Portfolio Management Unit – II Session No. 10 Topic: Investor Characteristics Unit – II Session No. 10 Topic: Investor Characteristics.

Slides:



Advertisements
Similar presentations
Organization Change and Development
Advertisements

Learning Outcomes Define leadership, power and authority
UGBA Section 2. UGBA Section 2 Ziemowit Bednarek 2 NPV rule recap NPV or net present value of the project tells us whether we should undertake.
P.V. VISWANATH FOR A FIRST COURSE IN INVESTMENTS.
What Is Perception, and Why Is It Important?
Chapter 8 Portfolio Selection.
Organizational Behaviour Individual and Social Behaviour
Last Day Utility Analysis. Today Utility Analysis (cont’d) International Diversification.
Notes – Theory of Choice
AN INTRODUCTION TO PORTFOLIO MANAGEMENT
INVESTMENT POLICY STATEMENTS AND ASSET ALLOCATION ISSUES
The Manager as Leader 3.1 The Importance of Leadership
Basic Tools of Finance Finance is the field that studies how people make decisions regarding the allocation of resources over time and the handling of.
Strategic Financial Decision-Making Framework
 Introduction (Scary details)  Part I: Introduction to Stock Market Challenge (Brett) 4:30 to 5:15  Part II: What is Financial Literacy (Bill) 5:15.
Copyright ©2004 Pearson Education, Inc. All rights reserved. Chapter 18 Asset Allocation.
Asset Management How We Manage Money STEPS IN OUR METHODOLOGY.
FINANCE IN A CANADIAN SETTING Sixth Canadian Edition Lusztig, Cleary, Schwab.
Evaluation of portfolio performance
RESEARCH DESIGN.
Portfolio Management Grenoble Ecole de Management.
Chapter 5 THE ASSET ALLOCATION DECISION. Chapter 5 Questions What is asset allocation? What are four basic risk management strategies? How and why do.
Portfolio Management Lecture: 26 Course Code: MBF702.
Pauline Shum Schulich School of Business York University
LECTURE 22 VAR 1. Methods of calculating VAR (Cont.) Correlation method is conceptually simple and easy to apply; it only requires the mean returns and.
Portfolio Management Unit – II Session No. 16 Topic: Managing Portfolios by Insurance Industry Unit – II Session No. 16 Topic: Managing Portfolios by Insurance.
MACQUARIE ADVISER SERVICES Risk, Return and finding the right balance March 2008.
CORPORATE FINANCE CORPORATE FINANCE J.D. Han King’s College, UWO.
TOPIC THREE Chapter 4: Understanding Risk and Return By Diana Beal and Michelle Goyen.
International Finance FIN456 ♦ Fall 2012 Michael Dimond.
Understanding Human Behavior Helps Us Understand Investor Behavior MA2N0246 Tsatsral Dorjsuren.
Chapter 3 Arbitrage and Financial Decision Making
Investment and portfolio management MGT 531.  MGT 531   Lecture # 16.
FIN437 Vicentiu Covrig 1 Portfolio management Optimum asset allocation Optimum asset allocation (see chapter 7 Bodie, Kane and Marcus)
Portfolio Management Unit – II Session No. 13 Topic: Introduction to Asset Allocation Unit – II Session No. 13 Topic: Introduction to Asset Allocation.
Portfolio Management Unit – 1 Session No.4 Topic: Investment Objectives Unit – 1 Session No.4 Topic: Investment Objectives.
Integrated Risk Management Charles Yoe, PhD Institute for Water Resources 2009.
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Risk and Capital Budgeting 13.
