Human Resources/Security and portfolio management
What is the Objectives of Investment,security and portfolio?
What is the Objectives of Investment,security and portfolio?
What is the Objectives of Investment
three fundamental OBJECTIVES - safety, income and growth - which also correspond to types of investor objectives. While it is possible for an investor to have more than one of these objectives, the success of one must come at the expense of others. Let's examine these three types of objectives, the investments that are used to achieve them and the ways in which investors can incorporate them in devising a strategy.
Perhaps there is truth to the axiom that there is no such thing as a completely safe and secure investment. Yet we can get close to ultimate safety for our investment funds through the purchase of government-issued securities in stable economic systems, or through the purchase of the highest quality corporate bonds issued by the economy's top companies. Such securities are arguably the best means of preserving principal while receiving a specified rate of return.
The safest investments are usually found in the money market and include such securities as Treasury bills (T-bills), certificates of deposit (CD), commercial paper or bankers' acceptance slips; or in the fixed income (bond) market in the form of municipal and other government bonds, and in corporate bonds. The securities listed above are ordered according to the typical spectrum of increasing risk and, in turn, increasing potential yield. To compensate for their higher risk, corporate bonds return a greater yield than T-bills.
It is important to realize that there's an enormous range of relative risk within the bond market. At one end are government and high-grade corporate bonds, which are considered some of the safest investments around; at the other end are junk bonds, which have a lower investment grade and may have more risk than some of the more speculative stocks. In other words, it's incorrect to think that corporate bonds are always safe, but most instruments from the money market can be considered very safe.
The safest investments are also the ones that are likely to have the lowest rate of income return, or yield. Investors must inevitably sacrifice a degree of safety if they want to increase their yields. This is the inverse relationship between safety and yield: as yield increases, safety generally goes down, and vice versa.
In order to increase their rate of investment return and take on risk above that of money market instruments or government bonds, investors may choose to purchase corporate bonds or preferred shares with lower investment ratings. Investment grade bonds rated at A or AA are slightly riskier than AAA bonds, but presumably also offer a higher income return than AAA bonds. Similarly, BBB rated bonds can be thought to carry medium risk but offer less potential income than junk bonds, which offer the highest potential bond yields available, but at the highest possible risk. Junk bonds are the most likely to default.
Most investors, even the most conservative-minded ones, want some level of income generation in their portfolios, even if it's just to keep up with the economy's rate of inflation. But maximizing income return can be an overarching principle for a portfolio, especially for individuals who require a fixed sum from their portfolio every month. A retired person who requires a certain amount of money every month is well served by holding reasonably safe assets that provide funds over and above other income-generating assets, such as pension plans, for example.
Growth of Capital
This discussion has thus far been concerned only with safety and yield as investing objectives, and has not considered the potential of other assets to provide a rate of return from an increase in value, often referred to as a capital gain. Capital gains are entirely different from yield in that they are only realized when the security is sold for a price that is higher than the price at which it was originally purchased. Selling at a lower price is referred to as a capital loss. Therefore, investors seeking capital gains are likely not those who need a fixed, ongoing source of investment returns from their portfolio, but rather those who seek the possibility of longer-term growth.
Growth of capital is most closely associated with the purchase of common stock, particularly growth securities, which offer low yields but considerable opportunity for increase in value. For this reason, common stock generally ranks among the most speculative of investments as their return depends on what will happen in an unpredictable future. Blue-chip stocks, by contrast, can potentially offer the best of all worlds by possessing reasonable safety, modest income and potential for growth in capital generated by long-term increases in corporate revenues and earnings as the company matures. Yet rarely is any common stock able to provide the near-absolute safety and income-generation of government bonds.
It is also important to note that capital gains offer potential tax advantages by virtue of their lower tax rate in most jurisdictions. Funds that are garnered through common stock offerings, for example, are often geared toward the growth plans of small companies, a process that is extremely important for the growth of the overall economy. In order to encourage investments in these areas, governments choose to tax capital gains at a lower rate than income. Such systems serve to encourage entrepreneurship and the founding of new businesses that help the economy grow.
