Investment Management Process Setting Investment Objectives –Return, Liquidity, Time Frame Establishing Investment Policy –Constraints: Client, Regulatory, Policy Setting a Portfolio Strategy –Active –Passive –Structure: Immunization, Cash Flow matching
Investment Management Process Selecting Assets –Identifying mispriced securities –Expectational Strategy Measuring & Evaluating Performance –Performance vis-à-vis benchmark –Success in meeting the objectives within the set policy
Tracking Error Active Returns –In excess of benchmark returns Tracking Error –Standard deviation of active returns –Ex-post & Ex-ante –In active and passive portfolio
Active Portfolio Strategies Interest Rate expectation strategy –Rate anticipation swap Yield curve Strategy –Butterfly and twists Yield spread Strategies –Importance of dollar duration in spread swaps
Duration of a Leveraged Portfolio Calculate the duration of levered portfolio Determine the dollar duration Calculate the ratio of dollar duration to initial equity Scale it up/down to find the duration (w.r.t 100 bps change in yield)
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