiently large sales or purchases of individual assets can shift market prices for
that asset and others (via cross-elasticity of demand.) An investor may not even be
able to assemble the theoretically optimal portfolio if the market moves too much
while they are buying the required securities.

• Any investor can lend and borrow an unlimited amount at the risk free rate of
interest. In reality, every investor has a credit limit.
• All securities can be divided into parcels of any size. In reality, fractional shares
usually cannot be bought or sold, and some assets have minimum orders sizes.
More complex versions of MPT can take into account a more sophisticated model of the
world (such as one with non-normal distributions and taxes) but all mathematical models of
finance still rely on many unrealistic premises.
MPT does not really model the market
The risk, return, and correlation measures used by MPT are based on expected values, which
means that they are mathematical statements about the future (the expected value of returns is
explicit in the above equations, and implicit in the definitions of variance and covariance.) In
practice investors must substitute predictions based on historical measurements of asset
return and volatility for these values in the equations. Very often such expected values fail to
take account of new circumstances which did not exist when the historical data were
generated.
More fundamentally, investors are stuck with estimating key parameters from past market
data because MPT attempts to model risk in terms of the likelihood of losses, but says
nothing about why those losses might occur. The risk measurements used are probabilistic in
nature, not structural. This is a major difference as compared to many engineering approaches
to risk management.
Options theory and MPT have at least one important conceptual difference from the
probabilistic risk assessment done by nuclear power [plants]. A PRA is what economists
would call a structural model. The components of a system and their relationships are
modeled in Monte Carlo simulations. If valve X fails, it causes a loss of back pressure on
pump Y, causing a drop in flow to vessel Z, and so on.
But in the Black-Scholes equation and MPT, there is no attempt to explain an underlying
structure to price changes. Various outcomes are simply given probabilities. And, unlike the

PRA, if there is no history of a particular system-level event like a liquidity crisis, there is no
way to compute the odds of it. If nuclear engineers ran risk management this way, they would
never be able to compute the odds of a meltdown at a particular plant until several similar
events occurred in the same reactor design.
—Douglas W. Hubbard, 'The Failure of Risk Management', p. 67, John Wiley & Sons, 2009.
ISBN 978-0-470-38795-5
Essentially, the mathematics of MPT view the markets as a collection of dice. By examining
past market data we can develop hypotheses about how the dice are weighted, but this isn't
helpful if the markets are actually dependent upon a much bigger and more complicated
chaotic system -- the world. For this reason, accurate structural models of real financial
markets are unlikely to be forthcoming because they would essentially be structural models
of the entire world. Nonetheless there is growing awareness of the concept of systemic risk in
financial markets, which should lead to more sophisticated market models.
Variance is not a good measure of risk
Mathematical risk measurements are also useful only to the degree that they reflect investors'
true concerns -- there is no point minimizing a variable that nobody cares about in practice.
MPT uses the mathematical concept of variance to quantify risk, and this might be justified
under the assumption of elliptically distributed returns such as normally distributed returns,
but for general return distributions other risk measures (like coherent risk measures) might
better reflect investors' true preferences.
In particular, variance is a symmetric measure that counts abnormally high returns as just as
risky as abnormally low returns. Some would argue that, in reality, investors are only
concerned about losses, and do not care about the dispersion or tightness of above-average
returns. According to this view, our intuitive concept of risk is fundamentally asymmetric in
nature.

"Optimal" doesn't necessarily mean "most profitable"
MPT does not account for the social, environmental, strategic, or personal dimensions of
investment decisions. It only attempts to maximize risk-adjusted returns, without regard to
other consequences. In a narrow sense, its complete reliance on asset prices makes it
vulnerable to all the standard market failures such as those arising from information
asymmetry, externalities, and public goods. It also rewards corporate fraud and dishonest
accounting. More broadly, a firm may have strategic or social goals that shape its investment
decisions, and an individual investor might have personal goals. In either case, information
other than historical returns is relevant.
See also socially-responsible investing, fundamental analysis.
Extensions
Since MPT's introduction in 1952, many attempts have been made to improve the model,
especially by using more realistic assumptions.
Post-modern portfolio theory extends MPT by adopting non-normally distributed,

asymmetric measures of risk. This helps with some of these problems, but not others.
Black-Litterman model optimization is an extension of unconstrained Markowitz

optimization which incorporates relative and absolute `views' on inputs of risk and returns.
Other Applications
Applications to project portfolios and other "non-financial"

assets
Some experts apply MPT to portfolios of projects and other assets besides financial
instruments.[11] When MPT is applied outside of traditional financial portfolios, some
differences between the different types of portfolios must be considered.

1. The assets in financial portfolios are, for practical purposes, continuously divisible while
portfolios of projects like new software development are "lumpy". For example, while we can
compute that the optimal portfolio position for 3 stocks is, say, 44%, 35%, 21%, the optimal
position for an IT portfolio may not allow us to simply change the amount spent on a project.
IT projects might be all or nothing or, at least, have logical units that cannot be separated. A
portfolio optimization method would have to take the discrete nature of some IT projects into
account.
2. The assets of financial portfolios are liquid can be assessed or re-assessed at any point in time
while opportunities for new projects may be limited and may appear in limited windows of
time and projects that have already been initiated cannot be abandoned without the loss of the
sunk costs (i.e., there is little or no recovery/salvage value of a half-complete IT project).
Neither of these necessarily eliminate the possibility of using MPT and such portfolios. They
simply indicate the need to run the optimization with an additional set of mathematically-
expressed constraints that would not normally apply to financial portfolios.
Furthermore, some of the simplest elements of Modern Portfolio Theory are applicable to
virtually any kind of portfolio. The concept of capturing the risk tolerance of an investor by
documenting how much risk is acceptable for a given return could be and is applied to a
variety of decision analysis problems. MPT, however, uses historical variance as a measure
of risk and portfolios of assets like IT projects don't usually have an "historical variance" for
a new piece of software. In this case, the MPT investment boundary can be expressed in more
general terms like "chance of an ROI less than cost of capital" or "chance of losing more than
half of the investment". When risk is put in terms of uncertainty about forecasts and possible
losses then the concept is transferable to various types of investment.[11]
Application to other disciplines
In the 1970s, concepts from Modern Portfolio Theory found their way into the field of
regional science. In a series of seminal works, Michael Conroy modeled the labor force in the
economy using portfolio-theoretic methods to examine growth and variability in the labor
force. This was followed by a long literature on the relationship between economic growth
and volatility.[12]

More recently, modern portfolio theory has been used to model the self-concept in social
psychology. When the self attributes comprising the self-concept constitute a well-diversified
portfolio, then psychological outcomes at the level of the individual such as mood and self-
esteem should be more stable than when the self-concept is undiversified. This prediction has
been confirmed in studies involving human subjects.[13]
Recently, modern portfolio theory has been applied to modelling the uncertainty and
correlation between documents in information retrieval. Given a query, the aim is to
maximize the overall relevance of a ranked list of documents and at the same time minimize
the overall uncertainty of the ranked list .
Comparison with arbitrage pricing theory
The SML and CAPM are often contrasted with the arbitrage pricing theory (APT), which
holds that the expected return of a financial asset can be modeled as a linear function of
various macro-economic factors, where sensitivity to changes in each factor is represented by
a factor specific beta coefficient.
The APT is less restrictive in its assumptions: it allows for an explanatory (as opposed to
statistical) model of asset returns, and assumes that each investor will hold a unique portfolio
with its own particular array of betas, as opposed to the identical "market portfolio". Unlike
the CAPM, the APT, however, does not itself reveal the identity of its priced factors - the
number and nature of these factors is likely to change over time and between economies.

UNDERSTANDING PORTFOLIO MANAGEMENT
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.
• 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.
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 Management is used to select a portfolio of new product development projects to

achieve the 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.

The chart shown above provides a graphical view of the project portfolio risk-reward balance.
It is used to assure balance in the portfolio of projects - neither too risky nor conservative and
appropriate levels of reward for the risk involved. The horizontal axis is Net Present Value;
the vertical axis is Probability of Success. The size of the bubble is proportional to the total
revenue generated over the lifetime sales of the product.
While this visual presentation is useful, it can't prioritize projects. Therefore, some mix of
these techniques is appropriate to support the Portfolio Management Process. This mix is
often dependent upon the priority of the goals.
Our recommended approach is to start with the overall business plan that should define the
planned level of R&D investment, resources (e.g., headcount, etc.), and related sales expected
from new products. With multiple business units, product lines or types of development, we
recommend a strategic allocation process based on the business plan. This strategic allocation
should apportion the planned R&D investment into business units, product lines, markets,
geographic areas, etc. It may also breakdown the R&D investment into types of development,
e.g., technology development, platform development, new products, and
upgrades/enhancements/line extensions, etc.
Once this is done, then a portfolio listing can be developed including the relevant portfolio
data. We favor use of the development productivity index (DPI) or scores from the scoring
method. The development productivity index is calculated as follows: (Net Present Value x
Probability of Success) / Development Cost Remaining. It factors the NPV by the probability
of both technical and commercial success. By dividing this result by the development cost
remaining, it places more weight on projects nearer completion and with lower uncommitted
costs. The scoring method uses a set of criteria (potentially different for each stage of the
project) as a basis for scoring or evaluating each project.
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 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.
Governance
Implementing portfolio management practices in an organization is a transformation effort
that typically involves developing new capabilities to address new work efforts, defining (and
filling) new roles to identify portfolios (collections of work to be done), and delineating
boundaries among work efforts and collections.
Implementing portfolio management also requires creating a structure to provide planning,
continuing direction, and oversight and control for all portfolios and the initiatives they
encompass. That is where the notion of governance comes into play. The IBM view of
governance is:
An abstract, collective term that defines and contains a framework for
organization, exercise of control and oversight, and decision-making authority,
and within which actions and activities are legitimately and properly executed;
together with the definition of the functions, the roles, and the responsibilities of
those who exercise this oversight and decision-making.
Portfolio management governance involves multiple dimensions, including:

• Defining and maintaining an enterprise business strategy.
• Defining and maintaining a portfolio structure containing all of the
organization's initiatives (programs, projects, etc.).
• Reviewing and approving business cases that propose the creation of new
initiatives.
• Providing oversight, control, and decision-making for all ongoing
initiatives.
• Ownership of portfolios and their contents.

Each of these dimensions requires an owner -- either an individual or a collective -- to

develop and approve plans, continuously adjust direction, and exercise control through
periodic assessment and review of conformance to expectations.
A good governance structure decomposes both the types of work and the authority to plan
and oversee work. It defines individual and collective roles, and links them to an authority
scheme. Policies that are collectively developed and agreed upon provide a framework for the
exercise of governance.
The complexities of governance structures extend well beyond the scope of this article. Many
organizations turn to experts for help in this area because it is so critical to the success of any
business transformation effort that encompasses portfolio management. For now, suffice it to
say that it is worth investing time and effort to create a sound and flexible governance
structure before you attempt to implement portfolio management practices.
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.
Portfolio Management Process
The Processes on Demand portfolio management process is a best practice for management
of the projects and programs of the portfolio. The portfolio management process steps
include:
 Portfolio Management Process

• Identification
• Categorization
• Evaluation
• Selection
• Prioritization
• Balancing
• Authorization
• Review and Reporting
• Strategic Change
 Governance Process
• Consultation
• Preparation
• Selection
 Portfolio Management Dashboards
• Status Summary View

• Gantt View
• Cost View
• Risk view
The process of portfolio management provides a better understanding about the benefits, loss
and the risks regarding the business. The outcome of the process of the portfolio management
is evaluated with the performance graph of the organization. The portfolio management is
differentiated into two major types. They are the enterprise portfolio management process
and the project portfolio management process.
The enterprise portfolio management gives information regarding the amount of finance to be
spent over the business and the requirement of the
enterprise architecture. The project portfolio management gives an analytical approach to the
decisions over the sets of portfolio.
Portfolio management is the best process or making planned decisions and

also for determining the expenditures of the business. An effective way of portfolio
management ensures the growth of the organization and also the other business
establishments of the organization.
1. Value Maximization
Allocate resources to maximize the value of the portfolio via a number of key
objectives such as profitability, ROI, and acceptable risk. A variety of methods
are used to achieve this maximization goal, ranging from financial methods to
scoring models.
2. Balance
Achieve a desired balance of projects via a number of parameters: risk versus
return; short-term versus long-term; and across various markets, business
arenas and technologies. Typical methods used to reveal balance include bubble
diagrams, histograms and pie charts.
3. Business Strategy Alignment

Ensure that the portfolio of projects reflects the company’s product innovation
strategy and that the breakdown of spending aligns with the company’s strategic
priorities. The three main approaches are: top-down (strategic buckets); bottom-

up (effective gate keeping and decision criteria) and top-down and bottom-up
(strategic check).
4. Pipeline Balance
Obtain the right number of projects to achieve the best balance between the
pipeline resource demands and the resources available. The goal is to avoid
pipeline gridlock (too many projects with too few resources) at any given time. A
typical approach is to use a rank ordered priority list or a resource supply and
demand assessment.
5. Sufficiency
Ensure the revenue (or profit) goals set out in the product innovation strategy
are achievable given the projects currently underway. Typically this is conducted
via a financial analysis of the pipeline’s potential future value.
What are the benefits of Portfolio Management?
When implemented properly and conducted on a regular basis, Portfolio

Management is a high impact, high value activity:
• Maximizes the return on your product innovation investments

• Maintains your competitive position
• Achieves efficient and effective allocation of scarce resources
• Forges a link between project selection and business strategy
• Achieves focus
• Communicates priorities
• Achieves balance
• Enables objective project selection
Top performers emphasize the link between project selection and business
strategy.
Why is it so important?
Companies without effective new product portfolio management and project

selection face a slippery road downhill. Many of the problems that plague new
product development initiatives in businesses can be directly traced to

ineffective portfolio management. According to benchmarking studies conducted

by Dr. Cooper and Dr. Edgett, some of the problems that arise when portfolio
management is lacking are:
• Projects are not high value to the business

• Portfolio has a poor balance in project types
• Resource breakdown does not reflect the product innovation strategy
• A poor job is done in ranking and prioritizing projects
• There is a poor balance between the number of projects underway and the
resources available
• Projects are not aligned with the business strategy
As a result too many companies have:
• Too many projects underway (often the wrong ones)

• Resources are spread too thin and across too many projects
• Projects are taking too long to get to market, and
• The pipeline has too many low value projects
Portfolio Management is about doing the right projects. If you pick the right
projects, the result is an enviable portfolio of high value projects: a portfolio that
is properly balanced and most importantly, supports your business strategy.
Models
 Arbitrage pricing theory Some of the financial models used in the process
of Valuation, stock selection, and management of portfolios include:
 Maximizing return, given an acceptable level of risk
 Modern portfolio theory—a model proposed by Harry Markowitz among
others
 The single-index model of portfolio variance
 Capital asset pricing model
 The Jensen Index
 The Treynor Index

 The Sharpe Diagonal (or Index) model
 Value at risk model

prices in the bond market often increase, and vice versa. A collection of both types of assets
can therefore have lower overall risk than either individually. But diversification lowers risk
even if assets' returns are not negatively correlated—indeed, even if they are positively
correlated.
advance in the mathematical modeling of finance. Since then, many theoretical and
practical criticisms have been leveled against it. These include the fact that financial returns
do not follow a Gaussian distribution or indeed any symmetric distribution, and that
correlations between asset classes are not fixed but can vary depending on external events
(especially in crises). Further, there is growing evidence that investors are not rational and
markets are not efficient. The fundamental concept behind MPT is that the assets in an

investment portfolio cannot be selected individually, each on their own merits. Rather, it is
important to consider how each asset changes in price relative to how every other asset in the
portfolio changes in price.
holdings of assets are possible.)
MPT is therefore a form of diversification. Under certain assumptions and for

specific quantitative definitions of risk and return, MPT explains how to find the best
possible diversification strategy.
In general:
 Expected return:
where Rp is the return on the portfolio, Ri is the return on asset i and wi is

the weighting of component asset i (that is, the share of asset i in the
portfolio).
 Portfolio return variance:
where ρij is the correlation coefficient between the returns on

assets i and j. Alternatively the expression can be written as:
,

 Portfolio return volatility (standard deviation):
 Portfolio
return:
 Portfolio variance:
 Portfolio return:
 Portfolio
variance:
The single-index model (SIM) is a simple asset pricing model commonly used in
the finance industry to measure risk and return of a stock. Mathematically the SIM is
expressed as:
where:
rit is return to stock i in period t

rf is the risk free rate (i.e. the interest rate on treasury bills)
rmt is the return to the market portfolio in period t
αi is the stock's alpha, or abnormal return
βi is the stocks's beta, or responsiveness to the market return

Note that rit − rf is called the excess return on the stock, rmt − rf the excess return
on the market
εit is the residual (random) return, which is assumed normally distributed with
mean zero and standard deviation σi
These equations show that the stock return is influenced by the market (beta), has a firm
specific expected value (alpha) and firm-specific unexpected component (residual). Each
stock's performance is in relation to the performance of a market index (such as the All
Ordinaries). Security analysts often use the SIM for such functions as computing stock betas,
evaluating stock selection skills, and conducting event studies.
In finance, the capital asset pricing model (CAPM) is used to determine a theoretically
appropriate required rate of return of an asset, if that asset is to be added to an already well-
diversified portfolio, given that asset's non-diversifiable risk. The model takes into account
the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk),
often represented by the quantity beta (β) in the financial industry, as well as the expected
return of the market and the expected return of a theoretical risk-free asset. The model was
introduced by Jack Treynor (1961, 1962), William Sharpe (1964), John Lintner(1965a,b)
and Jan Mossin (1966) independently, building on the earlier work of Harry Markowitz on
diversification and modern portfolio theory. Sharpe, Markowitz and Merton Miller jointly
received the Nobel Memorial Prize in Economics for this contribution to the field of financial
economics.
The CAPM is a model for pricing an individual security or a portfolio. For individual
securities, we make use of the security market line (SML) and its relation to expected return
and systematic risk (beta) to show how the market must price individual securities in relation
to their security risk class. The SML enables us to calculate the reward-to-risk ratio for any
security in relation to that of the overall market. Therefore, when the expected rate of return
for any security is deflated by its beta coefficient, the reward-to-risk ratio for any individual
security in the market is equal to the market reward-to-risk ratio, thus:

The market reward-to-risk ratio is effectively the market risk premium and by
rearranging the above equation and solving for E(Ri), we obtain the Capital Asset
Pricing Model (CAPM).
where:
 is the expected return on the capital asset
 is the risk-free rate of interest such as interest arising from

government bonds
 (the beta) is the sensitivity of the expected excess asset returns to the
expected excess market returns, or also ,
 is the expected return of the market
 is sometimes known as the market premium or risk

premium (the difference between the expected market rate of return and
the risk-free rate of return).
Restated, in terms of risk premium, we find that:
which states that the individual risk premium equals the market premium times β.
Note 1: the expected market rate of return is usually estimated by measuring

the Geometric Average of the historical returns on a market portfolio (e.g. S&P 500).
Note 2: the risk free rate of return used for determining the risk premium is usually the
arithmetic average of historical risk free rates of return and not the current risk free rate
of return.
For the full derivation see Modern portfolio theory.
Arbitrage pricing theory (APT), in finance, is a general theory of asset pricing, that has
become influential in the pricing of stocks.

