PORTFOLIO:Revision

Performance Evaluationand

Management

Presented By: Sumit Shukla

2

• Collection of Assets.• Portfolio means a collection of financial assets

(or securities) such as shares, debentures and government securities.

Portfolio Revision

4

Changing the existing mix of securities

5

Maximizing the Return

Minimizing the Risk

6

Portfolio Revision Strategy

• Active Strategy• Passive Strategy

7

Active Strategy• Active strategy of portfolio revision involves a

process to similar to portfolio analysis and selection, which is based on an analysis of fundamental factors covering economy, industries and companies as well as technical factors.

8

Passive Strategy

• Under passive strategy some kinds of formula plans are followed for revision.

9

Constraints in Portfolio Revision

• Transaction Cost• Taxes• Statutory Stipulation• No single Formula

10

Dollar Cost Averaging

• It is a technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. Also referred as “Constant Dollar Plan”

11

Constant-Ratio Plan

• This is an investment strategy in which the portfolio’s composition by asset class is maintained at a certain level through periodic adjustments.

Performance Evaluation of Portfolio

13

• It enables the investor to appraise how well the portfolio manager has achieved the targeted return.

• It enables the investor to examine how well the manager has achieved the targets in comparison to other mutual funds.

• It enables the fund authorities to evaluate the performance of their investment decisions not only earning a specified rate of return, in relative terms i.e. per unit of risk.

14

Portfolio Performance And Risk Adjusted Methods

• Sharpe’s Ratio• Treynor’s Measure• Jensen’s Differential Returns

15

Sharpe’s Ratio

• A ratio developed by Nobel laureate William F. Sharpe to measure risk adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio return.

16

E[R]= Expected portfolio returnRf = Risk free rateβ = Portfolio Standard daviation

17

Treynor Portfolio Performance

• Developed by Jack Treynor in 1965.• A performance measure that would apply to all

investors regardless of their risk preferences.

• RM= Market return• RF= Risk Free return• Β= Standard daviation

18

Differential Return (Jensen Measure)

• The standard is based on the manager’s predictive ability. Successful prediction of security price would enable the manager to earn higher returns than the ordinary investor expects to earn in a given level of risk.

19

The basic model of Jensen is

• R=α+β(Rm-Rf)• R= average return of portfolio• α= the intercept • β= a measure of systematic risk

20

21

Phases of Portfolio Management

• Specification of investment objectives and constraints.

• Choice of asset mix.• Formulation of portfolio strategy.• Selection of securities.• Portfolio execution.• Portfolio revision.• Portfolio evaluation.

22

23

24

Determining your Risk Preference

• Time Horizon• Bankroll

25

Investment Risk Pyramid

26

Asset mixAsset allocation is an investment portfolio technique that aims to balance the risk and create diversification by dividing asset among major categories such as bonds, stocks, real estate, and cash.

27

Building an Investment Portfolio

• Asset allocation• Asset classes• Diversification

28

RISK REDUCTION IN THE STOCK PORTION OF A PORTFOLIO

29

• Law of Large Numbers

30

• A Strategy for Everyone

31

Value investing

32

Growth Investing

33

Performance Index

• Sharpe’s Portfolio Performance Measure• Treynor Portfolio Performance Measure• Jensen Portfolio Performance Measure

34

THANK YOU