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    Chapter - 11 Portfolio Management

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    D2N
    Portfolio management refers to selecting investments and managing them to maximize returns based on an individual's risk tolerance and time horizon. There are several types of portfolio management including active, passive, and discretionary. Performance is measured using metrics like the Sharpe ratio, Treynor ratio, and Jensen's alpha, which compare the portfolio's risk-adjusted returns to benchmarks.

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    Chapter - 11 Portfolio Management

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    D2N
    99 views5 pages
    Portfolio management refers to selecting investments and managing them to maximize returns based on an individual's risk tolerance and time horizon. There are several types of portfolio management including active, passive, and discretionary. Performance is measured using metrics like the Sharpe ratio, Treynor ratio, and Jensen's alpha, which compare the portfolio's risk-adjusted returns to benchmarks.

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    investment bbs 4th year

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    Chapter -11 Portfolio Management

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    Portfolio management refers to selecting investments and managing them to maximize returns based on an individual's risk tolerance and time horizon. There are several types of portfolio management including active, passive, and discretionary. Performance is measured using metrics like the Sharpe ratio, Treynor ratio, and Jensen's alpha, which compare the portfolio's risk-adjusted returns to benchmarks.

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    Download as docx, pdf, or txt
    99 views5 pages

    Chapter - 11 Portfolio Management

    Uploaded by

    D2N
    Portfolio management refers to selecting investments and managing them to maximize returns based on an individual's risk tolerance and time horizon. There are several types of portfolio management including active, passive, and discretionary. Performance is measured using metrics like the Sharpe ratio, Treynor ratio, and Jensen's alpha, which compare the portfolio's risk-adjusted returns to benchmarks.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 5

    What is Portfolio Management ?

    The art of selecting the right investment policy for the


    individuals in terms of minimum risk and maximum return is
    called as portfolio management.
    Portfolio management refers to managing an individual’s
    investments in the form of bonds, shares, cash, mutual funds
    etc so that he earns the maximum profits within the stipulated
    time frame.
    Portfolio management refers to managing money of an
    individual under the expert guidance of portfolio managers.

    Types of Portfolio Management 

    In a broader sense, portfolio management can be classified under 4 major


    types, namely –

     Active portfolio management

    In this type of management, the portfolio manager is mostly concerned


    with generating maximum returns. Resultantly, they put a significant share
    of resources in the trading of securities. Typically, they purchase stocks
    when they are undervalued and sell them off when their value increases.

     Passive portfolio management 

    This particular type of portfolio management is concerned with a fixed


    profile that aligns perfectly with the current market trends. The managers
    are more likely to invest in index funds with low but steady returns which
    may seem profitable in the long run.
     Discretionary portfolio management

    In this particular management type, the portfolio managers are entrusted


    with the authority to invest as per their discretion on investors’ behalf.
    Based on investors’ goals and risk appetite, the manager may choose
    whichever investment strategy they deem suitable.

    Measuring of the performance


    HPR= (V1-V0)+C
    V0
    V1=Ending Value of investment
    V0=Beginning Value of investment
    C= Current income( interest /Dividend)
    2. HPR portfolio= RGC +UGC+C
    E0+(NF× ip/12) –(WF ×wp/12)
    Where,
    RGC=realized capital gain
    UGC=Unrealized capital gain
    C=dividend/ interest
    E0=Initial Equity investment
    Nf=New fund
    Ip=number of months in portfolio
    Wf=withdraw fund
    Wp=number of month with draw from portfolio

    1.Sharpe's Measure of Portfolio Performance


    Sharpe's measure of portfolio performance, developed by
    William F. Sharpe, is given after his name.
    SP=RP-RF SM=RM-RF
    QP QM
    2. Treynor's Measure of Portfolio Performance

    Treynor's measure of portfolio performance, developed by


    Jack L. Treynor, is also given after his name. This measure is
    different from the Sharpe's measure in consideration of
    portfolio risk. This measure provides a portfolio performance
    index that compares a portfolio's risk premium to the
    systematic or non- diversifiable risk associated with the
    portfolio.
    TP =RP-RF
    BP
    Where

    TP =Treynor's index of portfolio performance measure.


    RP = total rate of return on portfolio.
    RF = the risk-free rate of return.
    BP= the beta coefficient of the portfolio.

    3.Jensen's Measure of Portfolio Performance

    Jensen's measure of portfolio performance, developed by Michael C. Jensen, is


    also called Jensen's Alpha. The theoretical orientation of this measure is similar
    to the Treynor's measure because both are based on the capital asset pricing
    model. However, calculation aspect of Jensen measure differs significantly from
    the Sharpe's measure and Treynor's measure. Jensen's measure calculates the
    Jensen's Alpha which is the excess of portfolio return above the required rate of
    return on the portfolio. The required rate of return on the portfolio is calculated
    using the capital asset pricing model. The Jensen's Alpha is given by:

    AP= Rp-[RF+ (RM-RF)ẞP]

    Where
    AP = Jensen's Alpha
    RP = portfolio return
    RF = risk-free rate
    RM = market return
    BP= portfolio beta

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