APT holds that the expected return of a financial asset can be modeled as a linear function of
various macro-economic factors or theoretical market indices, where sensitivity to changes in
each factor is represented by a factor-specific beta coefficient. The model-derived rate of
return will then be used to price the asset correctly - the asset price should equal the expected
end of period price discounted at the rate implied by model. If the price
diverges, arbitrage should bring it back into line. The theory was initiated by
the economist Stephen Ross in 1976.
The APT model
Risky asset returns are said to follow a factor structure if they can be expressed as:
where
 E(rj) is the jth asset's expected return,

 Fk is a systematic factor (assumed to have mean zero),
 bjk is the sensitivity of the jth asset to factor k, also called factor
loading,
 and εj is the risky asset's idiosyncratic random shock with mean
zero.
Idiosyncratic shocks are assumed to be uncorrelated across assets and uncorrelated

with the factors.
The APT states that if asset returns follow a factor structure then the following
relation exists between expected returns and the factor sensitivities:
where
 RPk is the risk premium of the factor,

 rf is the risk-free rate,

That is, the expected return of an asset j is a linear function of the assets sensitivities to
the n factors.
Note that there are some assumptions and requirements that have to be fulfilled for the latter
to be correct: There must be competition in the market, and the total number of factors may
never surpass the total number of assets (in order to avoid the problem of matrix singularity),
In finance, Jensen's alpha (or Jensen's Performance Index, ex-post alpha) is used to
determine the abnormal return of a security or portfolio of securities over the theoretical
expected return.
The security could be any asset, such as stocks, bonds, or derivatives. The theoretical return
is predicted by a market model, most commonly the Capital Asset Pricing Model (CAPM)
model. The market model uses statistical methods to predict the appropriate risk-adjusted
return of an asset. The CAPM for instance uses beta as a multiplier.
Jensen's alpha was first used as a measure in the evaluation of mutual fund managers
by Michael Jensen in 1968. The CAPM return is supposed to be 'risk adjusted', which means
it takes account of the relative riskyness of the asset. After all, riskier assets will have higher
expected returns than less risky assets. If an asset's return is even higher than the risk adjusted
return, that asset is said to have "positive alpha" or "abnormal returns". Investors are
constantly seeking investments that have higher alpha.
In the context of CAPM, calculating alpha requires the following inputs:
 the realized return (on the portfolio),

 the market return,
 the risk-free rate of return, and
 the beta of the portfolio.
Jensen's alpha = Portfolio Return − [Risk Free Rate + Portfolio Beta * (Market Return −
Risk Free Rate)]
Since Eugene Fama, many academics believe financial markets are too efficient to allow
for repeatedly earning positive Alpha, unless by chance. To the contrary, empirical

studies of mutual funds spearheaded by Russ Wermers usually confirm managers' stock-
picking talent, finding positive Alpha. However, they also show that after fees and
expenses are deducted, the effective Alpha for investors is negative. (These results also
explain why passive investing is increasingly popular.)
Nevertheless, Alpha is still widely used to evaluate mutual fund and portfolio manager
performance, often in conjunction with the Sharpe ratioand the Treynor ratio.
The Treynor ratio (sometimes called the reward-to-volatility ratio or Treynor measure),
named after Jack L. Treynor, is a measurement of the returns earned in excess of that which
could have been earned on an investment that has no diversifiable risk (e.g., Treasury Bills or
a completely diversified portfolio), per each unit of market risk assumed.
The Treynor ratio relates excess return over the risk-free rate to the additional risk taken;
however, systematic risk is used instead of total risk. The higher the Treynor ratio, the better
the performance of the portfolio under analysis.
where
Treynor ratio,
portfolio i's return,
risk free rate
Portfolio i's beta
Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of
active portfolio management. It is a ranking criterion only. A ranking of portfolios based on
the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a
broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic
risk, but different total risk, will be rated the same. But the portfolio with a higher total risk is
less diversified and therefore has a higher unsystematic risk which is not priced in the market.
An alternative method of ranking portfolio management is Jensen's alpha, which quantifies

the added return as the excess return above the security in the capital asset pricing model. As

they two both determine rankings based on systematic risk alone, they will rank portfolios
identically.
In financial mathematics and financial risk management, Value at Risk (VaR) is a widely
used risk measure of the risk of loss on a specific portfolio of financial assets. For a given
portfolio, probability and time horizon, VaR is defined as a threshold value such that the
probability that the mark-to-market loss on the portfolio over the given time horizon exceeds
this value (assuming normal markets and no trading in the portfolio) is the given probability
level.
For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 0.05
probability that the portfolio will fall in value by more than $1 million over a one day period,
assuming markets are normal and there is no trading. Informally, a loss of $1 million or more
on this portfolio is expected on 1 day in 20. A loss which exceeds the VaR threshold is
termed a “VaR break.”
"Given some confidence level the VaR of the portfolio at the confidence
level α is given by the smallest number l such that the probability that the loss L exceeds l is
not larger than (1 − α)"
The left equality is a definition of VaR. The right equality assumes an underlying probability
distribution, which makes it true only for parametric VaR. Risk managers typically assume
that some fraction of the bad events will have undefined losses, either because markets are
closed or illiquid, or because the entity bearing the loss breaks apart or loses the ability to
compute accounts. Therefore, they do not accept results based on the assumption of a well-
defined probability distribution. Nassim Taleb has labeled this assumption,
"charlatanism." On the other hand, many academics prefer to assume a well-defined
distribution, albeit usually one with fat tails. This point has probably caused more contention
among VaR theorists than any other.

INSTRUMENTS IN PORTFOLIO
• BONDS BY COUPON
- Fixed Rate Bonds

- Floating Rate Bonds
- Zero Coupon Bond
- Inflation Indexed Bond
- Commercial Paper
- Perpetual Paper
• BONDS BY ISSUER
- Corporate Bond
- Government Bond
- Muncipal Bond
- Sovereign Bond
• EQUITIES
• INVESTMENT FUNDS
- Mutual Fund
- Indexed Fund
- Exchange transfer Fund
- Close End Fund
- Segregated Fund
- Hedge Fund
• STRUCTURED FINANCE
- Securitization
- Asset Backed Security
- Mortgage Backed Security
- Commercial Mortgage Backed Security
- Residential Mortgage Backed Security
- Tranche
- Collateralized Debt Obligation
- Collateralized Fund Obligation
- Collateralized Mortgage Obligation
- Credit Linked Note
- Unsecured Debt
- Agency Security
• DERIVATIVES
- Option
- Warrant

- Futures
- Forward Contract
- Swaps
- Credit Derivative
- Hybrid Security
BONDS
A bond is a debt security, in which the authorized issuer owes the holders a debt and,
depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the
principal at a later date, termed maturity. A bond is a formal contract to repay borrowed
money with interest at fixed intervals.
Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender
(creditor), and the coupon is the interest. Bonds provide the borrower with external funds to
finance long-term investments, or, in the case of government bonds, to finance current
expenditure. Certificates of deposit (CDs) or commercial paper are considered to be money
market instruments and not bonds. Bonds must be repaid at fixed intervals over a period of
time.
Bonds and stocks are both securities, but the major difference between the two is that
stockholders have an equity stake in the company (i.e., they are owners), whereas

bondholders have a creditor stake in the company (i.e., they are lenders). Another difference
is that bonds usually have a defined term, or maturity, after which the bond is redeemed,
whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a
perpetuity (i.e., bond with no maturity).
The following descriptions are not mutually exclusive, and more than one of them may apply
to a particular bond.
• Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
• Floating rate note (FRNs) have a variable coupon that is linked to a reference rate of
interest, such as LIBOR or Euribor. For example the coupon may be defined as three
month USD LIBOR + 0.20%. The coupon rate is recalculated periodically, typically
every one or three months.
• Zero-coupon bonds pay no regular interest. They are issued at a substantial discount
to par value, so that the interest is effectively rolled up to maturity (and usually taxed
as such). The bondholder receives the full principal amount on the redemption date.
An example of zero coupon bonds is Series E savings bonds issued by the U.S.
government. Zero-coupon bonds may be created from fixed rate bonds by a financial
institution separating "stripping off" the coupons from the principal. In other words,
the separated coupons and the final principal payment of the bond may be traded
separately. See IO (Interest Only) and PO (Principal Only).
• Inflation linked bonds, in which the principal amount and the interest payments are
indexed to inflation. The interest rate is normally lower than for fixed rate bonds with
a comparable maturity (this position briefly reversed itself for short-term UK bonds in
December 2008). However, as the principal amount grows, the payments increase
with inflation. The United Kingdom was the first sovereign issuer to issue inflation
linked Gilts in the 1980s. Treasury Inflation-Protected Securities (TIPS) and I-bonds
are examples of inflation linked bonds issued by the U.S. government.
• Perpetual bonds are also often called perpetuities or 'Perps'. They have no maturity
date. The most famous of these are the UK Consoles, which are also known as

Treasury Annuities or Undated Treasuries. Some of these were issued back in 1888
and still trade today.
• In the global money market, commercial paper is a unsecured promissory note with a
fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued
(sold) by large banks and corporation to get money to meet short term debt
obligations (for example, payroll), and is only backed by an issuing bank or
corporation's promise to pay the face amount on the maturity date specified on the
note. Since it is not backed by collateral, only firms with excellent credit ratings from
a recognized rating agency will be able to sell their commercial paper at a reasonable
price. Commercial paper is usually sold at a discount from face value, and carries
higher interest repayment dates than bonds. Typically, the longer the maturity on a
note, the higher the interest rate the issuing institution must pay. Interest rates
fluctuate with market conditions, but are typically lower than banks' rates.
• A corporate bond is a bond issued by a corporation. It is a bond that a corporation
issues to raise money in order to expand its business. The term is usually applied to
longer-term debt instruments, generally with a maturity date falling at least a year
after their issue date. (The term "commercial paper" is sometimes used for
instruments with a shorter maturity.)
Sometimes, the term "corporate bonds" is used to include all bonds except those
issued by governments in their own currencies. Strictly speaking, however, it only
applies to those issued by corporations. The bonds of local authorities and
supranational organizations do not fit in either category.
• A bond is a debt investment in which an investor loans a certain amount of money, for
a certain amount of time, with a certain interest rate, to a company. A government
bond is a bond issued by a national government denominated in the country's own
currency. Bonds issued by national governments in foreign currencies are normally
referred to as sovereign bonds. The first ever government bond was issued by the
English government in 1693 to raise money to fund a war against France. It was in the
form of a tontine.

Government bonds are usually referred to as risk-free bonds, because the government
can raise taxes to redeem the bond at maturity. Some counter examples do exist where
a government has defaulted on its domestic currency debt, such as Russia in 1998 (the
"ruble crisis"), though this is very rare. As an example, in the US, Treasury securities
are denominated in US dollars. In this instance, the term "risk-free" means free of
credit risk. However, other risks still exist, such as currency risk for foreign investors
(for example non-US investors of US Treasury securities would have received lower
returns in 2004 because the value of the US dollar declined against most other
currencies). Secondly, there is inflation risk, in that the principal repaid at maturity
will have less purchasing power than anticipated if the inflation outturn is higher than
expected. Many governments issue inflation-indexed bonds, which should protect
investors against inflation risk.
• A municipal bond is a bond issued by a city or other local government, or their

agencies. Potential issuers of municipal bonds include cities, counties, redevelopment
agencies, special-purpose districts, school districts, public utility districts, publicly
owned airports and seaports, and any other governmental entity (or group of
governments) below the state level. Municipal bonds may be general obligations of
the issuer or secured by specified revenues. Interest income received by holders of
municipal bonds is often exempt from the federal income tax and from the income tax
of the state in which they are issued, although municipal bonds issued for certain
purposes may not be tax exempt.
• A sovereign bond is a bond issued by a national government. The term usually refers
to bonds issued in foreign currencies, while bonds issued by national governments in
the country's own currency are referred to as government bonds. The total amount
owed to the holders of the sovereign bonds is called sovereign debt.
Nations with very high or unpredictable inflation or with unstable exchange rates
often find it uneconomic to issue bonds in their own currencies and so are forced to
issue bonds denominated in more stable foreign currencies. This raises the issue of
sovereign default if the nation cannot afford to repurchase the necessary foreign
currency at bond repayment time. Because of the risk of default, investors require the
bonds to be issued with a higher yield. This makes the debt more expensive to service,

increasing risk of default. In the event of default, unlike a corporation or even a

municipal subdivision, a nation cannot file for bankruptcy. But on the rare occasions
that a default occurs, just as in defaults on corporate bonds, recent practice has been
that the defaulting borrower presents an exchange offer to its bond holders in an effort
to restructure the sovereign debt, as has been the case in US dollar denominated bonds
issued by Peru (1996) and Argentina (2001). However, getting the bond holders to
accept an exchange offer has become very difficult, something caused by the holdout
problem.
EQUITY
COMMON SHARES:
It represents an ownership claim on the earnings and the assets of a company. After holders
of debt claims are paid, the management of the company can either pay out the remaining
earnings to stockholder in the form of Dividends or reinvest part or all the earnings. The
holder of a common stock has limited liability up to the amount of share capital contributed.
The majority of stock issued is common stock, which represents a share of the ownership of a
company and a claim on a portion of profits. This claim is paid in the form of Dividends.
Stockholders receive one vote per share owned in the elections to the company board.
If a company goes into liquidation, common stock holders do not receive any money until the
creditors, bondholders and preference shareholders are paid.

PREFERENCE SHARE:
It means shares can which fulfill the following 2 conditions. Therefore, a share which does
not fulfill both these conditions is an equity shares.
• It carries preferential rights in respect of dividend at fixed amount or at fixed rate. The
payment of dividend should be made before the payment of dividend to holders of
equity shares.
• It also carries preferential rights in regard to payment of capital or winding up or
otherwise. It means the amount paid on preference shares must be paid back to
preference shareholders before anything in paid to the equity shareholders.
INVESTMENT IN EQUITIES
There are primarily two routes to investing in equities.
a) Through the primary market

b) Through the secondary market
PRIMARY MARKET
It provides opportunity to corporate and government to raise resources to meet their

requirement of capital for funding their new business plan, or expanding the existing set up or
meeting up the enhanced working capital requirement. The issuer thus issues fresh capital in
the form of equity shares, preference shares or raises loan in form of debt via public issue or
through private placements. These shares can be issued at face value, or at premium, or at
discount.
SECONDARY MARKET

In finance, the private equity secondary market (also often called private equity
secondaries or secondaries) refers to the buying and selling of pre-existing investor
commitments to private equity and other alternative investment funds.
Sellers of private equity investments sell not only the investments in the fund but also their
remaining unfunded commitments to the funds. By its nature, the private equity asset class is
illiquid, intended to be a long-term investment for buy-and-hold investors. For the vast
majority of private equity investments, there is no listed public market; however, there is a
robust and maturing secondary market available for sellers of private equity assets.
Driven by strong demand for private equity exposure, a significant amount of capital has
been committed to dedicated secondary market funds from investors looking to increase and
diversify their private equity exposure.

SHORT SELLING
In finance, short selling (also known as shorting or going short) is the practice of selling
assets, usually securities, that have been borrowed from a third party (usually a broker) with
the intention of buying identical assets back at a later date to return to the lender. The short
seller hopes to profit from a decline in the price of the assets between the sale and the
repurchase, as the seller will pay less to buy the assets than the seller received on selling
them. Conversely, the short seller will incur a loss if the price of the assets rises. Other costs
of shorting may include a fee for borrowing the assets and payment of any dividends paid on
the borrowed assets. "Shorting" and "going short" also refer to entering into any derivative or
other contract under which the investor profits from a fall in the value of an asset.
Going short can be contrasted with the more conventional practice of "going long", whereby
an investor profits from any increase in the
price of the asset.

INVESTMENT FUNDS
MUTUAL FUNDS
A mutual fund is a professionally managed type of collective investment scheme that pools
money from many investors and invests typically in investment securities (stocks, bonds,
short-term money market instruments, other mutual funds, other securities, and/or
commodities such as precious metals. The mutual fund will have a fund manager that trades
(buys and sells) the fund's investments in accordance with the fund's investment objective. In
the U.S., a fund registered with the Securities and Exchange Commission (SEC) under both
SEC and Internal Revenue Service (IRS) rules must distribute nearly all of its net income and
net realized gains from the sale of securities (if any) to its investors at least annually. Most
funds are overseen by a board of directors or trustees (if the U.S. fund is organized as a trust
as they commonly are) which is charged with ensuring the fund is managed appropriately by
its investment adviser and other service organizations and vendors, all in the best interests of
the fund's investors.
INDEX FUNDS
An index fund or index tracker is a collective investment scheme (usually a mutual fund or
exchange-traded fund) that aims to replicate the movements of an index of a specific financial
market, or a set of rules of ownership that are held constant, regardless of market conditions.
Tracking

Tracking can be achieved by trying to hold all of the securities in the index, in the same
proportions as the index. Other methods include statistically sampling the market and holding
"representative" securities. Many index funds rely on a computer model with little or no
human input in the decision as to which securities are purchased or sold and is therefore a
form of passive management.
Fees
The lack of active management generally gives the advantage of lower fees and lower taxes
in taxable accounts. Of course, the fees reduce the return to the investor relative to the index.
In addition it is usually impossible to precisely mirror the index as the models for sampling
and mirroring, by their nature, cannot be 100% accurate. The difference between the index
performance and the fund performance is known as the "tracking error" or informally "jitter".
Index funds are available from many investment managers. Some common indices include
the S&P 500, the Nikkei 225, and the FTSE 100. Less common indexes come from
academics like Eugene Fama and Kenneth French, who created "research indexes" in order to
develop asset pricing models, such as their Three Factor Model. The Fama-French three-
factor model is used by Dimensional Fund Advisors to design their index funds. Robert
Arnott and Professor Jeremy Siegel have also created new competing fundamentally based
indexes based on such criteria as dividends, earnings, book value, and sales.
EXCHANGE TRADED FUNDS
An exchange-traded fund (ETF), also known as an exchange-traded product (ETP), is an

investment fund traded on stock exchanges, much like stock. An ETF holds assets such as
stocks, commodities, or bonds and trades at approximately the same price as the net asset
value of its underlying assets over the course of the trading day. Most ETFs track an index,
such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their
low costs, tax efficiency, and stock-like features.
Only so-called authorized participants (typically, large institutional investors) actually buy or
sell shares of an ETF directly from/to the fund manager, and then only in creation units, large
blocks of tens of thousands of ETF shares, which are usually exchanged in-kind with baskets

of the underlying securities. Authorized participants may wish to invest in the ETF shares
long-term, but usually act as market makers on the open market, using their ability to
exchange creation units with their underlying securities to provide liquidity of the ETF shares
and help ensure that their intraday market price approximates to the net asset value of the
underlying assets. Other investors, such as individuals using a retail broker, trade ETF shares
on this secondary market.
An ETF combines the valuation feature of a mutual fund or unit investment trust, which can
be bought or sold at the end of each trading day for its net asset value, with the tradability
feature of a closed-end fund, which trades throughout the trading day at prices that may be
more or less than its net asset value. Closed-end funds are not considered to be "ETFs", even
though they are funds and are traded on an exchange. ETFs have been available in the US
since 1993 and in Europe since 1999. In 1993, the first country specific ETFs were a
collaboration between MSCI, BGI and a small independent third party Distribution firm
called Funds Distributor, Inc. The product eventually evolved into the iShares brand widely
known around the globe. ETFs traditionally have been index funds, but in 2008 the U.S.
Securities and Exchange Commission began to authorize the creation of actively managed
ETFs.
CLOSE END FUNDS
A closed-end fund, or closed-ended fund (CEF) is a collective investment scheme with a

limited number of shares.
New shares are rarely issued after the fund is launched; shares are not normally redeemable
for cash or securities until the fund liquidates. Typically an investor can acquire shares in a
closed-end fund by buying shares on a secondary market from a broker, market maker, or
other investor as opposed to an open-end fund where all transactions eventually involve the
fund company creating new shares on the fly (in exchange for either cash or securities) or
redeeming shares (for cash or securities).
The price of a share in a closed-end fund is determined partially by the value of the
investments in the fund, and partially by the premium (or discount) placed on it by the
market. The total value of all the securities in the fund divided by the number of shares in the

fund is called the net asset value (NAV) per share. The market price of a fund share is often
higher or lower than the per share NAV: when the fund's share price is higher than per share
NAV it is said to be selling at a premium; when it is lower, at a discount to the per share
NAV.
In the U.S. legally they are called closed-end companies and form one of three SEC
recognized types of investment companies along with mutual funds and unit investment
trusts. Other examples of closed-ended funds are investment trusts in the UK and listed
investment companies in Australia.
SEGREGATED FUNDS
A Segregated Fund (Seg Fund) is a type of investment fund administered by Canadian

insurance companies in the form of individual, variable life insurance contracts offering
certain guarantees to the policyholder such as reimbursement of capital upon death. As
required by law, these funds are fully segregated from the company's general investment
funds, hence the eponym. A Seg Fund is synonymous with the U.S. insurance industry
"separate account" and related insurance and annuity products.
Usage
A segregated fund is an investment fund that combines the growth potential of a mutual fund
with the security of a life insurance policy. Segregated funds are often referred to as "mutual
funds with an insurance policy wrapper".
Like mutual funds, segregated funds consist of a pool of investments in securities such as
bonds, debentures, and stocks. The value of the segregated fund fluctuates according to the
market value of the underlying securities.
Segregated funds do not issue units or shares, therefore a segregated fund investor is not
referred to as a unitholder. Instead, the investor is the holder of a segregated fund contract.

Contracts can be registered (held inside an RRSP) or non-registered (not held inside an
RRSP). Registered investments qualify for annual tax-sheltered RRSP contributions. Non-
registered investments are subject to tax payments on the capital gains each year and capital
losses can also be claimed.
Features
Insurance Contracts
Segregated funds are sold as deferred variable annuity contracts and can be sold only by
licensed insurance representatives. Segregated funds are owned by the life insurance
company, not the individual investors, and must be kept separate (or “segregated”) from the
company’s other assets. Segregated funds are made up of underlying assets that are purchased
via the Life assurance companies. Investors do not have ownership share. Segregated Funds
have guarantees and run for a period. Should the investor leave before the end date, he/she
may be penalized.
Maturity Dates
All segregated fund contracts have maturity dates, which are not to be confused with maturity
guarantees (outlined below). The maturity date is the date at which the maturity guarantee is
available to the contract holder. Holding periods to reach maturity are usually 10 or more
years.
Maturity & Death Guarantees
Guarantee amounts are offered in all segregated funds whereby no less than a certain
percentage of the initial investment in a contract (usually 75% or higher) will be paid out at
death or contract maturity. In either case, the contract holder or their beneficiary will receive
the greater of the guarantee or the investment’s current market value.