An investor may pursue certain investments in order to adopt tax minimization as part of his or her investment strategy. A highly-paid executive, for example, may want to seek investments with favorable tax treatment in order to lessen his or her overall income tax burden. Making contributions to an IRA or other tax-sheltered retirement plan, such as a 401(k), can be an effective tax minimization strategy.
Marketability / Liquidity
Many of the investments we have discussed are reasonably illiquid, which means they cannot be immediately sold and easily converted into cash. Achieving a degree of liquidity, however, requires the sacrifice of a certain level of income or potential for capital gains.
Common stock is often considered the most liquid of investments, since it can usually be sold within a day or two of the decision to sell. Bonds can also be fairly marketable, but some bonds are highly illiquid, or non-tradable, possessing a fixed term. Similarly, money market instruments may only be redeemable at the precise date at which the fixed term ends. If an investor seeks liquidity, money market assets and non-tradable bonds aren't likely to be held in his or her portfolio.
As we have seen from each of the five objectives discussed above, the advantages of one often comes at the expense of the benefits of another. If an investor desires growth, for instance, he or she must often sacrifice some income and safety. Therefore, most portfolios will be guided by one pre-eminent objective, with all other potential objectives occupying less significant weight in the overall scheme.
Choosing a single strategic objective and assigning weightings to all other possible objectives is a process that depends on such factors as the investor's temperament, his or her stage of life, marital status, family situation, and so forth. Out of the multitude of possibilities out there, each investor is sure to find an appropriate mix of investment opportunities. You need only be concerned with spending the appropriate amount of time and effort in finding, studying and deciding on the opportunities that match your objectives.
The investment process describes how an investor must go about making.
decisions with regard to what securities to invest in while constructing a portfolio, how extensive the investment should be, and when the investment should be made. This is a procedure involving the following five steps:
• Set investment policy
• Perform security analysis
• Construct a portfolio
• Revise the portfolio
• Evaluate the performance of portfolio
1. Setting Investment Policy
This initial step determines the investor?s objectives and the amount of his investable wealth. Since there is a positive relationship between risk and return, the investment objectives should be stated in terms of both risk and return.
This step concludes with the asset allocation decision: identification of the potential categories of financial assets for consideration in the portfolio that the investor is going to construct. Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds and cash.
The asset allocation that works best for an investor at any given point in his life depends largely on his time horizon and his ability to tolerate risk.
Time Horizon – The time horizon is the expected number of months, years, or decades that an investor will be investing his money to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable with a riskier or more volatile investment because he can ride out the slow economic cycles and the inevitable ups and downs of the markets. By contrast, an investor who is saving for his teen-aged daughter?s college education would be less likely to take a large risk because he has a shorter time horizon.
Risk Tolerance – Risk tolerance is an investor?s ability and willingness to lose some or all of his original investment in exchange for greater potential returns. An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low-risk tolerance, tends to favour investments that will preserve his or her original investment. The conservative investors keep a “bird in the hand,” while aggressive investors seek “two in the bush.”
While setting the investment policy, the investor also selects the portfolio management style (active vs. passive management).
Active Management is the process of managing investment portfolios by attempting to time the market and/or select „undervalued? stocks to buy and „overvalued? stocks to sell, based upon research, investigation and analysis.
Passive Management is the process of managing investment portfolios by trying to match the performance of an index (such as a stock market index) or asset class of securities as closely as possible, by holding all or a representative sample of the securities in the index or asset class. This portfolio management style does not use market timing or stock selection strategies.
2. Performing Security Analysis
This step is the security selection decision: Within each asset type, identified in the asset allocation decision, how does an investor select which securities to purchase. Security analysis involves examining a number of individual securities within the broad categories of financial assets identified in the previous step. One purpose of this exercise is to identify those securities that currently appear to be mispriced. Security analysis is done either using Fundamental or Technical analysis (both have been discussed in subsequent units).
Fundamental analysis is a method used to evaluate the worth of a security by studying the financial data of the issuer. It scrutinizes the issuer’s income and expenses, assets and liabilities, management, and position in its industry. In other words, it focuses on the „basics? of the business.
