- Calculation of vulnerability of return on a security to changes in market
returns i.e., calculation of beta. - Determination of target beta
- Determination of duration of each kind of security
- Realignment based on the strategy of offensive or defensive portfolios.
Mutual funds is the other source for an investor i.e., investing in mutual funds
and allow the mutual fund operator to do the portfolio management for him.
In portfolio design each asset component, has to be designed properly. In each asset
component, the level of each specific security has to be determined with reference to
market risk and interest rate risk. Once the level has been determined with duration
continuous rebalancing is required in response to forecasted market trends.
This is all about designing and revision of portfolios
Constant ratio plan
Constant ratio plan means maintenance of the ratio on common percentages with
reference to asset allocation in a portfolio with some percentage of a band for
fluctuations. The extent of the trading depends on the width of a bond.
Constant Value Plan
It means constant value be invested with a prescribed bond.
Insurance
An investor may opt for portfolio insurance as protection against downward movement in
prices. Just as an investor can buy ‘put options’, the investor can sell a security at a pre-
specified price with pre-specified date. In case of downward trend, an investor may sell
accordingly with no or little loss. By this option, one cannot compel an investor to sell
when the prices are up. That means when prices are going up an investor may make
profit without any obligation.
One cannot have all the kinds of securities in a single portfolio. An investor may select
only a few securities for diversification in a portfolio. Only a regular financial institution
may choose large number securities for portfolio design.
Evaluation
Did everything happen according to our expectations? If not, what were reasons for the
differences between the actual and the estimations. Why did our estimation go wrong?