CHAPTER TWO
2.1 CONCEPT OF ASSET PORTFOLIO MANAGEMENT
The dictionary of accounting defined portfolio as the collection of different securities or other assets held by an individual or an institution which can be evaluated interns of their combined risk and return. This risk of a portfolio depend nor any on the risking or security bills also on the relationship among the securities. For a proper understanding of the frame work upon which this study is based, it is inevitable to highlight it. The contribution made by earlier writer on portfolio management foremost among these is the work of Professor Harry mackowitz (the portfolio management in journal of Finance (1952) and portfolio selection “efficient diversification of investment 1959). His assertion were that the possess of portfolio selection could be of two fold.
1. Starting with there observation and experience that end with belief about the future performance that end of available securities and.
2. Starting with relevant belief about the performance that end with the choice of portfolio. In general maxrkowitz and Adesota (1995) identify here factors that determine the efficiency of portfolios selection theory. These are:
1. The expected future return of each candidate security.
2. The expected risk of each candidate’s security.
3. The extent to which each security’s risk correlated with every other security. From the evaluation of the entire potolio was the return one expects from the portfolio and associated risk of portfolio. He believed those portfolios are created to diversify holdings of wealth to achieved low risk and high returns from these it is obvious that the ultimate aim of an investor is to minimize risk without necessary reducing the returns form investment. The following those portfolios are created to diversify holding of wealth to achieved low risk and high returns from these it is obvious that the ultimate aim of an investor is to minimize risk without necessary reducing the returns form investment. The following assumptions were made for our study:
1. If two portfolio of investment have same risk but different expected returns the portfolio with higher expected returns the will be selected.
2. If two portfolio of investment have the same expected returns. But different risk will be selected.
3. A portfolio with a larger expected returns and higher degree of risk. Be commensurate with risk of such investment. In the Nigeria socio economic setting first banks as a commercial bank whose asset have been greatly regulated by various government pronouncement, usually from the interest of judiciary. Role this banks plays to protect the interest of depositor in there of liquidity and the share holders in terms of profitability hence he opined that in a world of balance budged where each speeding units current in come and aggregate expenditure in the economy would be internally financed and surplus exit among spending units current in come and aggregate expenditure in the economy would be internally financed and would approximated gross national product. That is where deficit and surplus exit among spending such unit. Some expending would be financed externally and the extent of such fiancé would be measured by the sum of the deficit (or surpluses) undertaken (generated) by the spending units. Eyre methue (1970) identified the following reasons for assets diversification.
1. To save money for future requirement.
2. To obtain the return from long term saving
3. To provide a return that is more than sufficient to compensate for the fall in the purchasing power of money.
4. Due to the effect of inflation from the bank plc stand point
5. The obligating they own their share-holder in term of profitability would require them to invest in order to earn maximum returns on the facilities on their disposal.
2.2 TYPES OF ASSET
Asset can be classified into two broad categories namely. Earning assets and non earning assets earning assets are loan and investment while non earning deposits asset are fixed asset the total reserves of banks would cash and earning deposit with the central bank earning asset liquidity more so some earning assets like short term investment provides liquidity while non earning assets like cash balance also provide liquidity. Bank asset will be discussed as follow:
1. Cash and short term funds: Cash is the amount of note and coins held in the strong rooms, of branches of the bank and in the head office to meet customer’s demands for withdrawals. These are idle find since they can not earn interest hence the effort of keeping the balance low short term finds refers to items in course of collection within Nigeria as well as balance with banks abroad e.g cheques.
2. Government securities: These include treasury bill and certificate and development stock and bonds. Treasury bill and certificate provides a safe short term involvement avenues for the surplus funds, they are issued by the CBN weekly. For 90-91 days. They are very risk but liquid and they can be discounted with the CBN before their maturity.
3. Statutory and other deposit with the CBN: These include balance on current account with the central bank which do attract interest, cash reserves deposit special deposits and letters of credit deposits e.t.c, the balance on current accounting is a working balance to meet they day to day cash requirement of backs such as cash withdrawal by branches foreign exchange allocation, adverse clearing balance and payment for other investments.
4. Investment with other bank: These include investment in call money fixed and negotiable certificate of deposit with other banks. The investment yields a high return and are reasonable saft.
5. Loans and advances: This is by far by the largest assets on the balance sheet of many banks it stood at N500 million on the balance sheet under consideration. All loans demand except for term loans practically most rate charged on these assets are quite high and are usually fixed by the central bank.
6. Fixed assists: This represent the banks investment in building (premises) are quite high and are usually fixed by the central bank.
7. Other assets: These include pre payments accrued interest received sub suspense resources and uncapitalised expenditure.