With the growth of the economy and increase in savings, investors require new channels of investment. Further, they require professional managers for their funds and this has led to the expansion of funds management business. Funds management involves several activities like portfolio construction, constant performance monitoring, portfolio churning etc., the focus here is portfolio construction process.
Portfolio construction and management is an art as well as a science. Several mathematical models have been developed, like Sharpe's optimization model, Lagrange's multiplier model, etc., all of which aim to make the selection of securities for the portfolio and simultaneously balancing risk-return trade off. However, all these models feed on a set of securities, out of which optimized output is provided. And here lies the main crux of the task, forming a security set is done in the industry based on various parameters like PE multiple, EPS growth rate, discounted cash flow, market capitalization, book value to market value ratio, return on equity, etc. It is hereby suggested to use the concept of Economic Value Added (EVATM) for the selection of the security set.
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