CSS-318a Portfolio Management

Ron D’Vari, Ph.D., CFA

Senior Vice President, Head of Quantitative Research and Portfolio Manager

State Street Research and Management

email: rdvari@ssrm.com

 

Portfolio management is both an art and a science. It is a dynamic decision making process, one that is continuous and systematic but also requires a great deal of judgment. The objective of this class is to blend theory and practice to achieve a consistent portfolio management process. This dynamic process is designed to be applied in a comprehensive and logical fashion to variety of objectives and constraints in an increasingly more volatile and global capital markets.

This class will discuss various theories and widely used techniques for combining different investments to create portfolios meeting specific goals and objectives within given risk parameters. This class will include in-depth exploration of many of the concepts introduced in CSS-318 (Investments: Theory and Application). These include selecting suitable investment policies and strategies, balancing asset classes, integrated risk management, efficient diversification, market efficiency, measuring and attributing performance for an investment portfolio. Some considerations are given to analyzing international assets and techniques of using them both opportunistically (tactically) and strategically. Specific risks of global investing such as country, political, currency, convertibility, liquidity and settlement are treated. Key issues in managing emerging market portfolios are analyzed.

This course is modeled after portfolio management curriculum for CFA levels I through III.

Text Books:

  1. Investment Analysis and Portfolio Management, Frank K. Reilly, Fourth Edition, 1994, The Dryden Press.
  2. Managing Investing Portfolios – A Dynamic Process, Edited By J. Magnin, and D. Tuttle, Warren, Gorham, and Lamont, 2nd Edition, 1990.

 

Class Grading:

Office Hours: After each class.

Sessions 1-2: The Investment Background

Sessions 3-4: Introduction to Portfolio Management and Asset Pricing Models

Sessions 5-6: An Introduction to Basic Principles of Financial Asset Management

Sessions 7-8: Determination of Investment Objectives, Constraints, and Portfolio Policies

Sessions 9-10: Valuation Principles, Practices and Expectations for Capital Markets

Sessions 11-14: Integrating Expectational Factors and Portfolio Policies and Constructing Portfolios

Portfolio Management of Fixed-income and Equity Portfolios

Session 15: Emerging Markets

Session 16: Final Project Presentations

 

 

Sessions 1-2: The Investment Background

Readings: Frank K. Reilly, Chapters 1-5.

Assignments: Form a Project Team, Initiate Setting Portfolio Objectives

Sessions 3-4: Introduction to Portfolio Management and Asset Pricing Models

Readings: Frank K. Reilly, Chapters 6, 7, and 8.

Assignments: Formulate Portfolio Objectives and Investment Policies for a Typical Institutional Investor of Your Choice, e.g. an employee benefit fund (Due by week 4)

Sessions 5-6: An Introduction to Basic Principles of Financial Asset Management

Portfolio Management as a Dynamic Process

Portfolio Management Basics

Readings: Part I, Managing Investing Portfolios – A Dynamic Process

Assignments:

  1. Forecast long term and short term macro economic environment and its impact on various asset classes’ risks and returns. Include expected nominal and real growth, inflation, and currencies for all countries your team intends to invest in.
  2. Formulate a tactical asset allocation strategy for the portfolio you intend to manage
  3. Set up a consistent framework to measure your portfolio absolute and relative risks, performance, and return attribution.
  4. Identify a source of pricing for your portfolio and benchmark

Session 7-8: Determination of Investment Objectives, Constraints, and Portfolio Policies

Individual Investors

Institutional Investors

Pension Plan Investment Policy and Investment Mandates

Liquidity Requirements

Regulatory and Legal Considerations

Decisions on Changes in Asset Allocation

Unique Needs and Circumstances

Return Requirements and Objectives and Their Relationship to Spending Rate and Inflation

Regulatory and Legal Considerations

Unique Needs and Circumstances

Life Insurance

Non-life Insurance Companies

Readings: Frank K. Reilly, Chapters 10, 11, and 12.

Part II, Managing Investing Portfolios – A Dynamic Process

Assignments:

  1. Establish initial asset/sector allocation and start to trade your portfolios.
  2. Construct a trial portfolio based on your team investment guidelines and strategies and rebalance it weekly.
  3. Identify absolute risk and relative risk of your portfolio vs. benchmark
  4. Measure return of your portfolio and its benchmark weekly
  5. Devise a performance attribution methodology for your portfolio and benchmark and apply it on weekly basis.
  6. Prepare weekly summary report including: a) market outlook updates, b) portfolio actions, c) portfolio absolute and relative risks to its benchmark, d) weekly and cumulative performance of portfolio and benchmark and their attribution. Weekly reports are to be turned in with the final project report.

Sessions 9-10: Valuation Principles, Practices and Expectations for Capital Markets

Security Valuation

Macro Factors

Individual Asset Classes

Readings: Part III, Expectational Factors, Managing Investing Portfolios – A Dynamic Process

Assignments: Continue weekly team portfolio management project.

