FUNDAMENTALS OF INVESTMENT

MODULE-IV (Portfolio analysis)

Portfolio
A portfolio is a collection of securities held together as an investment. It
is a collection of financial investments.
Types of portfolio
1. Aggressive portfolio
It is a type of portfolio that attempt to maximize returns by taking a
relatively higher degree of risks.
2. Conservative portfolio
It is a type of portfolio designed to preserve value by increasing its
concentration of lower risk securities.
Portfolio analysis
The process of estimating the expected return and risk of different set
of portfolios is called portfolio analysis.
Portfolio management
Portfolio management is the art of establishing the best investment
policy for an individual in terms of least risk and maximum return.
Objectives/ Importance of portfolio management
 Safety of principle investment
 Capital appreciation
 Consistency in return on investment
 Marketability
 Liquidity
 Diversification of portfolios
 Tax planning
Phases/ Stages/Steps of portfolio management
1. Specification of investment objectives and constraints
2. Quantification of capital market expectations
3. Asset allocation
4. Formulating portfolio strategy
5. Selection of securities
6. Portfolio execution
7. Portfolio revision
8. Performance evaluation
Portfolio diversification
Portfolio diversification is the process of investing money in different
asset classes and securities in order to minimize the overall risk of the
portfolio.
Efficient portfolio
It is also known as optimal portfolio. It offers the highest expected
return for a given level of risk, or one with the lowest level of risk for a
given expected return.

Markowitz model
 Harry Markowitz put forward this model in 1952.
 It assist in selection of most efficient portfolio of the given securities.
 This model shows investors how to reduce their risk.
 This model is also called mean variance model.
Assumptions of Markowitz theory
 Returns from all the assets are distributed normally.
 The investor is rational.
 All investors have the access to the same information.
 All the investors having the same view on rate of return expected.
 Unlimited capital at the risk free rate of return can be borrowed.
 Investors will give their best to maximize return.

Random walk theory

Random walk theory is a stock market mathematical model. This theory
advocates that the prices of securities in the stock market follow a
random walk.
This theory is also known as random walk hypothesis. It suggest that
stock prices are completely independent of past stock price.
Assumptions of Random walk theory
 Stock prices discounts all information.
 Markets are strongly efficient.
 All investors have same access to information.
 Investors behave in rational manner.
 The prices of each securities in the stock market follow random walk.

Efficient market hypothesis (EMH)

It is a financial theory. It says that asset prices reflect all the available
information or data and stock trades at fair value at all time.
Assumptions of EMH
 Stocks are traded on exchanges at fair market value.
 Market value of stock represents all the relevant information.
 Investors act rationally and normal.
 Information is costless.
 There is no tax and transaction cost.
 No single trader can affect the price.
Forms/ Levels of EMH
1. Weak form of efficient market hypothesis
It assumes that stock prices includes all information publically available,
but not the information that is not publically available.
2. Semi strong form of efficient market hypothesis
This form give no importance to both technical and fundamental
analysis.
3. Strong form of efficient market hypothesis
It assumes that both public and private information is priced into the
stock price. Private information is available to insiders.

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