Portfolio Analysis is primarily the study of a certain portfolio regarding their performance, ROI (Return on Investment), and associated risks. Portfolio analysis is conducted with two objectives viz. minimizing the risk and maximizing the returns. Individual securities have risk-return characteristics of their own. In any case, given an estimate of return, the investor is always concerned about the probable downside price expectation or the risk. A Portfolio, or combination of securities, helps in spreading this risk over many securities. The investors hope that if they hold different assets, even if one goes bad, the others will provide some protection from an extreme loss.
Portfolio management thus refers to the efficient management of the investment in the securities by diversifying the investments across industry lines or market types. The reasons are related to the inherent differences in the debt and equity markets, coupled with a notion that investment in companies in dissimilar industries would most likely do much better than the companies within the same industry.
Expected Return on a Portfolio.
A. Based on Past Returns of Stock:
(i) The Expected Return on a Portfolio is computed as the weighted average of the expected returns on the stocks which comprise the Portfolio. The weights reflect the proportion of the portfolio invested in the stocks. The equation for its expected return is as follows:
WA = Weight of security A
RA = Expected return of security A
WB = Weight of security B
RB = Expected return of security B
Wn = Weight of security n
Rn = Expected return of security n4
B. Based on Probability of Expected Returns of the Portfolio:
(i) Expected Return is the Mean Return computed on the basis of the probability of returns expected from the portfolio as a whole.
Let us construct a portfolio consisting of two-thirds stock X and one-third stock Y. The average return of this average return of each security in the portfolio; that is;
Rp = Xi Ri
i = 1
Rp = expected return to portfolio
Xi = proportion of total portfolio invested in security i
Ri = expected return to security i
N = total number of securities in the portfolio
The portfolio is a collection of securities belonging to a diverse set of industries. Management of a portfolio is considered to be a specialized activity because of the time and effort involved in tracking each component of the portfolio. Portfolio management is a relatively new concept in security analysis. It gained prominence after World War II when it was realized that the instability of the securities market had put at stake the fortunes of individuals, companies, and governments. It was then discovered that investing in a basket of stocks maximized profits while minimizing risks.