Technical analysis is a method used to evaluate the worth of a security by studying market statistics. Unlike fundamental analysis, technical analysis disregards an issuer’s financial statements. Instead, it relies upon market trends to ascertain investor sentiment to predict how a security will perform.
3. Portfolio Construction
This step identifies those specific assets in which to invest, as well as determining the proportion of the investor?s wealth to put into each one. Here selectivity, timing and diversification issues are addressed.
Selectivity refers to security analysis and focuses on price movements of individual securities. Timing involves forecasting of price movement of stocks relative to price movements of fixed income securities (such as bonds). Diversification aims at constructing a portfolio in such a way that the investor?s risk is minimized.
The following table summarizes how the portfolio is constructed for an active and a passive investor.
4. Portfolio Revision
This step is the repetition of the three previous steps, as objectives might change and previously held portfolio might not be the optimal one.
5. Portfolio performance evaluation
This step involves determining periodically how the portfolio has performed over some time period (returns earned vs. risks incurred).
there are three distinct risks you must guard against; they are business risk, valuation risk, and force of sale risk. In this article, we are going to examine each type and discover ways you can protect yourself from financial disaster.
Investment Risk #1: Business Risk
Business risk is, perhaps, the most familiar and easily understood. It is the potential for loss of value through competition, mismanagement, and financial insolvency. There are a number of industries that are predisposed to higher levels of business risk (think airlines, railroads, steel, etc).
The biggest defense against business risk is the presence of franchise value. Companies that possess franchise value are able to raise prices to adjust for increased labor, taxes or material costs. The stocks and bonds of commodity-type businesses do not have this luxury and normally decline significantly when the economic environment turns south.
Investment Risk #2: Valuation Risk
Recently, I found a company I absolutely love (said company will remain nameless). The margins are excellent, growth is stellar, there is little or no debt on the balance sheet and the brand is expanding into a number of new markets. However, the business is trading at a price that is so far in excess of it's current and average earnings, I cannot possibly justify purchasing the stock.
Why? I'm not concerned about business risk. Instead, I am concerned about valuation risk. In order to justify the purchase of the stock at this sky-high price, I have to be absolutely certain that the future growth prospects will increase my earnings yield to a more attractive level than all of the other investments at my disposal.
The danger of investing in companies that appear overvalued is that there is normally little room for error. The business may indeed be wonderful, but if it experiences a significant sales decline in one quarter or does not open new locations as rapidly as it originally projected, the stock will decline significantly. This is a throw-back to our basic principle that an investor should never ask "Is company ABC a good investment"; instead, he should ask, "Is company ABC a good investment at this price."
Investment Risk #3: Force of Sale Risk
You've done everything right and found an excellent company that is selling far below what it is really worth, buying a good number of shares. It's January, and you plan on using the stock to pay your April tax bill.
By putting yourself in this position, you have bet on when your stock is going to appreciate. This is a financially fatal mistake. In the stock market, you can be relatively certain of what will happen, but not when. You have turned your basic advantage (the luxury of holding permanently and ignoring market quotations), into a disadvantage.
Consider the following: If you had purchased shares of great companies such as Coca-Cola, Berkshire Hathaway, Gillette and Washington Post at a decent price in 1987 yet had to sell the stock sometime later in the year, you would have been devastated by the crash that occurred in October. Your investment analysis may have been absolutely correct but because you imposed a time limit, you opened yourself up to a tremendous amount of risk.
Being forced to sell your investments is really something known as liquidity risk, which is important enough I wrote a separate article about it to help you understand why it poses such a threat to your net worth.
Risk is an inherent part of investing. Generally, investors must take greater risks to achieve greater returns. Those who do not tolerate risk very well have a relatively smaller chance of making high earnings than do those with a higher tolerance for risk.
It's crucial to understand that there is an inescapable trade-off between investment performance and risk: Higher returns are associated with higher risks of price fluctuations. Stocks historically have provided the highest long-term returns of the three major asset classes and have been subject to the biggest losses over shorter periods. At the other extreme, short-term cash investments are among the safest of investments when it comes to price stability, but they have provided the lowest long-term returns.
