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What is Portfolio Management?

Portfolio Management:
It is a process of managing the money of an individual by investing money into different securities to maximise the return and reduces the risk. It is done under the expert guidance of portfolio manager. It is an art of selecting the right securities to make a security portfolio for earning high return.

Importance:

·         Diversification: There are different securities in a portfolio which reduces the risk of losing the investment amount.

·         Handle by expert: The portfolio is managed by expert who is continuously analysing the market securities under different environment.

·          Time consuming: The market changes very fast and the individuals don’t have enough time to check his investment status time to time. So, it is best if the investment decision is handling by expert.

·         Chances of maximise return: If the portfolio is managed by expert then the chance of earning high return is maximise.

Modern Portfolio Theory: This theory states that minimise the risk and maximise the return by adding diversified securities in a portfolio. It means selecting those securities in a portfolio which maximises the return and minimises the risk of a portfolio.  Modern portfolio helps to achieve the efficient frontier position by selecting right securities in a portfolio.

Assumptions:

There are some assumptions in a modern portfolio theory:
·         Investors are risk averse. It means investors prefer to invest in those securities which have low risk and investor known the risk.
·         All investors have same information for taking an investment decision.
·         Brokerage commission and taxes are not considered.
·         The investors considered the standard deviation, correlation and variances for taking an investment decision.
·         All investors have same goal.
·         If investors add one more security it reduces the risk level of a portfolio.

Efficient frontier: It is a curved line which shows the potential return on given portfolio an investor earn at given level of risk. Investors always want to remain in left side of curve where risk level is very low. But those investors who can bear risk can earn higher return and they like to remain in right side of curve. Investors can earn less than frontier curve but not more than frontier curve.


 Risk involved in Portfolio Management:

Call risk: If the issuer of security calls back its security or stock prior to maturity date then it will not satisfy the interest of investment holder by offering less return.

Default risk:  If the issued company declared bankrupt then it also affect on the rate of return of an investment holders. Then the chance of getting lower rate of return or even no return is high.

Political risk: In this risk if the government make changes in Company law and in taxation rules. Then it also affects the earning of the investment holders.

Management risk:  If the managers of the stock or bond issued company take any wrong decision which affects the net income and leverage or capital structure of a company. Then it also affects the rate of return of investment holders.

Purchasing power risk: Under this risk the rate of return of investors are affected by business cycle like inflation.

Interest rate risk: Under this risk if the interest rate changes then the value of security also changes. If the interest rate increases then the value of long term securities will decreases in comparison to short term securities.  The value of existing stock will decreases if the interest rate is increases.


Convertible risk: If the securities are converted by issued company then the rate of return of investor will increases or decreases. 

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