thesis on risk management techniques in portfolio managment

L7) INTRODUCTION OF PORTFOLIO "Portfolio means combined holding of many kinds of financial securities i.e. shares, debentures, government bonds, units and other financial assets," The term investment portfolio refers to the various assets of an investor which are to be considered as a unit_ It is not merely a collection of unrelated assets but a carefully blended asset combination within a unified framework_ It is necessary for investors to take all decisions as regards their wealth position in a context of portfolio. Making a portfolio means putting ones eggs in different baskets with varying element of risk and return.

The object of portfolio is to reduce risk by diversification and maximise gains.

Thus, portfolio is a combination of various instruments of investment. It is also a combination of securities with different risk-return characteristics. A portfolio is built up out of the wealth or income of the investor over a period of time with a view to manage the risk-return preferences. The analysis of risk-return characteristics of individual securities in the portfolio is made from time to time and changed that may take place in combination Nrvith other securities are adjusted accordingly. The object of portfolio is to reduce risk by diversification and maximize gains.

1.7.1) OBJECTIVES OF PORTFOLIO MANAGEMENT 1)Security/Safety of Principal 2)Stability of Income: 3)Capital Growth 4)Marketability 5)Liquidity i.e, nearness to money 6)Diversification 7)Favorable Tax status (Tax Incentives)

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1.7.2) CONSTRUCTION OF PORTFOLIO: Portfolio construction means determining the actual composition of portfolio. It refers to the allocation of funds among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governing such allocation. Therefore, the objective of the theory is to elaborate the principles in which the risk can be minimized subject to a desired level of return on the portfolio or maximize the return subject to the constraints of a certain level of risk. The portfolio manager has to set out all the alternative investments along with their projected return and risk, and choose investments which satisfy the requirements of the investor and cater to his preferences.

It is a critical stage because asset mix is the single most determinant of portfolio performance, Portfolio construction requires knowledge of the different aspects of securities. The components of portfolio construction are a)Asset allocation b)Security selection and c)Portfolio structure.

Asset allocation means setting the asset mix, Security selection involves choosing the appropriate security to meet the portfolio targets and portfolio structure involves setting the amount of each security to be included in the portfolio.

Investing in securities presupposes risk. A common way of reducing risk is to follow the principle of diversification. Diversification is investing in a number of different securities rather than concentrating in one or two securities. The diversification assures the benefit of obtaining the anticipated return on the portfolio of securities, In a diversified portfolio, some securities may not perform as expected but other securities may exceed expectations with the effect that the actual results of the portfolio will be reasonably close to the anticipated results.

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and to assess their general capital adequacy in relation to their risk profile. In addition; as suggested by Al-Tamimi (2002), in managing risk, commercial banks can follow comprehensive risk management process which includes eight steps: exposure identification; data gathering and risk quantification; management objectives; product and control guidelines; risk management evaluation; strategy development; implementation; and performance evaluation (e_ g_ Baldoni, 1998; Harrington and Niehaus, 1999)-

A comprehensive explanation of risk management in Islamic. banking are made by Akkizidis and Khandelwal (2008) covering the aspect of risk management issues in Islamic financial contracts, Basel I I and Islamic Financial Services Board (IFSB) for Islamic financial risk, and examining, the credit, market and operational risk management for IBs_ They also explain the unique mixes or risk for each financial contracts in lBs_ Moreover, Iqbal and Mirarkhor (2007) explain that the context of risk management in 18 s covering the aspect of the needs for risk measurement, management and controls in Ms and highlight the comprehensive risk management fi-amework for each unique risk with the references of 1FSB standards. Greuning and lqbal (2007) discuss the three major modification of theoretical balance sheet of an Islamic bank that has implications on the overall risk free of the banking environment. Apart from that, the contractual role of various stakeholders in relation to risk is also been highlighted.

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According to IFSB, the primary aim of releasing its risk management standard sterns from the recognition that although "certain issues are of equal concern to all financial institutions" (IFS B, 2005) some risks are localized to IBs and as such, these princip les "serve to complement the BCBS guidelines in order to cater the specificities of IBs" IF B, 2005). In addressing the various forms of risk that IBs are exposed to, the guiding principles set forth the methodologies required in order to balance concerns between both the internationally agreed standards of the BC BS and Shari'ah compliance issues that are fundamental to the operation of these specialized institutions.