Potential Creditor Protection
Granted certain qualifications are met, segregated fund investments may be protected from
seizure from creditors. This is an important feature for business owners or professionals
whose assets may have a high exposure to creditors.
Probate Protection
If a beneficiary is named, the segregated fund investment may be exempt from probate and
executor’s fees and pass directly to the beneficiary. If the named beneficiary is a family
member (such as a spouse, child, or parent), the investment may also be secure from creditors
in case of bankruptcy. These protections apply to both registered and non-registered
investments.
Reset Option
A reset option allows the contract holder to lock in investment gains if the market value of a
segregated fund contract increases. This resets the contract’s deposit value to equal the
greater of the deposit value or current market value, restarts the contract term, and extends
the maturity date. Contract holders are limited to a certain number of resets, usually one or
two, in a given calendar year.
Cost of the Guarantees
The shorter the term of the maturity guarantees on investment funds - whether they are
segregated funds or protected mutual funds - the higher the risk exposure of the insurer and
the cost of the guarantees. This inverse relationship is based on the premise that there is a
greater chance of market decline (and hence a greater chance of collecting on a guarantee)
over shorter periods. A contract holder's use of reset provisions also contributes to costs,
since resetting the guaranteed amount at a higher level means that the issuer will be liable for
this higher amount.
HEDGE FUND

A hedge fund is an investment fund open to a limited range of investors that undertakes a
wider range of investment and trading activities than traditional long-only investment funds,
and that, in general, pays a performance fee to its investment manager. Every hedge fund has
its own investment strategy that determines the type of investments and the methods of
investment it undertakes. Hedge funds, as a class, invest in a broad range of investments
including shares, debt and commodities. ]
As the name implies, hedge funds often seek to hedge some of the risks inherent in their
investments using a variety of methods, most notably short selling and derivatives. However,
the term "hedge fund" has also come to be applied to certain funds that, as well as (or instead
of) hedging certain risks, use short selling and other "hedging" methods as a trading strategy
to generate a return on their capital.
In most jurisdictions hedge funds are open only to a limited range of professional or wealthy
investors who meet certain criteria set by regulators, and are accordingly exempted from
many regulations that govern ordinary investment funds. The exempted regulations typically
cover short selling, the use of derivatives and leverage, fee structures, and the rules by which
investors can remove their capital from the fund. Light regulation and the presence of
performance fees are the distinguishing characteristics of hedge funds.
The net asset value of a hedge fund can run into many billions of dollars, and the gross assets
of the fund will usually be higher still due to leverage. Hedge funds dominate certain
specialty markets such as trading within derivatives with high-yield ratings and distressed
debt.
DERIVATIVES
OPTIONS
An option is a derivative financial instrument that establishes a contract between two parties
concerning the buying or selling of an asset at a reference price during a specified time frame.
During this time frame, the buyer of the option gains the right, but not the obligation, to

engage in some specific transaction on the asset, while the seller incurs the obligation to
fulfill the transaction if so requested by the buyer. The price of an option derives from the
value of an underlying asset (commonly a stock, a bond, a currency or a futures contract) plus
a premium based on the time remaining until the expiration of the option. Other types of
options exist, and options can in principle be created for any type of valuable asset.
An option which conveys the right to buy something is called a call; an option which conveys
the right to sell is called a put. The price specified at which the underlying may be traded is
called the strike price or exercise price. The process of activating an option and thereby
trading the underlying at the agreed-upon price is referred to as exercising it. Most options
have an expiration date. If the option is not exercised by the expiration date, it becomes void
and worthless.
In return for granting the option, called writing the option, the originator of the option
collects a payment, the premium, from the buyer. The writer of an option must make good on
delivering (or receiving) the underlying asset or its cash equivalent, if the option is exercised.
An option can usually be sold by its original buyer to another party. Many options are created
in standardized form and traded on an anonymous options exchange among the general
public, while other over-the-counter options are customized to the desires of the buyer on an
ad hoc basis, usually by an investment bank.
WARRANTS
A warrant is a security that entitles the holder to buy stock of the issuing company at a
specified price, which can be higher or lower than the stock price at time of issue.
Warrants and options are similar in that the two contractual financial instruments allow the
holder special rights to buy securities. Both are discretionary and have expiration dates. The
word warrant simply means to "endow with the right", which is only slightly different to the
meaning of an option.

Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the
issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the
bond, and make them more attractive to potential buyers. Warrants can also be used in private
equity deals. Frequently, these warrants are detachable, and can be sold independently of the
bond or stock.
In the case of warrants issued with preferred stocks, stockholders may need to detach and sell
the warrant before they can receive dividend payments. Thus, it is sometimes beneficial to
detach and sell a warrant as soon as possible so the investor can earn dividends.
Warrants are actively traded in some financial markets such as Deutsche Börse and Hong
Kong. In Hong Kong Stock Exchange, warrants accounted for 11.7% of the turnover in the
first quarter of 2009, just second to the callable bull/bear contract.
STRUCTURE AND FEATURES
Warrants have similar characteristics to that of other equity derivatives, such as options, for
instance:
• Exercising: A warrant is exercised when the holder informs the issuer their intention
to purchase the shares underlying the warrant.
The warrant parameters, such as exercise price, are fixed shortly after the issue of the bond.
With warrants, it is important to consider the following main characteristics:
• Premium: A warrant's "premium" represents how much extra you have to pay for
your shares when buying them through the warrant as compared to buying them in the
regular way.
• Gearing (leverage): A warrant's "gearing" is the way to ascertain how much more
exposure you have to the underlying shares using the warrant as compared to the
exposure you would have if you buy shares through the market.
• Expiration Date: This is the date the warrant expires. If you plan on exercising the
warrant you must do so before the expiration date. The more time remaining until

expiry, the more time for the underlying security to appreciate, which, in turn, will
increase the price of the warrant (unless it depreciates). Therefore, the expiry date is
the date on which the right to exercise no longer exists.
• Restrictions on exercise: Like options, there are different exercise types associated
with warrants such as American style (holder can exercise anytime before expiration)
or European style (holder can only exercise on expiration date).
Warrants are longer-dated options and are generally traded over-the-counter.
FUTURES
A futures contract is a standardized contract between two parties to buy or sell a specified
asset of standardized quantity and quality at a specified future date at a price agreed today
(the futures price). The contracts are traded on a futures exchange. Futures contracts are not
"direct" securities like stocks, bonds, rights or warrants. They are still securities, however,
though they are a type of derivative contract. The party agreeing to buy the underlying asset
in the future assumes a long position, and the party agreeing to sell the asset in the future
assumes a short position.
The price is determined by the instantaneous equilibrium between the forces of supply and
demand among competing buy and sell orders on the exchange at the time of the purchase or
sale of the contract.
In many cases, the underlying asset to a futures contract may not be traditional
"commodities" at all – that is, for financial futures, the underlying asset or item can be
currencies, securities or financial instruments and intangible assets or referenced items such
as stock indexes and interest rates.
The future date is called the delivery date or final settlement date. The official price of the
futures contract at the end of a day's trading session on the exchange is called the settlement
price for that day of business on the exchange.
A closely related contract is a forward contract; they differ in certain respects. Future
contracts are very similar to forward contracts, except they are exchange-traded and defined
on standardized assets. Unlike forwards, futures typically have interim partial settlements or

"true-ups" in margin requirements. For typical forwards, the net gain or loss accrued over the
life of the contract is realized on the delivery date.
A futures contract gives the holder the obligation to make or take delivery under the terms of
the contract, whereas an option grants the buyer the right, but not the obligation, to establish
a position previously held by the seller of the option. In other words, the owner of an options
contract may exercise the contract, but both parties of a "futures contract" must fulfill the
contract on the settlement date. The seller delivers the underlying asset to the buyer, or, if it is
a cash-settled futures contract, then cash is transferred from the futures trader who sustained a
loss to the one who made a profit. To exit the commitment prior to the settlement date, the
holder of a futures position has to offset his/her position by either selling a long position or
buying back (covering) a short position, effectively closing out the futures position and its
contract obligations.
Futures contracts, or simply futures, (but not future or future contract) are exchange-traded
derivatives. The exchange's clearing house acts as counterparty on all contracts, sets margin
requirements, and crucially also provides a mechanism for settlement.
STANDARDIZATION
Futures contracts ensure their liquidity by being

highly standardized, usually by specifying:
• The underlying asset or instrument. This

could be anything from a barrel of crude
oil to a short term interest rate.
• The type of settlement, either cash
settlement or physical settlement.
• The amount and units of the underlying
asset per contract. This can be the
notional amount of bonds, a fixed number
of barrels of oil, units of foreign currency,

the notional amount of the deposit over which the short term interest rate is traded,
etc.
• The currency in which the futures contract is quoted.
• The grade of the deliverable. In the case of bonds, this specifies which bonds can be
delivered. In the case of physical commodities, this specifies not only the quality of
the underlying goods but also the manner and location of delivery. For example, the
NYMEX Light Sweet Crude Oil contract specifies the acceptable sulphur content
and API specific gravity, as well as the pricing point -- the location where delivery
must be made.
• The delivery month.
• The last trading date.
• Other details such as the commodity tick, the minimum permissible price fluctuation.
WHO TRADES FUTURES?
Futures traders are traditionally placed in one of two groups: hedgers, who have an interest in
the underlying asset (which could include an intangible such as an index or interest rate) and
are seeking to hedge out the risk of price changes; and speculators, who seek to make a profit
by predicting market moves and opening a derivative contract related to the asset "on paper",
while they have no practical use for or intent to actually take or make delivery of the
underlying asset. In other words, the investor is seeking exposure to the asset in a long futures
or the opposite effect via a short futures contract.
Hedgers typically include producers and consumers of a commodity or the owner of an asset
or assets subject to certain influences such as an interest rate.
For example, in traditional commodity markets, farmers often sell futures contracts for the
crops and livestock they produce to guarantee a certain price, making it easier for them to
plan. Similarly, livestock producers often purchase futures to cover their feed costs, so that
they can plan on a fixed cost for feed. In modern (financial) markets, "producers" of interest
rate swaps or equity derivative products will use financial futures or equity index futures to
reduce or remove the risk on the swap.

An example that has both hedge and speculative notions involves a mutual fund or separately
managed account whose investment objective is to track the performance of a stock index
such as the S&P 500 stock index. The Portfolio manager often "equitizes" cash inflows in an
easy and cost effective manner by investing in (opening long) S&P 500 stock index futures.
This gains the portfolio exposure to the index which is consistent with the fund or account
investment objective without having to buy an appropriate proportion of each of the
individual 500 stocks just yet. This also preserves balanced diversification, maintains a higher
degree of the percent of assets invested in the market and helps reduce tracking error in the
performance of the fund/account. When it is economically feasible (an efficient amount of
shares of every individual position within the fund or account can be purchased), the portfolio
manager can close the contract and make purchases of each individual stock.
The social utility of futures markets is considered to be mainly in the transfer of risk, and
increased liquidity between traders with different risk and time preferences, from a hedger to
a speculator, for example.
SWAPS
In finance, a swap is a derivative in which counterparties exchange certain benefits of one

party's financial instrument for those of the other party's financial instrument. The benefits in
question depend on the type of financial instruments involved. For example, in the case of a
swap involving two bonds, the benefits in question can be the periodic interest (or coupon)
payments associated with the bonds. Specifically, the two counterparties agree to exchange
one stream of cash flows against another stream. These streams are called the legs of the
swap. The swap agreement defines the dates when the cash flows are to be paid and the way
they are calculated. Usually at the time when the contract is initiated at least one of these
series of cash flows is determined by a random or uncertain variable such as an interest rate,
foreign exchange rate, equity price or commodity price.
The cash flows are calculated over a notional principal amount, which is usually not
exchanged between counterparties. Consequently, swaps can be in cash or collateral.
Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes
in the expected direction of underlying prices.

The first swaps were negotiated in the early 1980s. David Swensen, a Yale Ph.D. at Salomon
Brothers, engineered the first swap transaction according to "When Genius Failed: The Rise
and Fall of Long-Term Capital Management" by Roger Lowenstein. Today, swaps are among
the most heavily traded financial contracts in the world: the total amount of interest rates and
currency swaps outstanding is more thаn $426.7 trillion in 2009, according to International
Swaps and Derivatives Association.
TYPES OF SWAPS
The five generic types of swaps, in order of their quantitative importance, are: interest rate
swaps, currency swaps, credit swaps, commodity swaps and equity swaps. There are also
many other types.
Interest rate swaps
A is currently paying floating, but wants to pay fixed. B is currently paying fixed but wants to
pay floating. By entering into an interest rate swap, the net result is that each party can 'swap'
their existing obligation for their desired obligation. Normally the parties do not swap
payments directly, but rather, each sets up a separate swap with a financial intermediary such
as a bank. In return for matching the two parties together, the bank takes a spread from the
swap payments.

The most common type of swap is a “plain Vanilla” interest rate swap. It is the exchange of a
fixed rate loan to a floating rate loan. The life of the swap can range from 2 years to over 15
years. The reason for this exchange is to take benefit from comparative advantage. Some
companies may have comparative advantage in fixed rate markets while other companies
have a comparative advantage in floating rate markets. When companies want to borrow they
look for cheap borrowing i.e. from the market where they have comparative advantage.
However this may lead to a company borrowing fixed when it wants floating or borrowing
floating when it wants fixed. This is where a swap comes in. A swap has the effect of
transforming a fixed rate loan into a floating rate loan or vice versa.
For example, party B makes periodic interest payments to party A based on a variable
interest rate of LIBOR +70 basis points. Party A in return makes periodic interest payments
based on a fixed rate of 8.65%. The payments are calculated over the notional amount. The
first rate is called variable, because it is reset at the beginning of each interest calculation
period to the then current reference rate, such as LIBOR. In reality, the actual rate received
by A and B is slightly lower due to a bank taking a spread.
Currency swaps
A currency swap involves

exchanging principal and fixed rate
interest payments on a loan in one
currency for principal and fixed
rate interest payments on an equal
loan in another currency. Just like
interest rate swaps;the currency
swaps also are motivated by comparative advantage.
Commodity swaps
A commodity swap is an agreement whereby a floating (or market or spot) price is exchanged
for a fixed price over a specified period. The vast majority of commodity swaps involve
crude oil.

Equity Swap
An equity swap is a special type of total return swap, where the underlying asset is a stock, a
basket of stocks, or a stock index. Compared to actually owning the stock, in this case you do
not have to pay anything up front, but you do not have any voting or other rights that stock
holders do have.
Credit default swaps
A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series
of payments to the seller and, in exchange, receives a payoff if a credit instrument - typically
a bond or loan - goes into default (fails to pay). Less commonly, the credit event that triggers
the payoff can be a company undergoing restructuring, bankruptcy or even just having its
credit rating downgraded. CDS contracts have been compared with insurance, because the
buyer pays a premium and, in return, receives a sum of money if one of the events specified
in the contract occur. Unlike an actual insurance contract the buyer is allowed to profit from
the contract and may also cover an asset to which the buyer has no direct exposure.
Other variations
There are myriad different variations on the vanilla swap structure, which are limited only by
the imagination of financial engineers and the desire of corporate treasurers and fund
managers for exotic structures.
• A total return swap is a swap in which party A pays the total return of an asset, and
party B makes periodic interest payments. The total return is the capital gain or loss,
plus any interest or dividend payments. Note that if the total return is negative, then
party A receives this amount from party B. The parties have exposure to the return of
the underlying stock or index, without having to hold the underlying assets. The profit
or loss of party B is the same for him as actually owning the underlying asset.
• An option on a swap is called a swaption. These provide one party with the right but
not the obligation at a future time to enter into a swap.

• A variance swap is an over-the-counter instrument that allows one to speculate on or

hedge risks associated with the magnitude of movement, a CMS, is a swap that allows
the purchaser to fix the duration of received flows on a swap.
• An Amortising swap is usually an interest rate swap in which the notional principal
for the interest payments declines during the life of the swap, perhaps at a rate tied to
the prepayment of a mortgage or to an interest rate benchmark such as the LIBOR.
CREDIT DERIVATIVES
A credit derivative is a securitized derivative whose value is derived from the credit risk on
an underlying bond, loan or any other financial asset. In this way, the credit risk is on an
entity other than the counterparties to the transaction itself. This entity is known as the
reference entity and may be a corporate, a sovereign or any other form of legal entity which
has incurred debt. Credit derivatives are bilateral contracts between a buyer and seller under
which the seller sells protection against the credit risk of the reference entity.
Stated in plain language, a credit derivative is a wager, and the reference entity is the thing
being wagered on. Similar to placing a bet at the racetrack, where the person placing the bet
does not own the horse or the track or have anything else to do with the race, the person
buying the credit derivative doesn't necessarily own the bond (the reference entity) that is the
object of the wager. He or she simply believes that there is a good chance that the bond or
collateralized debt obligation (CDO) in question will default (go to zero value). Originally
conceived as a kind of insurance policy for owners of bonds or CDO's, it evolved into a
freestanding investment strategy. The cost might be as low as 1% per year. If the buyer of the
derivative believes the underlying bond will go bust within a year (usually an extremely
unlikely event) the buyer stands to reap a 100 fold profit. A small handful of investors
anticipated the credit crunch of 2007/8 and made billions placing "bets" via this method.
The parties will select which credit events apply to a transaction and these usually consist of
one or more of the following:

• bankruptcy (the risk that the reference entity will become bankrupt)
• failure to pay (the risk that the reference entity will default on one of its obligations
such as a bond or loan)
• obligation default (the risk that the reference entity will default on any of its
obligations)
• obligation acceleration (the risk that an obligation of the reference entity will be
accelerated e.g. a bond will be declared immediately due and payable following a
default)
• repudiation/moratorium (the risk that the reference entity or a government will declare
a moratorium over the reference entity's obligations)
• restructuring (the risk that obligations of the reference entity will be restructured)...
Where credit protection is bought and sold between bilateral counterparties, this is known as
an unfunded credit derivative. If the credit derivative is entered into by a financial institution
or a special purpose vehicle (SPV) and payments under the credit derivative are funded using
securitization techniques, such that a debt obligation is issued by the financial institution or
SPV to support these obligations, this is known as a funded credit derivative.
This synthetic securitization process has become increasingly popular over the last decade,
with the simple versions of these structures being known as synthetic CDOs; credit linked
notes; single tranche CDOs, to name a few. In funded credit derivatives, transactions are
often rated by rating agencies, which allows investors to take different slices of credit risk
according to their risk appetite.
Credit derivatives are fundamentally divided into two categories: funded credit derivatives
and unfunded credit derivatives. An unfunded credit derivative is a bilateral contract
between two counterparties, where each party is responsible for making its payments under
the contract (i.e. payments of premiums and any cash or physical settlement amount) itself
without recourse to other assets. A funded credit derivative involves the protection seller
(the party that assumes the credit risk) making an initial payment that is used to settle any
potential credit events. The advantage of this to the protection buyer is that it is not exposed
to the credit risk of the protection seller.
Unfunded credit derivative products include the following products:

• Credit default swap (CDS)

• Total return swap
• Constant maturity credit default swap (CMCDS)
• First to Default Credit Default Swap
• Portfolio Credit Default Swap
• Secured Loan Credit Default Swap
• Credit Default Swap on Asset Backed Securities
• Credit default swaption
• Recovery lock transaction
• Credit Spread Option
• CDS index products
Funded credit derivative products include the following products:
• Credit linked note (CLN)

• Synthetic Collateralised Debt Obligation (CDO)
• Constant Proportion Debt Obligation (CPDO)
• Synthetic Constant Proportion Portfolio Insurance (Synthetic CPPI)
HYBRID SECURITIES
Hybrid securities are a broad group of securities that combine the elements of the two
broader groups of securities, debt and equity.
Hybrid securities pay a predictable (fixed or floating) rate of return or dividend until a certain
date, at which point the holder has a number of options including converting the securities
into the underlying share.
Therefore, unlike a share of stock (equity) the holder has a 'known' cash flow, and, unlike a
fixed interest security (debt) there is an option to convert to the underlying equity. More
common examples include convertible and converting preference shares.

