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Portfolio Revision: Presented by
Portfolio Revision: Presented by
Portfolio Revision: Presented by
REVISION
PRESENTED BY
MBA (FS) Part 1: Group 3
Tahira de Sa
{03}
Tracy Fernandes
{06}
Omcar Harmalkar
{12}
Viplav Harmalkar
{13}
Sameer Shaikh
{23}
What is a Portfolio ?
1. A combination of various investment products.
Portfolio Selection
1. Portfolio analysis provides the input for the next
phase in portfolio management.
2. The aim of portfolio construction is to generate
a portfolio that provides the highest returns.
3. A portfolio having this characteristic is known as
an efficient portfolio.
4. From this set of efficient portfolios the optimum
portfolio has to be selected for investment.
Portfolio Revision
1. Portfolio revision means alteration of the
composition of debt/equity instruments.
2. Any portfolio requires monitoring and revision.
3. Portfolio revision involves changing the existing
mix of securities.
4. New securities may be added to the portfolio.
Intrinsic difficulty
Methodology not established
Different approaches adopted
Taxes
Short term capital gains taxed at higher rates
Market impact
cost of executing a transaction
Tax implications
taxes on the realized capital gains
Portfolio Upgrading
Portfolio upgrading calls for re-assessing the risk return
characteristics of various securities selling over priced
securities, and buying under priced securities
A hold candidate
Unattractive/ mildly unattractive
Stock
Bonds
1 Jan
$2,000,000
60%/40%
$1,200,000 $800,000
1 Apr
$2,500,000
56%/44%
$1,400,000 $1,100,000
17
Constant Proportion
Portfolio Insurance (contd)
Example
A portfolio has a market value of $2 million. The investment
policy statement specifies a floor value of $1.7 million and a
multiplier of 2.
What is the dollar amount that should be invested in stocks
according to the CPPI strategy?
Solution: $600,000 should be invested in stock:
$ in stocks = 2.0 ($2,000,000 $1,700,000)
= $600,000
20
Solution: The desired equity position after one quarter should be:
$ in stocks = 2.0 ($2,200,000 $1,700,000)
= $1,000,000
The portfolio manager should move $350,000 into stock. The
resulting percentage would be: $1,000,000/$2,200,000 = 45.5%
21
1. Constant Proportion
A constant proportion strategy within an
equity portfolio requires maintaining the
same percentage investment in each stock
May be mitigated by avoidance of odd lot
transactions
Price
Shares
Value
% of Total Portfolio
FC
22.00
400
8,800
31.15
HG
13.50
700
9,450
33.45
YH
50.00
200
10,000
35.40
$28,250
100.00
Total
After one quarter, the portfolio values are as shown below. Recommend
specific actions to rebalance the portfolio in order to maintain the constant
proportion in each stock.
Stock
Price
Shares
Value
% of Total Portfolio
FC
20.00
400
8,000
21.92
HG
15.00
700
10,500
28.77
YH
90.00
200
18,000
49.32
$36,500
100.00
Total
24
Price
Shares
Value
Before
FC
20.00
400
8,000
Buy 200
12,000
32.00
HG
15.00
700
10,500
Buy 100
12,000
32.00
YH
90.00
200
18,000
Sell 50
13,500
36.00
$37,500
100.00
Total
$36,500
Action
Value
After
% of
Portfolio
25
27
4. Indexing
Indexing is a form of portfolio management that
attempts to mirror the performance of a market
index
e.g., the S&P 500, S&P CNX Nifty
Summery
Rebalancing strategy based on reasonable monitoring
frequencies (such as annual or semiannual) and reasonable
allocation to provide sufficient risk control relative to the
target asset allocation for most portfolios with broadly
diversified stock and bond holdings.
Portfolio rebalancing is an important in bringing the different
asset classes back into proper relationship. Hence you
should look at your portfolio at least quarterly in terms of
rebalancing and more frequently if you have had a significant
gain or loss in any asset class.
