investment portfolio management
The main aim of investment portfolio management is to increase its market value. Management of the investment portfolio is in the selection and evaluation of the most promising stocks. The most important criterion for selection of the securities portfolio is their level of profitability. However, a straightforward approach to the issue of profitability of the investment portfolio ignores the fundamental truth is a higher expected return is associated with higher risk of its failure to receive or the risk of loss of the invested capital.
The use of a simple life to the principle of "not putting all the eggs in one basket", tells the investor, which is much more safer to have a set of shares, issued by various issuers. In other words, the investor holds its assets are not in the same form of securities, and in the investment portfolio.
Therefore, when the management of the investment portfolio should be fully evaluated its level of risk, and only then should be planned level of profitability of the investment portfolio.
Under the risk assessment means its quantitative dimension. Mathematical expression of the risk in this case is a variation (variation) of the expected values of yield around the mean value (mathematical expectation). Under the mathematical expectation refers to non-weighted average of all the projected values of yield, weighted by the probability of achieving these values.
The calculation of the investment risk of the portfolio of securities is carried out with the help of the assessment of the systematic (market) and unsystematic risk.
Classification of investment risks
Systematic (market) risk is a risk arising from external events that affect the market as a whole. The systematic risk may include:
interest rate risk - the risk associated with a reduction or increase of interest rates of the Central Bank of the country. When lowering the interest rate decreases the value of the loans obtained by companies, and increases the growth of their income, which is favorable for the stock market. And on the contrary, the interest rate increase has a negative impact on the market;
inflation risk is the risk caused by the growth of inflation. He reduces the real income of the companies, which have a negative impact on the market, and also causes the appearance of other risk - exposure to changes in interest rates;
currency risk - the risk arising in consequence of both the political and economic factors, taking place in the country;
political risk - the threat of the negative impact on the market due to a change of government, war, etc.
In this case, for the investor it is important to evaluate not so much the risk of each security, how much risk the entire market as a whole. Systematic risk cannot be reduced through diversification of shares with different types of risks, included in him (it affect all of the shares at the same time.
The indicators of the General condition of the market are the stock indices, such as the DJIA, S&P500, NIKKEI FTSE, etc. Each of them is a General indicator of the characteristics of state of the stock market as a whole. Simplifying, we can say that the dynamics of the stock index shows the behavior of a certain "average" of the stock market.
Unsystematic risk, or the risk that can be reduced through diversification, is dictated by the events, related to only one of this company.
The non-systematic risk may include:
branch risk - the risk associated with the impact on the company of industry-wide factors;
business risk - the riskassociated with the efficiency of production and management the management of the company;and
credit risk the Corporation occurs when part of the capital of the company is formed at the expense of the debt (for example, a lowering of the credit rating caused the drop of the price of the placed on the market of corporate bonds, as well as entail an increase in the value of Bank credit).
The less of securities in the investment portfolio, the higher the value of unsystematic risk. On the basis of theoretical research, portfolio, consisting of 40 randomly selected shares, is sufficiently diversified, and the Addendum to it of each of the new shares does not give a high reduction of unsystematic risk, as it was for the first 40 shares.
The integration of various shares in the portfolio allows to reduce non-systematic risk. Diversification through purchase of shares of different companies gives the opportunity to hold the yield of the portfolio from significant fluctuations due to the fact that the components of the portfolio - various share - have varied changing of yield.
However, through the diversification of the portfolio, even with a relatively small number of shares, you can clearly see how there is a decrease in the risk of the securities portfolio. Drawing up of a small portfolio of shares for daily trading on us stock exchanges : NYSE, NASDAQ, AMEX. diversification of the portfolio of different types of shares reduces the negative values of the portfolio yield in comparison with the portfolio, consisting of one share. However, the less risk of having to pay less total accumulated profitability of the portfolio.
As was already mentioned, between the stocks included in the portfolio, there is a correlation of their yield with the yield indices of the market as a whole - the stock indices. The impact of this communication cannot be eliminated through diversification of the investment portfolio. To account for this effect need to know the quantitative value of the degree of dependence of the yield of one share on the level of profitability of the entire market as a whole.
This problem is solved by constructing the regression equations, where the most important component for the management of the investment portfolio is the ratio of ?, which serves as a quantitative measure of the systematic risk of the shares that is resistant to diversification. If the event has ?-coefficient equal to 1, then about this action, you can say that it repeats the behavior of the market as a whole. In the case, when ?-ratio is greater than 1, the earnings per share more than the yield of the entire market as a whole, but also that the systematic risk of the shares above the market average. When ?-coefficient of less than 1, but greater than 0, the shares are less risky and less profitable than the market as a whole. Knowing the value of the index ? the action, can be quantitatively calculate the risk premium required by investors for investments in the action. The concept of ?-factors constitutes the basis of the Capital Asset Pricing Model (CAPM).
In itself, the theory of the CAPM is a graceful scientific theory, which has a solid mathematical basis. However, she got recognition in the real world of Finance. Major investment structures, such as the investment Bank Merrill Lynch, regularly calculated ?-ratios of all the companies listed on major stock exchanges of the world for use in a practical investment.
