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Portfolio management encompasses construction of portfolios and their evolution so that it’s possible to achieve the expected return. Nowadays fund management methods range from quantitative investment originated in Modern Portfolio Theory to rather traditional methods of financial analysis. However, the former is among the most popular in the portfolio management process.
Portfolio is formed based on a number of conditions like determining the investment policy, risk tolerance, constraints of expected return, etc. Investors should determine such factors before selecting stocks and creating efficient asset combinations.
It’s well known that it’s each investor wishes to create efficient portfolios, those that increase the expected returns or decrease the risk for expected return levels. Forming a portfolio presupposes a well acknowledgement and awareness of capital market and mathematical functions used in portfolio theory. Most importantly it requires a deep understanding of portfolio risk and return and portfolio diversification.
Portfolio Management and Maintenance
After the portfolio formation one should hold and maintain it up to date and revise the expected objectives of the portfolio. It’s necessary to be familiarized with the principles of stock valuation, and the methods of portfolio performance evaluation.
In the first phase of the management process the investor should determine investment goals and measure the expected risk and risk tolerance.
In the second phase, the investor should determine asset combinations that will ensure the best return at the tolerated risk level. And to achieve the optimal return he needs to continuously change asset combination. The third phase requires applying portfolio management strategies - active and passive, meaning that one can manage a portfolio actively or passively.
The final phase of portfolio management refers to the performance evaluation which acts as a feedback mechanism. Both approaches are of great help for investors to develop completely well-organized and profitable portfolios as each of them together with its features contributes to the creation, management and maintenance of efficient asset combinations.