Over short periods—even periods lasting a few years—lower-risk investments may provide better returns than higher-risk investments. But historically over long periods, riskier assets have provided higher returns.
There are various types of risk. We will discuss a few here:
This category of risk deals with the personal level of investing. The investor is likely to have more control over this type of risk compared to others.
Timing risk is the risk of buying the right security at the wrong time. It also refers to selling the right security at the wrong time. For example, there is the chance that a few days after you sell a stock it will go up several dollars in value. There is no surefire way to time the market.
Tenure risk is the risk of losing money while holding onto a security. During the period of holding, markets may go down, inflation may worsen, or a company may go bankrupt. There is always the possibility of loss on the company-wide level, too.
There are two common risks on the company-wide level. The first, financial risk, is the danger that a corporation will not be able to repay its debts. This has a great affect on its bonds, which finance the company's assets. The more assets financed by debts (i.e., bonds and money market instruments), the greater the risk. Studying financial risk involves looking at a company's management, its leadership style, and its credit history.
Management risk is the risk that a company's management may run the company so poorly that it is unable to grow in value or pay dividends to its shareholders. This greatly affects the value of its stock and the attractiveness of all the securities it issues to investors.
Fluctuation in the market as a whole may be caused by the following risks:
Market risk is the chance that the entire market will decline, thus affecting the prices and values of securities. Market risk, in turn, is influenced by outside factors such as embargoes and interest rate changes. See Political risk below.
Liquidity risk is the risk that an investment, when converted to cash, will experience loss in its value.
Interest rate risk is the risk that interest rates will rise, resulting in a current investment's loss of value. A bondholder, for example, may hold a bond earning 6% interest and then see rates on that type of bond climb to 7%.
Inflation risk is the danger that the dollars one invests will buy less in the future because prices of consumer goods rise. When the rate of inflation rises, investments have less purchasing power. This is especially true with investments that earn fixed rates of return. As long as they are held at constant rates, they are threatened by inflation. Inflation risk is tied to interest rate risk, because interest rates often rise to compensate for inflation.
Exchange rate risk is the chance that a nation's currency will lose value when exchanged for foreign currencies.
Reinvestment risk is the danger that reinvested money will fetch returns lower than those earned before reinvestment. Individuals with dividend-reinvestment plans are a group subject to this risk. Bondholders are another.
National And International Risks
National and world events can profoundly affect investment markets.
Economic risk is the danger that the economy as a whole will perform poorly. When the whole economy experiences a downturn, it affects stock prices, the job market, and the prices of consumer products.
Industry risk is the chance that a specific industry will perform poorly. When problems plague one industry, they affect the individual businesses involved as well as the securities issued by those businesses. They may also cross over into other industries. For example, after a national downturn in auto sales, the steel industry may suffer financially.
Tax risk is the danger that rising taxes will make investing less attractive. In general, nations with relatively low tax rates, such as the United States, are popular places for entrepreneurial activities. Businesses that are taxed heavily have less money available for research, expansion, and even dividend payments. Taxes are also levied on capital gains, dividends and interest. Investors continually seek investments that provide the greatest net after-tax returns.
Political risk is the danger that government legislation will have an adverse affect on investment. This can be in the form of high taxes, prohibitive licensing, or the appointment of individuals whose policies interfere with investment growth. Political risks include wars, changes in government leadership, and politically motivated embargoes.
The secret, in other words, is to take calculated risks, not reckless risks.
In financial terms, among other things, it implies the possibility of receiving lower than expected return, or not receiving any return at all, or even not getting your principal amount back.
Every investment opportunity carries some risks or the other. In some investments, a certain type of risk may be predominant, and others not so significant. A full understanding of the various important risks is essential for taking calculated risks and making sensible investment decisions.
Seven major risks are present in varying degrees in different types of investments.