Portfolio Management Unit – II Session No. 11 Topic: Investment Policy Statement Unit – II Session No. 11 Topic: Investment Policy Statement.
Portfolio Management Unit – 1 Session No. 6 Topic: Investment Constraints Unit – 1 Session No. 6 Topic: Investment Constraints.
Advisers. Ten Investment “Truths” nvesting is a process, not an event o investment process, as good as it may be, is perfect olatility / risk of your.
Ashish Mali Josh Cavers Ian Herle Lindsey Polishuk
Portfolio Management Unit – 1 Session No.3 Topic: Portfolio Management Process Unit – 1 Session No.3 Topic: Portfolio Management Process.
1 Capital Markets and Portfolio Analysis. 2 Introduction u Capital market theory springs from the notion that: People like return People do not like risk.
Agribusiness Library LESSON L060066: MANAGING FINANCIAL RISK.
Unit – III Session No. 26 Topic: Optimization
Managing Portfolio for Individual Investors Jakub Karnowski, CFA Portfolio Management for Financial Advisers.
The Investment Policy Statement (IPS) Jakub Karnowski, CFA Portfolio Management for Financial Advisers.
How to Build an Investment Portfolio The Determinants of Portfolio Choice The determinants of portfolio choice, sometimes referred to as determinants of.
FIN437 Vicentiu Covrig 1 Financial planning Financial planning (see chapter 21 Jones posted, plus Allen family and Mason family cases, all posted online)
Utility An economic term referring to the total satisfaction received from consuming a good or service. A consumer's utility is hard to measure. However,
Investment and portfolio management MGT 531.  Lecture #29.
Your Logo Here Do You Know Your Odds? Presented by: Your Name Here.
Managing Portfolio for Individual Investors Jakub Karnowski, CFA Portfolio Management for Financial Advisers.
Portfolio Management Unit – 1 Session No.2 Topic: Portfolio Management Process Unit – 1 Session No.2 Topic: Portfolio Management Process.
Portfolio Management Unit – II Session No. 9 Topic: Investor Characteristics Unit – II Session No. 9 Topic: Investor Characteristics.
Capital Asset Pricing Model (CAPM) Dr. BALAMURUGAN MUTHURAMAN Chapter
Asset Allocation What is it and how can you benefit? Insurance Concepts.
Portfolio Management Unit – III Session No. 19 Topic: Capital Market Expectations Unit – III Session No. 19 Topic: Capital Market Expectations.
Portfolio Management Unit – 1 Session No.5 Topic: Investment Objectives Unit – 1 Session No.5 Topic: Investment Objectives.
Portfolio Management Unit – III Session No. 23 Topic: Asset Allocation Unit – III Session No. 23 Topic: Asset Allocation.
On Investor Behavior Objective Define and discuss the concept of rational behavior.
Portfolio Management Unit – V Monitoring and Rebalancing Unit – V Monitoring and Rebalancing.
Chapter 11 Charles P. Jones, Investments: Analysis and Management, Twelfth Edition, John Wiley & Sons 11-1.
Behavioural Finance Impact on financial markets and individual investors.
FIN 420 TUTORIALS Learn by Doing / fin420tutorials.com.
Behavioral Finance.
Investment Analysis and Portfolio management
Behavioral Finance Unit II.
Chapter 7: Demographic and Socioeconomic Factors of Investors
Presentation transcript:

