Q.What is portfolio management by a commercial bank? Explain the objectives it seeks to balance.

Portfolio management is the way a bank spreads its funds among cash, near-cash assets, investments and loans to reconcile competing objectives.

Meaning. Portfolio management by a commercial bank means the way it distributes its funds among the various kinds of assets it can hold — cash, near-cash items, investments and loans — so as to earn the highest possible return without endangering its ability to repay depositors. The 'portfolio' is the whole collection of assets on the asset side of the balance sheet, and managing it is the central skill of banking.

The three competing objectives:

1. Liquidity — the ability to meet withdrawals promptly, which calls for holding cash and easily-sold assets that earn little.
2. Profitability — earning income for the owners, which calls for lending and investing as much as possible.
3. Safety (security) — protecting funds from loss, which calls for lending only to sound borrowers and holding secure investments. …

Students sometimes name only liquidity and profitability and forget safety (security) as the third objective. Also, portfolio management is about the *a …