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Portfolio Management Unit 1 Introduction and Scope of Portfolio Management

Sandesh Nayak

Introduction
Instead of putting all Eggs in a Single Basket it is better to put eggs in different baskets

Portfolio management

When a Single security is analyzed it is called security analysis, If Securities are combined to blend together to give maximum returns it is called portfolio management.

SCOPE OF PORTFOLIO MANAGEMENT

Study of different kinds of investment alternatives Analysis of single and combination securities to form a portfolio

Systematic and nonsystematic risk

influencing investment decisions

SCOPE OF PORTFOLIO MANAGEMENT (Contd..)


Study

of primary market and secondary

market
Features

of different securities and their valuation techniques


The role of market regulators Theories

and management

approaches

to

portfolio

SAVINGS AND INVESTMENTS


Savings part of personal earnings (excess of income over expenditure) Investments Earnings (savings) allocated for purchasing an asset or securities

Savings are from House Hold Sector

Savings are invested in Corporate and Government Sector

INVESTMENT
An investment is the commitment of funds made with an expectation of some positive returns in the form of interest, dividends, pension benefits, etc. Two essential aspects of investments: Waiting for returns Element of risk

Financial and Economic meaning of Investment

For an Economist, Investment means Net additions to the economys capital stock.

From Finance point of view, It is a commitment of a persons funds to derive future income in form of interest, dividend,rent, etc

Investment v/s Speculation


Point of Difference Investment Speculation

Time Horizon

Long term time frame work beyond 12 months

Risk

Limited Risk

Short term planning holding assets even for one day with objective. High Profits and Gains

Investment v/s Speculation


Point of Difference Investment Speculation

Return

Use of Funds

Consistent over long period even though its moderate Own Funds through savings

High Returns even though risk may be of high loss

Own and Borrowed Funds

Investment v/s Speculation


Point of Difference Investment Speculation

Decisions

Safety, Liquidity, Profitability& Stability

Market Behavior Information, Judgment on movement in the stock market

INVESTMENT V/S SPECULATION

Investment
Purchase of a financial asset that produces a yield that is proportionate to the risk assumed over some future investment period

Speculation Buying and selling activities with the expectation of getting profits from the price fluctuations

Example for investment v/s Speculation


If a person buys a stock for its dividend, he may be termed as an investor. If he buys with the anticipation of price rise in the near future and the hope of selling it at a gain price he would be termed as a speculator

Investment V/s Gambling

Gambling consists of uncertainty and high stakes for thrill and Excitement. Gambling is based on Tips and Rumors Typical Examples of Gambling are Horse Racing , Game of Cards, Lottery etc.

Investment v/s Arbitrage

The simultaneous purchase and sale of an asset in order to profit from a difference in the price.

Objectives of Investment
Return Risk Liquidity or marketability Hedge against Inflation Safety

INVESTMENT PROCESS
The investment process can be divided in to 5 stages: 1. Investment Policy 2. Investment/Security Analysis 3. Investment/Security valuation 4. Portfolio Construction 5. Portfolio Evaluation

Investment Process

Investment Policy

Alternatives, Objectives, Knowledge

Investment Process

Investmen t Analysis

Market/Indu stry/Compa ny

Investment Process

Investment Valuation

Intrinsic Value, Future Value

Investment Process

Portfolio Construction

Diversification, Selection and Allocation

Investment Process

Portfolio Evaluation

Appraisal, Revision