A hybrid security is structured differently and while the price of some securities behave more
like fixed interest securities, others behave more like the underlying shares into which they
convert.
TRADITIONAL HYBRIDS
Traditional hybrids were usually structured in a way that leads the securities to react to the
underlying share price. Although each has individual characteristics, typically:
• they have a set dividend until conversion

• the conversion might occur at a number of dates
• they are usually issued at a similar price to the underlying share
• they convert at a set ratio. e.g. 1 hybrid converts into 1 underlying share
Note: This fixed conversion ratio means the price of these hybrids react to the movement in
the underlying share price. (The extent of the co-relation is sometimes referred to as a delta,
and these typically have a delta of between 0.5 and 1) In addition, some of these securities
include minimum and maximum conversion terms, effectively giving the holder a put and
call option if the share price reaches a certain prices.
LATEST HYBRIDS
Most of the hybrid securities issued recently are very bond-like. Although each has individual
characteristics, typically:
• they have a set dividend rate for a 5 year period ('reset' period)
• are issued at $100
• the holder has the ability to take the new 'reset' terms, redeem the face value or
convert
• the holder can convert into the shares at a discount to the current ordinary share price
e.g. 5%
• the conversion ratio is into a dollar amount of shares. e.g. $100 worth of the
underlying equity Note: This 'variable' conversion ratio means the price of these
hybrids does not react to the movement in the share price, and they therefore behave

in a similar way to fixed interest securities (this lack of co-relation with the
underlying shares is sometime referred to as a zero delta).
STRUCTURED FINANCE
SECURITIZATION
Securitization is a structured finance process that distributes risk by aggregating assets in a

pool (often by selling assets to a special purpose entity), then issuing new securities backed
by the assets and their cash flows. The securities are sold to investors who share the risk and
reward from those assets.
Securitization is similar to a sale of a profitable business ("spinning off") into a separate

entity. The previous owner trades its ownership of that unit, and all the profit and loss that
might come in the future, for present cash. The buyers invest in the success and/or failure of
the unit, and receive a premium (usually in the form of interest) for doing so. In most
securitized investment structures, the investors' rights to receive cash flows are divided into
"tranches": senior tranche investors lower their risk of default in return for lower interest
payments, while junior tranche investors assume a higher risk in return for higher interest.
Securitization is designed to reduce the risk of bankruptcy and thereby obtain lower interest
rates from potential lenders. A credit derivative is also sometimes used to change the credit
quality of the underlying portfolio so that it will be acceptable to the final investors. As a
portfolio risk backed by amortizing cash flows - and unlike general corporate debt - the credit
quality of securitized debt is non-stationary due to changes in volatility that are time- and
structure-dependent. If the transaction is properly structured and the pool performs as
expected, the credit risk of all tranches of structured debt improves; if improperly structured,
the affected tranches will experience dramatic credit deterioration and loss.
Securitization has evolved from its tentative beginnings in the late 1970s to a vital funding
source with an estimated outstanding of $10.24 trillion in the United States and $2.25 trillion

in Europe as of the 2nd quarter of 2008. In 2007, ABS issuance amounted to $3,455 billion in
the US and $652 billion in Europe.
SPECIAL TYPES OF SECURITIZATION
Master trust
A master trust is a type of SPV particularly suited to handle revolving credit card balances,
and has the flexibility to handle different securities at different times. In a typical master trust
transaction, an originator of credit card receivables transfers a pool of those receivables to the
trust and then the trust issues securities backed by these receivables. Often there will be many
tranched securities issued by the trust all based on one set of receivables. After this
transaction, typically the originator would continue to service the receivables, in this case the
credit cards.
There are various risks involved with master trusts specifically. One risk is that timing of
cash flows promised to investors might be different from timing of payments on the
receivables. For example, credit card-backed securities can have maturities of up to 10 years,
but credit card-backed receivables usually pay off much more quickly. To solve this issue
these securities typically have a revolving period, an accumulation period, and an
amortization period. All three of these periods are based on historical experience of the
receivables. During the revolving period, principal payments received on the credit card
balances are used to purchase additional receivables. During the accumulation period, these
payments are accumulated in a separate account. During the amortization period, new
payments are passed through to the investors.
A second risk is that the total investor interests and the seller's interest are limited to
receivables generated by the credit cards, but the seller (originator) owns the accounts. This
can cause issues with how the seller controls the terms and conditions of the accounts.
Typically to solve this, there is language written into the securitization to protect the
investors.

A third risk is that payments on the receivables can shrink the pool balance and under-
collateralize total investor interest. To prevent this, often there is a required minimum seller's
interest, and if there was a decrease then an early amortization event would occur.
Issuance trust
In 2000, Citibank introduced a new structure for credit card-backed securities, called an
issuance trust, which does not have limitations, that master trusts sometimes do, that requires
each issued series of securities to have both a senior and subordinate tranche. There are other
benefits to an issuance trust: they provide more flexibility in issuing senior/subordinate
securities, can increase demand because pension funds are eligible to invest in investment-
grade securities issued by them, and they can significantly reduce the cost of issuing
securities. Because of these issues, issuance trusts are now the dominant structure used by
major issuers of credit card-backed securities.
Grantor trust
Grantor trusts are typically used in automobile-backed securities and REMICs (Real Estate
Mortgage Investment Conduits). Grantor trusts are very similar to pass-through trusts used in
the earlier days of Securitization. An originator pools together loans and sells them to a
grantor trust, which issues classes of securities backed by these loans. Principal and interest
received on the loans, after expenses are taken into account, are passed through to the holders
of the securities on a pro-rata basis.
Owner trust
In an owner trust, there is more flexibility in allocating principal and interest received to
different classes of issued securities. In an owner trust, both interest and principal due to
subordinate securities can be used to pay senior securities. Due to this, owner trusts can tailor
maturity, risk and return profiles of issued securities to investor needs. Usually, any income
remaining after expenses is kept in a reserve account up to a specified level and then after
that, all income is returned to the seller. Owner trusts allow credit risk to be mitigated by
over-collateralization by using excess reserves and excess finance income to prepay securities
before principal, which leaves more collateral for the other classes.

ASSET BACKED SECURITY
An asset-backed security is a security whose value and income payments are derived from
and collateralized (or "backed") by a specified pool of underlying assets. The pool of assets is
typically a group of small and illiquid assets that are unable to be sold individually. Pooling
the assets into financial instruments allows them to be sold to general investors, a process
called securitization, and allows the risk of investing in the underlying assets to be diversified
because each security will represent a fraction of the total value of the diverse pool of
underlying assets. The pools of underlying assets can include common payments from credit
cards, auto loans, and mortgage loans, to esoteric cash flows from aircraft leases, royalty
payments and movie revenues.
Often a separate institution, called a special purpose vehicle, is created to handle the
securitization of asset backed securities. The special purpose vehicle, which creates and sells
the securities, uses the proceeds of the sale to pay back the bank that created, or originated,
the underlying assets. The special purpose vehicle is responsible for "bundling" the
underlying assets into a specified pool that will fit the risk preferences and other needs of
investors who might want to buy the securities, for managing credit risk—often by
transferring it to an insurance company after paying a premium—and for distributing
payments from the securities. As long as the credit risk of the underlying assets is transferred
to another institution, the originating bank removes the value of the underlying assets from its
balance sheet and receives cash in return as the asset backed securities are sold, a transaction
which can improve its credit rating and reduce the amount of capital that it needs. In this
case, a credit rating of the asset backed securities would be based only on the assets and
liabilities of the special purpose vehicle, and this rating could be higher than if the originating
bank issued the securities because the risk of the asset backed securities would no longer be
associated with other risks that the originating bank might bear. A higher credit rating could
allow the special purpose vehicle and, by extension, the originating institution to pay a lower
interest rate (that is, charge a higher price) on the asset-backed securities than if the
originating institution borrowed funds or issued bonds.
Thus, one incentive for banks to create securitized assets is to remove risky assets from their
balance sheet by having another institution assume the credit risk, so that they (the banks)

receive cash in return. This allows banks to invest more of their capital in new loans or other
assets and possibly have a lower capital requirement.
TYPES
Home equity loans
Securities collateralized by home equity loans (HELs) are currently the largest asset class
within the ABS market. Investors typically refer to HELs as any nonagency loans that do not
fit into either the jumbo or alt-A loan categories. While early HELs were mostly second lien
subprime mortgages, first-lien loans now make up the majority of issuance. Subprime
mortgage borrowers have a less than perfect credit history and are required to pay interest
rates higher than what would be available to a typical agency borrower. In addition to first
and second-lien loans, other HE loans can consist of high loan to value (LTV) loans, re-
performing loans, scratch and dent loans, or open-ended home equity lines of credit
(HELOC),which homeowners use as a method to consolidate debt.
Auto loans
The second largest subsector in the ABS market is auto loans. Auto finance companies issue
securities backed by underlying pools of auto-related loans. Auto ABS are classified into
three categories: prime, nonprime, and subprime:
• Prime auto ABS are collaterized by loans made to borrowers with strong credit histories.
• Nonprime auto ABS consist of loans made to lesser credit quality consumers, which may
have higher cumulative losses.
• Subprime borrowers will typically have lower incomes, tainted credited histories, or both.
Owner trusts are the most common structure used when issuing auto loans and allow
investors to receive interest and principal on sequential basis. Deals can also be structured to
pay on a pro-rata or combination of the two.
Credit card receivables
Securities backed by credit card receivables have been benchmark for the ABS market since
they were first introduced in 1987. Credit card holders may borrow funds on a revolving basis
up to an assigned credit limit. The borrowers then pay principal and interest as desired, along
with the required minimum monthly payments. Because principal repayment is not
scheduled, credit card debt does not have an actual maturity date and is considered a
nonamortizing loan.
ABS backed by credit card receivables are issued out of trusts that have evolved over time
from discrete trusts to various types of master trusts of which the most common is the de-
linked master trust. Discrete trusts consist of a fixed or static pool of receivables that are
tranched into senior/subordinated bonds. A master trust has the advantage of offering
multiple deals out of the same trust as the number of receivables grows, each of which is
entitled to a pro-rata share of all of the receivables. The delinked structures allow the issuer to
separate the senior and subordinate series within a trust and issue them at different points in
time. The latter two structures allow investors to benefit from a larger pool of loans made
over time rather than one static pool.
Student loans
ABS collateralized by student loans (“SLABS”) comprise one of the four (along with home
equity loans, auto loans and credit card receivables) core asset classes financed through asset-
backed securitizations and are a benchmark subsector for most floating rate indices. Federal
Family Education Loan Program (FFELP) loans are the most common form of student loans
and are guaranteed by the U.S. Department of Education ("DOE") at rates ranging from 95%-
98% (if the student loan is serviced by a servicer designated as an "exceptional performer" by
the DOE the reimbursement rate was up to 100%). As a result, performance (other than high
cohort default rates in the late 1980s) has historically been very good and investors rate of
return has been excellent. The College Cost Reduction and Access Act became effective on
October 1, 2007 and significantly changed the economics for FFELP loans; lender special
allowance payments were reduced, the exceptional performer designation was revoked,
lender insurance rates were reduced, and the lender paid origination fees were doubled.
A second, and faster growing, portion of the student loan market consists of non-FFELP or
private student loans. Though borrowing limits on certain types of FFELP loans were slightly
increased by the student loan bill referenced above, essentially static borrowing limits for
FFELP loans and increasing tuition are driving students to search for alternative lenders.

Students utilize private loans to bridge the gap between amounts that can be borrowed
through federal programs and the remaining costs of education[2].
The United States Congress created the Student Loan Marketing Association (Sallie Mae) as
a government sponsored enterprise to purchase student loans in the secondary market and to
securitize pools of student loans. Since its first issuance in 1995, Sallie Mae is now the major
issuer of SLABS and its issues are viewed as the benchmark issues.
Stranded cost utilities
Rate reduction bonds (RRBs) came about as the result of the Energy Policy Act of 1992,
which was designed to increase competition in the US electricity market. To avoid any
disruptions while moving from a non-competitive to a competitive market, regulators have
allowed utilities to recover certain "transition costs" over a period of time. These costs are
considered nonbypassable and are added to all customer bills. Since consumers usually pay
utility bills before any other, chargeoffs have historically been low. RRBs offerings are
typically large enough to create reasonable liquidity in the aftermarket, and average life
extension is limited by a "true up" mechanism.
Others
There are many other cash-flow-producing assets, including manufactured housing loans,
equipment leases and loans, aircraft leases, trade receivables, dealer floor plan loans, and
royalties. Intangibles are another emerging asset class.
MORTGAGE BACKED SECURITY
A mortgage-backed security (MBS) is an asset-backed security or debt obligation that

represents a claim on the cash flows from mortgage loans through a process known as
securitization.
Most bonds backed by mortgages are classified as an MBS. This can be confusing, because a
security derived from an MBS is also called an MBS. To distinguish the basic MBS bond
from other mortgage-backed instruments the qualifier pass-through is used, in the same way
that "vanilla" designates an option with no special features.

Mortgage-backed security sub-types include:
• A pass-through mortgage-backed security is the simplest MBS, as described in the

sections above. Essentially, it is a securitization of the mortgage payments to the
mortgage originators. These can be subdivided into:
o A residential mortgage-backed security (RMBS) is a pass-through MBS
backed by mortgages on residential property.
o A commercial mortgage-backed security (CMBS) is a pass-through MBS
backed by mortgages on commercial property.
• A collateralized mortgage obligation (CMO) is a more complex MBS in which the
mortgages are ordered into tranches by some quality (such as repayment time), with
each tranche sold as a separate security.[13]
• A stripped mortgage-backed security (SMBS) where each mortgage payment is partly
used to pay down the loan's principal and partly used to pay the interest on it. These
two components can be separated to create SMBS's, of which there are two subtypes:
o An interest-only stripped mortgage-backed security (IO) is a bond with cash
flows backed by the interest component of property owner's mortgage
payments.
 A net interest margin security (NIMS) is resecuritized residual interest
of a mortgage-backed security.
o A principal-only stripped mortgage-backed security (PO) is a bond with cash
flows backed by the principal repayment component of property owner's
mortgage payments.
There are a variety of underlying mortgage classifications in the pool:
• Prime mortgages are conforming mortgages with prime borrowers, full

documentation (such as verification of income and assets), strong credit scores, etc.
• Alt-A mortgages are an ill-defined category, generally prime borrowers but non-
conforming in some way, often lower documentation (or in some other way: vacation
home, etc.)
• Subprime mortgages have weaker credit scores, no verification of income or assets,
etc.

• Jumbo mortgages when the size of the loan is bigger than the "conforming loan
amount" as set by Fannie Mae.
These types are not limited to Mortgage Backed Securities. Bonds backed by mortgages, but
are not MBS can also have these subtypes.
Covered bonds
In Europe there exists a type of asset-backed bond called a covered bond, commonly known
by the German term Pfandbriefe. Covered bonds were first created in 19th century Germany
when Frankfurter Hypo began issuing mortgage covered bonds. The market has been
regulated since the creation of a law governing the securities in Germany in 1900. The key
difference between covered bonds and mortgage-backed or asset-backed securities is that
banks that make loans and package them into covered bonds keep those loans on their books.
This means that when a company with mortgage assets on its books issue the covered bond
its balance sheet grows, which it wouldn't do if it issued an MBS, although it may still
guarantee the securities payments.
COMMERCIAL MORTGAGE BACKED SECURITY
Commercial mortgage-backed securities (CMBS) are a type of mortgage-backed security

backed by mortgages on commercial rather than residential real estate.
CMBS issues are usually structured as multiple tranches, similar to CMOs, rather than typical
residential "pass-through”. The typical structure for the securitization of commercial real
estate loans is a Real Estate Mortgage Investment Conduit (REMIC), a creation of the tax law
that allows the trust to be a pass-through entity which is not subject to tax at the trust level.
Many American CMBSs carry less prepayment risk than other MBS types, thanks to the
structure of commercial mortgages. Commercial mortgages often contain lockout provisions
after which they can be subject to defeasance, yield maintenance and prepayment penalties to
protect bondholders. European CMBS issues typically have less prepayment protection.
Interest on the bonds is usually floating, i.e. based on a benchmark (like LIBOR/EURIBOR)
plus a spread.

RESIDENTIAL MORTGAGE BACKED SECURITY
Residential mortgage-backed securities (RMBS) are a type of bond commonly issued in

American security markets. They are a type of mortgage-backed security which are backed
by mortgages on residential rather than commercial real estate.
TRANCHING
A tranche (often misspelled as traunch or traunche) is one of a number of related securities

offered as part of the same transaction. The word tranche is French for slice, section, series,
or portion. In the financial sense of the word, each bond is a different slice of the deal's risk.
Transaction documentation (see indenture) usually defines the tranches as different "classes"
of notes, each identified by letter (e.g. the Class A, Class B, Class C securities) with different
bond credit ratings (ratings).
The term "tranche" is used in fields of finance other than structured finance (such as in
straight lending, where "multi-tranche loans" are commonplace), but the term's use in
structured finance may be singled out as particularly important. Use of "tranche" as a verb is
limited almost exclusively to this field.
HOW TRANCHING WORKS
All the tranches together make up what is referred to as the deal's capital structure or liability
structure. They are generally paid sequentially from the most senior to most subordinate (and

generally unsecured), although certain tranches with the same security may be paid pari
passu. The more senior rated tranches generally have higher bond credit ratings (ratings) than
the lower rated tranches. For example, senior tranches may be rated AAA, AA or A, while a
junior, unsecured tranche may be rated BB. However, ratings can fluctuate after the debt is
issued and even senior tranches could be rated below investment grade (less than BBB). The
deal's indenture (its governing legal document) usually details the payment of the tranches in
a section often referred to as the waterfall (because the moneys flow down).
Tranches with a first lien on the assets of the asset pool are referred to as "senior tranches"
and are generally safer investments. Typical investors of these types of securities tend to be
conduits, insurance companies, pension funds and other risk averse investors.
Tranches with either a second lien or no lien are often referred to as "junior notes". These are
more risky investments because they are not secured by specific assets. The natural buyers of
these securities tend to be hedge funds and other investors seeking higher risk/return profiles.
"Market information also suggests that the more junior tranches of structured products are
often bought by specialist credit investors, while the senior tranches appear to be more
attractive for a broader, less specialised investor community". Here is a simplified example to
demonstrate the principle:
Example
• A bank transfers risk in its loan portfolio by entering into a default swap with a "ring-fenced"
special purpose vehicle (SPV).
• The SPV buys gilts (UK government bonds).
• The SPV sells 4 tranches of credit linked notes with a waterfall structure whereby:
o Tranche A absorbs the first 25% of losses on the portfolio, is the more risky.
o Tranche B absorbs the next 25% of losses
o Tranche C the next 25%
o Tranche D the final 25%, is the least risky.
• Tranches B, C and D are sold to outside investors.
• Tranche A is bought by the bank itself.

COLLETRALIZED DEBT OBLIGATION
Collateralized debt obligations (CDOs) are a type of structured asset-backed security

(ABS) whose value and payments are derived from a portfolio of fixed-income underlying
assets. CDOs securities are split into different risk classes, or tranches, whereby "senior"
tranches are considered the safest securities. Interest and principal payments are made in
order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or
lower prices to compensate for additional default risk.
A few academics, analysts and investors such as Warren Buffett and the IMF's former chief
economist Raghuram Rajan warned that CDOs, other ABSs and other derivatives spread risk
and uncertainty about the value of the underlying assets more widely, rather than reduce risk
through diversification. Following the onset of the 2007-2008 credit crunch, this view has
gained substantial credibility. Credit rating agencies failed to adequately account for large
risks (like a nationwide collapse of housing values) when rating CDOs and other ABSs.
Many CDOs are valued on a mark to market basis and thus have experienced substantial
write-downs on the balance sheet as their market value has collapsed.
CONCEPT

CDOs vary in structure and underlying assets, but the basic principle is the same. A CDO is a
type of asset-backed security. To create a CDO, a corporate entity is constructed to hold
assets as collateral and to sell packages of cash flows to investors. A CDO is constructed as
follows:
• A special purpose entity (SPE) acquires a portfolio of underlying assets. Common

underlying assets held include mortgage-backed securities, commercial real estate
bonds and corporate loans.
• The SPE issues bonds (CDOs) in different tranches and the proceeds are used to
purchase the portfolio of underlying assets. The senior CDOs are paid from the cash
flows from the underlying assets before the junior securities and equity securities.
Losses are first borne by the equity securities, next by the junior securities, and finally
by the senior securities.
The risk and return for a CDO investor depends directly on how the CDOs and their tranches
are defined, and only indirectly on the underlying assets. In particular, the investment
depends on the assumptions and methods used to define the risk and return of the tranches.
CDOs, like all asset-backed securities, enable the originators of the underlying assets to pass
credit risk to another institution or to individual investors. Thus investors must understand
how the risk for CDOs is calculated.
The issuer of the CDO, typically an investment bank, earns a commission at time of issue and
earns management fees during the life of the CDO. The ability to earn substantial fees from
originating and securitizing loans, coupled with the absence of any residual liability, skews
the incentives of originators in favor of loan volume rather than loan quality.

COLLETRALIZED FUND OBLIGATION
A collateralized fund obligation (CFO) is a form of securitization involving private equity

fund or hedge fund assets, similar to collateralized debt obligations. CFOs are a structured
form of financing for diversified private equity portfolios, layering several tranches of debt
ahead of the equity holders.
The data made available to the rating agencies for analyzing the underlying private equity
assets of CFOs are typically less comprehensive than the data for analyzing the underlying
assets of other types of structured finance securitizations, including corporate bonds and
mortgage-backed securities. Leverage levels vary from one transaction to another, although
leverage of 50% to 75% of a portfolio's net assets has historically been common.
The various CFO structures executed in recent years have had a variety of different objectives
resulting in a variety of different structures. These differences tend to relate to the amount of
equity sold through the structure as well as to the leverage levels.

COLLETRALIZED MORTGAGE OBLIGATION
A collateralized mortgage obligation (CMO) is a type of financial debt vehicle that was
first created in 1983 by the investment banks Salomon Brothers and First Boston for U.S.
mortgage lender Freddie Mac. (The Salomon Brothers team was lead by Gordon Taylor. The
First Boston team was led by Dexter Senft).
Legally, a CMO is a special purpose entity that is wholly separate from the institution(s) that
create it. The entity is the legal owner of a set of mortgages, called a pool. Investors in a
CMO buy bonds issued by the CMO, and they receive payments according to a defined set of
rules. With regard to terminology, the mortgages themselves are termed collateral, the bonds
are tranches (also called classes), while the structure is the set of rules that dictates how
money received from the collateral will be distributed. The legal entity, collateral, and
structure are collectively referred to as the deal.
Investors in CMOs include banks, hedge funds, insurance companies, pension funds, mutual
funds, government agencies, and most recently central banks. This article focuses primarily
on CMO bonds as traded in the United States of America.
The term collateralized mortgage obligation refers to a specific type of legal entity, but
investors also frequently refer to deals issued using other types of entities such as REMICs as
CMOs.

