Portfolio management Term Paper Example | Topics and Well Written Essays - 500 words

Portfolio management - Term Paper Example Generally, it is believed that the beginning of portfolio construction started in 1952 after the Portfolio Selection hypothesis of Harry Markowitz was published. This is the theory that introduced Modern Portfolio Theory to the world and offered a framework intended to maximize returns at a certain volatility level, described as the standard deviation of returns. Currently, an amalgamation of various theories forms the foundation for the process of investment consulting. It is this process of investment consulting that formalizes investing and develops a blue print for constructing one’s portfolio. Thus, the investor’s Financial Advisor must develop a blueprint for the investor on the basis of his/her needs and objectives, investment parameters as well as long-term asset allocation approach (McMillan & Pinto, 2011). After the strategic asset allocation has been developed, then, portfolio construction can start. As an aspect of the process of portfolio construction, investment options should be assessed not in seclusion but as complements to one another and as important elements of a bigger whole. When constructed suitably, the entire portfolio must minimize single-manager risk while at the same time looking to make the most of portfolio-wide returns, which is facilitated by combining managers that display low historical correlation in addition to exhibiting different behaviors in various market environments. There are four vital steps in portfolio construction which include determination of objectives and goals, asset allocation, searching and selection of a manager and performance monitoring. The first step is determination of investment parameters and involves cash flow requirements, risk tolerance of the investor, performance objectives, investment restrictions and time horizon. The second s tep is definition of investment strategy and consists of formulation of policy statement, risk optimization/reward