Investment management and modern portfolio theory

Résumé du document

Various assets or types of investment (stocks, bonds and cash equivalents) held and/or managed directly by investors, constitute a portfolio. In order to build up a coherence between risk tolerance and the investing objectives, investors favor large cap value stocks based on index funds if their strategy is conservative, an aggressive stock position if they are risk-takers (risky markets : real estates, futures, international investments). The choice of the strategy and its implementation is what is called portfolio management. Investopedia gives the following definition of portfolio management: "The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance." Investment Management concerns the professional management of various securities and assets. The managers' aim is to meet the defined investment goals for the benefit of their investors. They can also mange portfolios on behalf of private investors. This is called "private banking". Basically, their job is to perform financial analysis, asset selection, stock selection, plan implementation and monitoring of investments.

Extraits

[...] Retrieved july 1th from InvestorWords: http://www.investorwords.com/3083/modern_portfolio_theory.html InvestorWords.com. (s.d.). diversification. Consulté le July 1th sur InvestorWords.com: http://www.investorwords.com/1504/diversification.html Markovitz Differentiation. (s.d.). Consulté le July 1st sur ftsnet.com: http://www.ftsnet.com/Public/DiscusHTML/markowitz/markowitzindex.htm Wikipedia, t. f. (s.d.). Diversification. [...]

[...] The base of comparison established refers to an externally specified index funds”, and concern equities, bonds, stocks, commodities, hedge funds Implementing such a strategy may appear counterintuitive because there is no will to outperform the index selected, and the partisan of passive management believe that active management do not always allow to do better than the market. In fact, following this strategy, any average investor will meet the market average because he/ she will mainly benefit of the investment cost reduction. When our professor Mr. Horn applied this strategy, the result was lower than when he was actively trading. This observation comforts the existing controversy Active management An active investing is a portfolio management strategy. [...]

[...] Investment management and modern portfolio theory INVESTMENT MANAGEMENT AND MODERN PORTFOLIO THEORY I. I. II. III. IV. Executive summary Executive summary Abstract Introduction Investment styles : Passive management vs Active management Passive management Active management V. The importance of data analysis to optimize the results Technical vs. fundamental data analysis Technical Analysis The fundamental Analysis The rational analysis VI. Risk aversion management : Modern Portfolio Theory Creation and aim of the MPT The creation of the theory The aim The importance of the Markowitz's diversification Purpose Theory application Theory limitation VII. [...]

[...] This analysis helps to define a portfolio's asset's return as a random variable and describes a portfolio as a weighted combination of assets. VI. Risk aversion management : Modern Portfolio Theory No matter if the portfolio is actively or passively managed, a theory has been established in order to better manage a portfolio based on limited risk admittance by investors. This theory addresses to the rational investors who use technical and fundamental analysis to analyze data and build up their portfolio. [...]

[...] CAPM's ratio o Sharpe's ratio (portfolio's performance measurement) Simple performance measurement of a portfolio, it allows to determine the effective return of a portfolio in case the risk free rate is in excess. Then it is compared to the total risk of the portfolio. This ratio's advantages are to not refer to any benchmark, and in the same time to avoid pitfalls linked to a poor choice of benchmark. But with it ratio, it is not possible to identify if the performance is due to the market or to the manager's skills. [...]