Essay On Portfolio Analysis

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Recommended: Importance of proper asset allocation

Topic: Discuss the concept of portfolio analysis and some of the key principles and theories used by professional investors. Exploring the theory and giving some insight of evidence supporting (or refuting) the theory.

What is my understanding of Portfolio Analysis?
Upon reading and researching Portfolio Analysis, I have deduced that is a strategic planning tool implemented by stakeholders or business owners to assist in recognizing and making suitable business related decisions regarding new or old but lucrative investments.
This tool is also used to weed out less profitable investments which allow stakeholders to take a closer look at where the resources could be better utilized.
Portfolio Analysis is considered a key strategic planning tool and a necessity within any cash reproductive organization or industry as it also allow for a close view into how excessive growth in any business venture could be attained and how the resources needed for this growth could be appropriately distributed, enhanced and capitalized on since the main goal is to reap financial gains in any industry and with all investments made.

What are key principles used by professional investors in building a Portfolio?
In my research, it has been stated that in order to be reap great financial rewards an investor must first outline an asset allocation that best fit their personal investment and one that would meet their future financial goals. It is believed that determining one’s asset allocation is the most important decision that any investor would make.
Moving forward, there are three critical principles that any investors must take heed of when building a portfolio. These are as followed;
Asset Allocation
In short, Asset allocation comprises of thr...

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...ties has lower risk than a single security portfolio. He used a mathematical (Standard Deviation) model to construct an ideal portfolio for an investor which gave maximum return depending on the investor’s willingness to take risks by taking into consideration the association between risks and returns.
Markowitz Portfolio Theory goes on to say that with optimal diversification, the risk weight of a portfolio is less than the average risk weights of the securities it holds.
Another addition to the portfolio theory is the Efficient Frontier. Markowitz used the concept of the efficient frontier to explain portfolio theory. He said that every probable combination of securities can be plotted on a graph. He states that the pool of all portfolios with risk-return defines an area, which is bordered by an upward sloping line. This line is termed as the efficient frontier.

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