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Overview of Portfolio Management

The art of selecting the right investment policy for the individuals in terms of minimum risk and maximum return is known 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.

Also, it refers to managing money of an individual under the expert guidance of portfolio managers.

In a layman’s language, the art of managing an individual’s investment is called portfolio management.


Need for Portfolio Management

Portfolio management presents the best investment plan to the individuals as per their income, budget, age and ability to undertake risks.

Portfolio management minimizes the risks involved in investing and also increases the chance of making profits.

Portfolio managers understand the client’s financial needs and suggest the best and unique investment policy for them with minimum risks involved.

Portfolio management enables the portfolio managers to provide customized investment solutions to clients as per their needs and requirements.

Explain the importance of the portfolio perspective

According to the portfolio perspective, individual investments should be judged in the context of how much risk they add to a portfolio rather than on how risky they are on a stand-alone basis.

Investors, analysts, portfolio managers should analyze the risk return trade-off of the portfolio as a whole, not the risk return trade-off of the individual investments in the portfolio, because unsystematic risk can be diversified away by combining the investments into a portfolio. The systematic risk that remains in the portfolio is the result of the economic fundamentals that have a general influence on the security returns, such as GDP growth, unexpected inflation, consumer confidence, unanticipated changes in credit spreads, and business cycle.

November 2015 Q1A

December 2017 Q1a

Describe the steps of the portfolio management process and the components of those steps

The three steps in the portfolio management process are the planning step (objectives and constraint determination, investment policy statement creation, capital market expectation formation, and strategic asset allocation creation); the execution step (portfolio selection/composition and portfolio implementation); and the feedback step (performance evaluation and portfolio monitoring and rebalancing).

The planning phase consists of analyzing objectives and constraints, developing an IPS, determining the appropriate investment strategy, and selecting an appropriate asset allocation. The focus of this topic review at Level II is the first step: planning.

To get complete copy of this PORTFOLIO MANAGEMENT KASNEB study text, Buy a copy using Masomo Msingi Publishers app which is in Playstore or order hard copy through 0728 776 317

Portfolio management process

  1. Specification of investment objectives and constraints –


MAY 2016 Q3B

Evaluate four categories of assets that could be used to construct a portfolio (4 marks)

  1. Selection of asset mix – based of objectives and constraints, selection of assets is done. Selection of assets refers to the amount of portfolio to be invested in each of the following asset categories:
  2. Cash
  3. Bonds – represent long-term debt instruments.
  4. Stocks/Shares
  5. Real estate
  6. Precious objects or metals


  1. Formulation of portfolio strategy

There are two types of portfolio strategies:

  1. Active portfolio strategy – most investment professionals follow an active portfolio strategy and aggressive investors who strive to earn superior returns after adjustment for risk. The four principle sectors of an active strategy are:
  • Market timing – Involves departing from the normal or strategic or long-term asset mix to reflect one’s assessment of the prospect of various assets in the near future.
  • Sector rotation – May be applied to stocks as well as bonds. It involves shifting the weight for various industrial sectors based on their assessed outlook.
  • Security selection – Involves a search for securities. If an investor resorts to active stock selection, he may employ fundamental and/or technical analysis to identify stocks that seem to promise superior returns and overweigh the stock component of his portfolio on them.
  • Use of specialized concepts – Is to employ a specialized concept or philosophy particularly with respect to investment in stocks.
  1. Passive portfolio strategy – Rests on the fact that the capital market is fairly efficient with respect to the available information. It is implemented in two ways:
  • Create a well-diversified portfolio at a pre-determined level of risk
  • Hold the portfolio relatively unchanged over time unless it becomes inadequately diversified or inconsistent with the investor’s risk-return preferences.


  1. Selection of securities

Factors to consider when selecting bonds

  • Yield to maturity – Represents the rate return earned by the investor if he invests in the bonds.
  • Risk of default
  • Liquidity
  • Tax shield


Approaches in Selection of stocks

  1. Technical analysis
  2. Fundamental analysis
  • Random selection approach – is based on the promise that the market is efficient and securities are properly priced.
  1. Portfolio execution – Is the implementation of portfolio plan by buying or selling specified securities in given amounts.
  2. Portfolio revision – Involves changing the existing mix of securities. This may be effected either by change the securities currently included in the portfolio or by altering the proportion of funds invested in the securities.

It has two steps/stages:

  1. Portfolio rebalancing – involves reviewing and revising the portfolio composition.

The 3 strategies we can consider include:

  1. Buy and hold – once the initial allocation is made, no rebalancing takes place. If equities increase in value, the weight in equities increases and if equities decrease in value, the weight of equities decreases.
  2. Constant mix- involves rebalancing the portfolio to its target weights, either on a periodic basis or when asset class weights move from the selected weights.
  3. Constant proportion portfolio insurance – the target weights in equities varies directly with the difference between the portfolio value and some minimum value. The difference is called the cushion. As equities increase in value, the cushion increases the weight in equities of the portfolio is increased as a result.


Sept 2015 Q4a

Define the term ‘portfolio upgrading’ clearly stating any two principle objectives of portfolio upgrading                 (4 marks)

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