In general, according to IFSB (2005), lBs shall have in place a complete risk management and treatment process, including proper board and senior management oversight, to recognize, measure, observe, report and control related categories of risks and, where suitable, to hold sufficient capital against these risks.. The process shall take into account appropriate steps to comply with Sha•i'ah rules and principles and to ensure the adequacy of relevant risk reporting to the supervisory authority

"Theory of financial explains that the risk control has become the main concerns of financial institutions. They require for sufficient arithmetical tools to compute and foresee the amplitude of the probable moves of financial markets is visibly expressed, in exacting for derivative markets., however, classical theories are based on easy assumptions such as Gaussian statistics and lead to a regular dryness of real risks."(Bouchaud and Potters 2000)

'This article guide to take financial risk management decisions. Theis is based on two important principles, a "Sharpe rule' assess prospective changes in a in fianacial sector and portfolio's expected risk of return profile and the imporvement of a constant chances of default, that evaluate the financial sector or portfolio's leverage_ Rules can not be restricted to thel return distributions; they are also collected a variety 29

of abnormal distributions_ This approach could be applied with value at risk as the measure °f risk or portfolio standard deviation -.(Dowd 1999) 'This article explain the use of credit derivatives by • corporate treasurers. Financial

Corporations have in recent years, become grown with the idea of using traditional derivative products to hedge their exposure_ e. g, foreign exchange risk_ Credit risk, interest rate and on the other side, has to approve a more difficuk tame_ And avenues for the credit risk management do exist, e_g, the use of traditional insurance pro-ducts and (LOC) letters of credit, that means are not always be convenient",(Freeman, Cox et al. 2006) "This article represent that the most of Firms and the financial institutions are good viewed as ongoing entities, whose required renewed injections of liquidity. This artical suggest a contract theoretic framework_ That represent three dimensions of prudential regulation and corporate financing".

CAS or Casualty Actuarial Society (2003) defines Enterprise Risk Management as disciplines b which an organization in any industry assesses, controls, exploits, finances, and monitors risks from all sources for the purposes of increasing the organization's short.- and long-term value to its stakeholders. Lam (2000) on the other hand, defines Enterprise Risk Management as an integrated framework for managing credit risk, market risk, operational risk, economic capital, and risk transfer in order to maximize firm value. Makomaski (2008) defines Enterprise Risk Management as a decision-making discipline that addresses variation in company goals. Alviunessen and Jankensgard ( 2009) point out that Enterprise Risk

Management is concerned about a holistic, company-wide approach in managing risks, and centralized the information according to the risk exposures. They use the term —Risk Universe!, which is the risk that might impact on the future cash flow, profitability and continued existence of a company. In other words, risk universe is risk that could affect the entity of the company. If risk universe can be identified, the net step is to take an appropriate action such as risk mapping process, accessing the 30

likelihood and impact and curb the risk based on the organizations' objective.

Anderson (2008) presented the objectives of the portfolio management as: define goals and objectives, make trade-offs, manage risks, monitor portfolio performance, and achieve the organization's objectives_ Complementary, to achieve its objectives, the portfolio management has three main steps: strategic considerations, individual project evaluation, and portfolio selection (Gabriel et al, 2006).

The risk management is also a concern in the portfolio management due to the portfolio's risk should be appropriate due to the portfolio's financial return (Pereira and Veloso, 2009). The public administration is different from the private sector and this differentiation has impacts in the public sector's objectives that, among others, are: maximize the innovation, maximize the number of direct beneficiaries and maximize the number of agents indirectly benefited (Duarte and Reis, 2006).

