Wolf of Wall Street was a story that happened a long time ago. In the modern world, humans have become smarter and so did our toys. Now, the stock market has something called portfolio management. Well, it is not only limited to stockbroking. Other industries also employ portfolio managers to –
Portfolio management assignments are simple and complex at the same time. It all actually depends on the capability of the student mostly. You can check yourself on a scale of Tigress to Po in this portfolio management assignment sample.
Here we go.
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You assume that the assets do not move in concert. You accept the fact that some assets are more volatile than others. In asset allocation, you ensure that the investor gets the highest return or lowest risk. This is done by investing in different and a mix of assets that have a low correlation to each other.
It is impossible to predict the winners in any investment. Thus, investors prefer to create a bundle of investments due to which they will have higher exposure and, hence, a higher probability of reward. This method of spreading the risk and reward in an asset is called diversification.
The portfolio is returned to its target allocation in the end. This is done through rebalancing. This is done so that the best asset mix is reflected in the profile risk or return profile of the investor. If this is not done, the portfolio will be exposed to greater risk due to market forces.
Before you start with writing down everything on a piece of pen and paper, it is important that you know what Fund of Funds (or FoF) are.
Simply speaking, the FoF is a strategy of investment in which you invest in other funds. There are portfolios of other assets like stocks and securities that you invest in. This has advantages like –
Correlation coefficient tells us how strong a relationship between the relative movement of the two variable is. For example, there is a variable X and there is a variable Y. The correlation coefficient will tell us how much does the relative movement of one affects the other.
The correlation coefficient always lies between -1 and +1. If your coefficient is lesser than -1 and greater than +1, then your answer is wrong. This only works for the linear relationship between the variables.
Let us assume that X and Y are at the originof a graph.A -1 score means that X and Y have a perfectly negative correlation. If X moves up by 1 unit, Y moves down by 1 unit.
Now, the variables have a+1 score, i.e. X and Y have a perfectlypositive correlation. If X moves up by 1 unit, Y also moves up by 1 unit.
If the correlation coefficient is 0, there is no relative movement between X and Y. If X moves up by 1 unit, there will be no change in the position of Y.
Term structure of interest rates is the relationship between the interest rates and the maturity (the time when the lifeof investment ends). If you ever talk to your friends in economics, ask them about ‘yield curve’. The term structure of interest rates and yield curve are one and the same thing.
The short-term rate is the one where you get your investment back quickly.For example, you had to buy some groceries but are out of money. You borrowed a few dollars from a friend and returned it back to him when you got your salary. This was a short-term investment that your friend just made.
These investments go on for a long time period. Generally, they last one year or longer. For example, you saw a really good apartment and decided to purchase it. To purchase it, you took a loan from the bank that will be paid back in a tenure of 10 years. This is the long-term investment that the bank made in you.
The risk of borrower unable to pay back the loan is called credit risk. There are three types of credit risks –
It occurs due to volatility in the difference between the interest rates if the investments and the risk-freereturn rate.
This arises when the borrower fails to make contractual payments.
Occurs when the risk rating of the borrower goes down. It is attributed to the credit score.
The yield curve can take any one of the following three shapes –
In a slope-up fashion, this shows that the returns on long-term bonds are increasing. When these long-term maturity bonds are expected to generate a higher result, the investors purchase long-term bonds for higher yield.
This downslope shows that the yields on long-term bonds are falling and will fall due to the recession.
They are a part of normal as well as the inverted yield curve.
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