This course develops the rationale for diversification based on risk/return analysis. The theory of efficient diversification is developed and practical examples are discussed that illustrate how and why diversification is beneficial. Alternative approaches to diversification and portfolio rebalancing over time are analyzed.
Modern portfolio theory, the capital asset pricing model, and multi-factor models are explained and illustrated. The concepts of systematic risk, unsystematic risk, beta, the “efficient frontier” and the “security market line” are developed, and their applications in portfolio management are explained.
Alternative measures of portfolio performance are analyzed and evaluated.
“Portfolio Management” utilizes a combination of lecture, video, class discussion, and in-class individual and group exercises to illustrate theory and practice relevant to best practices in efficient portfolio management. In this, and in the VIF’s related courses in equity analysis and portfolio management, participants develop proficiency in using either the HP 10BII or the Texas Instruments BA II Plus calculator for financial and statistical analyses.
- Be able to define and calculate standard measures of return and risk for individual investments and for portfolios of investments.
- Be able to understand modern portfolio theory and the building blocks upon which it is built.
- Understand the advantages of diversification and how to efficiently manage a diversified portfolio of assets.
- Understand the structure and strengths and weaknesses of various types of mutual funds as diversification vehicles.
- Be able to identify and calculate measures of portfolio risk and return, as well as appropriate performance measures that should be used in evaluating portfolios.
The target audience includes two groups:
1) Business professionals who wish to upgrade their analytical skills in making investment-related decisions related to their present or future business roles.
2) Individuals who wish to enhance their investment acumen so that they can make better personal investment decisions to enhance their wealth and manage funds invested for retirement.
- Estimated and calculated expected returns and measures of risks.
- The capital asset pricing model, multi-factor models, and other theories used in the formulation of efficient portfolios.
- Managing/rebalancing portfolios through time and the impact of life-cycle considerations.
- Evaluating portfolio performance.
Measuring and Calculating Risk and Return
- The risk-free rate of return
- A review of measures of return: yield to maturity, current yield, period yield…
- Expected returns and variances of a security
- Expected returns and variances of a portfolio
- Expected vs. unexpected and realized returns
- Systematic, unsystematic, stand-alone, and portfolio risk
Theory and Practice in Portfolio Management
- The practical case for diversification
- “Traditional” portfolio management contrasted to modern portfolio theory
- Markowitz diversification
- The attainable set, efficient portfolios, and the efficient frontier
- The market portfolio
- The security market line
- Calculating and using “beta”
- Multi-factor models
- What is “asset allocation” and how do portfolio managers use it?
- How important is diversification across industries?
- How important is international diversification?
- The case for rebalancing portfolios over time
- Should young investors take more risk: Theory and the historical record?
- Life cycle investing
Mutual Funds as Vehicles for Portfolio Deversification
- Mutual Fund returns and risks by fund characteristics
- Closed-end, open-end, load, no-load funds
- Leveraged funds via
- Borrowed funds or preferred stock issues
- Options and futures strategies
- Anomalies in mutual fund performance
Measuring Portfolio Performance
- Calculating Sharpe, Treynor, and Value-at-risk model metrics
- Strengths and weaknesses of alternative performance measures
Hedging Portfolios and Individual Securities
- Diversification as hedging
- Inverse correlation and hedging
- Options and futures contracts as hedges and returns on hedged positions