Portfolio Analysis - Definition And Markowitz Theory

Every investor is a bit different. Some are willing to take risks in the name of greater profits. However, it happens that the most important thing for a given person is security, so it is not worth copying the moves of other investors. You need to think about your own strategy that will bring the assumed rate of return and at the same time will make the capitalist sleep peacefully. For the investors to feel calm, they uses portfolio analysis.

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Definition

The shares of a given company will be inextricably linked with it, which is why its condition may strongly affect the valuation of shares (determining their value). What's more, companies whose economic situation is very good do not always attract the attention of investors. Suggestions by famous people, subjective beliefs of many capital providers, and even gossip and rumors can strongly influence negative opinions about the purchase of securities of a given entity. To eliminate factors, e.g. emotional ones, an analytical tool called portfolio analysis is used.

Portfolio analysis makes it possible to assess the current position and development opportunities of the company and is the basis for strategic planning. In addition, it clarifies the company's position in a particular segment. Portfolio analysis is made possible by a matrix of two variables. One of them is the company's competitive position in the market segment, the other is the value of the segment.

Markowitz theory

Fundamental, technical and portfolio analysis are used to determine your own investment strategy. They all help you manage your money by analyzing the stock market. The foundations of portfolio analysis in a modern edition were laid by the Nobel laureate Harry Markowitz. It is based on diversification.

Investors repeat the well-known saying "Don't put all your eggs in one basket". In other words, when investing money, this means buying different units for your investment portfolio, otherwise known as a portfolio. It is nothing more than a certain collection of assets. They can be not only stocks or long- and short-term bonds, but also real estate, gold and other metals, cash and others.

Types of wallets

Markowitz's portfolio theory introduced an element of risk and its relation to the rate of return to the portfolio analysis. This term stands for an indicator that tells a potential investor how much he earned in a given period, comparing this sum to the expenses incurred. When he properly composes his investment portfolio (preferably from products that are not correlated with each other), the risk of losses is lower than that of its individual components.

Depending on the propensity to risk and the expected profit in the portfolio analysis, the following portfolios can be distinguished:

• conservative, characterized by low risk and profitability,
• aggressive, giving a high rate of return, but with a high investment risk,
• optimal, on the verge of profitability, bringing the best profit with the lowest risk,
• minimal risk, which, as the name suggests, maintain the greatest possible security,
• market, where the most important is the increase in investment efficiency (while reducing the risk),
• critical, in which the increase in the rate of return equals the increase in risk.

Efficient portfolio

Markowitz found that there is one portfolio assigned to a given rate of return. It is possible to create only one portfolio for each risk that provides the best return (yield). When, for example, only shares of companies from one industry are present in it, it will be ineffective when the market collapses. It should also be taken into account that you cannot have everything, i.e. high profit and low (or even zero) risk. That is why diversification mentioned above is important. Each investor, when conducting a portfolio analysis, should strive to develop an effective portfolio (one for which there is no other portfolio with the same or lower risk and the same or higher rate of return).

 

Source: Antczak S. (2010) Metody portfelowe w planowaniu strategicznym jednostek biznesu, investopedia.com