CREDIT LINKED NOTES
A credit linked note (CLN) is a form of funded credit derivative. It is structured as a security
with an embedded credit default swap allowing the issuer to transfer a specific credit risk to
credit investors. The issuer is not obligated to repay the debt if a specified event occurs. This
eliminates a third-party insurance provider.
It is issued by a special purpose company or trust, designed to offer investors par value at
maturity unless the referenced entity defaults. In the case of default, the investors receive a
recovery rate.
The trust will also have entered into a default swap with a dealer. In case of default, the trust
will pay the dealer par minus the recovery rate, in exchange for an annual fee which is passed
on to the investors in the form of a higher yield on their note.
The purpose of the arrangement is to pass the risk of specific default onto investors willing to
bear that risk in return for the higher yield it makes available. The CLNs themselves are
typically backed by very highly-rated collateral, such as U.S. Treasury securities.
The Italian dairy products giant, Parmalat, notoriously dressed up its books by creating a
credit-linked note for itself, betting on its own credit worthiness.
In Hong Kong and Singapore, credit-linked notes have been marketed as "minibonds" and
sold to individual investors. After Lehman Brothers, the major issuer of minibond in Hong
Kong and Singapore, filed for bankruptcy in September 2008, many retail investors of

minibonds claim that banks and brokers mis-sold minibonds as low-risk products. Many
banks accepted minibonds as collateral for loans and credit facilities.
EXAMPLE
A bank lends money to a company, XYZ, and at the time of loan issues credit-linked notes
bought by investors. The interest rate on the notes is determined by the credit risk of the
company XYZ. The funds the bank raises by issuing notes to investors are invested in bonds
with low probability of default. If company XYZ is solvent, the bank is obligated to pay the
notes in full. If company XYZ goes bankrupt, the note-holders/investors become the creditor
of the company XYZ and receive the company XYZ loan. The bank in turn gets compensated
by the returns on less-risky bond investments funded by issuing credit linked notes.
UNSECURED DEBT
In finance, unsecured debt refers to any type of debt or general obligation that is not
collateralised by a lien on specific assets of the borrower in the case of a bankruptcy or
liquidation.
In the event of the bankruptcy of the borrower, the unsecured creditors will have a general
claim on the assets of the borrower after the specific pledged assets have been assigned to the
secured creditors, although the unsecured creditors will usually realize a smaller proportion
of their claims than the secured creditors.
In some legal systems, unsecured creditors who are also indebted to the insolvent debtor are
able (and in some jurisdictions, required) to set-off the debts, which actually puts the
unsecured creditor with a matured liability to the debtor in a pre-preferential position.
AGENCY SECURITY
Agency securities are specific securities that are issued by either Ginnie Mae, Fannie Mae,
Freddie Mac or the Federal Home Loan Banks. These securities are backed by mortgage
loans, and due to their creation from these particular corporations that are sponsored by the

U.S. government, they enjoy credit protection based on an explicit guarantee from the U.S.
Government in the case of Ginnie Mae securities, or an implicit guarantee from the U.S.
Government in the case of Fannie Mae and Freddie Mac.
Due to the expectation of federal backing, these securities historically hold the highest credit
rating possible.
Importance of Portfolio Management

Portfolio management is viewed as a very important task in the business.
provides the mean importance ratings of portfolio management, broken down by executive
function. Not surprisingly, senior managers in technology (CTOs, VPs of R&D, etc.) are
evaluated as giving portfolio management the highest importance ratings of all functions (see
‘technology management’ with a score of 4.1 out of 5, where 5 = critically important). They
are followed by senior management overall and then by corporate executives Of the 20
percent top performing firms, senior managers are given the value of 4.2 on the 5-point scale,
the technology managers in the top 20% are given a 4.6 out of 5.

Why So Critical?
Consider these eight key reasons cited by senior management who took part in the study:
1. Financial – to maximize return; to maximize R&D productivity; to achieve financial

goals.
2. To maintain the competitive position of the business – to increase sales and market
share.
3. To properly and efficiently allocate scarce resources.
4. To forge the link between project selection and business strategy: the portfolio is
the expression of strategy; it must support the strategy.
5. To achieve focus – not doing too many projects for the limited resources available;
and to resource the “great” projects.
6. To achieve balance – the right balance between long and short term projects, and
high risk and low risk ones, consistent with the business’s goals.
7. To better communicate priorities within the organization, both vertically and

horizontally.
8. To provide better objectivity in project selection – to weed out bad projects.
These eight reasons were uncovered in part by asking managers to rate possible
reasons why portfolio management might be important in their businesses. Seven
possible reasons were suggested, and ratings on each one were sought

1. Financial: Not surprisingly, the most frequently mentioned reasons by far for why
portfolio management is so vital are financial – making the most money, bang for buck, and
so on. Many of these financial reasons obviously are closely related to maintaining the
competitive position of the business and to effective resource allocation, but it is indeed
interesting to note how much the financial concerns dominate the discussion on why the
business undertakes portfolio management. Comments such as “... because it [portfolio
management] improves and maximizes R&D productivity” and “... to get the best return on
investment” are typical here.
2. Maintaining (or improving) the competitive position of the business – the number one
rated item in Figure 3 – is echoed in the “top of mind” comments as a reason why portfolio
management is important. The types of comments offered include “... because we must
continue to meet our growth targets” and “... because we must
depend on new products to grow”.

3. Properly and efficiently allocating scarce resources is a key issue for managements, and
is rated an important reason why portfolio management is critical (see Figure 3). Today’s
business is called upon to develop and launch more new products, and faster than ever. But
resources have not increased. Thus, allocating these scarce resources is more vital than ever,
hence the increasing importance of portfolio management. A typical comment is that
“portfolio management focuses resources on projects that matter most to the business”. In the
same vein, “portfolio
management is important to ensure that the limited number of new product projects
we can do and our limited development resources are aimed at parts of the business
that need them most and can maximize their value”.
4. Strategic issues is another major “top of mind” theme (see Figure 4), which coincidently,
is the number three rated reason for the importance of portfolio management in Figure 3.
Increasingly, the realization is that strategy begins when
one starts spending money, and so resource allocation to projects is how strategy is
implemented. Comments such as “portfolio management is the tangible expression of
strategy” and “portfolio management is critical because it provides the basis for meeting
defined business objectives” are common.

5. The desire to achieve better focus – not doing too many projects for the resources
available – is also a highly rated reason, and emerges in the “top of mind” comments
as well (see Figures 3 and 4). “We have too many projects ... we wish to resource
the great ones!” and “we want to make sure that the resources are focused on the
right ones” characterize the desire for focus.
6. The goal of the right balance of projects (e.g., between long term and short term,
between high risk and low risk) is yet another highly rated reason (see Figure 3).
“Portfolio management makes sure that where resources are spent is consistent with
short term and long term business goals” and “portfolio management helps to balance short
term and long term goals” are typical comments.
7. Improved communication within the organization is a frequently-mentioned “top of

mind” reason for viewing portfolio management as important (see Figure 4). Some
communication is vertical and for visibility reasons: “portfolio management is a very
effective communication tool between executive management and divisional
management” and “portfolio management provides visibility for all projects so that
people understand why we are working on a certain project” are comments heard
here.
Horizontal communication – across functions – is also a frequently cited “top of mind”

reason for adopting portfolio management: Comments are that “portfolio
management promotes communication between R&D and Commercial” and “... to
maintain uniform priorities [of projects] across functions”.
8. Providing better objectivity in project selection is the final reason for the importance
accorded portfolio management management “greatly reduces the tendency for ‘pet projects’
to enter the system – projects that cannot really be justified” and that effective portfolio
management must be in place “... to ensure that projects do not take on a life of their own –
that older projects which have outlived their usefulness can be killed and replaced by others.”
Popular Portfolio Management Methods Used

1. Financial methods dominate portfolio management and project selection approaches.

Financial methods include various profitability and return metrics, such as NPV, RONA, ROI
or payback period. See Figure 6 for an example of a typical financial
method, the ECV approach. The popular Productivity Index method is yet another
but similar approach here [13,20]. A total of 77.3 percent of businesses use a
financial approach in portfolio management and project selection – see Figure 5 –
while 40.4 percent of businesses rely on financial approaches as the dominant
portfolio method. That is, project selection and the composition of the portfolio of
projects boils down to a financial calculation, and the rating and ranking of projects is
based on this financial number or index!
2. The business’s strategy as the basis for allocating money across different types of
projects is the second most popular portfolio approach. For instance, having decided
the business’s strategy, money is allocated across different types of projects and into
different envelopes or buckets. Projects are then ranked or rated within buckets. See
Figure 7 for a disguised example of one strategic method as used in a major
materials company – we labelled it the Strategic Buckets approach

A total of 64.8 percent of businesses use a strategic approach to
select their portfolio of projects; for 26.6 percent of businesses, this is the dominant
method.

3. Bubble diagrams or portfolio maps have received much hype and exposure in recent
books, articles and software. Here, projects are plotted on an X-Y
plot or map, much like bubbles or balloons. Projects are categorized according to the
zone or quadrant they are in (e.g., pearls, oysters, white elephants, and bread-andbutter
projects) – see Figure 8 for an example. These bubble diagrams resemble
the original portfolio models – Stars, Cash Cows, Dogs, etc. – except that the axes
are quite different, and projects rather than business units are plotted [12]. A total of
40.6 percent of businesses use portfolio maps; only 5.3 percent of businesses use
this as their dominant method, however.

4. Scoring models: Here, projects are rated or scored on a number of questions or

criteria (for example, low-medium-high; or 1-5 or 0-10 scales). The ratings on each
scale are then added to yield a Total or Project Score, which becomes the criterion
used to make project selection and/or ranking decisions. This addition is done in a
simple or a weighted fashion (certain questions are weighted more heavily, reflecting
greater importance). Figure 9 provides a sample of the scoring model used in a
major chemical company [6]. A total of 37.9 percent of businesses use scoring
models; in 13.3 percent, this is the dominant decision method.


5. Check lists: Projects are evaluated on a set of Yes/No questions. Each project must
achieve either all Yes answers, or a certain number of Yes answers to proceed. The
number of Yes’s is used to make Go/Kill and/or prioritization (ranking) decisions.
Only 20.9 percent of businesses use check lists; and in only 2.7 percent is this the
dominant method.
6. Others: Twenty-four percent of businesses indicate that they use some “other
method”– other than the ones described above. A closer scrutiny of these “other”
methods reveals that most are variants or hybrids of the above models and
methods, for example:
 M any businesses that responded “other method” describe a strategically driven

process, much like the strategic method above. That is, they let their business’s
strategy drive the spending splits (e.g., across buckets such as markets, product
types, project types) and even let their strategy drive the choice of individual
projects.
A number of businesses use multiple criteria – profitability, strategic, customer

appeal – but not necessarily in a formal scoring model format (as in method 4
above).
Some businesses use probabilities of commercial and technical success, either

multiplied together, or multiplied by various financial numbers (EBIT, NPV) – a
variant of the financial methods (#1 above).
How Sound Are Their Portfolios?
Portfolio management appears to be working in a moderately satisfactory fashion on

average in our sample of businesses. Mean scores across the six performance metrics
are typically in the mid-range area – not stellar, but not disastrous either – although
there are some major differences across performance metrics (see Figure 17; the black
bars show mean values). But averages don’t tell the whole story here: there are broad
distributions of responses on these six performance metrics, suggesting major
differences between the best and worst performers.

The Best Versus the Rest
This large performance spread begs the question: Who are these better performers?
And what is it that they are doing differently than the poor performers? To answer the
questions, we developed a single performance gauge, based on the six individual
metrics in Figure 175. To gain insights into best practices, we separated the top 20
percent of businesses – the Best – measured by their portfolio performance on this
gauge, and compare their results and practices to the bottom 20 percent of businesses
– the Worst.
As might be expected, the top performers – the Best – achieve dramatically better
portfolio performance results across all six performance metrics (Figure 17, the pairs of
shaded bars). For example, their portfolios are aligned with the business’s objectives
and R&D spending mirrors the business’s strategy; and their portfolios contain very high
value projects.

However, the two areas where the Best really excel are:
 portfolio balance – achieving the right balance of projects; and
 having the right number of projects for the resources available.
Both are areas where the average business performs fairly weakly.
Reasons for Portfolio Managements Failure
When portfolio management wrong, expect serious negative consequences in your total new
product efforts. Indeed, many of the ailments that plague businesses’ new product efforts can
be directly or indirectly traced to ineffective portfolio management, according to the mangers
we interviewed in the exploratory phase of the investigation (see box):
 Strategic: One negative side of poor portfolio management is that strategic criteria are
missing in project selection. This translates into no strategic direction to projects
selected; projects not strategically aligned with the business strategy; many
strategically unimportant projects in the portfolio; and R&D spending that does not
reflect strategic priorities of the business. The end result is a scattergun R&D and new
product effort that does not support the company’s strategy.
 Low value projects: Poor portfolio management means deficient Go/Kill and project
selection decisions, which in turn leads to many mediocre projects in the pipeline –
too many extensions, modifications, enhancements and short-term projects. Many of
these are marginal value projects to the business. This translates into a lack of stellar,
high reward projects, while the few really good projects are starved for resources –
they take too long, and may fail to achieve their full potential.

 No focus: Another outcome of poor portfolio management is a strong reluctance to

kill projects: there are no consistent criteria for Go/Kill decisions, and projects just get
added to active list. The result is a lack of focus – too many projects, and resources
thinly spread. This in turn leads to increased times to market, poor quality of
execution, and decreased success rates.
 The wrong projects: Poor portfolio management means that often the wrong projects
are selected. With no formal selection method, decisions are not based on facts and
objective criteria, but rather on politics, opinion and emotion ... for example, “pet”
projects of some senior executive. Many of these emotionally-selected projects fail.
Portfolio management is typically very poorly handled, however. It was rated as the
weakest area in new product management in a recent benchmarking study
Management confessed to no serious Go/Kill decision points in their new product

process; no criteria for making the Go/Kill decision; poor project prioritization; and too
many projects for the limited resources available.
How to identify the best portfolio

Importance of Portfolio Management
Senior managements in the Best companies consistently and significantly view portfolio
management as much more important than do managements in the Worst (see Figure
18, the pairs of shaded bars). This is true regardless of functional area. Thus, there
appears to be a direct link between whether senior management in a business
recognizes portfolio management to be important, and the portfolio results it achieves.
Once again, however, technology managers score by far the highest here, with senior
technology management in the Best businesses rating portfolio management a very
high 4.6 out of 5 in importance. Marketing/Sales and Operations/Production managements
continue to be perceived as seeing portfolio management as less vital, even among the Best
businesses.
Explicit Portfolio Method
Does having a consistently applied, explicit portfolio management process have any
impact on performance? Definitely yes, according to the results of the survey. Consider
the major and significant differences between the Best and the Worst in Figure 19:
The Best, when compared to the Worst
 Have an explicit, established method for portfolio management,

 Where management buys into the method, and supports it through their actions;
 The method has clear rules and procedures,
 It treats projects as a portfolio (considers all projects together and treats them as
a portfolio), and
 It is consistency applied across all appropriate projects.
These differences between Best and Worst are consistent and major. The clear
message is this: Businesses that achieve positive portfolio results – a balanced,
strategically aligned, high value portfolio, with the right numbers of projects and good
times-to-market (no gridlock) – boast a clearly defined, explicit, all-project, consistently
applied portfolio management process which management endorses. Poor performers
lack this!
Portfolio Methods Used
The Best have decided preferences for which portfolio model or method dominates their
decision process (see Figure 20):
 The Best tend to rely much less on financial models and methods as the
dominant portfolio tool than does the average business. By contrast, the Worst place much
more emphasis on financial tools. For example, only 35.9 percent of the Best rely on financial
models as their dominant method, whereas 56.4 percent of the Worst use this as their
dominant portfolio method.
 The Best let the business strategy allocate resources and decide the portfolio
much more so than do the Worst. Only 10.3 percent of the Worst use the
business’s strategy as the dominant method, compared to 38.5 percent of the
Best. Indeed, business strategy methods are the number one method for the

Best, used even more so than the popular financial approaches as the dominant
decision tool here – see Figure 20.
The use of other methods – scoring models, check lists, bubble diagrams – as the
dominant approach is too infrequent to allow meaningful comparison of Best versus
Worst (Figure 20).
Multiple Methods Used
The Best tend to reply on multiple methods for portfolio management – that is, they
appear to acknowledge that no one method gives the correct results. For example, the
Best on average use 2.43 different portfolio management techniques per business to
select projects and manage their portfolio, while almost half of the Best (47.5%) use

three or more methods! Even the average business uses multiple methods (2.34 per
business). The Worst tend to rely on far fewer or even one portfolio method more so
(1.83 methods per business, on average), with almost half of the Worst focusing on a
single method only (46.3% of the Worst use only one portfolio approach).
Challenges Remaining
Although most businesses in the study recognize the need for and importance of
portfolio management, there are still many issues that need to be addressed. Thus, we
asked managers to identify what are the most significant challenges ahead The most common
challenge identified is the need to create a positive climate, culture and buy-in for their
portfolio method. As might be expected, a key issue in any new process is the need to obtain
organizational buy-in. Without total senior executive support, the portfolio management
process becomes a difficult sell.

Other challenges and issues pertain to achieving the primary goals of portfolio management –
achieving business objectives, obtaining linkages to strategy and achieving balance – and to
the tools needed to obtain the needed information to be able
to make disciplined decisions.
The most common complaint cited by managers is the abundance of short term, low risk
projects in the pipeline. People are too busy working on these types of projects to be
able to devote the time and energy needed to develop the next generation of “big
winners” for the company. Executives are concerned that the need for quick hits in the
market is placing longer term projects at risk.
Is Portfolio Management worth an Investment ?
A number of benefits have been derived from implementing portfolio management aside
from the obvious goals of obtaining better financial returns. Figure 22 lists the “top of the
mind” near-term benefits that managers expect to reap from their efforts in portfolio
management.

The most frequently cited benefit is the expectation of achieving a common basis for
discussion. By putting discipline into the process and providing a consistent basis of
comparison, people are able to compare projects and to assess them from the same
base of information and using the same criteria. Consistency in evaluations across
projects is the result.
Managers also expect to obtain better focus, balance and strategic alignment – to
target projects that are better and are more closely aligned to strategy, and to obtain the
right mix between short and long term projects. By being better able to focus their
resources, they expect to be in a position to reduce time to market and have the
resources to seek the projects that will make a significant difference to the organization.
Implications for Management Action
Here then are our conclusions and suggestions – a call to action:

1. Portfolio management works! Those businesses that have gone to the trouble of
installing a systematic, explicit portfolio management system – one with clear rules and
procedures, that is consistently applied across all appropriate projects and treats all
projects as a portfolio, and which management buys into – are the clear winners [8,10].
Their portfolios outperform the rest on all six performance metrics: higher value projects;
better balance; the right number of projects; a strategically aligned portfolio; and so on.
The message is clear:
Step #1 is to make a commitment to installing a systematic, formal and rigorous portfolio

management system or process in your business.
2. Sell all senior management on the importance of portfolio management.
Management buy-in is one of the key challenges identified in the study. Further, while
many senior managements are well aware of the importance of portfolio management, many
others are not – perhaps out of ignorance, or perhaps because they think that project selection
and portfolio management is “an R&D thing”, best handled by technology management
people. Finally, those businesses where portfolio management is accorded great importance
are also doing the best – their portfolios are in great shape! So there is a strong link here
between perceived importance, management buyin, and doing well. Perhaps the toughest sell
will be to the senior Marketing/Sales and Operations
Management people. They seem to be the least in tune with the importance of
portfolio management. As ammunition, we offer you our list of eight key reasons why other
businesses and their senior managements see portfolio management as so important
3. There is no one right portfolio management method – so try a hybrid approach.
Certainly financial models and methods are the most popular, with 77 percent of
businesses using them, and 40 percent relying on them as the dominant portfolio
decision tool. But there is great diversity of approaches as well: strategic approaches,
scoring models and bubble diagrams are also popular, and can easily be used in
conjunction with financial models, and in concert with each other. Indeed, the Best
businesses tend to use a combination or hybrid approach – an average of 2.43 portfolio
methods per business. Finally, no one method has a monopoly on strengths and positive
performance. Rather, strengths and weaknesses were offered in verbal
comments for all methods, and while certain portfolio methods do yield superior portfolio
results, when used in conjunction with other methods, the results are even better.
4. Beware an over-reliance on financial methods and models.
Those businesses that use financial methods as the dominant portfolio selection
method end up with the worst and poorest performing portfolios! This is ironic: these
businesses adopted what appeared to be a rigorous approach to project evaluation, namely a
financial tool, in order to maximize returns and performance, yet achieved exactly the
opposite outcomes. Why? One reason is that the sophistication of financial tools often far
exceed the quality of the data inputs (These sophisticated tools can be quite elegant,
andinclude ECV, Productivity Index and even probabilistic models such as At Risk and
Crystal Ball6; but the data inputs are often based on flimsy market and costs analyses).A
second reason is that the key Go/Kill and prioritization decisions must be made fairly early in
the life of a project, precisely when the financial data are the least accurate! A final reason is
that financial projections are fairly easy to “rig”, consciously or unconsciously, especially by
an over-zealous project team
5. Look more to strategic approaches as the way to manage your portfolio.
Businesses that rely principally on strategic methods for portfolio management

outperform the rest. Recall that 39 percent of the Best businesses use strategic
approaches as the dominant portfolio method, while only 10 percent of the Worst do.
Strategic approaches, such as Strategic Buckets, can be used to allocate resources or
funds into different buckets. Look to Figure 11 for a list of the popular bucket categories:
by market; by project type; by product line; by project size; and by technology type. So
first consider electing one or more of these dimensions, and splitting resources into
buckets. Begin with your business’s new product goals, vision and strategy, and then
move to resource splits
Remember: strategy begins when you start spending money!

