One of the main tasks of a management team is to make critical decisions regarding the firm's future direction. To achieve this the portfolio analysis is used to guide resource allocation and investment decisions.Portfolio anaylsis is of great value to the firm this is because it allows for guided evaluation of existing facts resulting in useful information.This information can be used as it is or extrapolated to predict future expectations.However the portfolio analysis has its own limitations that lower its effectiveness in informing decision making for the team.
Portfolio analysis involves carrying out an assessment of the segments of a portfolio in order to analyze what are the expected returns and when they will be realized.This includes doing a quantification of the segment's operations and checking the impact it will have financially.Portfolio analysis is used in the allocation of resources and in investment decisions.
The first type of portfolio analysis is the performance analysis which is done through total value analysis, the value of each of the positions in the portfolio is calculated separately. Then this individual values are summed up to come up with the final value of the portfolio. Aggregated returns can also be used to assess performance, where future cash flows are summed up to give expected returns, Kerr (1999) found that this is important because it allows management to check the contribution and the potential of each segment in the portfolio. The second type is on Risk Sensitivity, this involves an assessment of how the value of the portfolio will change with respect to changes in the market, like a small shift in interest rates. Also conducted is the stress testing where there is an evaluation of how extreme conditions will affect portfolio.
The value of a portfolio analysis is evident, Wolfe (2011)found that portfolio analysis is important because it enables tracking of the performance of individual segments allowing the making of informed decisions on how to handle each.Kerr (1999) found that portfolio analysis is a good system that supports making strategic decisions.This is made possible because of the history created from anaylsing the performance of each segment over the years.The portfolio analysis can be used to identify how risks will be distributed, that is the areas with low and those with high risks.This is important in making critical decisions especially in investment. Levišauskait (2010) found that after the high and low risk areas have been identified the choices made when using portfolio analysis depend on how risk averse the people involved are. Also of consideration is what brings satisfaction to the participants.
However portfolio analysis has its own share of limitations, Renee (2011) found that the analysis involves a lot of assumptions like the expected economic growth and future currency value.He continues to add that any variances between forecasts and reality would produce results that are distorted. Portfolio analysis involves simplifying difficult matters like which resources should be used where and what investments should be retained or disposed.This simplification is a limitation because not all important factors are put into consideration to produce the information. The analysis only considers the segments that can be put together to form a portfolio that has the highest possible returns. This means it does not consider segments that might not be doing very well now but have a great potential of making exceptional returns in future.
- Kerr, R, C . (1999), Using Portfolio Analysis http://www.crfonline.org/orc/pdf/ref6.pdf
- Levišauskait, K . (2010) , Investment Analysis and Portfolio Management Gaining an Understanding of Your Customers http://www.bcci.bg/projects/latvia/pdf/8_IAPM_final.pdf
- Wolf , M . (2011) The advantages of Portfolio Analysis. http://www.ehow.com/list_7348309_advantages-portfolio-analysis.html
- Renee , F. (2011) Portfolio Analysis Limitations. http://www.ehow.com/info_8656641_portfolio-analysis-limitations.html