Portfolio Management Concepts

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Portfolio Management Concepts

The concept of portfolio management is a lucrative sword as not only it offers not only returns but the investor also have to face risk associated with it. If the Investor is willing to earn higher return he has to associate higher return with higher risk. For an investor to diversify away the risk he can follow diversification rule. Under diversification, investor can include the assets which are not correlated to each other and thus by including these asset classes he can diversify away the risk. However, in terms of the risk there are two kinds of risk i.e Unsystematic Risk and Systematic Risk and an investor can diversify only unsystematic risk by following diversification rule including the asset classes that are not correlated with other and the risk left will be systematic risk, which is not possible to diversify even if the investor includes all the securities available in the investment universe.

Systematic Risk

For KMK Holdings, diversification is an important part of portfolio construction. Considering the market conditions which have grown highly risk on account of low interest rates and high volatility, the company in order to diversify away the risk will be using the asset allocation strategy by investing in Stocks, ADR’s and ETF in a rationale proportionate manner. The portfolio consists of 15 stocks, 3 ADR and 1 ETF, the net worth of portfolio at the time of writing was $103892.97 while the total borrowing power is $108931. The portfolio have earned a return of 3.89% on overall basis while on daily basis the return is 1.35%. However, the portfolio has not outperformed the S&P 500 benchmark as the benchmark return of 7.67% is not achieved by the portfolio.

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...t could call the investment decision into question. This can also be extended to prior belief. For instance, an investor may believe that Dell is a good company and inclusion of the stock of Dell in the portfolio is a good decision even if Dell is not performing well at the time of portfolio construction.

Escalation Bias:

The tendency of investor that lead to investment through psychological sentiments can also be related to escalation bias. This refers to tendency of investor to committ more funds to a position that has gone down, often refered to as averaging(the purchase price)down. To the extent that investors undervalue information in opposition to the original purchase decision and overweight the importance of information indicating the original decision was a ‘’proper’’ one, they will tend to average down too often, escalatng the size of their position.

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