GROUP MEMBERS SHRUSHTI RAJGOR CHITRA SARODE NEELIMA NIMJE SNEHA TURILAY KASTURI YADAV 1084 1093 1071

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What is Portfolio?
Holding a portfolio is a part of an investment and risk-limiting strategy called expansion & diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include bank accounts, stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, or any other item that is expected to retain its value & earn revenue.

In building up an investment portfolio a financial institution will typically conduct its own investment analysis, while an individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services. Market timing is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.

What is Portfolio Management? Portfolio management is an investment advisory that incorporates financial planning, investment portfolio management and a other numerous aggregate financial services. Typically there are two strategically approaches to manage portfolio.
Portfolio Management

Active Portfolio Management

Passive Portfolio Management

Index Booster

Index Followers

Active management refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index. The active manager exploits market inefficiencies by purchasing securities (stocks etc.) that are undervalued or by short selling securities that are overvalued.

Passive management is a financial strategy in which an investor invests in accordance with a predetermined strategy that doesn't entail any forecasting. The idea is to minimize investing fees and to avoid the adverse consequences of failing to correctly anticipate the future.

By Hendricks, Patel and Zeckhauser Active fund managers allocation, both strategic as well as tactical and stock selection. In shorter period active fund management performed better than passive management

By Elton, Gruber and Blake, 1996; Gruber, 1996; Carhart, 1997 Passive fund managers try to track an index. They do not try to forecast the movement of the economy and sectors, these activities reduce the expenses of managing the portfolio. Over a long term index funds are likely to out perform a majority of actively managed funds of similar risk showed neither the growth nor the value investment styles outperformed indexes over the long term
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Value of financial assets is obtained as present value of all future cash flow expected to be received from the asset .
V = CFi/(1+k)
i

Beginning from the general relationship it is possible to derive the relationship among maturity, systematic risk and price changes in a financial asset when the market risk premium changes. The assets proportional change in the value per unit in the market risk premium as its elasticity and denote it with letter E
E= V /V

MRP
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Market risk premium Risk premium is the added compensation, an investor receives for placing his money at risk of loss. The greater the risk of an investment, the greater the risk premium the investor receives. E= (-N)/

(1+Rf)/ +(MRP)

Modified Duration The magnitude of elasticity E increases with modified duration as well as systematic risk. If the direction of change in market risk premium could be anticipated investment gains could be made by increasing or decreasing E appropriately.
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The ability to correctly anticipate changes in market risk premium and suitably alter E would add value to investment. The relationship between systematic risk and N for a given value of E is a rectangular hyperbole. For each value of E there is distinct curve, these curves are indifference curves of E.

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Market Risk Premium decreases, the investments that have modified duration would gain more value. Market Risk Premium decreases, the investments with systematic risk would gain more value.

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Equity Investment Government Debt Corporate Debt

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DEPENDANT FACTORS

Investment in different asset classes offer different opportunity for timing the market. A pure equity investment would rely on systematic risk change on market timing. Investment in government securities would rely more on changing the duration of investment. Corporate debt would rely on both. Balance funds is that which invests it equity and debt and offers better scope to explore such opportunities.

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Equity portfolios offers scope to time the market through change of portfolio systematic risk. The overall response to changes in market risk premium is governed by both the portfolio systematic risk as well as its duration. Some asset classes offer considerable leeway to modify duration while others offer handle to change the systematic risk.

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Market timing has been seen in the limited contacts of changes in the market risk. There are complex security such as bonds with options, high yield bonds, equity derivatives, bonds denomination in different currencies and so on. The simple model used might fail to deal complex situations.

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From this we would like to conclude that as a general case varying both duration as well as systematic risk enables market timing. The relative importance of these two enablers varies with the portfolio asset class.

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