Portfolio Management Unit – II Session No. 10 Topic: Investor Characteristics Unit – II Session No. 10 Topic: Investor Characteristics

Session Plan Recap the Previous Session What is Traditional Finance? What is Behavioral Finance? What is personality typing? Summarizing and Q & A

What are the fundamental factors influencing the investors characters? Why “Self-made” investors may have greater familiarity with risk taking? How an individual differentiate the size of Portfolio to meet his future needs? Why the investors’ ability to accept risk should gradually decline through his life time? Recap

Psychological Profiling Focus on psychological influences process by which an individual establishes his or her investment preferences. Individual brings to the investment decision making process an objective set of – financial circumstances, – goals, and constraints Behavioral patterns and personality characteristics often also play an important role in setting individual risk tolerance and return objectives. Psychological profiling, sometimes referred to as Personality typing, Bridges the differences between traditional finance (economic analysis of objective financial circumstances).

Psychological Profiling Traditional Finance Much of the standard history of economic and financial theory rests on the philosophy that financial market participants are rational. Information-based investors Objectives that maximize the expected utility of wealth. In models of traditional, or standard, investment decision making, investors are assumed to:  Exhibit risk aversion - prefer the investment with the lowest volatility  Hold rational expectations - forecasts will reflect all relevant information  Practice asset integration - investors choose among risky investments

Psychological Profiling Behavioral Finance Individuals approach/behavior in uncertain situations. In these studies, psychological considerations appear to play an important role Guiding investor behavior, especially during periods of stress. These decision-making models attempt to incorporate the principles of behavioral finance, in which individual investors are recognized to:  Exhibit loss aversion - investors evaluate opportunities in terms of gain or loss rather than in terms of uncertainty with respect to terminal wealth  Hold biased expectations - misplaced confidence in one’s ability to assess the future  Practice asset segregation - investment choices individually

Psychological Profiling Personality Typing Classification of Investors by their personality dimensions, socioeconomic background, personal experience, and current wealth status. Personality typing understand through survey and scenario analysis. It helps the investment advisers to better understand the behavioral drivers – individual’s goal-setting, asset allocation, and risk-taking decisions, Client management

Psychological Profiling The critical question that must be answered with respect to client questionnaires is whether the results consistently assign respondents to risk- taking and decision-making styles that explain the respondents’ actual behavior. A stratified random sample involves independent sampling from subgroups that, when combined, represent a population’s overall characteristics. Results from the sample questions (each question addresses a specific category of investor risk tolerance and decision-making style) are tabulated and used to identify systematic differences in decision-making style and risk tolerance. Based on these measures, four investment personality types are established. Correlation analysis can be used to assess a questionnaire’s usefulness. By assigning ranks to personality types (1 = Methodical, 2 = Cautious, 3 = Individualistic, 4 = Spontaneous)

Psychological Profiling

Cautious Investors Cautious investors are generally averse to potential losses. This aversion may be a consequence of their current financial situation or of various life experiences, but most exhibit a strong need for financial security. Cautious investors usually desire low-volatility investments with little potential for loss of principal. Although these individuals generally do not like making their own decisions Cautious investors dislike losing even small amounts of money. They often miss opportunities because of over analysis or fear of taking action. Their investment portfolios generally exhibit low turnover and low volatility.

Psychological Profiling Methodical Investors This group relies on ‘‘hard facts.’’ Methodical investors may intently follow market analysts or undertake research on trading strategies. Even when their hard work is rewarded, they typically remain on a quest for new and better information. Their reliance on analysis and database histories generally keeps them from developing emotional attachments to investment positions, and their discipline makes them relatively conservative investors.

Psychological Profiling Spontaneous Investors Spontaneous investors are constantly readjusting their portfolio allocations and holdings. With every new development in the marketplace, they fear a negative consequence. Although spontaneous investors generally acknowledge that they are not investment experts, they doubt all investment advice and external management decisions. Spontaneous investors are quick to make decisions on investment trades and generally are more concerned with missing an investment trend than with their portfolio’s level of risk.

Psychological Profiling Individualist Investors This group has a self-assured approach to investing. Individualists gain information from a variety of sources and are not averse to devoting the time needed to reconcile conflicting data from their trusted sources. They are also not afraid to exhibit investment independence in taking a course of action. Individualist investors place a great deal of faith in hard work and insight, and have confidence that their long-term investment objectives will be achieved.

Psychological Profiling

Summarizing Q & A What is Traditional Finance? What is the consequence of traditional assumptions on individual economic behavior? What is Behavioral finance? How individuals are taking decisions based on behavioral finance? How the personality typing bridges the difference between traditional finance and behavioral finance?

Team Assignment The students are asked to prepare a Personality typing questionnaire based on decision making style and risk tolerance to identify the four different type of investors.