unit -4 investor indiffernce curve

8/8/2019 Unit -4 Investor Indiffernce Curve

1/14

Investor risk and return preferences

An investor choose efficient portfolio which giveshim maximum return subject to minimum risk.He is indifference to all the portfolios which lies

on the his indifference curve. The indifferencecurve is upward slopping indicating that allrational investors are risk averse and requirehigher higher return for high risk.

Indifference curve represents combination of ofrisk and return at which the investor is indifferenti.e. which gives investors a certain level ofsatisfaction or utility.


2/14

Investor risk and return preferences

Risk

ReturnIndifference curve 1

Indifference curve 2



X

B

C

Y

Z

A


3/14

Investor risk and return

preferencescontInvestor is indifferent between portfolios A, B, and

C because all the portfolios are satisfying hisutility but he will prefer portfolios X, Y ,and Z

because these portfolios are offering higherreturn to the investors in comparison to A, B,and C portfolios.

Higher indifference curve indicates higher utility

the the investor, all the combination on IC 2 arepreferred to all the combination on IC1, in thesame way all the combination on IC4 arepreferred all the combination on other ICs.


4/14


preferencescontAn indifference map with straight lines

represents an investor whose risk andreturn trade off is constant irrespective of

the absolute amount of risk involved.A more rational risk averse investor will have

steeper indifference curve as indicated in

figure below. And he will choose thatportfolio which will tangent efficient frontier.


5/14


preferencescont


6/14

Traditional Portfolio Management for

individuals

Traditional portfolio management approach

is starts with the identification of investors

objective and investment in selectednumber of securities.

Traditional approach is just like the buy and

hold strategy, once money invested to

keep hold the same portfolio for the longtime period.


7/14

Traditional Portfolio Management for

individualscont

1. Objective of the investor-A Investor can have number of

investment objectives which includes:

1.Growth Objective

2.Income Objective3.Balance Objective

2. Current wealth of the investor

3. Liquidity requirement of the investor-

4. Tax consideration of the investor-

5. Anticipated future inflation effect on the expected return

of the investor.


8/14

Asset Allocation Pyramid

Asset allocation pyramid is the guiding approach to

the investors that how a investor should diversify

his total funds in different investment securities.

A investor should invest large portfolio of his total

fund in income securities, and a very less portion

in highly risky securities.


9/14

Asset Allocation Pyramid

Derivatives

Growth Stocks,

Real estate, bonds

Saving plans, TBs,Fixed Income securities,

Pension plans

Low Risk/Low Return

High Risk/High Return


10/14

Investor Life Cycle Approach

A investor has certain life cycle which determine

his ability of taking risk. There are mainly three

phases in investor life cycle:

1.Early career/Accumulated phase

At this stage there is need to satisfy and fulfill the

basic requirements like house, and other basic

things, surplus funds can be invested in long term

growth plans.2. Mid career/Consolidation phase

In this stage balance investment plans are good for the

investors which will satisfy both income and growth needs

of the investors.


11/14

Investor Life Cycle Approachcont

3. Retirement Phase:

In this phase income investment options are

good for the investor.


12/14

Portfolio Management Strategies

There are two mainly portfolio management

strategies

1. Passive Portfolio management2. Active Portfolio management


13/14

Passive Portfolio management

Index InvestingPassive portfolio management is just like buy and hold

strategy which involves tracking some index and

investing in index stocks. This is called index investing.

Systematic Investment PlanPassive portfolio management strategy also involves

investing constantly in one investment options which is

called systematic investment plan.


14/14

Active Portfolio management

Active Portfolio management involves taking the advantageof market developments. This approach calls twoapproaches

Market timing investing-

it means whenever there is good time for investmentinvestor should invest, and whenever there is good timefor selling investor should sells the stocks.

Style investing-

style investing is a approach which involves selecting theundervalued stocks on the basis of P/E ratio and Bookvalue/Market value ratio.

unit -4 investor indiffernce curve

Documents