This is the most frightening of all investment risks. The risk of non-payment refers to both the principal and the interest. For all unsecured loans, e.g. loans based on promissory notes, company deposits, etc., this risk is very high. Since there is no security attached, you can do nothing except, of course, go to a court when there is a default in refund of capital or payment of accrued interest.
Given the present circumstances of enormous delays in our legal systems, even if you do go to court and even win the case, you will still be left wondering who ended up being better off - you, the borrower, or your lawyer!
So, do look at the CRISIL / ICRA credit ratings for the company before you invest in company deposits or debentures.
The market value of your investment in equity shares depends upon the performance of the company you invest in. If a company's business suffers and the company does not perform well, the market value of your share can go down sharply.
This invariably happens in the case of shares of companies which hit the IPO market with issues at high premiums when the economy is in a good condition and the stock markets are bullish. Then if these companies could not deliver upon their promises, their share prices fall drastically.
When you invest money in commercial, industrial and business enterprises, there is always the possibility of failure of that business; and you may then get nothing, or very little, on a pro-rata basis in case of the firm's bankruptcy.
A recent example of a banking company where investors were exposed to business risk was of Global Trust Bank. Global Trust Bank, promoted by Ramesh Gelli, slipped into serious problems towards the end of 2003 due to NPA-related issues.
However, the Reserve Bank of India's [ Get Quote ] decision to merge it with Oriental Bank of Commerce [ Get Quote ] was timely. While this protected the interests of stakeholders such as depositors, employees, creditors and borrowers was protected, interests of investors, especially small investors were ignored and they lost their money.
The greatest risk of buying shares in many budding enterprises is the promoter himself, who by overstretching or swindling may ruin the business.
Money has only a limited value if it is not readily available to you as and when you need it. In financial jargon, the ready availability of money is called liquidity. An investment should not only be safe and profitable, but also reasonably liquid.
An asset or investment is said to be liquid if it can be converted into cash quickly, and with little loss in value. Liquidity risk refers to the possibility of the investor not being able to realize its value when required. This may happen either because the security cannot be sold in the market or prematurely terminated, or because the resultant loss in value may be unrealistically high.
Current and savings accounts in a bank, National Savings Certificates, actively traded equity shares and debentures, etc. are fairly liquid investments. In the case of a bank fixed deposit, you can raise loans up to 75% to 90% of the value of the deposit; and to that extent, it is a liquid investment.
Some banks offer attractive loan schemes against security of approved investments, like selected company shares, debentures, National Savings Certificates, Units, etc. Such options add to the liquidity of investments.
The relative liquidity of different investments is highlighted in Table 1.
Liquidity of Various Investments
Liquidity Some Examples
Very high Cash, gold, silver, savings and current accounts in banks, G-Secs
High Fixed deposits with banks, shares of listed companies that are actively traded, units, mutual fund shares
Medium Fixed deposits with companies enjoying high credit rating, debentures of good companies that are actively traded
Low and very low Deposits and debentures of loss-making and cash-strapped companies, inactively traded shares, unlisted shares and debentures, real estate
What is the Objectives security
Security objectives are goals and constraints that affect the confidentiality, integrity, and availability of your data and application
Security objectives should be identified as early in the development process as possible, ideally in the requirements and analysis phase. Security objectives are critically important. If you do not know what the objectives are for your application, then it is difficult to be successful with any other security activity.
Security objectives are used to:
Filter the set of design guidelines that are applicable.
Guide threat modeling activities.
Determine the scope and guide the process of architecture and design reviews.
Help set code review objectives.
Guide security test planning and execution.
Guide deployment reviews.
In each activity, you can use the security objectives to help you focus on the highest value areas while avoiding issues that will not affect your application.
Types of Objectives
Security objectives are unique for each application. However, there is a set of common categories of objectives that you can use to jump-start the identification process.
Each of these categories is associated with a set of questions you can use to build your objective list. lists the security objective categories and associated questions.
Application Vulnerabilities and Potential Problems
Objective Category Questions to Ask
Tangible assets to protect Are there user accounts and passwords to protect?
Is there confidential user information (such as credit card numbers) that needs to be protected?
Is there sensitive intellectual property that needs to be protected?
