Stock Investments

The Process of Diversification of Investment Portfolio

The process of diversification  of investment portfolio has various phases involving investment into various classes of assets like equity shares, preference shares, money market instruments like commercial paper, inter-corporate investments, certificate of deposits etc. Within each class of assets, there is further possibility of diversification into various industries, different companies etc. The proportion of funds invested into various classes of assets, instruments, industries and companies would depend upon the objectives of investor, under portfolio management and his asset preferences, income and asset requirements.

A portfolio with the objective of regular income would invest a proportion of funds in bonds, debentures and fixed deposits.… Read the rest

Abey Francis

Diversification of Securities in Portfolio Investments

Reduction of Risk through Diversification of Securities

The process of combining securities in an investment portfolio is known as diversification. The aim of diversification of securities is to reduce total risk without sacrificing portfolio return. To understand the mechanism and power of diversification, it is necessary to consider the impact of co-variance or correlation on portfolio risk more closely. We shall examine three cases: (1) when security returns are perfectly positively correlated, (2) when security returns are perfectly negatively correlated and (3) when security returns are not correlated.

Diversification means, investment of funds in more than one risky asset with the basic objective of risk reduction.… Read the rest

Abey Francis

Risk and Return in Portfolio Investments

Risk in Portfolio Investments

The Webster’s New Collegiate Dictionary definition of risk includes the following meanings: “……. Possibility of loss or injury ….. the degree or probability of such loss”. This conforms to the connotations put on the term by most investors. Professional often speaks of “downside risk” and “upside potential”. The idea is straightforward enough: Risk has to do with bad outcomes, potential with good ones.

In considering economic and political factors, investors commonly identify five kinds of hazards to which their investments are exposed. The following are different  components of risks associated with portfolio investments:

A. Systematic Risk

Systematic risk refers to the portion of total variability in return caused by factors affecting the prices of all securities.… Read the rest

Abey Francis

Portfolio Construction Phase in Investment Portfolio Management

Investment portfolio construction refers to the allocation of funds among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governing such allocation. The objective of the theory is to elaborate the principles in which the risk can be minimized subject to desired level of return on the portfolio or maximize the return, subject to the constraint of a tolerate level of risk.

Thus, the basic objective of portfolio management is to maximize yield and minimize risk. The other ancillary objectives are as per the needs of investors, namely:

  • Safety of the investment
  • Stable current returns
  • Appreciation in the value of capital
  • Marketability and Liquidity
  • Minimizing of tax liability.
… Read the rest
Abey Francis

Portfolio Performance Evaluation in Investment Portfolio Management

Portfolio evaluating refers to the evaluation of the performance of the investment portfolio. It is essentially the process of comparing the return earned on a portfolio with the return earned on one or more other portfolio or on a benchmark portfolio. Portfolio performance evaluation essentially comprises of two functions, performance measurement and performance evaluation. Performance measurement is an accounting function which measures the return earned on a portfolio during the holding period or investment period. Performance evaluation, on the other hand, address such issues as whether the performance was superior or inferior, whether the performance was due to skill or luck etc.… Read the rest

Abey Francis

Portfolio Selection and Revision in Investment Portfolio Management

Portfolio Selection

Portfolio analysis provides the input for the next phase in portfolio management, which is portfolio selection. The proper goal of portfolio construction is to generate a portfolio that provides the highest returns at a given level of risk. A portfolio having this characteristic is known as an efficient portfolio. The inputs from portfolio analysis can be used to identify the set of efficient portfolios. From this set of efficient portfolios the optimum portfolio has to be selected for investment. Harry Markowitz portfolio theory provides both the conceptual framework and analytical tools for determining the optimal portfolio in a disciplined and objective way.… Read the rest

Abey Francis