Learn Some Portfolio Management Techniques to

Manage Your Investment

Thanks to Harry Markowitz – a renowned Noble Prize winner in

economics – that the world now has become familiar with the theory

of portfolio. It was Markowitz who suggested that investors can

indeed secure their investments by leveraging different price

movements. His was the goal of diversification.

Different Portfolio Management Techniques

There are two major techniques to manage the portfolio –

aggressive and passive. Interesting aspect of both these

techniques is that they are not dependent upon the market

knowledge. But, they are rather dependent upon diversification of

assets, duration, industry, capitalization and cash cycles. The only

difference between the two strategies is that passive expects the

return equal to the market assuming that market is highly efficient,

whereas aggressive technique aims for a return above the market

assuming the inefficiency of the market.

Portfolio Stress Testing

Stress testing per se is a system to test the stability of a particular

system, in this case the system of portfolio of the investor. This type

of testing is employed to check whether any particular system can

work inspite of abnormal conditions. In other words, it checks the

limits of the system and the outcome. Generally, when it comes to

portfolio stress testing, points to be considered include: how the

portfolio reacts in case of equity markets crash, GDP fall, change in

interest rates etc. The experts decide a certain limit for this test and

that is how it is carried out.

CRE Stress Testing

Last year, the he Office of the Comptroller of the Currency, U.S.,

released the guidance for Community Bank Stress Testing. It gives

the institution an example of a kind of a stress test framework that

can be used to test the stress of commercial real estate investment.

The purpose of this guidance is to make the institutions analyze

their own risk appetite and tolerance. By this process, they can

assess the possible impact of the difficult situations as well.

Benefits of CRE Stress Testing

One of the major benefits is that it prepares the institutions to cope

up with any emergency. It also boosts up the confidence and raises

the level of awareness about the possibility of the adverse

situations. This consequently not only helps the institution plan in-

advance but also maintain the necessary capital flows.

Methods of Stress Testing

This process does not need to be complicated always. It can range

from a simple excel sheet analysis to a bit more advanced model.

Methods therefore should depend upon the size and the risk of the

portfolio in question and the complexity of the bank.

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