Portfolio Management

From Open Risk Manual


Portfolio Management (PM) denotes a loose set of principles, tools, processes and management roles that aim to underpin the management of a portfolio (collection) of financial positions (assets)

Types of Portfolio Management

Practices and tools for portfolio management vary depending on

  • the nature of the portfolio (e.g. credit portfolios, securities, derivatives)
  • the business model (trading, buy-and-hold)

Well developed areas of with distinct portfolio management cultures and tools include

  • Credit Portfolio Management, as practised e.g., by commercial / retail banks, credit insurers and other similar entities. Characterised by the direct underwriting of credit risk, ongoing bilateral relationships
  • Market Risk Management, as practised e.g., by investment banks and hedge funds. Characterised by the focus on short term trading strategies involving marketable securities and derivatives
  • Asset Management, as practised by insurers and pension funds. Characterised by the focus on long-term investments strategies that match assets with liabilities

Elements of Portfolio Management

Some common elements of PM are:

Organizational Aspects

  • Defining the scope of activities (including which portfolios, asset classes etc)
  • Identifying the roles and high level objectives of portfolio managers

Data Infrastructure and Analytics / Measurement Tools

Policies and other Management Tools

  • Limits
  • Concentration Risk
  • Stress Testing Exercises
  • Capital Requirements
  • Risk-Adjusted Returns
  • Risk Capital Allocation
  • Portfolio Optimization

Issues and Challenges

  • Portfolio Management activities have strong overlap with Risk management which can lead to role and responsibility overlaps and conflicts
  • Same underlying financial product (e.g. credit) can be managed according to different business models, even within the same firm


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