Portfolio Management

Course Description

Portfolio Management is a key subject in finance, generally included in undergraduate and postgraduate programs like B.Com, BBA, MBA (Finance), or specialized certification courses. The subject covers the process of managing a collection of investments to achieve specific financial goals, such as maximizing returns or minimizing risk. Here’s an overview of the typical syllabus for Portfolio Management:

What You’ll Learn?

1. Introduction to Portfolio Management

Definition and Concepts:

• What is a portfolio?
• Importance of portfolio management in investment decision-making.
• Investment objectives: Growth, income, liquidity, tax considerations.

Types of Portfolios:

• Active vs. passive portfolios.
• Growth, income, balanced portfolios.

Phases of Portfolio Management:

• Investment planning, selection, execution, and monitoring.

2. Financial Markets and Instruments

Introduction to Financial Markets:

• Overview of primary and secondary markets.
• Functions and types of financial markets: Money markets, capital markets, derivatives markets.

Types of Financial Instruments:

• Equity instruments: Stocks, preference shares.
• Debt instruments: Bonds, debentures, government securities.
• Derivatives: Options, futures, forwards, swaps.
• Mutual funds, ETFs (Exchange-Traded Funds), alternative investments (commodities, real estate).

Risk-Free vs. Risky Assets:

• Government securities as risk-free assets.
• Corporate bonds, stocks as risky assets.

3. Risk and Return Analysis

Concept of Risk and Return:

• Relationship between risk and return.
• Types of risks: Systematic risk (market risk), unsystematic risk (company-specific risk), and total risk.
• Risk measurement tools: Standard deviation, variance, beta.

Expected Return:

• Calculation of expected returns on individual securities and portfolios.

Risk Adjusted Return:

• Sharpe Ratio, Treynor Ratio, and Jensen’s Alpha.

4. Portfolio Theory

Modern Portfolio Theory (MPT):

• Harry Markowitz’s efficient frontier.
• Portfolio optimization: Risk-return trade-off, efficient frontier, minimum variance portfolio.

Diversification:

• Concept of diversification and its role in reducing portfolio risk.
• How to achieve optimal diversification.

Capital Allocation Line (CAL):

• Combining risk-free assets and risky portfolios.
• Finding the optimal portfolio on the CAL.

5. Asset Pricing Models

Capital Asset Pricing Model (CAPM):

• Assumptions, formula, and applications of CAPM.
• Security Market Line (SML) and its significance.
• Beta and its interpretation in risk assessment.

Arbitrage Pricing Theory (APT):

• Assumptions and comparison with CAPM.
• Factors affecting asset returns according to APT.

Multi-Factor Models:

• Fama-French three-factor model.
• Role of market risk, size, and value factors.

6. Portfolio Construction and Selection

Portfolio Construction:

• Steps involved in constructing an investment portfolio.
• Security selection: Fundamental analysis vs. technical analysis.

Asset Allocation:

• Strategic and tactical asset allocation.
• Factors influencing asset allocation: Risk tolerance, time horizon, financial goals.

Bond Portfolio Management Strategies:

• Active vs. passive bond strategies.
• Duration and immunization techniques.
• Managing interest rate risk and credit risk in bond portfolios.

7. Portfolio Evaluation

Performance Measurement:

• Absolute performance vs. relative performance.
• Benchmarks for portfolio performance evaluation.

Performance Ratios:

• Sharpe Ratio, Treynor Ratio, Jensen’s Alpha.
• Information Ratio, Sortino Ratio.

Portfolio Revision:

• Need for portfolio revision: Changes in financial goals, market conditions, and risk tolerance.
• Strategies for portfolio revision: Active and passive revision strategies.

8. Behavioral Finance and Portfolio Management

Behavioral Biases in Investing:

• Common biases: Overconfidence, loss aversion, herd mentality, anchoring, mental accounting.

Impact of Behavioral Biases on Portfolio Management:

• How biases affect decision-making and portfolio performance.
• Corrective strategies for behavioral biases.

9. Mutual Funds and Portfolio Management

Types of Mutual Funds:

• Open-ended, close-ended, equity, debt, balanced funds, index funds.

Mutual Fund Portfolio Construction:

• Understanding the portfolio strategies of mutual funds.
• Risk and return analysis of mutual funds.

Exchange-Traded Funds (ETFs):

• Advantages and disadvantages of ETFs.
• Role of ETFs in portfolio management.

10. Portfolio Management Strategies

Active Portfolio Management:

• Market timing, stock selection, sector rotation.
• Risks and benefits of active management.

Passive Portfolio Management:

• Indexing strategies: Replicating market indices.
• Buy-and-hold strategy.

Core-Satellite Strategy:

• Combining active and passive portfolio management strategies.
• Diversification using core stable assets and satellite investments.

11. International Portfolio Management

International Diversification:

• Benefits and risks of investing globally.
• Currency risk, political risk, and economic risk in international investments.

Global Investment Strategies:

• Emerging markets, developed markets.
• Global equity and bond funds, exchange rates, and currency hedging.

12. Derivatives and Portfolio Management

Role of Derivatives in Portfolio Management:

• Hedging, speculation, and arbitrage using derivatives.
• Risk management using options and futures in portfolio management.

Options Strategies:

• Call and put options, option pricing models (Black-Scholes model).
• Option strategies: Protective puts, covered calls, straddles, strangles.

Futures Strategies:

• Using stock index futures for portfolio protection.
• Futures on interest rates, currencies, commodities.

13. Risk Management in Portfolio Management

Risk Management Strategies:

• Hedging with derivatives, insurance of portfolios.
• Managing market risk, credit risk, and liquidity risk.

Value at Risk (VaR):

• Measuring portfolio risk using VaR.
• Limitations of VaR and other advanced risk metrics.

14. Ethics in Portfolio Management

Ethical Considerations:

• Standards of professional conduct in portfolio management.
• CFA Institute Code of Ethics and Standards of Professional Conduct.
• Conflict of interest, insider trading, and fiduciary responsibility.

15. Practical Application: Project Work/Case Studies

Portfolio Simulation:

• Creating and managing a simulated portfolio.
• Using financial tools like MS Excel, Bloomberg, or other portfolio management software.

Case Studies:

• Analysis of real-life portfolios and decision-making processes of institutional investors, mutual funds, hedge funds.