Functions of Portfolio and Management: The objective of portfolio management is to develop a portfolio that has a maximum return at whatever level of risk the investor deems appropriate.
Risk Diversification An essential function of portfolio management is spread risk akin to investment of assets. Diversification could take place across different securities and across different industries. Is an effective way of diversifying the risk in an investment. Simple diversification reduces risk within categories of stocks that all have the same quality rating.
Asset Allocation An important function of portfolio management is asset allocation. It deals with attaining the operational proportions of investments from asset categories. Portfolio managers basically aim of stock-bond mix. For this purpose, equally weighted categories of assets are used.
Bets Estimation Another important function of a portfolio manager is to make an estimate of best coefficient. It measurers and ranks the systematic risk of different assets. Best coefficient is an index of the systematic risk. This is useful in making ultimate selection of securities for investment by investment by a portfolio manager.
E-Balancing Portfolios Rebalancing of portfolios involves the process of periodically adjusting the portfolios to maintain the original conditions of the portfolio. The adjustment may be made either by way of ‘Constant proportion portfolio or by way of Constant best portfolio’. In Constant proportion portfolio, adjustments are made in such a way as to maintain the relative weighing in portfolio components according to the change in prices. Under the constant beta portfolio, adjustments are made to accommodate the values of component betas in the portfolio.
Strategies A portfolio manager may adopt any of the following strategies an part of an efficient portfolio management.
Buy and Hold Strategy Under the buygy, andtheportfoliohold‘manager buildsstrate portfolio of stock which is not disturbed at all for a long period of time. This practice is common in the case of perpetual securities such as common stock.
Indexing Another strategy employed by portfolio managers is indexing’. Indexing attempt to replicate the investment characteristics of a popular measure of the bond market.
Securities that are held in best-known bond indexes are basically high grade issues.
Laddered Portfolio Under the laddered portfolio, bonds are selected in such a way as that their maturities are spread uniformly over a long period of time. This way a portfolio manager aims at distributing the funds throughout the yield curve.
Barbell Portfolio Under the laddered portfolio, bonds are selected in such a way as that their maturities are spread uniformly over a long period of time. This way a portfolio manager aims at distributing the funds throughout the yield curve can also benefit from lower transaction costs because of better liquidity.