CHAPTER 7: PORTFOLIO MANAGEMENT
·As potential Investment
a Investor there are various Instruments to consider
investigating in.
Investment Instruments provide different levels of returns risk, and are prone to different
VISKS.
some Investments (provide an income on continuous basis (dividends, rent
Other Investments (provide capital growth (gain)
&RISKS differ from Investment to Investment
·Investor
combining certain Investments: have greater certainty over his Income? The risk of all
Investments together.
to success: diversification construction of
key over different asset classes
during portfolio
ASSETS CLASSES & INVESTMENT INSTRUMENTS
key success factor to create wealth: build a diversified portfolio of Investments
(l.e spread available funds across asset classes possible within the constraints of the
as
many as
Investment objectives (
Two groups asset classes of Investment Instruments:
I
Real
2. Financial
REAL INVESTMENT: FINANCIAL INVESTMENT: Monetary
non-monetary
& Real estate, luxury goods, commodities Bands, shares, cash
&
IllIquid, high return, riskle LIquid, low return, less risk
I I
properties: properties:
physical products Piece of paper
Lots of admin computer entry
Not
very liquid High 11
quidity
Difficult to safeguard Easy to
safeguard
Return: end of period Return: continuous
& C.G.
property, Krugerrands, artworks,
· E.G. shares, fixed interest securities, unit trusts,
coins, motors, silverware, wine, books participation bands, satrix products
, RETURN & RISK RISK:
possibility investment produce
w ill not
RETURNN desired return (incomel
Uncertainty associated with return
Investors wanta return either:
D
I Actual return expected return
continuous (dividends, interest)
Actual return (Expected return
Endof
period (capital growth)
Each investor must
decide on an
DETERMINING RETURN:
objective
investment
If there is
uncertainty f uture
about
satisfactory level of return
(amtof Income;apply probabilities to
specific risk profile risk
to acceptt o achieve desired return) calculate an expected future return.
willing
z
EXAMPLE:
↳
↳ fixed
PORTFOLIO: Investi n depositw ith variable
int rates
Desiredportfolio:diversified
4 possible intrates:9;10%; 11%.
Negative performance in one
RETURN AND RISK 12.1
investmentcancelled out
by positive
ofrealisation:0.10,0.30
probability
I
performance in another Investment.
portfolio
0.40, 0.20
management philosophy: I
Am expected retur n:(9%) (0.10) t
compile combination of Investment
(10.1.0.3) (ICO)
realistic HI.CO.C
+
alternatives to achieve a
acceptable level ofr is k within the
investmentobjectives. CHARACTERISTICS OF
ASSET
CLASSES:
I Risks Increase as the return of
the
Be
MEASURES TO DETERMINE
RISK: Alter various c lasses
asset increase.
1. calculate the variance/standard deviation ofexpected returns ·Risk bills
attached to
treasury
The greater the variance STDEU, the greater the
uncertainty (money market of
i nstrument
thatthe expected return will be realised, thus the greater the risk
goul is
very low accompanying
B
problem:based on historical data. return is also low.
2. Determine ofretur ns with a higher risk,
the
range ·property, much
Larger range:greater uncertainty of expected
what return will have a much higher expected
will be ... the greater the risk return.
3. View
only the returns lower than the expected return
(than portfolio management:combination
:Implies the calculation s emi-variance.
of ofa
healthy balance ofi nvestment
Instruments thatsuite the investor's specific
profile r isk/return.
of
·As potential Investment
a Investor there are various Instruments to consider
investigating in.
Investment Instruments provide different levels of returns risk, and are prone to different
VISKS.
some Investments (provide an income on continuous basis (dividends, rent
Other Investments (provide capital growth (gain)
&RISKS differ from Investment to Investment
·Investor
combining certain Investments: have greater certainty over his Income? The risk of all
Investments together.
to success: diversification construction of
key over different asset classes
during portfolio
ASSETS CLASSES & INVESTMENT INSTRUMENTS
key success factor to create wealth: build a diversified portfolio of Investments
(l.e spread available funds across asset classes possible within the constraints of the
as
many as
Investment objectives (
Two groups asset classes of Investment Instruments:
I
Real
2. Financial
REAL INVESTMENT: FINANCIAL INVESTMENT: Monetary
non-monetary
& Real estate, luxury goods, commodities Bands, shares, cash
&
IllIquid, high return, riskle LIquid, low return, less risk
I I
properties: properties:
physical products Piece of paper
Lots of admin computer entry
Not
very liquid High 11
quidity
Difficult to safeguard Easy to
safeguard
Return: end of period Return: continuous
& C.G.
property, Krugerrands, artworks,
· E.G. shares, fixed interest securities, unit trusts,
coins, motors, silverware, wine, books participation bands, satrix products
, RETURN & RISK RISK:
possibility investment produce
w ill not
RETURNN desired return (incomel
Uncertainty associated with return
Investors wanta return either:
D
I Actual return expected return
continuous (dividends, interest)
Actual return (Expected return
Endof
period (capital growth)
Each investor must
decide on an
DETERMINING RETURN:
objective
investment
If there is
uncertainty f uture
about
satisfactory level of return
(amtof Income;apply probabilities to
specific risk profile risk
to acceptt o achieve desired return) calculate an expected future return.
willing
z
EXAMPLE:
↳
↳ fixed
PORTFOLIO: Investi n depositw ith variable
int rates
Desiredportfolio:diversified
4 possible intrates:9;10%; 11%.
Negative performance in one
RETURN AND RISK 12.1
investmentcancelled out
by positive
ofrealisation:0.10,0.30
probability
I
performance in another Investment.
portfolio
0.40, 0.20
management philosophy: I
Am expected retur n:(9%) (0.10) t
compile combination of Investment
(10.1.0.3) (ICO)
realistic HI.CO.C
+
alternatives to achieve a
acceptable level ofr is k within the
investmentobjectives. CHARACTERISTICS OF
ASSET
CLASSES:
I Risks Increase as the return of
the
Be
MEASURES TO DETERMINE
RISK: Alter various c lasses
asset increase.
1. calculate the variance/standard deviation ofexpected returns ·Risk bills
attached to
treasury
The greater the variance STDEU, the greater the
uncertainty (money market of
i nstrument
thatthe expected return will be realised, thus the greater the risk
goul is
very low accompanying
B
problem:based on historical data. return is also low.
2. Determine ofretur ns with a higher risk,
the
range ·property, much
Larger range:greater uncertainty of expected
what return will have a much higher expected
will be ... the greater the risk return.
3. View
only the returns lower than the expected return
(than portfolio management:combination
:Implies the calculation s emi-variance.
of ofa
healthy balance ofi nvestment
Instruments thatsuite the investor's specific
profile r isk/return.
of