Another difference, according to Stentoft et al (2015), is that the services provided by the public sector to citizens are done without a direct payment_ In the same way, Baker and Solak (2014) defined the portfolio success in the public sector as the maximization of the expected social utility. On the other hand, Seheinberg and Stretton (1994) stipulated that the main parameters to measure the portfolio's success in the public sector arc defined by the political authorities or contracts made with partners_ In the early 1980s. the public sector initiate a reform that is known as New Public Management (NPM). The NPM is important because it made that the public sector adopted management techniques from the private sector in order to improve the public service's efficiency and results (Young et al, 2012). The project portfolio management is one of the private sector techniques that were adopted by the public sector

Private and public organizations aim to grow, and, for this, is necessary to coordinate changes and the organization's strategy. Projects are responsible for organizational changes and the strategies' implementation are done through the projects caccution (Rwelamila and Purushottam, 2012). Lee et al (2008) defined a project portfolio as a 31

CHAPTER -III OBJECTIVES & RESEARCH METHODOLOGY 3.1) NEED FOR THE STUDY Risk Analysis and Risk Management has got much importance in the Indian Economy during this liberalization period. The foremost among the challenges faced by the financial sector today is the challenge of understanding and managing the risk.

The very nature of the financial business is having the threat of risk imbibed in it.

Financial institutions' main role is intermediation between those having resources and those requiring returns_ For management of risk in portfolio and investment, various risks like interest rate risk, liquidity risk or market risk have to be converted into one composite measure. Therefore, it is necessary that measurement of interest rate risk should be in tandem with other measurements of liquidity and market risk so that the requisite composite estimate can be worked out. So, focusing on investor and organizational, knowledge identification of different risk management techniques is being most important_ Therefore, the overall purpose of the research is "to investigate risk an techniques in investment and portjblio management."

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3.2) OBJECTIVES OF THE STUDY As my interest is in the Portfolio and Investment Management but it is hard to cover the whole area and that is the reason I select Risk Management Techniques in Portfolio and investment management. To understand the whole process of portfolio and investment management. To get to know the contemporary trends and issues in designing portfolio.

To identify the portfolio and investment calculation techniques that has to be used and followed by the employee. of the organizations.

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3

)

HYPOTHESIS The hypothesis for the study is as follows:Ho — There is correlation between rate of return and risk of the investment.

H1 — There is correlation between rate of return and risk of the investment.

3.4) SCOPE OF THE STUDY My research paper will investigate risk an

and risk management techniques in

selected financial organizations in Delhi NCR_ Risk Management is one of the major problems in financial sector_ Therefore I wanted to show the method and techniques that are used to manage the different types of risk associated in investment which can be further used by the investor and financial organization to understand in detail.

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5. What is the ratio of equity and debt in Hybrid fund for wealth maximization in portfolio?

31 responses

 

20.80 40.60



60:40



80-20

 

70:30 90:10

In the Hybrid Fund, There is always a mix of both equity and debt. Here I wanted to know about wealth maximization fund which are mostly used in the mark_et to invest and maximize the wealth for long period of time Here we can find out that there is 83.9% of the employees are using the ratio of equity and debt is 80:20, and remaining are using different ratio of the portfolio to maximize the wealth of the investor.

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6. What is the ratio of equity and debt in Hybrid fund for Income Generation in your portfolio?

31 responses



20-80

In the Hybrid Fund, There is always a mix of both equity and debt_ Here I wanted 0 40.60 to  60.40

know about Income Generation fund which are mostly  used 80.20in the market to invest

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and generate regular income_ Here we can find out that there is 71% of the employees are using the ratio of equity and debt is 20:80, 216% are using the ratio of 10:90 40:60 and m 30:70

remaining, are using different ratio of the portfolio to generate regular income of the investor.

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7, How do you rate your customer's satisfaction related to risk

25

2D

23 (742%)

2

3

4

15

81:25.8%) From the above diagram we can conclude that around 75% of the employees are 5

0 i:Os.V.

0 (0%)

believing that their clients are fully satisfied related to risk profiling and controlling of the risk. But there is around 25% of the employees who are saying that all of their customer's are not fully satisfied about they are about to satisfy

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8. How do you rate your customer's satisfaction related to return?

31 responses

3 0

25 (80.6%)

2 5 2 0

0 (0%)

(0%)

0 {o%)

5(194%)

2

3

4

5

From the above diagram we can conclude that around 80% of the employees are believing that their clients are fully satisfied related to return they are giving to the clients. But there is around 20%, who are saying that all of their

customer's

arc

not

fully satisfied about they are about to satisfy.

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