OUTLINE (PART ONE):
I. The Rationale for Portfolio Management;
II. Investor Objectives and Constraints;
III. Risk and Return Profile of Philippine Financial Assets; IV. Traditional Portfolio Management;
V. Modern Portfolio Theory;
VI. Implications of Diversifications on Portfolio Management; and VII. Investing in Managed Portfolios.
I. The Rationale for Portfolio Management:
To balance investor objectives and available investment opportunities;
b) To provide investors a framework and techniques for selecting various instruments available or a portfolio that best meets the overall objectives and constraints of an investor.
The Portfolio Management Process
The portfolio management process is the process an investor takes to aid him in meeting his investment goals.
The procedure is as follows:
Create a Policy Statement -A policy statement is the statement that contains the investor’s goals and constraints as it relates to his investments. •
Develop an Investment Strategy - This entails creating a strategy that combines the investor’s goals and objectives with current financial market and economic conditions. •
Implement the Plan Created -This entails putting the investment strategy to work, investing in a portfolio thatmeets the client’s goals and constraint requirements. •
Monitor and Update the Plan -Both markets and investors’ needs change as time changes. As such, it is important to monitor for these changes as they occur and to update the plan toadjust for the changes that have occurred.
A policy statement is the statement that contains the investor’s goals and constraints as it relates to his investments. This could be considered to be the most important of all the steps in the portfolio management process. The statement requires the investor to consider his true financial needs, both in the short run and the long run. It helps to guide the investment portfolio manager in meeting the investor’s needs. When there is market uncertainty or the investor’s needs change, the policy statement will help to guide the investor in making the necessary adjustments the portfolio in a disciplined manner.
Return objectives can be divided into the following needs:
Capital Preservation - Capital preservation is the need to maintain capital. To accomplish this objective, the return objective should, at a minimum, be equal to the inflation rate. In other words, nominal rate of return would equal the inflation rate. With this objective, an investor simply wants to preserve his existing capital.
Capital Appreciation -Capital appreciation is the need to grow, rather than simply preserve, capital. To accomplish this objective, the return objective should be equal to a return that exceeds the expected inflation. With this objective, an investor's intention is to grow his existing capital base. 3.
Current Income -Current income is the need to create income from the investor's capital base. With this objective, an investor needs to generate income from his investments. This is frequently seen with retired investors who no longer have income from work and need to generate income off of their investments to meet living expenses and other spending needs.
Total Return - Total return is the need to grow the capital base through both capital appreciation and reinvestment of that appreciation.
When creating a policy statement, it is important to consider an investor's constraints. There are five types of constraints that need to be considered when creating a policy statement. They are as follows: 1. Liquidity Constraints - Liquidity constraints identify an investor's need for liquidity, or cash. For example, within the next year, an investor needs $50,000 for the purchase of a new home. The P50,000 would be considered a liquidity constraint because it needs to be set aside (be liquid) for the...
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