The starting point would be an understanding of the investment management process. This process has 5 steps:
SETTING THE INVESTMENT OBJECTIVE: The first step for the investor is to set the investment objective. Which would vary for individuals, pension and mutual funds, banks, financial institutions, insurance companies, etc. For instance the objective for a pension or mutual fund or insurance company maybe to have a cash flow specification to satisfy liabilities at different dates in the future. These liabilities would include redemption, dividends or claim settlement payouts. For a bank it maybe to lock in a minimum interest spread over their cost of funds. For the individual investor the objective maybe to maximize return on investment. A more appropriate word would be 'optimize'. As the individual would achieve optimum return at optimum risk. To maximize return would imply the maximization of risk, which would not be practical or sustainable.
ESTABLISHING INVESTMENT POLICY: Establishing or setting investment policy begins with asset allocation amongst the major asset classes available in the capital market. Which range from equities, debt, fixed income securities, real estate, foreign securities to currencies. This may also be understood as the establishing of investment policy begins with the allocation of the financial resource amongst the major asset classes available in the capital market. Which range from equities, debt, fixed income securities, real estate, foreign securities and currencies, commodities, amongst others.
SELECTING THE PORTFOLIO STRATEGY: The portfolio strategy selected would have to be in conformity with both the investment objective and investment policy guidelines. Any contradiction here would result in a systems break down and losses. Portfolio strategies are mainly of two types; which are active portfolio strategies and passive portfolio strategies. Portfolio strategies are mainly of two types; which are active portfolio strategies and passive portfolio strategies. Active strategies have a higher expectation about the factors that are expected to influence the performance of the asset classes. While passive strategies involve a minimum expectation input.
SELECTING THE ASSETS: It is of importance for the investor to select specific assets to be included in the portfolio. It is here that the investor or manager attempts to construct an optimal or efficient portfolio. Which would give the expected return for a given level of risk, or the lowest risk for a given expected return.
MEASURING AND EVALUATING PERFORMANCE: This step would involve the measuring and evaluating of portfolio performance relative to a realistic benchmark. We would measure portfolio performance in both absolute and relative terms, against a predetermined, realistic and achievable benchmark. Further, we would evaluate the portfolio performance relative to the objective and other predetermined performance parameters. The investor or manager would consider two main aspects; namely risk and return. He would measure and evaluate, whether the returns were worth the risk, or whether the risk was worth the return. The issue here is, whether the portfolio has achieved commensurate returns, given the risk exposure of the portfolio.