SELECTING THE SECURITIES:
Once the objective of the portfolio is determined the securities to be included in the portfolio must be selected. For bond portfolio this task is not difficult. Normally, the portfolio is selected from list of high-quality bonds that the portfolio manager has at hand. Common stock portfolios however are somewhat more complex because the objective may range from income only to pure appreciation. The portfolio manager has to decide the goals before selecting the common stock. The goal may be to achieve pure growth, growth with some income or income only.
- Select one industry appropriate to goal.
- Select one company per industry.
- Determine the size of participation.
In addition to certain qualitative considerations, the decision to select the company will also be based on current uncertainty, growth, yield, expected earnings, past earnings, expected dividends, expected price earning-ratio and price past earnings ratio .the final step is to determine the number of shares of each company to purchase. This involves determining the number of different stocks that would require giving adequate diversification. If the size of the portfolio permits an equal an equal amount can be invested in each stock adjusted to round lots.