Portfolio Analysis Definition and Process


Portfolio Analysis Definition and Process

A portfolio analysis by definition is a company’s organization of various types of elements in the product mix so as to determine optimum allocation of its resources. There are two things to be measured in the portfolio analysis. They are; the market growth rate and the relative market share. Portfolio analysis is one of the best elements used in strategic planning to maximize in investment activities in allocating resources towards the right of business opportunities. It extends its operations to areas such as the bonds, indexes, commodities, funds and options, equities and securities. It gains its importance since its class has a particular risk which is associated with it. The portfolio analysis will affect the rate of return of a business and its overall investment process (Elton &Edwin 2010).

The process of portfolio analysis can be broadly categorized into two asset levels; risk aversion and analyzing of returns. To start with, risk aversion, it involves analyzing the composition a considering the risk appetite of the investor. An investor will accept investing in an activity which pays low returns than involving in a riskier activity even if it generates high returns. In analyzing the returns, it encompasses calculating the prospective returns through average and compound of returns methods. The average return is an arithmetic mean of all the returns of an individual while compound returns are the arithmetic mean with the cumulative effect on the overall performance. Either part of portfolio analysis is the dispersion of returns. This is a measure of variability or volatility of an asset which involves the measurement of the standard deviation of returns of a particular asset.

Advantages of portfolio analysis
  1. Portfolio analysis encourages management in the evaluation of every business activity and setting of objectives by allocating the resources effectively.
  2. It encourages an organization to use the intrinsic date to supplement management’s judgment.
  • It incorporates the use of cash flow available for the expansion and growth of an organization.
Disadvantages of portfolio analysis
  1. It is not easy to define the market- product segments.
  2. It gives an illusion of science especially when subjective judgments are applied.
 Steps involved portfolio analysis.
  1. Identification of lines of business.

Here the lines of business should be identified (SBUs) to make up association portfolio

  1. Group lines of business

In this step we have three important lines; the core businesses which are the business which supports objectives of business directly as per its strategic plan, support functions make it possible for the business to deliver its core business benefits to its members. The support functions include administrative, accounting and legal (Dickinson, John 1974). The support function is defined to minimize the cost of the functions and the transfer resources so as to support the core business activities. The third line is the money makers which are the source of business revenues to support the association’s core activities. Example of money makers are the rental car discounts, insurance programs, and affinity cards.

I will highlight the other steps in a continuous prose format as follows; comparing the core business with mission statements, defining products and services in every line of the business to determine their relation with the program evaluation matrix, applying the program evaluation matrix to simplify process of analyzing all the products and services in line with association’s portfolio. Determining the product fit to ascertain whether services under review are in line with association’s mission and priorities, determining the ease of funding and implementing whether it is able to provide current and future support, whether the business has a stable source of funding that is measurable and reportable in terms of results(Elton, Edwin 2010).


Portfolio analysis involves steps to reveal the association’s situation. It involves analyzing both internal and external factors to determine the distinctive competence which will enable organization to take advantage of specific environmental opportunities. To achieve this, an organization must consider the lookout of strategic windows which are in other words called the market opportunities.


Work cited

Hult, Henrik. Risk and Portfolio Analysis: Principles and Methods. New York: Springer, 2012. Print.

Elton, Edwin J. Modern Portfolio Theory and Investment Analysis. Hoboken, NJ: J. Wiley & Sons, 2010. Print.

Grandville, Olivier. Bond Pricing and Portfolio Analysis: Protecting Investors in the Long Run. Cambridge, Mass. [u.a.: MIT Press, 2003. Print.

Dickinson, John P. Portfolio Analysis: A Book of Readings. Westmead [u.a.: Saxon House [u.a., 1974. Print.

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