A. Arithmetic mean = 5.3%; Geometric mean = 5.2%, B. Arithmetic mean = 4.0%; Geometric mean = 3.6%, C. Arithmentic mean = 4.0%; Geometric mean = 3.9%, $$\text{Arithmetic mean} = \frac {8\% + (-2\%) + 6\%} {3} = 4\%$$, $$\text{Geometric mean} = [(1+8\%) × (1+(-2\%)) × (1+6\%)]^{1/3} – 1 = 3.9\%$$, Calculate and interpret major return measures and describe their appropriate uses. Portfolio management is the art of selecting the right investment tools in the right proportion to generate optimum returns with a balance of risk from the investment made. Portfolio Risk and Return: Expected returns of a portfolio, Calculation of Portfolio Risk and Return, Portfolio with 2 assets, Portfolio with more than 2 assets. The different types of portfolio investment are as follows: Risk-Free Portfolios â Risk-free portfolios are the ones that have investment securities regarding treasury bonds and such where the risk is almost nil but low returns. Return on Portfolio: Each security in a portfolio contributes returns in the proportion of its invest­ment in security. Passive portfolio management Passive portfolio management is a process where the portfolio manager creates a fixed portfolio aligning it with current trends in the market. Privacy Policy3. Passive Portfolio: When the A portfolio that consists of 70% equities which return 10%, 20% bonds which return 4%, and 10% cash which returns 1% would have a portfolio return as follows: $$\text{Portfolio return} = (70\% × 10\%) + (20\% × 4\%) + (10\% × 1\%) = 7.9\%$$. There is an art, and a science, when it comes to making decisions about investment mix and policy, matching investments to objectives, asset allocation and balancing risk against performance. Module â 4 Valuation of securities: Bond- Bond features, Types of Bonds, Determinants of interest rates, Bond Management Strategies, Bond Valuation, Bond Duration. Each security in a portfolio contributes returns in the proportion of its invest­ment in security. Return in Portfolio Investments The typical objective of investment is to make current income from the investment in the form of dividends and interest income. I. 2. The answers to this question lie in the investor’s perception of risk attached to invest­ments, his objectives of income, safety, appreciation, liquidity and hedge against loss of value of money etc. Portfolio Management Involves,-Investing and divesting different, -investment Risk management,- Monitoring and analyzing returns Portfolio management is a process encompassing many activities aimed at optimizing the investment If the correlation coefficient is one (+ 1), an upward movement of one security return is followed by a direct upward movement of the second security. A portfolio contains different securities, by combining their weighted returns we can obtain the expected return of the portfolio. The basic equation for calculating risk can be formulated as a regression equation-, Where, y = Return in the security in a given period and, α = The intercept where the regression line crosses the y-axis. If α = 0, then the regression line goes through the origin and its return simply depends on the Beta times the market return. Active Portfolio Management: This type of portfolio management aims to make better returns in contrast to what the market hypothesizes. Portfolio management is a process of choosing the appropriate mix of investments to be held in the portfolio and the percentage allocation of those investments. The time period may be as short as a day or many years and is expressed as a total return. This means itâs generating the highest possible return at your established risk tolerance . A holding period return is a return earned from holding an asset for a specified period of time. These are briefly discussed below. An arithmetic mean is a simple process of finding the average of the holding period returns. Thus (.04)2 = .0016 and this multiplied by the probability of it 0.25 gives .0004 and so on. The formula for the holding period return computation is as follows: $$\text{Holding Period Return (HPR)} = \frac {P_t – P_{t-1} + D_t} {P_{t-1}}$$, $$P_t$$ is the price of the asset at time t when the asset is sold, $$P_{t-1}$$ is the price of the asset at time t-1 when the asset was bought, $$D_t$$ is the dividend per share paid between t and t-1. Active Portfolio Management: When the portfolio managers actively participate in the trading of securities with a view to earning a maximum return to the investor, it is called active portfolio management. If two Risks are compared, then standard deviations divided by their means are compared. Employees of both private and public companies often save and invest for retirement... Risk budgeting is focused on implementing the risk tolerance decisions taken at a... 3,000 CFA® Exam Practice Questions offered by AnalystPrep – QBank, Mock Exams, Study Notes, and Video Lessons, 3,000 FRM Practice Questions – QBank, Mock Exams, and Study Notes. x̅ is the mean or the weighted average return. Investors typically have one or more types of portfolios among their investments and seek to achieve a balanced return on investment over time. A weekly return of 2%, when annualized, is as follows: $$\text{Annualized return} = (1+2\%)^{52} – 1 = 180\%$$. Share Your Word File Meaningful diversification is one which involves holding of stocks of more than one industry so that risks of losses occurring in one industry are counterbalanced by gains from the other industry. Portfolio management helps an individual to decide where and how to invest his hard earned money for guaranteed returns in the future. 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