Portfolio Management Essay Example | Topics and Well Written Essays - 1000 words

Portfolio Management - Essay Example The strategies on the other hand demands awareness of the market conditions and stock volatilities to decide on the investment strategies in order to maximize the returns. Since risk in investments is unavoidable, the management of portfolio helps to mitigate the risk with appropriate investment strategies. The various investment strategies for formation of a portfolio are given below. Diversification The investment in assets is characterized by risk and return. These are two types of risk, namely the systematic risk and the unsystematic risk. The systematic risks are the risks that appear due to uncertainties in the market condition. The unsystematic risks are due to the fluctuation of the performance of individual companies. The diversification strategy is used in portfolio investments in order to reduce the unsystematic risk. Through the formation of a portfolio containing investments on a wide range of assets reduce the risk of the overall portfolio due to positive and negative e ffects of the individual assets. The diversification strategy helps to obtain optimum return through diversification of risk. ... stematic market risk could not be mitigated, the use of non-correlating assets helps to reduce the overall risk of the portfolio with the optimization of returns. Leap Puts and other Option The use of Put options and the Long Term Equity Anticipation securities are alternative investment strategies adopted by the investor. There may be cases where the returns of the portfolio have increased in short period of time and is likely to fall due to market volatility. However, there may be anticipations of future rise of returns. The objective behind adoption of this strategy is to secure the higher returns obtained and at the same time not withdraw from the position of investment. The use of Put options enables the investor to enter into a contract of selling the security at a particular price on a future date. Thus the investor could hold on to their investments without allowing the gains achieved to be depleted. The LEAP Puts are used as long term investment strategies with the same obje ctive. Stop Losses This is another investment strategy in order to protect the portfolio from the risk of fall in the value of shares. The use of stop losses means that the stock would be automatically sold if the price of the share falls to the pre-fixed value of stop losses. The use of stop losses sells the low performing shares and provides an impulse to the investor to investment in shares that could replace the sold share in the portfolio. Dividends The use of information on dividend payments by the companies form part of the investment strategies. Especially in cases of market downturn, the information on dividend is used by risk-averse investors and an important to hedge their portfolio. The dividends paid by the companies are interpreted by the investors as indicators of strong