Investment Timing
Timing is everything
Everything you do is an investment of time
Basic strategy
Buy when the economy looks bad, corporate profits look bad,
and consumers are dejected.
The reason for this is simple:
WHEN IT LOOKS REALLY BAD, THERES PLENTY OF
ROOM ON THE UPSIDE. AND WHEN IT FEELS REALLY
GOOD, THERES PLENTY OF ROOM ON THE
DOWNSIDE.
Principles
Look for Multiple Positives
Avoid Multiple Negatives
Strategy
Neither bear nor bull market is bad for knowledgeable
investors because both can be used to their benefits - the most
important thing is stock market predictability.
Everything is subject to change.
It is always dark before sunrise", or "the good times come
back when you least expect them
Formula Plans
Formula Plans
Basic rules and regulations for the purchase and sale of
securities
The amount to be spent on different type of securities is fixed
Depends on the investors attitude towards the risk and return
Certain predefined rules and regulations deciding when and
how much assets an individual can purchase or sell for
portfolio revision.
Advantages
Basic rules and regulations for the purchase and sale of securities are
provided.
Rules and regulations are rigid and overcome human emotions
Higher profits
A course of action is formulated, according to investors objectives.
Disadvantages
Does not help the selection of the security.
It is strict and not flexible with the inherent problems of
adjustment.
Should be applied for long periods, otherwise the transaction
cost may be high.
Assumptions
cont
Example
Market
price
Number of
shares in
stock
portion
Value of
stock
(Rs)
Value of
defensive
Portfolio
(Rs)
Total
portfolio
value
(Rs)
50
100
5000
5000
10000
Ratio of
stock
portion to
Defensive
portion
1.00
48
100
4800
5000
9800
0.96
45
100
4500
5000
9500
0.90
105.5
4748
4752
9500
1.00
40.5
105.5
4273
4752
9025
0.90
111.4
4512
4511
9023
1.00
44.5
111.4
4357
4511
9468
1.10
5 shares are sold and invested in bonds to make the ratio equal 1:1
Market
Price (Rs)
Number of
shares
Value of
stock
portfolio
(Rs)
Value of
Defensive
portfolio
Total
50
200
10,000
10,000
20,000
44
200
8,800
10,000
18,800
40
200
8,000
10,000
18,000
40
250
10,000
8,000
18,000
Bought 50 Shares
5
44
250
11,000
8,000
19,000
50
250
12,500
8,000
20,500
50
200
10,000
10,500
20,500
Sold 50 Shares
Advantages
The investor is not emotionally affected by the
price changes in the market.
Disadvantages
Security selection by analyzing merits of stock.
appropriate zones and trend for alteration of the
proportions
Small zones reduce portfolio performance.
Market
Price
Shares
purchase
d
Cumulati Market
ve
Value
Investme (Rs)
nt
Unrealis
ed
Profit/
loss
Average
cost
per
share
Average
Market
price per
share
100
10
1000
1000
100
100
90
11
1990
1890
(100)
94.76
95
100
10
2990
3100
110
96.45
96.67
110
3980
4400
420
99.50
100
Advantages
Reduces the average cost per share
Pressure of timing stock purchase taken away
Makes the investors to plan the investment
programme based on the commitment of funds
that has to be done periodically.
Applicable to both falling and rising market,
although it works best if the stocks are acquired
in a declining market.
Disadvantages
Value of
Stock
portion
(Rs)
Value of
Defensive
(Rs)
Total
portfolio
value (Rs)
Stock as a
percentag
e of the
portfolio
Portfolio
adjustmen
t
Shares in
stock
portion
(Rs)
100
10,000
10,000
20,000
50.00
100
90
9,000
10,000
19,000
47.37
100
80
8,000
10,000
18,000
44.4
100
80
12,640
5,400
18,040
70.06
Bought 58
shares
158
90
14,220
5,400
19,620
72.48
158
100
15,800
5,400
21,200
74.53
Sold 50
shares
158
100
10,800
10,800
21,600
50.00
108