Portfolio Analysis




In financial terms, ‘portfolio analysis’ is a study of the performance of specific portfolios under different circumstances. It includes the efforts made to achieve the best trade-off between risk tolerance and returns. The analysis of a portfolio can be conducted either by a professional or an individual investor who may utilizes specialized software.

What is Portfolio Analysis?

Portfolio analysis involves quantifying the operational and financial impact of the portfolio. It is vital to evaluate the performances of investments and timing the returns effectively.

The analysis of a portfolio extends to all classes of investments such as bonds, equities, indexes, commodities, funds, options and securities. Portfolio analysis gains importance because each asset class has peculiar risk factors and returns associated with it. Hence, the composition of a portfolio affects the rate of return of the overall investment.


What is involved in Portfolio Analysis?

Portfolio analysis is broadly carried out for each asset at two levels:

  • Risk aversion: This method analyzes the portfolio composition while considering the risk appetite of an investor. Some investors may prefer to play safe and accept low profits rather than invest in risky assets that can generate high returns.
  • Analyzing returns: While performing portfolio analysis, prospective returns are calculated through the average and compound return methods. An average return is simply the arithmetic average of returns from individual assets. However, compound return is the arithmetic mean that considers the cumulative effect on overall returns.

The next step in portfolio analysis involves determining dispersion of returns. It is the measure of volatility or standard deviation of returns for a particular asset. Simply put, dispersion refers is the difference between the real interest rate and the calculated average return.

Portfolio Analysis Tools

Several specialized portfolio analysis softwares are available in the market to ease the task for an investor. These application tools can analyze and predict future trends for almost every investment asset. They provide essential data for decision making on the allocation of assets, calculation of risks and attainment of investment objectives.