The portfolio management process
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The portfolio management process. The portfolio management process. Set objective and policy goals Examine and understand the environment Construct the portfolio: asset allocation & security selection Monitor and update. Individual investment objectives? . Popular belief:

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The portfolio management process

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The portfolio management process

The portfolio management process


The portfolio management process1

The portfolio management process

  • Set objective and policy goals

  • Examine and understand the environment

  • Construct the portfolio: asset allocation & security selection

  • Monitor and update


Individual investment objectives

Individual investment objectives?

  • Popular belief:

  • Investments are aimed at “making money”


Suggested strategies for making money

Suggested strategies for “making money”

  • Put $1 in the bank at 3%.

  • Eventually you will become a billionaire

  • Put all of your earnings in the lottery.

  • Eventually you’ll hit the jackpot


Goals vs objectives

Goals vs. objectives

  • Financial Goals

  • Broad financial ends, such as, buying a home, paying for children’s education, etc.

  • Investment objectives

  • Stated in terms of risk and return - a function of goals, investment horizon etc.


Investment objectives

Investment objectives

  • Are dictated by risk tolerance and time horizon

  • Capital preservation

  • Income

  • Growth


Individual investment objectives1

Individual investment objectives

  • Age considerations

  • Risk consideration


Individual investor life cycle

Individual investor life cycle

  • Accumulation phase

  • Consolidation phase

  • Spending phase

  • Gifting phase


Accumulation phase

Accumulation phase

  • Long-term goals

  • Retirement

  • Children’s education

  • Etc

  • Short-term goals

  • Car

  • House


Consolidation phase

Consolidation phase

  • Long-term goals

  • Retirement

  • Short-term goals

  • Children’s education

  • Vacation

  • Etc.


Spending phase

Spending phase

  • Long-term goals

  • Estate planning

  • Short-term

  • Life style

  • Gifts


Gifting phase

Gifting phase

  • Long-term goals

  • Estate planning

  • Short-term

  • Life style

  • Gifts


Risk considerations

Risk considerations

  • Factors:

  • Psychological makeup

  • Family situation

  • Income

  • Age


Investment constraints

Investment constraints

  • Liquidity needs

  • Tax concerns

  • Regulations

  • Unique needs


Liquidity needs

Liquidity needs

  • Related to investment horizon & age

  • Longer horizons = accept less liquidity & more risk


Tax concerns

Tax concerns

  • Investors think in terms of after-tax return


Regulations

Regulations

  • Impose restrictions and constraints

  • Ex:

  • RRSP: Foreign content rule


Unique needs

Unique needs

  • A function of each individual


Asset classes

Asset classes

  • Classification according to risk and expected return characteristics

  • Stocks

  • Bonds

  • Risk-free investments


Asset classes1

Asset classes

  • Each class can be further divided into subclasses

  • Bonds:

  • Long-term corporate bonds

  • Long-term government bonds

  • Medium-term corporate bonds

  • Medium -term government bonds

  • Etc.


The portfolio management process

Historical record: 1926-1998 (US)


The portfolio management process

Historical record: 1948 -1998 (Canada)


Returns from investing 1 1948 1999

$ 357.3

TSE300

$ 36.4

Bonds

$ 20.4

T-bills

$ 8.4

Inflation

1945

1975

2000

Returns from investing $1: 1948-1999


The portfolio management process

Asset allocation: Various countries


World stock markets annual rates of return and risk in local currency 1986 1997

Return

27%

22%

17%

12%

7%

Standard deviation

20%

30%

World stock markets annual rates of return and risk in local currency 1986-1997


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