ó Select securities under each category of asset.
ó Estimate risk that the investor is willing to take under each category of asset.
ó Specify the time period to be considered to evaluate the performance of the portfolio.
ó Design the portfolio.
ó Make revision based on the changes in the prices of securities.
ó Make revision based on interest and other such parameters.
ó Consider the influence of changes in industry and in the economy as a whole.
When profits are received on securities taxes have to be paid as per the existing laws.
After designing a portfolio, the market movements must be analyzed. The risk estimated,
must be commensurate with the movement of the market.
Time Value of Money
In Learning Unit 2 we have learnt the calculation of time value of money i.e., to calculate
the present value of returns receivable in future. Normally time value of money is
measured on the basis of interest.
As discussed in Learning Unit 2 the future value of money invested will be calculated by
using compound interest formula.
FV = PV x (1+r)n
Where FV stands for future value and PV stands for present value and ‘r’ stands
for interest rate and ‘n’ stands for number of years.For example, the FV of Rs.100 at the interest rate of 10% at the end of the first year is
equal to Rs.110 and at the end of second year the FV is 121 and so on.
In Learning Unit 2 we have also learnt the use of SPPWF and USPWF tables, where the
calculations were made for Rs.1 for different years and at different interest rate to find
out the present value.
Now reverse the question i.e., how much should we invest now to get Rs.121 at 10% at
the end of the second year. The answer is that we have to invest Rs.100 now. That means
the PV of Rs.121 receivable in future is Rs.100. This is called the process of discounting.
Here the interest rate used is called discounting factor.
To get the present value, we have to reverse the compound interest formula, which is as
follows:
1
PV = FV x ------
(1+r) n
In Learning Unit 2 we have also learnt the calculation of internal rate of returns.