Next, categorize your projects according to buckets, and then rank order your projects
by bucket, as in Figure 7. You can consider financial methods or perhaps scoring
models to do the ranking within buckets. This strategic method will ensure that your
R&D spending reflects your business’s strategy
6. Consider a scoring model as an effective prioritization tool.
The users of scoring models have great praise for them, and see them as effective and
efficient decision tools for portfolio management. Scoring models have the advantage that
they combine the popular financial criteria with the desirable strategic criteria (Note that in
the sample scoring model in Figure 9, the first two criteria are financial ones, and Factors 2
and 3 are both strategic factors). Use the sample in Figure 9, but also consider the often-used
project evaluation criteria in Figure 14, and build these into a scoring model for your own
use.

Employ scoring models at gate meetings to make Go/Kill and prioritization decisions;
and utilize the project scores to help make prioritization decisions at periodic portfolio
review meetings. A word of caution: don’t use the project score mechanistically. The
real value is the process of decision-makers walking through the criteria, discussing
each and gaining closure on each criterion, rather than dwelling on the score itself!
7. Bubble diagrams must also be part of your repertoire of portfolio models. They
receive very high praise from management, who very strongly recommend their use to
others. Moreover they are thought to be an effective decision tool, yielding correct
portfolio decisions. Bubble diagrams have the advantage that they portray the entire
portfolio in visual format, and are also able to display portfolio balance. Do look at the
list of possible bubble diagrams: the majority of users plot the traditional risk-reward
diagram (as in Figure 8), but Figure 15 shows some other axes that you should consider
for your bubble diagrams.

UNDERSTANDING PORTFOLIO MANAGEMENT
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.
• 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.
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 Management is used to select a portfolio of new product development projects to

achieve the 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.
The chart shown above provides a graphical view of the project portfolio risk-reward balance.
It is used to assure balance in the portfolio of projects - neither too risky nor conservative and
appropriate levels of reward for the risk involved. The horizontal axis is Net Present Value;

the vertical axis is Probability of Success. The size of the bubble is proportional to the total
revenue generated over the lifetime sales of the product.
While this visual presentation is useful, it can't prioritize projects. Therefore, some mix of
these techniques is appropriate to support the Portfolio Management Process. This mix is
often dependent upon the priority of the goals.
Our recommended approach is to start with the overall business plan that should define the
planned level of R&D investment, resources (e.g., headcount, etc.), and related sales expected
from new products. With multiple business units, product lines or types of development, we
recommend a strategic allocation process based on the business plan. This strategic allocation
should apportion the planned R&D investment into business units, product lines, markets,
geographic areas, etc. It may also breakdown the R&D investment into types of development,
e.g., technology development, platform development, new products, and
upgrades/enhancements/line extensions, etc.
Once this is done, then a portfolio listing can be developed including the relevant portfolio
data. We favor use of the development productivity index (DPI) or scores from the scoring
method. The development productivity index is calculated as follows: (Net Present Value x
Probability of Success) / Development Cost Remaining. It factors the NPV by the probability
of both technical and commercial success. By dividing this result by the development cost
remaining, it places more weight on projects nearer completion and with lower uncommitted
costs. The scoring method uses a set of criteria (potentially different for each stage of the
project) as a basis for scoring or evaluating each project.
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

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 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.
Governance
Implementing portfolio management practices in an organization is a transformation effort
that typically involves developing new capabilities to address new work efforts, defining (and
filling) new roles to identify portfolios (collections of work to be done), and delineating
boundaries among work efforts and collections.
Implementing portfolio management also requires creating a structure to provide planning,
continuing direction, and oversight and control for all portfolios and the initiatives they
encompass. That is where the notion of governance comes into play. The IBM view of
governance is:
An abstract, collective term that defines and contains a framework for
organization, exercise of control and oversight, and decision-making authority,
and within which actions and activities are legitimately and properly executed;
together with the definition of the functions, the roles, and the responsibilities of
those who exercise this oversight and decision-making.

Portfolio management governance involves multiple dimensions, including:

• Defining and maintaining an enterprise business strategy.
• Defining and maintaining a portfolio structure containing all of the
organization's initiatives (programs, projects, etc.).
• Reviewing and approving business cases that propose the creation of new
initiatives.
• Providing oversight, control, and decision-making for all ongoing
initiatives.
• Ownership of portfolios and their contents.
Each of these dimensions requires an owner -- either an individual or a collective -- to
develop and approve plans, continuously adjust direction, and exercise control through
periodic assessment and review of conformance to expectations.
A good governance structure decomposes both the types of work and the authority to plan
and oversee work. It defines individual and collective roles, and links them to an authority
scheme. Policies that are collectively developed and agreed upon provide a framework for the
exercise of governance.
The complexities of governance structures extend well beyond the scope of this article. Many
organizations turn to experts for help in this area because it is so critical to the success of any
business transformation effort that encompasses portfolio management. For now, suffice it to
say that it is worth investing time and effort to create a sound and flexible governance
structure before you attempt to implement portfolio management practices.
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.
Portfolio Management Process
The Processes on Demand portfolio management process is a best practice for management
of the projects and programs of the portfolio. The portfolio management process steps
include:
 Portfolio Management Process

• Identification
• Categorization
• Evaluation
• Selection
• Prioritization

• Balancing
• Authorization
• Review and Reporting
• Strategic Change
 Governance Process
• Consultation
• Preparation
• Selection
 Portfolio Management Dashboards
• Status Summary View
• Gantt View
• Cost View
• Risk view
The process of portfolio management provides a better understanding about the benefits, loss
and the risks regarding the business. The outcome of the process of the portfolio management
is evaluated with the performance graph of the organization. The portfolio management is
differentiated into two major types. They are the enterprise portfolio management process
and the project portfolio management process.
The enterprise portfolio management gives information regarding the amount of finance to be
spent over the business and the requirement of the
enterprise architecture. The project portfolio management gives an analytical approach to the
decisions over the sets of portfolio.
Portfolio management is the best process or making planned decisions and

also for determining the expenditures of the business. An effective way of portfolio
management ensures the growth of the organization and also the other business
establishments of the organization.
1. Value Maximization
Allocate resources to maximize the value of the portfolio via a number of key
objectives such as profitability, ROI, and acceptable risk. A variety of methods
are used to achieve this maximization goal, ranging from financial methods to
scoring models.

2. Balance
Achieve a desired balance of projects via a number of parameters: risk versus
return; short-term versus long-term; and across various markets, business
arenas and technologies. Typical methods used to reveal balance include bubble
diagrams, histograms and pie charts.
3. Business Strategy Alignment

Ensure that the portfolio of projects reflects the company’s product innovation
strategy and that the breakdown of spending aligns with the company’s strategic
priorities. The three main approaches are: top-down (strategic buckets); bottom-
up (effective gate keeping and decision criteria) and top-down and bottom-up
(strategic check).
4. Pipeline Balance
Obtain the right number of projects to achieve the best balance between the
pipeline resource demands and the resources available. The goal is to avoid
pipeline gridlock (too many projects with too few resources) at any given time. A
typical approach is to use a rank ordered priority list or a resource supply and
demand assessment.
5. Sufficiency
Ensure the revenue (or profit) goals set out in the product innovation strategy
are achievable given the projects currently underway. Typically this is conducted
via a financial analysis of the pipeline’s potential future value.
What are the benefits of Portfolio Management?
When implemented properly and conducted on a regular basis, Portfolio

Management is a high impact, high value activity:
• Maximizes the return on your product innovation investments

• Maintains your competitive position
• Achieves efficient and effective allocation of scarce resources
• Forges a link between project selection and business strategy
• Achieves focus
• Communicates priorities
• Achieves balance

• Enables objective project selection
Top performers emphasize the link between project selection and business
strategy.
Why is it so important?
Companies without effective new product portfolio management and project

selection face a slippery road downhill. Many of the problems that plague new
product development initiatives in businesses can be directly traced to
ineffective portfolio management. According to benchmarking studies conducted
by Dr. Cooper and Dr. Edgett, some of the problems that arise when portfolio
management is lacking are:
• Projects are not high value to the business

• Portfolio has a poor balance in project types
• Resource breakdown does not reflect the product innovation strategy
• A poor job is done in ranking and prioritizing projects
• There is a poor balance between the number of projects underway and the
resources available
• Projects are not aligned with the business strategy
As a result too many companies have:
• Too many projects underway (often the wrong ones)

• Resources are spread too thin and across too many projects
• Projects are taking too long to get to market, and
• The pipeline has too many low value projects
Portfolio Management is about doing the right projects. If you pick the right
projects, the result is an enviable portfolio of high value projects: a portfolio that
is properly balanced and most importantly, supports your business strategy.
Models
 Arbitrage pricing theory Some of the financial models used in the process
of Valuation, stock selection, and management of portfolios include:
 Maximizing return, given an acceptable level of risk
 Modern portfolio theory—a model proposed by Harry Markowitz among
others
 The single-index model of portfolio variance
 Capital asset pricing model
 The Jensen Index
 The Treynor Index
 The Sharpe Diagonal (or Index) model
 Value at risk model

prices in the bond market often increase, and vice versa. A collection of both types of assets
can therefore have lower overall risk than either individually. But diversification lowers risk
even if assets' returns are not negatively correlated—indeed, even if they are positively
correlated.

advance in the mathematical modeling of finance. Since then, many theoretical and
practical criticisms have been leveled against it. These include the fact that financial returns
do not follow a Gaussian distribution or indeed any symmetric distribution, and that
correlations between asset classes are not fixed but can vary depending on external events
(especially in crises). Further, there is growing evidence that investors are not rational and
markets are not efficient. The fundamental concept behind MPT is that the assets in an
investment portfolio cannot be selected individually, each on their own merits. Rather, it is
important to consider how each asset changes in price relative to how every other asset in the
portfolio changes in price.
holdings of assets are possible.)
MPT is therefore a form of diversification. Under certain assumptions and for

specific quantitative definitions of risk and return, MPT explains how to find the best
possible diversification strategy.
In general:
 Expected return:
where Rp is the return on the portfolio, Ri is the return on asset i and wi is

the weighting of component asset i (that is, the share of asset i in the
portfolio).

 Portfolio return variance:
where ρij is the correlation coefficient between the returns on

assets i and j. Alternatively the expression can be written as:
,
 Portfolio return volatility (standard deviation):
 Portfolio
return:
 Portfolio variance:
 Portfolio return:
 Portfolio
variance:
The single-index model (SIM) is a simple asset pricing model commonly used in
the finance industry to measure risk and return of a stock. Mathematically the SIM is
expressed as:
where:
rit is return to stock i in period t

rf is the risk free rate (i.e. the interest rate on treasury bills)
rmt is the return to the market portfolio in period t
αi is the stock's alpha, or abnormal return
βi is the stocks's beta, or responsiveness to the market return
Note that rit − rf is called the excess return on the stock, rmt − rf the excess return
on the market
εit is the residual (random) return, which is assumed normally distributed with
mean zero and standard deviation σi
These equations show that the stock return is influenced by the market (beta), has a firm
specific expected value (alpha) and firm-specific unexpected component (residual). Each
stock's performance is in relation to the performance of a market index (such as the All
Ordinaries). Security analysts often use the SIM for such functions as computing stock betas,
evaluating stock selection skills, and conducting event studies.
In finance, the capital asset pricing model (CAPM) is used to determine a theoretically
appropriate required rate of return of an asset, if that asset is to be added to an already well-
diversified portfolio, given that asset's non-diversifiable risk. The model takes into account
the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk),
often represented by the quantity beta (β) in the financial industry, as well as the expected
return of the market and the expected return of a theoretical risk-free asset. The model was
introduced by Jack Treynor (1961, 1962), William Sharpe (1964), John Lintner(1965a,b)
and Jan Mossin (1966) independently, building on the earlier work of Harry Markowitz on
diversification and modern portfolio theory. Sharpe, Markowitz and Merton Miller jointly
received the Nobel Memorial Prize in Economics for this contribution to the field of financial
economics.
The CAPM is a model for pricing an individual security or a portfolio. For individual
securities, we make use of the security market line (SML) and its relation to expected return

and systematic risk (beta) to show how the market must price individual securities in relation
to their security risk class. The SML enables us to calculate the reward-to-risk ratio for any
security in relation to that of the overall market. Therefore, when the expected rate of return
for any security is deflated by its beta coefficient, the reward-to-risk ratio for any individual
security in the market is equal to the market reward-to-risk ratio, thus:
The market reward-to-risk ratio is effectively the market risk premium and by
rearranging the above equation and solving for E(Ri), we obtain the Capital Asset
Pricing Model (CAPM).
where:
 is the expected return on the capital asset
 is the risk-free rate of interest such as interest arising from

government bonds
 (the beta) is the sensitivity of the expected excess asset returns to the
expected excess market returns, or also ,
 is the expected return of the market
 is sometimes known as the market premium or risk

premium (the difference between the expected market rate of return and
the risk-free rate of return).
Restated, in terms of risk premium, we find that:
which states that the individual risk premium equals the market premium times β.
Note 1: the expected market rate of return is usually estimated by measuring

the Geometric Average of the historical returns on a market portfolio (e.g. S&P 500).

Note 2: the risk free rate of return used for determining the risk premium is usually the
arithmetic average of historical risk free rates of return and not the current risk free rate
of return.
For the full derivation see Modern portfolio theory.
Arbitrage pricing theory (APT), in finance, is a general theory of asset pricing, that has
become influential in the pricing of stocks.
APT holds that the expected return of a financial asset can be modeled as a linear function of
various macro-economic factors or theoretical market indices, where sensitivity to changes in
each factor is represented by a factor-specific beta coefficient. The model-derived rate of
return will then be used to price the asset correctly - the asset price should equal the expected
end of period price discounted at the rate implied by model. If the price
diverges, arbitrage should bring it back into line. The theory was initiated by
the economist Stephen Ross in 1976.
The APT model
Risky asset returns are said to follow a factor structure if they can be expressed as:
where
 E(rj) is the jth asset's expected return,

 Fk is a systematic factor (assumed to have mean zero),
 bjk is the sensitivity of the jth asset to factor k, also called factor
loading,
 and εj is the risky asset's idiosyncratic random shock with mean
zero.
Idiosyncratic shocks are assumed to be uncorrelated across assets and uncorrelated

with the factors.

The APT states that if asset returns follow a factor structure then the following
relation exists between expected returns and the factor sensitivities:
where
 RPk is the risk premium of the factor,

 rf is the risk-free rate,
That is, the expected return of an asset j is a linear function of the assets sensitivities to
the n factors.
Note that there are some assumptions and requirements that have to be fulfilled for the latter
to be correct: There must be competition in the market, and the total number of factors may
never surpass the total number of assets (in order to avoid the problem of matrix singularity),
In finance, Jensen's alpha (or Jensen's Performance Index, ex-post alpha) is used to
determine the abnormal return of a security or portfolio of securities over the theoretical
expected return.
The security could be any asset, such as stocks, bonds, or derivatives. The theoretical return
is predicted by a market model, most commonly the Capital Asset Pricing Model (CAPM)
model. The market model uses statistical methods to predict the appropriate risk-adjusted
return of an asset. The CAPM for instance uses beta as a multiplier.
Jensen's alpha was first used as a measure in the evaluation of mutual fund managers
by Michael Jensen in 1968. The CAPM return is supposed to be 'risk adjusted', which means
it takes account of the relative riskyness of the asset. After all, riskier assets will have higher
expected returns than less risky assets. If an asset's return is even higher than the risk adjusted
return, that asset is said to have "positive alpha" or "abnormal returns". Investors are
constantly seeking investments that have higher alpha.
In the context of CAPM, calculating alpha requires the following inputs:
 the realized return (on the portfolio),

 the market return,
 the risk-free rate of return, and
 the beta of the portfolio.
Jensen's alpha = Portfolio Return − [Risk Free Rate + Portfolio Beta * (Market Return −
Risk Free Rate)]
Since Eugene Fama, many academics believe financial markets are too efficient to allow
for repeatedly earning positive Alpha, unless by chance. To the contrary, empirical
studies of mutual funds spearheaded by Russ Wermers usually confirm managers' stock-
picking talent, finding positive Alpha. However, they also show that after fees and
expenses are deducted, the effective Alpha for investors is negative. (These results also
explain why passive investing is increasingly popular.)
Nevertheless, Alpha is still widely used to evaluate mutual fund and portfolio manager
performance, often in conjunction with the Sharpe ratioand the Treynor ratio.
The Treynor ratio (sometimes called the reward-to-volatility ratio or Treynor measure),
named after Jack L. Treynor, is a measurement of the returns earned in excess of that which
could have been earned on an investment that has no diversifiable risk (e.g., Treasury Bills or
a completely diversified portfolio), per each unit of market risk assumed.
The Treynor ratio relates excess return over the risk-free rate to the additional risk taken;
however, systematic risk is used instead of total risk. The higher the Treynor ratio, the better
the performance of the portfolio under analysis.
where
Treynor ratio,
portfolio i's return,
risk free rate
Portfolio i's beta
Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of
active portfolio management. It is a ranking criterion only. A ranking of portfolios based on

the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a
broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic
risk, but different total risk, will be rated the same. But the portfolio with a higher total risk is
less diversified and therefore has a higher unsystematic risk which is not priced in the market.
An alternative method of ranking portfolio management is Jensen's alpha, which quantifies

the added return as the excess return above the security in the capital asset pricing model. As
they two both determine rankings based on systematic risk alone, they will rank portfolios
identically.
In financial mathematics and financial risk management, Value at Risk (VaR) is a widely
used risk measure of the risk of loss on a specific portfolio of financial assets. For a given
portfolio, probability and time horizon, VaR is defined as a threshold value such that the
probability that the mark-to-market loss on the portfolio over the given time horizon exceeds
this value (assuming normal markets and no trading in the portfolio) is the given probability
level.
For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 0.05
probability that the portfolio will fall in value by more than $1 million over a one day period,
assuming markets are normal and there is no trading. Informally, a loss of $1 million or more
on this portfolio is expected on 1 day in 20. A loss which exceeds the VaR threshold is
termed a “VaR break.”
"Given some confidence level the VaR of the portfolio at the confidence
level α is given by the smallest number l such that the probability that the loss L exceeds l is
not larger than (1 − α)"
The left equality is a definition of VaR. The right equality assumes an underlying probability
distribution, which makes it true only for parametric VaR. Risk managers typically assume
that some fraction of the bad events will have undefined losses, either because markets are
closed or illiquid, or because the entity bearing the loss breaks apart or loses the ability to
compute accounts. Therefore, they do not accept results based on the assumption of a well-
defined probability distribution. Nassim Taleb has labeled this assumption,

"charlatanism." On the other hand, many academics prefer to assume a well-defined

distribution, albeit usually one with fat tails. This point has probably caused more contention
among VaR theorists than any other.
Software used in Portfolio management
Mprofit portfolio management software details describes the electronic portfolio development
process further and covers seven different software and hardware tools for creating portfolios.
Some very good commercial electronic portfolio programs are on the market, although they
often reflect the developerís style or are constrained by the limits of the software structure.
Many educators who want to develop electronic portfolios tend to design their own, using
off-the-shelf software or generic strategies. Here, I discuss the structure of each type of
program, the advantages and disadvantages of each strategy, the relative ease of learning the
software, the level of technology required, and related issues. The seven generic types of
software are:

1. Relational databases
2. Hypermedia "card" software
3. Multimedia authoring software
4. World Wide Web (HTML) pages
5. Adobe Acrobat (PDF files)
6. Multimedia slideshows
7. Video (digital and analog)
It helps us to maintain following attributes:-
 Manage an unlimited number of portfolios and groups.
 Manage assets like Stocks, MFs, ETFs,ULIPs, Insurance Policies, Private Equity,
FDs, Bonds, PPF, Gold, Silver, Property, Art and many more...
 Import data from contract notes, CAMS/ KARVY, excel templates and online portals.
 Asset Allocation reports with graphs.
 Online update of BSE stock prices, Mutual Fund NAVs and ETFs.
 Quick Summary view with multiple sorting options by name or current value.
 Summary & detailed transaction wise Capital Gain Tax reports for Stocks & MFs.
 Annualised Returns (XIRR) report.
 Tax Calculator.
 Online update for newly listed stocks, mutual funds and ETFs.
 Again very helpful in finding the following:-

 Keep track of your purchase & sale transactions of stocks in a simple and familiar
contract note format as well as subscription, redemptions & dividend reinvestment
entries of mutual funds.
 Daily Gain, Overall Gain, Current Value for Stocks and MFs.
 Support for bonuses, splits, merger & demerger transactions (closing balances and
capital gain calculations are adjusted based on these corporate actions as per the
income tax rules).
 Support for adding multiple buy and sell transactions in one contract note form.
 Manage transactions related to short selling in stocks.
 Mutual Fund transactions can be entered to buy (subscribe), sell (redeem), dividend
reinvestment and addition of bonus units (value for such bonus units is zero).
 Auto generate past SIP (Systematic Investment Plan) entries for mutual funds.
 Keep track of mutual funds schemes with folio numbers.
 Lock-In Period and reminder alert for MFs (very useful for ELSS tax saving schemes.
 Transactions related to Exchange Traded Funds (ETFs)..
It can also manage your investments such as ULIPs,insurance policies and your Private
Equity holdings. The features for ULIPs and insurance policies are:-

Keep track of all the details associated with your ULIP and insurance plans. Information such
as:
 Policy Number, Sum Assured, Name of the nominee, Premium Term, Lock-in Date
and Maturity
Date.
 Reminder alert for the premium, lock-in date and maturity date.
 Complete record of premium and withdrawals.
 Keep track of funds associated with ULIP plans.
 Manage units quantity and NAV values for ULIP funds.
 Option to set ULIP policy value based on funds values or manually as per the policy
statement.
In the Private Equity category you can list transactions related to unlisted/delisted stocks as
well as shares of Private Limited companies.
It can manage other asset classes as well such as FDs,bonds, PPF/EPF, gold, silver, jewellry,
property, art and many othersI
The features for FDs/Bonds/Deposits/Loans/PPF/EPF and Post Office Schemes are:
 Calculation of current value and maturity values
 Display of daily gain in terms of accrued (accumulated) interest
 Interest in PPF/EPF category is calculated based on PPF rules

 Interest calculation is based on reducing balance method in case of loans, deposits and
Post Office schemes
 Current value can be set based on interest rate or market value for bonds
 Track income received from rental income and other sources
It allows you to import your financial data from a wide variety of data sources. We have 4
categories of file types we support:
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jdfngkjdfngkjdf
 Brokerage digital contract notes - we support brokers such as Kotak, MF Global,
Motilal Oswal, Reliance Securities, Way2Wealth and many others brokers, we are
constantly adding new brokers to the list.
 CAMS/KARVY mutual fund files - we support Karvy 201/221, Karvy personal file,
CAMS WBR2 and CAMS personal files.
 Predefined Excel formats - using the templates provided you can import your stock
and mutual fund Transactions.
 Online portals - we currently support Value Research Online and NJ Fundz. This
allows you to keep a backup of your financial data on your computer and also
aggregate all your financial data.