Can this system be used as a conduit to access other corporate assets that need to be protected?
Intangible assets to protect Are there corporate values that could be compromised by an attack on this system?
Is there potential for an attack that may be embarrassing, although not otherwise damaging?
Compliance requirements Are there corporate security policies that must be adhered to?
Is there security legislation you must comply with?
Is there privacy legislation you must comply with?
Are there standards you must adhere to?
Are there constraints forced upon you by your deployment environment?
Quality of service requirements Are there specific availability requirements you must meet?
Are there specific performance requirements you must meet?
Assets with some financial value are called securities.
Characteristics of Securities
Securities are tradable and represent a financial value.
Securities are fungible.
Classification of Securities
Debt Securities: Tradable assets which have clearly defined terms and conditions are called debt securities. Financial instruments sold and purchased between parties with clearly mentioned interest rate, principal amount, maturity date as well as rate of returns are called debt securities.
Equity Securities: Financial instruments signifying the ownership of an individual in an organization are called equity securities. An individual buying equities has an ownership in the company’s profits and assets.
Derivatives: Derivatives are financial instruments with specific conditions under which payments need to be made between two parties.
The PORTFOLIO is an entirety of the financial assets (and usually also liabilities) that an economic agent or group of agents .
A PORTFOLIO that includes a variety of assets whose prices are not likely all to change together. In international economics, this usually means holding assets denominated in different currencies.
What is the Objectives of portfolio
Objectives of Portfolio Management:-
The objective of portfolio management is to invest in securities is securities in such a way that one maximizes one’s returns and minimizes risks in order to achieve one’s investment objective.
A good portfolio should have multiple objectives and achieve a sound balance among them. Any one objective should not be given undue importance at the cost of others. Presented below are some important objectives of portfolio management.
1. Stable Current Return: -
Once investment safety is guaranteed, the portfolio should yield a steady current income. The current returns should at least match the opportunity cost of the funds of the investor. What we are referring to here current income by way of interest of dividends, not capital gains.
2. Marketability: -
A good portfolio consists of investment, which can be marketed without difficulty. If there are too many unlisted or inactive shares in your portfolio, you will face problems in encasing them, and switching from one investment to another. It is desirable to invest in companies listed on major stock exchanges, which are actively traded.
3. Tax Planning: -
Since taxation is an important variable in total planning, a good portfolio should enable its owner to enjoy a favorable tax shelter. The portfolio should be developed considering not only income tax, but capital gains tax, and gift tax, as well. What a good portfolio aims at is tax planning, not tax evasion or tax avoidance.
4. Appreciation in the value of capital:
A good portfolio should appreciate in value in order to protect the investor from any erosion in purchasing power due to inflation. In other words, a balanced portfolio must consist of certain investments, which tend to appreciate in real value after adjusting for inflation.
The portfolio should ensure that there are enough funds available at short notice to take care of the investor’s liquidity requirements. It is desirable to keep a line of credit from a bank for use in case it becomes necessary to participate in right issues, or for any other personal needs.
6. Safety of the investment:
The first important objective of a portfolio, no matter who owns it, is to ensure that the investment is absolutely safe. Other considerations like income, growth, etc., only come into the picture after the safety of your investment is ensured.
Investment safety or minimization of risks is one of the important objectives of portfolio management. There are many types of risks, which are associated with investment in equity stocks, including super stocks. Bear in mind that there is no such thing as a zero risk investment. More over, relatively low risk investment give correspondingly lower returns. You can try and minimize the overall risk or bring it to an acceptable level by developing a balanced and efficient portfolio. A good portfolio of growth stocks satisfies the entire objectives outline above.
Scope of Portfolio Management:-
Portfolio management is a continuous process. It is a dynamic activity. The following are the basic operations of a portfolio management.
a) Monitoring the performance of portfolio by incorporating the latest market conditions.
b) Identification of the investor’s objective, constraints and preferences.
c) Making an evaluation of portfolio income (comparison with targets and achievement).
d) Making revision in the portfolio.
e) Implementation of the strategies in tune with investment objectives.