PORTFOLIO FOR PROFESSIONAL PRACTICE AND ENTERPRISE

Portfolio for Professional Practice and Enterprise: Tools & Techniques (PPE)



Portfolio for Professional Practice and Enterprise: Tools & Techniques (PPE)

Introduction

Portfolio analysis is a tool which helps managers assess how best to identify opportunities and to allocate resources across a set of products or businesses. The portfolio analysis framework seeks to first identify individual business units' growth cycle stages. The tool then examines these business units in the context of the overall growth of their respective industries, with a view to optimizing resources and maximizing overall portfolio performance. As an example, the technique seeks to identify resource-hungry units in sectors with the potential for dynamic growth and then shows how highly profitable cash-generative units in more mature industry sectors could be exploited to meet the resource needs of the growing businesses in such a way as to maximize overall portfolio returns. Portfolio analysis can also be used to identify business units or products that have already fulfilled their potential and could therefore be sold to free up resources for more productive investment elsewhere.

Selecting the appropriate portfolio of assets in which to invest is an essential component of real estate fund management. Although a large proportion of portfolio selection decisions are still taken on a qualitative basis, quantitative approaches to selection are increasingly being employed. Experts established a quantitative framework for asset selection into a portfolio that is now well known. In this it is assumed that asset returns follow a multivariate normal distribution or that investors have a quadratic utility function. This approach shows that characteristics of a portfolio of assets can be completely described by the mean and the variance (risk) and so is described as the mean-variance (MV) portfolio model. For a particular universe of assets, the set of portfolios of assets that offer the minimum risk for a given level of return form the efficient frontier. The portfolios on the efficient frontier can be found by quadratic programming and such problems can now be solved easily in spreadsheet programs. The solutions are optimal and the selection process can be constrained by practical considerations, such upper and lower bounds, which can be written as linear constraints. The weakness of the MV approach, however, is that the underlying assumptions of multivariate normality or that investors have a quadratic utility function are not sustainable. This has led researchers to develop portfolio asset allocation models using other measures of risk that have many theoretical and practical advantages over MV. Even so, the MV approach remains the most popular approach to the asset allocation problem.

Assumptions and Procedures

Though there are many different portfolio analysis tools, many approaches assess business units on the basis of market share and the growth rate of the industry or sector in which they operate. The technique is founded on the basis that increasing market share should generate higher earnings, while a higher rate of overall market growth typically requires higher levels of investment if the business is to capitalize on the available ...