A Portfolio Manager is a professional investor responsible for administering a set of financial securities (stocks, bonds, derivatives, commodities, funds, etc.). Each of the portfolios can be segregated, by asset class or by management type (dynamic, passive, active, momentum, contrarian, etc.). One of the portfolio manager’s tasks, besides performance, is to manage the risk of invested assets better, whether through a rigorous selection process conducted upstream or through diversification methods.
Understanding the process
Portfolio management can be more or less free. In some cases, the client, which is the actual asset holder, gives the manager a discretionary directive to freely choose the securities or the type of management. They can also want to remain in a recommended management style and thus retain the power of decision; the manager then merely makes recommendations. Finally, the portfolio manager can opt for a blended strategy where the client agrees on an overall plan with the client, and then revises the client regularly in the event of changes in the portfolio.
Portfolio management and risk analysis
The various aspects of portfolio management are discussed in this section, from basic theoretical models to different management styles, including risk and performance analysis. First of all, it is essential to outline the basic financial models that are at the origin of modern finance, and which allows portfolio managers to understand the notions of valuation of financial assets, risk, return, and diversification.
The most famous of these is the modern portfolio theory, which served as the basis for the CAPM model that competes with the APT model. To learn more, contact Kirk Chewning.
Whether at the level of investment funds or securities portfolios, there are different ways to analyze and measure performance beyond simply calculating returns. The best known and used of these methods are the Sharpe, Treynor, and Jensen’s alpha measures, which measure fund returns based on volatility or risk.
Risk management tools should also be considered. In recent years, financial operators have had to deal with a high number of complex financial instruments, high volatility markets, and increasingly stringent regulations. In this context, the use of risk measurement tools has become systematic, and professionals have developed very sophisticated instruments. Nevertheless, many tools form the basis of risk management, available to all investors and proven effective.