Portfolio Management Project

Portfolio
The term portfolio refers to any collection of financial assets such as cash. Portfolios may be
held by individual investors and/or managed by financial professionals, hedge funds, banks
and other financial institutions. It is a generally accepted principle that a portfolio is designed
according to the investor's risk tolerance, time frame and investment objectives. The
monetary value of each asset may influence the risk/reward ratio of the portfolio and is
referred to as the asset allocation of the portfolio. When determining a proper asset allocation
one aims at maximizing the expected return and minimizing the risk. This is an example of a
multi-objective optimization problem: more "efficient solutions" are available and the
preferred solution must be selected by considering a trade off between risk and return.
Investment Strategy
An investor's plan of attack to guide their investment decisions based on individual goals, risk
tolerance and future needs for capital. The components of most investment strategies include
asset allocation, buy and sell guidelines, and risk guidelines.
Philosophy
The Islamic investment philosophy promotes the correlation between risk and reward, and
links the acceptable risks in islam to the profit received from taking up this risk. \
Efficient capital market
An efficient capital market is one in which security prices adjust rapidly to the arrival of new
Information and, therefore, the current prices of securities reflect all information about the
security. We should understand the analysis performed to test the Efficient Market Hypothesis
and the results of studies that either support or contradict the hypothesis. We should be aware
of the implications of these results when you analyse alternative investments and work to
construct a portfolio. The combined effect of (1) information coming in a random,
independent, unpredictable fashion and (2) numerous competing investors adjusting stock
prices rapidly to reflect this new information means that one would expect price changes to
be independent and random. in an efficient market, the expected returns implicit in the
current price of the security should reflect its risk, which means that investors who buy at
these informationally efficient prices should receive a rate of return that is consistent with the
perceived risk of the stock. Put another way, in terms of the CAPM, all stocks should lie on
the SML such that their expected rates of return are consistent with their perceived risk.
The overall efficient market hypothesis (EMH) and the empirical tests of the hypothesis are
divided into three subhypotheses depending on the information set involved:
(1) weak-form EMH,
(2) semistrong-form EMH,
(3) strong-form EMH.
The stocks returns should be independent of one another over time because new information
comes to the market in a random, independent fashion and security prices adjust rapidly to
this new information.
Autocorrelation tests must be run to check the level of interdependence econometrics or
excel can be used to check the relationships.
Objective of our desired portfolio
The benchmark or the optimal portfolio for the average investor should combine high risk
and low risk assets for greater diversification and suitable for the demographic target.
Example instruments should be real estate equities, non-government bonds and government
bonds. A combination of aggressive as well as conservative stocks to successfully diversify
risk.
Instruments that are suitable for our targeted demographics and takes our constrains
into consideration
1. Shariah compliant instruments
No investment in haram (bank interest, alcohol industry, gaming and entertainment,
pornography)
No investment in interest bearing investments (convertible debts securities although it can get
restructured
No investment in financial products such as options and futures (no derivatives)
No investment in companies whose business involves a high degree of speculation and risk
(ex. Property speculation companies)
2. Acceptable risks in Islam


3. Financial parameters ( Shariah Screening)
Total conventional debt/total assets to be < 33%
(Non-operating gross interest + income from impermissible undefined activities)/ total
revenue to be < 5%
Cash+ interest-bearing securities/ total assets to be <33%
Liquid assets (cash+AR) / total assets to be <45%
Methods of Analyzing stock prices ( MUST take into consideration while choosing our
stocks)
1. Fundamental Analysis
A method of evaluating a security that entails attempting to measure its intrinsic value by
examining related economic, financial and other qualitative and quantitative factors.
Fundamental analysts attempt to study everything that can affect the security's value,
including macroeconomic factors (like the overall economy and industry conditions) and
company-specific factors (like financial condition and management). The end goal of
performing fundamental analysis is to produce a value that an investor can compare with the
security's current price, with the aim of figuring out what sort of position to take with that
security (underpriced = buy, overpriced = sell or short).
2. Technical Analysis
A method of evaluating securities by analyzing statistics generated by market activity, such
as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic
value, but instead use charts and other tools to identify patterns that can suggest future
activity. The academic study of historical chart patterns and trends of publicly traded stocks.
Technical analysis of stocks and trends employs the use of tools such as bar or candlestick
charts and trading volumes to determine the future behavior of a stock. Much of this practice
involves discovering the overall trend line of a stock's movement.