PORTFOLIO ELECTION

AND
PORTFOLIO
MANAGEMENT

Arranged by :
Gladys Windatari Yasmin (B200164007)
Zulfa Alfiani Abidah (B200164012)
Tito Setiawan Prakasa (B200164016)
 PORTFOLIO ELECTION
DETERMINE THE ATTAINABLE SET AND EFFICIENT SET
Opportunity sets or attainable sets are all sets that provide portfolio
possibilities that can be formed from a combination of available
assets.
1. Perfect positive correlation
For a perfect positive correlation of two assets A and B, namely ρAB =
+1, the portfolio variant formula:
σp² = a². σA² + b². σB² + 2.a.b. σA. σB

Standard portfolio deviations with perfect positive correlation are:

σp = a. σA + (1 - a). σB or σp = σB + (σA - σB). A

The formula for expectations of a portfolio for two securities is stated as

follows.
E (Rp) = a. E (RA) + (1-a). E (RB)
2. There is no correlation between securities
For the correlation between the two assets A and B of zero, namely ρAB = 0 and
substitute b = (1-a), the variant formula of the portfolio becomes:
σp2 = a2. σA2 + (1-a) 2. σB2

The relationship between portfolio risk and the proportion of securities (a) for
zero correlation (ρAB = 0) is non-linear. Because this relationship is not linear,
an optimization point can occur.
3. The correlation between securities is perfect negative
For a perfect negative correlation between assets A and B that is ρAB = -1, then
the portfolio variance formula becomes:
σp2 = a2. σA + (1-a) 2. σB2
2.a. (1-a) .σA. σB
DETERMINING EFFICIENT PORTFOLIO
• Rational people are defined as those who will choose more compared to
choosing less.
• Efficient Portfolios are portfolios that provide the greatest expected
returns with the same level of risk or portfolios that contain small risks
with the same level of expected returns.
DETERMINE THE OPTIMAL PORTFOLIO

In choosing the optimal portfolio there are several approaches, namely:

Optimal Portfolio Based on Markowitz Model Invsetor Preferences

The Markowitz model uses the following assumptions:

The time used is only one period

There are no transaction fees

Investor preferences are only based on expected returns and risks of the
portfolio

There are no loans and no risk deposits

2. THE SMALLEST OPTIMAL RISK PORTFOLIO OF THE
MARKOWITZ MODEL

The objective function can be Thus, this optimization completion

minimized by installing three model can be written as follows:
constraints, namely: Objective Function:
1. First obstacle:                         n n n
n Minimize ∑ wi. σi2 + ∑ ∑wi. wj. σij
∑ wi = 1 i=1i=1h=1
i=1 i≠j
2. The second obstacle Subjects to constraints:
n
Wi ≥ 0 for i = 1 to n. (1) ∑wi = 1
i=1
3. The third obstacle (2) wi ≥ 0 for i = 1 through n n
n (3) wi. Ri = Rp
∑wi. Ri = Rp i=1
i=1
OPTIMAL PORTFOLIO WITH RISK-FREE ASSETS
• Portfolios that are truly optimal in general (not dependent on
specific investor preferences) can be obtained using risk free
assets.
• Risk-free assets are assets that have a certain expected return
with a risk equal to zero.
OPTIMAL PORTFOLIOS WITH RISK-FREE SAVINGS AND
LOANS
• Investors can enter risk-free assets into an optimal portfolio of risk
assets in the form of savings (lending) or loans (borrowing). In the
form of savings (lending) means buying risk-free assets and put
them into an efficient portfolio of risk assets. In the form of a loan
(borrowing) means borrowing a number of funds at a risk free
interest rate (selling risk free assets) and using these funds to add
proportion to the efficient portfolio of risk assets.
 PORTFOLIO MANAGEMENT

The reason for choosing portfolio management proposed by CFA

(Chartered Financial Analyst) is
o A well-known institution that develops professional investment
standards for its members
o Systematic stages that are easily understood
o Widely used in the education curriculum

PORTFOLIO MANAGEMENT PROCESS

Portfolio management: a process carried out by an investor to manage the
money invested in the portfolio he makes. The portfolio management process
proposed by CFA can be divided into three main parts, namely: Planning,
Execution, Feedback.
 PLANNING
There are three inputs used to form a portfolio
 Expected return of individual securities
 Variant of individual securities returns
 Covariance of individual securities returns.

Factors that determine these inputs:

 Self investors : Investment goals, Individual investor risk preferences,
Investment investment restrictions
 Capital market: consider the economic, social, political, and relevant
sectors
The results of planning
 Investment policies and strategies
 Relevant macro factor considerations
 Determine capital market expectations
 PORTFOLIO EXECUTION

Some stages in executing a portfolio are as follows:

 Asset allocation
 Portfolio optimization
 Securities selection
 Implementation and execution
 FEEDBACK OF PORTFOLIO PERFORMANCE

Poor market conditions, for example, can reduce portfolio

performance. Therefore, market conditions must always be monitored to
maintain optimal portfolio performance. If portfolio performance is not
optimal due to changing market conditions, then this portfolio needs to
be rebalanced.
 PORTFOLIO PERFORMANCE MEASUREMENT

Portfolio performance can be calculated based on portfolio returns

alone. Because there is a trade-off between return and risk, portfolio
measurement based on return alone may not be enough, but must
consider the risk, namely return and risk. Measurements involving these
two factors are called risk-adjusted returns.
 Return portofolio

Geometric mean
  Return-sesuai Risiko

Reward to variability (sharpe Reward to volatility (treynor

measure) measure)

Reward to market risk Reward to difersivication

Reward to difersivication Jansen’s alpha

M² measure Information ratio

ANY QUESTION??