The power of our software is via the reports that can be generated.These reports allow you to
view your portfolio and understand where and how your investments are performing.
Features include:
 Provides various reports that can be easily understood and customized per your needs.
 Choose from various report types, such as Capital Gains, Transaction, Analytical,
Accounting and Miscellaneous Reports
 Investors can review the diversification and performance of their portfolios through
Asset Allocation and Realised/Unrealised gains reports.
 Asset Allocation reports can display either a pie chart or bar chart. Portfolio Summary
Reports can also be customised for printing of any single asset type, for e.g. Portfolio
summary for only Stocks, MFs, ULIPs, etc.
 Detailed contract notes view for stock transactions.
 Annualised Returns (XIRR) report.
 Long Term, Short Term and Intra-day Profit/Loss reports in a variety of formats like
Summary, Transaction Wise and Detailed Transaction Wise (where multiple
purchased quantities of different dates are sold on
 one date) are available.
 Categorised into stocks, equity mutual funds and debt mutual funds.
 Reports are adjusted for bonuses, splits, merger & demerger transactions as per
income tax rules.

It has many features that allow you to take control of your investments and analyze your
portfolio. Some of the other features are:

 Online update of BSE stock prices, mutual fund NAVs and ETFs
 Automated weekly/monthly data backups to a local hard drive or USB pen drive.
 Database update for newly listed stocks, mutual funds, ETFs and company name
change updates.
 Balloon notification of Annualised Returns (XIRR) for a single asset, an asset

category or all assets for a particular portfolio or group
 Software updates as we keep improving the functionality and adding new features and
reports
 Instant display of details like folio number, lock-in period, maturity date, agent name,
reference name for
various assets via balloon notification
 Instant display of details for ULIP and Insurance products like policy numbers,
maturity date and lock-in date
via balloon notification
 Password feature for owner (full access) and user (can only enter transactions and
can’t see current prices and
values)
 Support for internet proxy settings (helpful in corporate office networks)
 Various reminder alerts such as due dates for insurance premiums, maturity of FDs,
deposits and insurance
 policies, and for other investments can be set

Import Your Data
MProfit allows you to import your data from a wide variety of data sources including digital
contract notes, CAMS/KARVY files, Excel templates and online portals.
Digital Contract Notes
• Anagram Securities
• Atlas Integrated Finance
• Eastern Financiers
• ENAM Securities
• Guiness Securities
• IL&FS Invest smart
• ISE Securities
• Kotak Securities
• Lalkar Securities
• MF Global-Sify
• Motilal Oswal
• Networth Stock Broking
• Reliance Securities
• Way2Wealth
.CAMS/KARVY
• CAMS Online
• CAMS WBR2 file
• KARVY Online
• KARVY 201 and 221 file
.Excel Templates
• MProfit stock template

• MProfit mutual fund template .

Online Portals
• NJ Fundz
Software Features
The Family Office is a concept from the West where the management and investment
decisions for a single wealthy family occur centrally. Although we don’t call them Family
Office’s in India, most families are run like Family Office’s since the investment decisions
affect the entire extended family. When we designed MProfit we took a look at the India
Family Office concept and made it a central part of the software via our Groups feature. Our
grouping feature allows you to aggregate all your individual personal portfolios into a single
group view. This single group view is similar to how most Indian families view their
portfolios as a single portfolio and not just individual portfolios.
The Grouping feature is very powerful when you create reports within MProfit. One example
is the Group Asset Allocation report for Stocks, with this report you can easily see where you
major stock holdings are for your entire family. Without the Grouping feature you would
have to manually figure out each individual’s stock allocation and the add them together in
Excel…not very efficient or easy. With MProfit, it takes just one click to generate the report.
Overall, MProfit is actually a Family Office software solution for Indian households and our
easy to use interface is the perfect way to manage all your assets. Other family (group)
features:
• Consolidated view of entire family (group) networth

• Create and manage multiple family (group) portfolios in various combinations of your
individual portfolios
• Group Annualised Return (XIRR) for any asset, asset category or family portfolio
• Group Holding report which gives you detailed holdings for group members
• Asset Allocation report for the entire family (group)
• Due Date report for the entire family (group) for insurance premium
payment, maturity and lock-in

Overview of Reports
We have updated our Reporting Overview video to reflect the new reports and the changes to
some existing reports. MProfit has 5 main categories for reports: Analytical, Transaction,
Capital Gains, Accounts and Miscellaneous.

Capital Gains Calculations
The financial year 2009-10 is over and in the next several months most of us will be filing
our income tax returns. If you invest in stocks and/or mutual funds, you will need to prepare
the capital gains calculations for your short-term and long-term gains for stocks and mutual
funds. Also, if you have any intra-day profits/losses for stocks you will have to calculate
those gains as well.
MProfit provides various simplified reports for capital gains calculations. MProfit follows the
First In First Out (FIFO) method for calculating capital gains. MProfit provides a summary as
well as transaction wise capital gains reports. Capital gains reports are listed separately for
equity mutual funds and debt mutual funds.
MProfit calculates and adjusts capital gains calculations based on corporate actions such as
merger, de-merger and split and bonus.
Below are several articles which explain in detail how MProfit handles capital gains
calculations.
Capital Gain Calculations for Shares (Stocks)

http://www.mprofit.in/2009/07/capital-gain-calculations-for-shares-stocks/
Capital Gain Calculations for Mutual Funds (MF)

http://www.mprofit.in/2009/07/capital-gain-calculations-for-mutual-funds-mf/

A video tutorial on Capital Gains Reports

http://www.mprofit.in/2010/03/capital-gains-reports/
Lastly, MProfit not only calculates capital gains post sale, MProfit has a feature called Tax
Calculator. The Tax Calculator can help you determine your short-term and long-term capital
gains and the amount of tax payable before you decide to sell your stocks or mutual funds.
Reporting Capabilities
One the biggest benefits of using MProfit is our reporting capabilities. You may find other
services available on the internet but most cannot compete with it comes to reporting. We
provide over 45 types of reports and are adding new ones based on customer feedback.
We have 5 main categories for reports: Analytical, Transaction, Capital Gains, Accounts
and Miscellaneous.
Managing your Mutual Funds
A continuing series that describes how MProfit handles specific asset classes and how
you can benefit from it.
There are many product that manage Mutual Funds, but none are as powerful as
MProfit. Whether you have equity or debt mutual funds…we can manage it. You can choose
from the 1000s of mutual funds, Exchange Traded Funds (ETFs) and Fixed Maturity Plans
(FMPs) to manage. With our unique Group view, you can aggregate and view your entire
family’s portfolio. Some of the features are below:
• NAVs are automatically updated via the internet and reflected in your mutual funds
holdings
• Capital Gain tax reports are printed separately for Equity MF and Debt MF
• Transactions in MF are categorised as subscription (buy), redemption (sale), dividend
reinvestment and bonus units

• Provision for details like folio number, lock-in period, agent name and reminder alert
for lock-in period
• Record for dividend pay-out for MFs
• Balloon notification displays folio number, lock-in period and Agent name (when
your mouse is rolled over the MF name)
• Tax Calculator to help identify short-term and long-term gain and calculate the tax
liability before you redeem (sell) MF units
• Generate past SIP entries through one form
• MF holdings can be viewed alphabetically or by current values
• Group (Family) portfolio will give you the consolidated view your entire family’s MF
holdings. You can view the details of how many family members are holding one
particular fund with details like quantity, purchase value and current value.
Reports
Wait, there is more. Where MProfit really shines is it’s reporting engine (it’s like a Ferrari!).
The Group (Family) portfolio reports such as MF portfolio summary, asset allocation in
mutual funds, group holding reports and annualised returns (XIRR) are very important
reports to help you make the right investment decisions. Overall, the report feature list is
quite impressive:
• MF portfolio pummary with overall gain percentage gain

• Asset allocation with pie chart showing percent holding with respect to MF assets and
overall assets
• Annualised return (XIRR) reports for individual scheme as well as for all your MFs
• Realised and unrealised gain for MF schemes
• Various transaction reports such as Date wise, scheme wise as well as buy, sale and
dividend re-investment transactions
• Short term capital gain reports for equity and debt MFs in various formats
• Closing balance report for MFs to reconcile with books of accounts

Asset Class: Bond’s
The current and maturity values for bonds are calculated based on the interest rate, frequency
of interest payout and cumulative or payout option.
The current and maturity values of remaining bonds will be adjusted when you sell some
bonds from your total holdings. The closing balance of bonds will be calculated based on the
original purchase price and the remaining quantity. This balance cost will match with the
balance in your books of accounts.
You can add transactions to your existing bond investments. The terms related to interest rate,
frequency of interest pay-out, cumulative or pay-out options and maturity value will remain
the same as original first investment. The current values and maturity values will be adjusted
based on subsequent purchases.
There is also an option to add transactions related to interest payout, which will not have any
affect on the current or maturity values. This transaction is helpful in computing the total gain
from the investment and when calculating your annualised returns (XIRR).
You can decide to calculate the values of bonds based on two options:
1) Set the value based on the interest rate
2) Set the value by manually adding the bond price
The option to add cumulative interest is provided via the bonds transactions screen. Investors
may want to pass this entry for tax calculation purposes. The accrued interest up to 31st
March can be passed as a cumulative interest entry in MProfit.
MProfit is designed in such a way that there will not be any difference in current and maturity
values of bonds even if you pass the cumulative entry at the end of any period.
Asset Class: Fixed Deposit’s
The current value and maturity value of bank fixed deposit’s (FDs) are calculated based on
the interest rate, frequency of interest payout and cumulative or payout option. MProfit has
provided the option to enter transactions for partial withdrawals to take care of FDs which are
linked to your bank accounts. If partial withdrawal has occured, you will need to enter the
principal amount as well as the interest payout (optional) on this withdrawal.
The assumption is that the bank pays out interest on this partial withdrawal. Usually bank
gives less interest for partial withdrawal as opposed to holding the FD till full maturity. After
a partial withdrawal, MProfit will calculate daily gain, overall gain, current and maturity
value based on your balance principal amount with the same terms of your original FD.
MProfit has provided the option to add cumulative interest in terms of FDs. Although, banks
do not show this entry in their FD statement, investors may want to pass this entry for the tax
calculation purposes. The accrued interest up to 31st March can be passed as cumulative
interest entry in MProfit, so as to tally the balance with the books of accounts. MProfit is
designed in such a way that there will not be any difference in current and maturity value of
this FD even if you pass the cumulative entry at the end of any period.
Lastly, you can set the alert for the lock-in period (if any) as well as the maturity date for FDs
created in MProfit.
Unit Linked Insurance Plans (ULIPs) and Pension Plans

Unit Linked Insurance Plans (ULIPs) are very complex products from the data management
perspective. There are more than 25 insurance companies and each has many ULIP products
and each ULIP product has 4 to 8 associated funds. ULIP holder can switch between the
funds and the units are reduced to recover the mortality charges and other charges. We
currently do not provide the NAV of each ULIP product. We will try to incorporate the same
in future if we find it feasible.
In spite of the complexity, we have tried to provide the complete ULIP management module
in MProfit. We believe that each investor would have one or two ULIP products to manage in
his portfolio. How data should be entered and managed for ULIP products in MProfit is
explained below in details.
Once you create the ULIP plan manually, fill out all the details about your policy (one time)
and you can create the associated funds by going into Edit Fund Allocation. You can create
the funds as per the plan you have chosen.
There are couple of ways you can set the current policy value to be reflected in your net
worth summary.
Go to Transaction list of ULIP product and Click on the Set Current Value button and choose
the appropriate option.
a) Periodically, (suggested monthly), you can go to Transaction List and Click on Other
Transactions and click on Edit Fund Allocation and change the Quantity of units and NAV of
your funds. The policy value will be calculated based on these data.
b) Second option is to calculate the policy value as per the total premium paid –
withdrawal (Use Set Current Value feature)
c) Third option is to set the policy value manually. You can directly enter the policy value
periodically (say monthly) based on the statement of your ULIP policy and this will be
reflected in your net worth of your portfolio (Use Set Current Value feature). You do not
need to enter the fund details and this is the simplest method to capture your policy value to
be included in your net worth.

ULIP products are very long term in nature and we recommend them to update the policy
value every month as per the statement of your ULIP policy based on your choice of setting.
By doing this, you can almost capture the true value of your ULIP investments in your net
worth summary.
You can manage the Unit Linked Pension Plans in the same manner, which will be without
insurance details.
Adding Exchange Traded Funds (ETFs) in MProfit
You can add all Exchange Traded Funds (ETFs) in MProfit. ETFs fall under the category of
Mutual Funds.
A Mutual Fund/ETF scheme is classified as an equity-oriented scheme if it has holdings in

the equity of domestic companies, amounting to 65 per cent or more, on an average, during
the year. A scheme that does not fulfil this condition is considered as a debt-oriented scheme.
All Gold ETFs fall under Debt MF category.
Some of the ETFs listed in MProfit are
• Gold Benchmark Exchange Traded Scheme (Gold BeES)

• Reliance Gold Exchange Traded Fund-Dividend Payout Option
• SBI GOLD EXCHANGE TRADED SCHEME
• UTI GOLD Exchange Traded Fund
• Liquid Benchmark Exchange Traded Scheme (Liquid BeES)
• Nifty Benchmark Exchange Traded Scheme- Nifty BeES
• Nifty Junior Benchmark Exchange Traded Scheme (Junior BeES)
• Sensex ICICI Prudential Exchange Traded Fund
• PSU Bank Benchmark Exchange Traded Scheme (PSU Bank BeES)
• Banking Index Benchmark Exchange Traded Scheme (Bank BeES)
• Reliance Banking Exchange Traded Fund-Dividend Option
Comparing Portfolio Values for Different Periods

Many of the users have asked us how they can compare their own individual portfolios as
well as family (group) portfolios for different periods.
One of the easiest way to do this is to save asset allocation reports for individual portfolios
and group portfolios in pdf or excel format, say monthly or quarterly. You can then always
compare your portfolio values of past and current date.
You need to go to Analytical Reports and select Asset Allocation Reports. In stead of printing
this report, you need to click the ‘Save’ button on the top panel of your report window. Select
the format in which you want to save your reports and save it with the appropriate name
ending with date, for e.g. Name1-NetWorth-31-Mar-2009, Name2-NetWorth-30-Jun-2009.
Once you do that, it would be extremely easy to compare your net worth reports for different
dates. Please let me know if you have any suggestions or better ideas.
Software Updates
As part of our continuous effort to improve MProfit we have added several new features
based on customer feedback to MProfit v4.03:
• An income module
• Reports relating to annualized returns (XIRR)
• Group holding reports
With our new Income Module, you can track a variety of income related transactions:
• Dividends received from any stock or mutual fund

• Rental income from property you own
• Other income from your other assets
• Bonus (accrued and pay-out) in case of insurance plans
A new feature that many of you have requested is finally here – reports relating to annualised
returns (XIRR). With our new Annualized Returns report you can see how your specific
investments are performing. Also, by highlighting a specific area of the summary screen we
provide instant balloon notification of Annualised Returns (XIRR) for a single asset, an asset
category or all assets for an individual portfolio or group portfolio.
In addition, we have introduced new reports for group holdings. You can view the
performance of your group holdings by stocks, equity MFs or debt MFs or a combined view
of all your asset classes.
Also, this version fixes some minor bugs.
How Do I Get The Update?
When using MProfit you will be prompted about the availability of v4.03. You will need to
accept and allow the installation to enjoy the latest features of MProfit.
When you accept, the update will be downloaded and installed on your desktop. Please make
sure that you have internet connectivity during this process and your antivirus software
and/or firewall is not blocking the download to allow the installation of the MProfit update.
Why Portfolios?
Portfolio assessment has become more commonplace in schools because it allows teachers to
assess student development over periods of time, sometimes across several years.
People develop portfolios at all phases of the lifespan. Educators in the Pacific Northwest
(Northwest Evaluation Association, 1990), developed the following definition of portfolio.
A portfolio is a purposeful collection of student work that exhibits the

studentís efforts, progress, and achievements in one or more areas. The
collection must include student participation in selecting contents, the criteria
for selection; the criteria for judging merit, and evidence of student self-
reflection.
Electronic Portfolios. My definition of electronic portfolio includes the use of electronic
technologies that allow the portfolio developer to collect and organize artifacts in many

formats (audio, video, graphics, and text). A standards-based electronic portfolio uses
hypertext links to organize the material to connect artifacts to appropriate goals or standards.
Often, the terms electronic portfolio and digital portfolio are used interchangeably. However,
I make a distinction: an electronic portfolio contains artifacts that may be in analog (e.g.,
videotape) or computer-readable form. In a digital portfolio, all artifacts have been
transformed into computer-readable form. An electronic portfolio is not a haphazard
collection of artifacts (i.e., a digital scrapbook or multimedia presentation) but rather a
reflective tool that demonstrates growth over time.
Electronic Portfolio Development
Electronic portfolio development brings together two different processes: multimedia project
development and portfolio development. When developing an electronic portfolio, equal
attention should be paid to these complimentary processes, as both are essential for effective
electronic portfolio development. (See the online supplement at www.iste.org/L&L for a
complete discussion of these processes.
 It consists of Five Stages
I have created a process for developing an electronic portfolio based on the general portfolio
and multimedia development processes (Table 1).
Table 1: Stages of Electronic Portfolio Development

Portfolio Stages of Electronic Multimedia
Development Portfolio Development Development
Purpose & 1. Defining the Portfolio Decide, Assess
Audience Context & Goals
Collect, 2. The Working Portfolio Design, Plan
Interject
Select, Reflect, 3. The Reflective Portfolio Develop

Direct
Inspect, 4. The Connected Portfolio Implement,
Perfect, Evaluate
Connect
Respect 5. The Presentation Present,
(Celebrate) Portfolio Publish
Differentiating the Levels of Electronic Portfolio Implementation. In addition to the stages

of portfolio development, there appear to be at least five levels of electronic portfolio
development. Just as there are developmental levels in student learning, there are
developmental levels in digital portfolio development. Table 2 presents different levels for
electronic portfolio development, which are closely aligned with the technology skills of the
portfolio developer.
Table 2. Levels of electronic portfolio software strategies based on

ease of use.
0 All documents are in paper format. Some portfolio data may be
stored on videotape.
1 All documents are in digital file formats, using word processing or
other commonly used software, and stored in electronic folders on a
hard drive, floppy disk, or LAN server.
2 Portfolio data is entered into a structured format, such as a database
or HyperStudio template or slide show (such as PowerPoint or
AppleWorks) and stored on a hard drive, Zip, floppy disk, or LAN.
3 Documents are translated into Portable Document Format with
hyperlinks between standards, artifacts, and reflections using Adobe
Acrobat Exchange and stored on a hard drive, Zip, Jaz, CD-R/W, or
LAN server.
4 Documents are translated into HTML, complete with hyperlinks
between standards, artifacts, and reflections, using a Web authoring
program and posted to a Web server.
5 Portfolio is organized with a multimedia authoring program,
incorporating digital sound and video. Then it is converted to digital

format and pressed to CD-R/W or posted to the Web in streaming

format.
Based on these levels and stages, I offer a few items to consider as you make this software
selection.
Stage 1: Defining the Portfolio Context and Goals (Keywords: Purpose, Audience,
Decide, Assess). What is the assessment context, including the purpose of the portfolio? Is it
based on learner outcome goals (which should follow from national, state, or local standards
and their associated evaluation rubrics or observable behaviors)? Setting the assessment
context frames the rest of the portfolio development process.
What resources are available for electronic portfolio development? What hardware and
software do you have and how often do students have access to it? What are the technology
skills of the students and teachers? Some possible options are outlined in Tables 3 & 4.
Table 3. Technology skill levels.

