portfolio management unit 1 session no.5 topic: investment objectives unit 1 session no.5 topic:...
DESCRIPTION
How to reduce portfolio risk? What is VaR? What is Absolute Risk and Relative Risk? Give example. Why risk budgeting is required? RecapTRANSCRIPT
Portfolio Management
Unit – 1Session No.5
Topic: Investment Objectives
Session Plan• Recap the Previous Session• How the return is measured?–What is investor’s expectation on return?–What are the specific return objectives?–What are the different types of return measures?
• How to reduce portfolio risk?• What is VaR?• What is Absolute Risk and Relative Risk?
Give example.• Why risk budgeting is required?
Recap
What is an Return Objective?• The investment policy framework is the return
objective, which must be consistent with the risk objective.–willingness and ability in setting the risk objective– It requires a resolution of return desires versus the risk
objective• Formulating a return objective, the investor must address
the following four questions:–How is return measured?–How much return does the investor say she wants?–How much return does the investor need to achieve, on
average? –What are the specific return objectives?
Return Objectives• How is return measured?• The usual measure is total return, the sum of
the return from price appreciation and the return from investment income.–Holding period returns (or) Average Returns
• Nominal returns must be distinguished from real returns. –Nominal returns are unadjusted for inflation. – Real returns are adjusted for inflation and
sometimes simply called inflation-adjusted returns.
How is return measured?
How is return measured?
How is return measured?• An investor purchased Rs.1,000 of a mutual
fund's shares. The fund had the following total returns over a 3- year period :
• Year 1 - 5%, • Year 2 – (-)8%, • Year 3 - 12%. • Calculate the value at the end of the 3 -year
period, the holding period return, the mean annual return, and the geometric mean annual return.
How is return measured?• Real return is nominal return adjusted for
inflation• Example: An investor who earns a nominal
return of 7% over a year when inflation is 2%.• The investor’s approximate real return is
simply 7 -2 = 5%.• The investor’s exact real return is slightly
lower,• 1.07/1.02 – 1 = 4.9%
What is an Return?• How much return does the investor say he wants?• This amount is the stated return desire. • These wants or desires may be realistic or unrealistic.• An investor may have higher-than-average return
desires to meet high consumption.–The adviser or portfolio manager must continually
evaluate the desire for high returns and,–The investor’s ability to assume risk and the
reasonableness of the stated return desire, especially relative to capital market conditions
What is an Return?• How much return does the investor need
to achieve, on average?• This amount is known as required return
or return requirement.– investors requirements typically achievable, at
least on average.• Example– the return that a retired investor must earn on
his investment portfolio to cover his annual living expenses.
What is an Return?• What are the specific return objectives?• The return objective incorporates – the required return, – the stated return desire, and – the risk objective into a measurable annual total
return specification.• An investor’s return objective should be
consistent with that investor’s risk objective.• A relative return objective is stated as a return
relative to the portfolio benchmark’s total return
What is an Return?
Summarizing• What is absolute return?• How much return does the investor need to
achieve, on average?• Distinguish return requirement and risk tolerance
for different types of investors. • What are the specific return objectives?