Portfolio Management

Résumé

Portfolio Management treats investments as a whole rather than in isolation, emphasizing diversification, risk-return trade-offs, and a disciplined process. The portfolio approach shows that combining assets with less than perfect correlation reduces risk without proportionally reducing expected return, so investors are compensated only for systematic (non-diversifiable) risk. The portfolio management process moves from planning, where the investment policy statement specifies objectives (return and risk) and constraints (liquidity, time horizon, taxes, legal, and unique circumstances), to execution (asset allocation and security selection) and feedback (monitoring and rebalancing). Risk and return are measured using expected return, variance and standard deviation, covariance and correlation, and the efficient frontier of optimal risky portfolios. Adding a risk-free asset produces the capital allocation line and, for the market portfolio, the capital market line. The capital asset pricing model and the security market line price individual assets according to beta, the measure of systematic risk, and define the market risk premium. Performance is evaluated with risk-adjusted measures such as the Sharpe ratio, Treynor ratio, Jensen's alpha, and the M-squared measure. The topic also introduces a risk management framework, including risk governance, identification, measurement, and tolerance, and behavioral finance, which examines cognitive errors and emotional biases that cause investors to deviate from rationality. Finally, it surveys technology and fintech in investment management, such as big data, machine learning, and robo-advisers, that are reshaping analysis and the delivery of advice.