1 Limited experience with desktop computers but able to use mouse
and menus and run simple programs
2 Level 1 plus proficient with a word processor, basic e-mail, and
Internet browsing; can enter data into a predesigned database
3 Level 2 plus able to build a simple hypertext (nonlinear) document

with links using a hypermedia program such as HyperStudio or

Adobe Acrobat Exchange or an HTML WYSIWYG editor
4 Level 3 plus able to record sounds, scan images, output computer
screens to a VCR, and design an original database
5 Level 4 plus multimedia programming or HTML authoring; can also
create QuickTime movies live or from tape; able to program a
relational database
Table 4. Technology Available

1 No computer
2 Single computer with 16 MB RAM, 500 MB HD, no AV
input/output
3 One or two computers with 32 MB RAM, 1+ GB HD, simple AV
input (such as QuickCam)
4 Three or four computers, one of which has 64+ MB RAM, 2+GB
HD, AV input and output, scanner, VCR, video camera, high-density
floppy (such as a Zip drive)
5 Level 4 and CD-ROM recorder, at least two computers with 128+
MB RAM; digital video editing hardware and software. Extra Gb+
storage (such as Jaz drive)
Who is the audience for the portfolioóstudent, parent, professor, or employer? The primary
audience for the portfolio affects the decisions made about the format and storage of the
presentation portfolio. Choose a format the audience will most likely have access to (e.g., a
home computer, VCR, or the Web).
You will know you are ready for the next stage when you have:

• identified the purpose and primary audience for your portfolio,

• identified the standards or goals you will use to organize your portfolio, and
• selected your development software and completed the first stage using that software.
Stage 2: The Working Portfolio (Keywords: Collect, Interject, Design, Plan). What is the
content of portfolio items (determined by the assessment context) and the type of evidence to
be collected? This is where the standards become a very important part of the planning
process. Knowing which standards or goals you are trying to demonstrate should help
determine the types of portfolio artifacts to collect. For example, if the portfolio goal is to
demonstrate the standard of clear communication, then examples should reflect studentís
writing (scanned or imported from a word processing document) and speaking abilities
(sound or video clips).
Which software tools are most appropriate for the portfolio context and the resources
available? This question is the theme of the rest of this article. The software used to create the
electronic portfolio will control, restrict, or enhance the portfolio development process. The
electronic portfolio software should match the vision and style of the portfolio developer.
Which storage and presentation medium is most appropriate for the situation (computer hard
disk, videotape, LAN, the Web, CD-ROM)? The type of audience for the portfolio will
determine this answer. There are also multiple options, depending on the software chosen.
What multimedia materials will you gather to represent a learnerís achievement? Once you
have answered the questions about portfolio context and content and addressed the limitations
on the available equipment and usersí skills (both teachersí and studentsí), you will be able to
determine the type of materials you will digitize.
This can include written work, images of 3-D projects, speech recordings, and video clips of
performances. You will want to collect artifacts from different time periods to demonstrate
growth and learning achieved over time.
• collected digital portfolio artifacts that represent your efforts and achievement
throughout the course of your learning experiences, and

• used the graphics and layout capability of your chosen software to interject your
vision and style into the portfolio artifacts.
Stage 3: The Reflective Portfolio (Keywords: Select, Reflect, Direct, Develop). How will
you select the specific artifacts from the abundance of the working portfolio to demonstrate
achieving the portfolioís goals? What are your criteria for selecting artifacts and for judging
merit? Having a clear set of rubrics at this stage will help guide portfolio development and
evaluation.
How will you record self-reflection on work and achievement of goals? The quality of the
learning that results from the portfolio development process may be in direct proportion to
the quality of the studentsí self-reflection on their work. One challenge in this process is to
keep these reflections confidential. The personal, private reflections of the learner need to be
guarded and not published in a public medium.
How will you record teacher feedback on student work and achievement of goals, when
appropriate? Even more critical is the confidential nature of the assessment process.
Teachersí feedback should also be kept confidential so that only the student, parents, and
other appropriate audiences have access. Security, in the form of password protection to
control access, is an important factor when choosing electronic portfolio development
software.
How will you record goals for future learning based on the personal reflections and feedback?
The primary benefit of a portfolio is to see growth over time, which should inspire goal
setting for future learning. It is this process of setting learning goals that turns the portfolio
into a powerful tool for long-term growth and development.
• selected the artifacts for your formal or presentation portfolio, and

• written reflective statements and identified learning goals.

Stage 4: The Connected Portfolio (Keywords: Inspect, Perfect, Connect, Implement,

Evaluate). How will you organize the digital artifacts? Have you selected software that
allows you to create hyperlinks between goals, student work samples, rubrics, and
assessment? The choice of software can either restrict or enhance the development process
and the quality of the final product. Different software packages each have unique
characteristics that can limit or expand the electronic portfolio options.
How will you evaluate the portfolioís effectiveness in light of its purpose and the assessment
context? In an environment of continuous improvement, a portfolio should be viewed as an
ongoing learning tool, and its effectiveness should be reviewed on a regular basis to be sure it
is meeting the goals set.
Depending on portfolio context, how will you use portfolio evidence to make
instruction/learning decisions? Whether the portfolio is developed with a young child or a
practicing professional, the artifacts collected along with the self-reflection should help guide
learning decisions. This process brings together instruction and assessment in the most
effective way.
Will you develop a collection of exemplary portfolio artifacts for comparison purposes?
Many portfolio development guidebooks recommend collecting model portfolio artifacts that
demonstrate achievement of specific standards. This provides the audience with a frame of
reference to judge a specific studentís work. It also provides concrete examples of good work
for students to emulate.
You will know you are ready for the next stage when:
• your documents are converted into a format that allows hyperlinks and you can
navigate using them,
• you have inserted the appropriate multimedia artifacts into the document, and
• you are ready to share your portfolio with others.
Stage 5: The Presentation Portfolio (Keywords: Respect, Celebrate, Present, Publish).
How will you record the portfolio to an appropriate presentation and storage medium? These
will be different for a working portfolio and a presentation portfolio. I find that the best

medium for a working portfolio is videotape, computer hard disk, Zip disk, or network server.
The best medium for a formal portfolio is CD-Recordable disc, Web server, or videotape.
How will you or your students present the finished portfolio to an appropriate audience? This
will be a very individual strategy, depending on the context. An emerging strategy is student-
led conferences, which enable learners to share their portfolios with a targeted audience,
whether parents, peers, or potential employers. This is also an opportunity for professionals to
share their teaching portfolios with colleagues for meaningful feedback and collaboration in
self-assessment.
Software Selection
One of the key criteria for software selection should be its capability to allow teachers and
students to create hypertext links between goals, outcomes, and various student artifacts
(products and projects) displayed in multimedia format. Another is Web accessibility. With
seven options to choose from, you should be able to find software to fit your audience, goals,
technology skills, and available equipment (See Table 5 for a comparison of software. Find
detailed descriptions, software resources, comparison information, and selection guidelines
throughout the process online at www.iste.org/L&L).
Relational Databases ( Microsoft Access). In recent years, new database management tools
have become available that allow teachers to easily create whole-class records of student
achievement. A relational database is actually a series of interlinked structured data files
linked together by common fields. One data file could include the studentsí names, addresses,
and various individual elements; another could include a list of the standards that each
student should be achieving; still another could include portfolio artifacts that demonstrate
each studentís achievement of those standards. The purpose of using a relational database is
to link together the students with their individual portfolio artifacts and the standards these
artifacts should clearly demonstrate.
Advantages include flexibility, network and Web capabilities, cross-platform capabilities,

tracking and reporting, multimedia, and security. Disadvantages include the size of relational
database files (they can become very large and unwieldy); they may not be accessible to users
who do have the software; and they require a high level of skill to use effectively.

Databases are really teacher-centered portfolio tools. They allow teachers to keep track of
student achievement at every level. They are less appropriate for students to use to maintain
their own portfolios. You may save appropriate pages from the database as PDF files for
students to include in their own portfolios.
Hypermedia "Card" Programs (e.g., HyperStudio, Digital Chisel, Toolbook, and

SuperLink). A hypermedia program allows the integration of various media types in a single
file, with construction tools for graphics, sound, and movies. The basic structure of a
hypermedia file is described as electronic cards that are really individual screens that can be
linked together by buttons the user creates.
Hypermedia programs are widely available in classrooms, usually all-inclusive, cross-

platform, multimedia capable, and secure. Disadvantages include lack of integrated Web
accessibility, size and resolution constraints, and increased effort linking artifacts to
standards.
Hypermedia programs are most appropriate for elementary or middle school portfolios.
Templates and strategies are widely available to help you begin using your chosen
hypermedia tool as a portfolio development and assessment tool.
Multimedia Authoring Software (e.g., Macromedia Director or Authorware). In recent years,

multimedia authoring software has emerged from such companies as Macromedia and
mTropolis. Authorware is an icon-based authoring environment, in which a user builds a flow
chart to create a presentation. Director is a time-based authoring environment, in which the
user creates an interactive presentation with a cast and various multimedia elements. Both
programs allow the user to create stand-alone applications that can run on Windows and
Macintosh platforms.
These programs allow users to create presentations that are self-running, without separate
player software. They were designed to incorporate multimedia elements. They are ideal for
CD-ROM publishing, but they have a steep learning curve, require extra effort to link
artifacts to standards, and may not offer the necessary security.

Multimedia authoring programs would be most appropriate for high school, college, or
professional portfolio creation.
Web Pages (e.g., Adobe PageMill, Claris Home Page, Microsoft FrontPage, Netscape
Composer). An emerging trend in the development of electronic portfolios is to publish them
in HTML format. With wide accessibility to the Web, many schools are encouraging students
to publish their portfolios in this format. Students convert word processing documents into
Web pages with tools built into those programs and create hyperlinks between goals and the
artifacts that demonstrate achievement.
The advantages of creating Web-based portfolios center on its multimedia, cross-platform,

and Web capabilities. Any potential viewer simply needs Internet access and a Web browser.
However, the learning curve is steep. Web pages require much more file-management skill
than other types of portfolio development tools, and the security can be a problem.
Students in upper-elementary grades and beyond can create Web pages, but this type of
portfolio is especially appropriate for those who wish to showcase their portfolio for a
potential employer.
With all of these choices, which strategy should you choose? Are different tools more
appropriate at different stages of the electronic portfolio development process? These
questions can only be answered after addressing some of the questions posed at the beginning
of the article, especially the purpose and audience for the portfolio, the resources available
(equipment and technology skills required), and where the advantages of the strategy
outweigh the disadvantages for your situation.
On such portfolio we can perform the following operations of buying,selling,dividend payout

etc.

Quantit
Date Portfolio Name Company Name Trans Type y Price Amount
01-11-2004 Master Aditya Mehta ICICI Bank BUY 400 500.00 200000.00
09-12-2006 Master Aditya Mehta ICICI Bank SELL 200 835.50 166264.50
20-02-2008 Mrs. Sapna Mehta 3M India BUY 200 1680.00 337680.00
28-10-2008 Mr. Madhu Mehta Kotak Mahindra Bank BONUS 400 200.00 80000.00
28-11-2008 Mr. Madhu Mehta Kotak Mahindra Bank BONUS 400
01-06-2009 Mr. Madhu Mehta ICICI Bank BUY 300 625.00 188437.50
15-02-2010 Mrs. Sapna Mehta 3i Infotech BUY 300 75.00 22612.50
DIV_PAYO
01-03-2010 Mr. Madhu Mehta ICICI Bank UT 1025.50
01-06-2010 Mr. Madhu Mehta Kotak Mahindra Bank SELL 400 960.00 385920.00
On such portfolio we can perform the following operations of buying ,selling,
dividend payout etc on the behalf of folio numbers.
Folio Portfolio
Number Name MF Scheme Name Trans Type Quantity Price Amount
Mr. Madhu Reliance Growth - 12.589 10000.0
123456 Mehta Growth Option BUY 794.3127 5 0
Mr. Madhu Reliance Growth - 15.500 10000.0
123456 Mehta Growth Option SELL 645.1613 0 0
Mrs. Sapna HDFC Equity Fund 55.525 12000.0
575751 Mehta - Dividend Opion BUY 216.1189 0 0
Mr. Madhu Reliance Growth - 51.500
123456 Mehta Growth Option DIV_REINV 97.0874 0 5000.00
Mr. Madhu HDFC Equity Fund
123456 Mehta - Dividend Opion DIV_PAYOUT 158.50
Master Aditya HDFC Equity Fund 75.582 12000.0
985985 Mehta - Dividend Opion BUY 158.7669 5 0
A hypothetical portfolio
Value Research Online

Portfolio Name : FUNDS
Date : 06-Sep-2010 00:12
Fund/Stock/Fixed-Asset NAV NAV Date Change From Previous Units/
(Rs) NAV/Price (Nos)
(Rs) (%)
DSPBR T.I.G.E.R. Reg-G 50.295 03-Sep-10 0.23 0.46 2,731

Franklin India Prima Plus-G 221.718 03-Sep-10 1.41 0.64 375.3
Franklin India Prima Plus-G 221.718 03-Sep-10 1.41 0.64 428.4
Franklin India Prima-G 290.7566 03-Sep-10 2.52 0.87 814.6
Franklin India Prima-G 290.7566 03-Sep-10 2.52 0.87 333.5
Franklin India Taxshield-G 202.7296 03-Sep-10 0.87 0.43 364.6
Franklin India Taxshield-G 202.7296 03-Sep-10 0.87 0.43 92.3
Franklin Templeton FTF Ser IV 60 14.8682 03-Sep-10 0.01 0.1 10,00
M-G
HDFC Equity-G 277.487 03-Sep-10 0.86 0.31 434.7
HDFC Prudence-G 211.283 03-Sep-10 0.95 0.45 323.2
HDFC Taxsaver-G 235.882 03-Sep-10 1.1 0.47 90.28
HDFC Top 200-G 208.051 03-Sep-10 0.3 0.14 580.1
ICICI Pru Infrastructure-G 30.53 03-Sep-10 0.04 0.13 4,752
Magnum Contra-G 59.61 03-Sep-10 0.21 0.35 1,808
Magnum Contra-G 59.61 03-Sep-10 0.21 0.35 1,566
Magnum Taxgain-D 41.88 03-Sep-10 0.13 0.31 288.0
Magnum Taxgain-D 41.88 03-Sep-10 0.13 0.31 1,019
Magnum Taxgain-D 41.88 03-Sep-10 0.13 0.31 889.0
Reliance Diversified Power Sector 84.5486 03-Sep-10 0.31 0.37 1,390
Retail-G
Retail-G
Retail-G
Reliance Equity Opportunities-G 36.7404 03-Sep-10 0.5 1.39 1,818
Reliance Equity-G 15.2269 03-Sep-10 0.04 0.25 4,950
Reliance Growth-G 489.6783 03-Sep-10 3.04 0.63 245.4

Reliance Vision-G 277.3521 03-Sep-10 0.95 0.34 206.6

Tata Infrastructure-G 35.7296 03-Sep-10 0.14 0.4 3,000
UTI Infrastructure-G 35.73 03-Sep-10 0.06 0.17 4,248
11,303.4
Fund Portfolio Total : 4 0.44
11,303.4
Portfolio Total : 4 0.44
Advantages
There are following advanteges of using portfolio management software:-
Powerful portfolio analysis and project reporting in Project Insight, online project
management software, allows executives to view all the projects in the portfolio in real time.
Access to real time information empowers project managers and executives to detect projects
at risk in order to make timely decisions. Executives may then create, save and share
customized reports, or even set a portfolio report as their default home page.
• Roll up your portfolio of projects by reporting on projects by organization, customer

or project type.
• Create your own scorecard to weigh projects in the portfolio
• Use goals, critical success factors and key performance indicators to objectively
assess project importance
• Utilize score as an objective way to prioritize projects in the organization
• View health indicators to know instantly the status of projects
Project portfolio management software enables the user, usually management or executives
within the organisation, to review the portfolio, which will assist in making key financial and
business decisions for the projects.
The objective of project portfolio management is to optimise the results of the project
portfolio to obtain benefits the organisation wants.
Disadvantages
Following are the disadvantages:
1. Expensive
This entails software, hardware, implementation, consultants, training, etc. Or

you can hire a programmer or two as an employee and only buy business
consulting from an outside source, do all customization and end-user training
inside. That can be cost-effective.
2. You could become complacent and not educate yourself thoroughly before
selling investments or buying new ones. Remember that no computer program

or person is infallible, and you should stay on top of trends in your investment
sector(s) without becoming obsessive about them.
3. You must be mindful to enter correct figures. A simple typo could render your
investment software program useless depending upon your objective.
4. While software is usually independent of a brokerage, don't allow your use of

it to coerce you into totally dismissing your stockbroker or investment
counselor. Balancing the advice you get from investment professionals, what
you read on your own initiative, and any software calculations is essential to
smart investing.
Always remember that investing holds absolutely no guarantees; you could gain a small
fortune or lose a small fortune in a matter of hours or days.

Working of Portfolio management software

Mutual fund equity

Stocks

ULIP

INSURANCE PLAN

FIXED DEPOSITS

BONDS

BIBLIOGRAPHY
• www.google.co.in
• www.altavista.com
• www.wikipedia.org
• www.investopedia.com

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[PORTFOLIO MANAGEMENT SOFTWARE]

Portfolio management is the discipline of planning, organizing, securing and managing

OBJECTIVES OF THE PROJECT

• Learning and Understanding the concept of Portfolio.

• Understanding the Models of Portfolio Management.

• Learning about the Instruments in Portfolio.

• Advantages and Diadvantages of Portfolio management

• Application of Computer in Portfolio.

• Understanding the operation of the Software used in Portfolio.

• Advantages of Software used and it limitations.

INDIAN INSTITUTE OF FINANCE Page 1

Primary source is a term used in a number of disciplines to describe source material

Secondary source is a document or recording that relates or discusses information

• Project is based on Secondary data.

1) Broad-based asset allocation and

2) Specific security selection

INDIAN INSTITUTE OF FINANCE Page 3

Portfolio management is the discipline of planning, organizing, securing and managing

INDIAN INSTITUTE OF FINANCE Page 4

Roman Soldiers Building a Fortress, Trajan's Column 113 ad.

INDIAN INSTITUTE OF FINANCE Page 5

Henry Gantt (1861-1919), the father of planning and control techniques.

As a discipline, Project Management developed from several fields of application including

INDIAN INSTITUTE OF FINANCE Page 6

PERT network chart for a seven-month project with five milestones

The AAPM American Academy of Project Management International Board of Standards

INDIAN INSTITUTE OF FINANCE Page 7

Manager, PME Project Management E-Business, CEC Certified-Ecommerce Consultant, and

The traditional approach

A traditional phased approach identifies a sequence of steps to be completed. In the

Typical development phases of a project

• Project initiation stage;

INDIAN INSTITUTE OF FINANCE Page 8

Planning, Conceptual Design, Schematic Design, Design Development, Construction

Critical Chain Project Management

INDIAN INSTITUTE OF FINANCE Page 9

Extreme Project Management

The generalization of Extreme Programming to other kinds of projects is extreme project

Event chain methodology

Event chain methodology is an uncertainty modeling and schedule network analysis

INDIAN INSTITUTE OF FINANCE Page 10

The PRINCE2 process model

PRINCE2 is a structured approach to project management, released in 1996 as a generic

INDIAN INSTITUTE OF FINANCE Page 11

Capability Maturity Model, predecessor of the CMMI Model

Also furthering the concept of project control is the incorporation of process-based

Agile Project Management approaches based on the principles of human interaction

INDIAN INSTITUTE OF FINANCE Page 12

introducing appropriate citations of additional sources. (August 2010)

Traditionally, project management includes a number of elements: four to five process

The project development stages[19]

Major process groups generally include:

In project environments with a significant exploratory element these stages may be

INDIAN INSTITUTE OF FINANCE Page 13

Initiating Process Group Processes[19]

The initiation stage should include a plan that encompasses the

• Analyzing the business needs/requirements in measurable goals

Planning and design

Planning Process Group Activities[19]

INDIAN INSTITUTE OF FINANCE Page 14

Project planning generally consists of

• determining how to plan (e.g. by level of detail or rolling wave);