Portfolio Analysis

PORTFOLIO ANALYSIS

Security analysis related to the analysis of individual securities within the framework of return and risk. Whereas, Portfolio analysis makes an analysis of securities in the combined form.

The portfolio analysis considers the determination of future risk and return in holding various blends of individual securities. Portfolio expected return is a weighted average of the expected return of individual securities but portfolio variance can be something less than a weighted average of security variances.

Returns

The expected return of a portfolio depends on the expected return of each of the security contained in the portfolio. It also seems logical that the amounts invested in each security should be important. Indeed, this is the case. The example of a portfolio with three securities shown in Table-1A illustrates this point. The expected holding period value-relative for the portfolio is clearly:

Rs.23, 100 / Rs.20, 000 = 1.155

giving an expected holding period return of 15.50%.

Risk

The probability of loss is the essence of risk. A useful measure of risk takes into account both the probability of various possible bad outcomes and their associated magnitudes. Instead of measuring the probability of a number of different possible outcomes, the measure of risk should somehow estimate the extent to which the actual outcome is likely to diverge from the expected. Two measures used for this purpose are the mean absolute deviation and the standard deviation.