WEALTH MANAGEMENT

(UNIT ONE)
DR CMA JOYDIP DASGUPTA
 THE SYLLABUS UNIT – I: [15 MARKS]
• Background, Role of Financial Planner; Financial Planning Process;

• Contract and Documentation;

• Client Data Collection – Client Data Analysis; Life Cycle; Wealth Cycle;

• Risk Profiling and Asset Allocation - Strategic Asset Allocation - Tactical

Asset Allocation – Fixed Asset Allocation with Annual Rebalancing – Flexible
Asset Allocation;

• Financial Plan - Goal-based Financial Plan –Comprehensive Financial Plan,

Financial Planning to Wealth Management;

• Financial Planning in India.

 ASSET
An asset is anything of value or a resource of value that can be converted into cash.
Individuals, companies, and governments own assets. For a company, an asset might
generate revenue, or a company might benefit in some way from owning or using the asset.

An Asset is a resource controlled by an enterprise, arising out of past performance from

which economic benefits is expected to flow into the enterprise. (CFW)

A financial asset is a non-physical asset whose value is derived from a contractual claim,
such as bank deposits, bonds, and stocks. Financial assets are usually more liquid than
other tangible assets, such as commodities or real estate, and may be traded
on financial markets.
FINANCIAL ASSSET/SECURITIES (DEFINTIION
AND CLASSIFICATION)
 RISK AND UNCERTAINTY
The philosophical roots of subjective interpretations of probability may be traced to
David Hume (1748)
The most famous definition of risk is that provided by Frank Knight (1921).
He distinguished between two specific kinds of probabilities
A Priori probability is derived from inherent symmetries, as in throw of a dice.
Statistical probabilities, derived from analysis of homogenous data.

1946 – The launching of the Journal of Finance (emergence of finance as an independent

subject)
1952 –The famous paper on Portfolio Theory by Harry Markowitz. [Defense of the
doctoral degree of Markowitz (Friedman)].
 RISK AND UNCERTAINTY
Only towards the end of the paper did he replace ‘risk’ by ‘variance of return’ (little
change of apparent meaning would result). (Markowitz).

Risk: People care about outcomes. And if someone has a personal interest in what
transpires that person is said to be exposed. Risk has two essential components
• Exposure
• Uncertainty

Uncertainty is a state of not knowing whether a proposition is true or false..

 RISK AND UNCERTAINTY

Risk is a personal experience, not only because it is subjective, but

because it is individuals who suffer the consequences of risk. Although
we may speak of companies taking risk, in actuality, companies are
merely conduits for risk
 RISK AND RETURN
• Risk refers to the variability of expected returns associated with a given investment..

• What about uncertainty?

• Total Risk of a security

• [systematic + non systematic]

• The standard deviation (σ), which is a measure of dispersion of the probability

distribution, is commonly used to measure risk.
 RISK AND RETURN
• Return on a Security consists of the dividend yield and capital gain.

HDFC 02-May-19 1,995.05

HDFC 03-May-19 2,017.40
• Return –Ex post or ex ante HDFC 06-May-19 2,006.40
HDFC 07-May-19 1,965.45
• Risk refers to the variability of expected returns associated with a given investment.

• Uncertainty is a situation where no probabilities can be assigned

• Expected Rate of Return on a Security is the sum of the products of possible rates of return and
their probabilities. (Probabilities are used to evaluate the risk involved in a security)
 EXPECTED VALUE (EX ANTE)

STATES OF NATURE
ACTS Expected Value
RAIN [0.4] SUNNY [.06]

Cofffee 570 200 348

Ice Cream 220 400 328

 FINANCIAL RISK IN
INVESTMENT DECISIONS
• Business risk is caused by fluctuations of earnings before interest and taxes
• Liquidity risk of not getting the right price.
• Default risk is the risk that a borrower will faulter interest payments or principal
repayments on debt.
• Market risk is the risk that a stock’s price will change due to changes in the stock
market.
• Interest rate risk is the risk resulting from fluctuations in the value of an asset due
to changes in interest rates.
• Purchasing power risk is the risk that a rise in price will reduce the quantity of
goods that can be purchased with a fixed sum of money.
SO, COEFFICIENT OF VARIATION
RETURN AND RISK OF A PORFOLIO
 RISK AND RETURN
Beta (β)
1. Security’s β reflects the systematic risk, which cannot be reduced.
2. The slope of the characteristics line (relationship between the security returns and
the market returns )is the sensitivity coefficient, which, as stated earlier, is referred
to as beta (β)
3. Security’s Beta (β) is also measure of risk and a method of estimating the market’s
risk-return line. The market (systematic) risk of a security is measured in terms of its
sensitivity to the market movements. This sensitivity is referred to the security’s beta.
• CAPM
 PORTFOLIO RISK
Portfolio Risk is not a weighted average risk.

Securities included in a portfolio are associated with each other.

Therefore, the portfolio risk also accounts for the covariance between the returns of
securities. The portfolio risk in the case of a two-security portfolio can be computed
as follows
 RISK AND RETURN

Beta (β)
1. Security’s β reflects the systematic risk, which cannot be reduced.

2. The slope of the characteristics line (relationship between the security returns and
the market returns )is the sensitivity coefficient, which, as stated earlier, is referred
to as beta (β)

3. Security’s Beta (β) is also measure of risk and a method of estimating the market’s
risk-return line. The market (systematic) risk of a security is measured in terms of
its sensitivity to the market movements. This sensitivity is referred to the security’s
beta.
This also states that the investor holds some kind of combination between the risk
free asset and the market portfolio – this is also the basic concept of asset
allocation
 Beta / Volatility of NIFTY 50 Stocks
Monthly -
Daily - One Daily - Three
Name Current Price Four Year
Month Range Month Range
Range
Asian Paints Ltd. 1387.8 1.05 0.998 1.11
Axis Bank Ltd. 741.85 1.23 0.998 1.65
Bajaj Auto Ltd. 3033.05 0.495 0.182 0.988
Bajaj Finance 3017.05 0.813 1.12 1.74
Bajaj Finserv Ltd. 7561.95 0.663 0.821 1.36
Bharat Petroleum Corporation
Ltd. 378.85 1.74 1.69 1.1
Bharti Airtel Ltd. 324.95 0.637 1.31 1.28
Bharti Infratel 268 1.91 1.3 0.382
Britannia Industries Ltd. 2650.55 0.372 0.41 0.961
Cipla Ltd. 557.95 0.272 0.17 0.454

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