Sessions 11-13: Integrating Expectational Factors and Portfolio Policies and Constructing Portfolios

Overview of Asset Allocation

Overview of Equity Portfolio Management

Overview of Fixed-Income Portfolio Management

Readings: Frank K. Reilly, Chapters 13-19.

Part IV, Integration of Portfolio Policies and Expectational Factors, Managing Investing Portfolios – A Dynamic Process

Assignments:

  1. Continue weekly team portfolio management project.
  2. Close out your portfolios by the end of Week 14

 

Session 15: Emerging Markets

Readings: Selected readings to be assigned.

Assignments:

  1. Final project report due.
  2. Take-home final to be passed out.

Session 16: Final Project Presentations

Assignments: Take-home finals to be turned in.

 

 

Optional Readings

  1. Singer, B.D., Terhaar, K., "Economic Foundations of Capital Market Returns", The Research Foundation of Institute of Chartered Finanacial Analysis, September 1997.
  2. Blingsley, R.S., "Equity Securities Analysis Case Study: Merck & Company", AIMR, 1993
  3. Cohen, M.I., Oakley, K.,"RJR Nabisco – Addition by Subtraction", U.S. Research, Goldman, Sachs and Co., May 25, 1994.
  4. Gorman, S.A., "The International Equity Commitment," The Research Foundation of Institute of Chartered Finanacial Analysis, August 1998.
  5. Erb, C.B., Harvey, C.R., Viskanta, T.E.., "Country Risk in Global Financial Management," The Research Foundation of Institute of Chartered Finanacial Analysis, January 1998.
  6. "Investing World Wide VIII- Developments In Global Portfolio Management", Proceedings, AIMR, September 1997.
  7. Peavy III, J.W., "Managing Emerging Market Portfolios: An Overview," ICFA Continuing Education, AIMR, 1994.
  8. Paulson-Ellis, J., "Introducing Emerging Markets," Proceedings of Managing Emerging Market Portfolios Seminar, ICFA Continuing Education, AIMR, 1994.
  9. Davis, L.H., "Top-Down Investing in Emerging Markets," Proceedings of Managing Emerging Market Portfolios Seminar, ICFA Continuing Education, AIMR, 1994.
  10. Wagener, S.B., "Bottom-Up Investing in Emerging Markets," Proceedings of Managing Emerging Market Portfolios Seminar, ICFA Continuing Education, AIMR, 1994.
  11. Krueger, D.M. "Valuation Techniques for Emerging Market Securities," Proceedings of Managing Emerging Market Portfolios Seminar, ICFA Continuing Education, AIMR, 1994.
  12. Quach, M. "Style Investing Implications for the Global Emerging Markets," Emerging Markets Quarterly, Fall 1998.
  13. Madden, M.H, Bonnell, R., "The Opportunity in Emerging Asia’s Recovery," Emerging Markets Quarterly, Fall 1998.
  14. Barry, C.B., Rodriguez, M., "Investing in Latin American Equity Markets," Emerging Markets Quarterly, Fall 1998.
  15. Hwang, S., Satchell, S.," "Evaluation of Mutual Fund Performance in Emerging Markets," Emerging Markets Quarterly, Fall 1998.
  16. Equity Research and Valuation Techniques, AIMR, ICFA Continuing Education Series, Pub. No. 980103, May 1998, 68 pages. This proceedings looks at the tried-and-true valuation and research methodologies from a new perspective and reviews some of the new methodologies from a practical standpoint. At the heart of the discussions is the notion that analysts and investors must use not only their analytical skills but also their creative skills to determine whether a stock is fairly priced. (Presentations by B. Kemp Dolliver, CFA; Alfred G. Jackson, CFA; Martin L. Leibowitz; Thomas A. Martin, Jr., CFA; Patrick O’Donnell; James A. Ohlson; Fred H. Speece, Jr., CFA; and Timothy J. Timura, CFA. Edited by Jan R. Squires, CFA.)
  17. Michaud, Richard, Investment Styles, Market Anomalies, and Global Stock Selection, AIMR, Pub. No. 988004, Fall 1998. This monograph focuses on global factor–return relationships for institutional equity management and style analysis. The author uses a new global factor–return equity database, defined in 1990 and allowed to evolve over time, that was designed to avoid incurring some of the common critiques of market anomaly studies. The framework and data the author presents are intended to enhance investor/manager understanding of vital global equity investment issues.
  18. Alternative Investing, AIMR, ICFA Continuing Education Series, Pub. No. 980105 • 105 pages, 1998. Historically, alternative investing has produced high returns and provided outstanding diversification benefits. It can also be very risky. In this proceedings, the authors stress that knowledge is the investor’s most important tool for successful investing in this area. (Presentations by Christopher B. Barry; Charles G. Froland, CFA; Frank E. Helsom, CFA; Bruce I. Jacobs; Ernest K. Jacquet; Donald M. Krueger, CFA; Scott L. Lummer, CFA; Barbara Lynch; Paul F. McKean, Jr., CFA; Henry G. Robin, CFA; and David Steyn.)