Portfolio Analysis Essay Example for Free

Portfolio Analysis Essay ABSTRACT This paper discusses the portfolio analysis. The paper includes a brief discussion on the meaning of the portfolio and why it is important for an investor to consider portfolio. It   also explains how an investor would select a particular asset to be a part of his portfolio. The limitations and disadvantages of having a portfolio analysis is also discussed in the last paragraphs of the paper. An investor or entrepreneur must study where he or she must invest in. These assets are combined in order to maximize the return of investment of the investor and entrepreneur. The combination of these assets, according to Weston and Copeland (1992) can be called a portfolio. The aim of an investor is to maximize their investments. Weston and Copeland (1992) believe in applying the portfolio theory to optimize the selection of assets. Each portfolio has a certain degree of risk and advantages. The weighted average of the returns of the individual assets is done in order to compute for the rate of return of the portfolio. A risk of a portfolio is the combination of all assets. The risk of the portfolio is different from the asset if it is held in isolation. A particular asset can be considered as very risky if it is held in isolation. However, this may not be so if it is combined with the other assets. Rather, these assets may contribute largely to an optimal portfolio of the investor. The risk of a particular portfolio depends on the risk factors of the assets. Litterman and Winkemann (1996) had noted that investors select their portfolio depending on the benchmark or the standard that they had set. The benchmark depends on the selection of the investors. These can be a liability stream, performance index or cash return. Experts are trying to understand the risk of assets and portfolio. Littermann and Winkelmann (1996) had recommended the use of risk factors. One of the most important risk factors that the investors must looked out for is the market exposure of the portfolio. This makes the risk of portfolio very unpredictable that is why investors are expected to risk their assets when they are managing their portfolio and are deciding on where to put their money. The analysis of one’s portfolio is important in its management. Through the analysis of the portfolio an investor can estimate the return or the loss that a particular asset may contribute. Having been able to study the portfolio does not mean a total success because as stated above, investing is a risk and an investor decides based on uncertainty. There may be cases that an investor had chosen the wrong combination of assets that may result to losses. Every businesses are exposed to risk and the percentage of failing is not fixed. An investor may estimate that the percentage of success is 75% and the percentage of failure is 25%. However, this may not be the case. It could be the other way around. Failure percentage can be higher than that of the success depending on the events that may happen. Even though the investors have uncovered all the risk factors that is connected with the success of the investment, there could be other complications that can occur once the investment had already been decided.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Investing in stocks and bonds are also a part of the portfolio. There is no fixed amount of return concerning stocks. A particular company stock may be high now but because of matters in the economy or problems in the company it could go very low. The limitations of having the portfolio analysis is that the computation of the portfolio may now approach the benchmark of the investor however, there could be times that the portfolio of an investor changes because of the â€Å"risk factors†Ã‚   in the market. REFERENCES: Littermann R. and Winkelmann K. 1996.   Managing Market Exposure. Retrieved last February 20, 2008 from Goldman Sachs. Website: http://faculty.fuqua.duke.edu/~charvey/Teaching/IntesaBci_2001/GS_Managing_market_exposure.pdf Weston, J. and Copeland, T. 1992. Managerial Finance 9th edition. Dryden Press. United States ofAmerica.