Portfolio analysis is valuable in commerce and investing.
In Commerce, portfolio analysis provides a view of the company's product mix to determine the optimum allocation of resources. Market growth rate and relative market share are the most common measures used in portfolio analysis.
Advantages
- Management is encouraged to evaluate each of its businesses individually, allowing them to set goals and allocate resources for each.
- Use of external oriented data is used to supplement management's intuitive judgment.
- Issues of cash flow are raised, so availability of cash for use in expansion and growth can be examined.
Limitations/Disadvantages:
- Product/market segments are not easily defined.
- Though it provides an illusion of scientific rigor, some subjective judgments are involved.
In Securities, portfolio analysis is used to analyze investments relative to an idealized balance of holdings and to optimize allocations.
Advantages
- Lagging assets can be identified and modifications to investments can be adjusted.
- How assets have performed over time can be examined.
- A comparison of the holdings in the portfolio can be compared with different indexes over time.
- An attempt can be made to identify the relative risk of the holdings in the portfolio.
- Areas in which holdings are concentrated can be identified in order to give the investor an idea of where he might be exposed.
Disadvantages:
- The analysis is based on the subjective evaluation of the analyst.
- The analysis is dependent on the availability of data, which may be difficult to get for certain assets. This can make accuracy difficult.
- Assets have complex attributes that portfolio analysis may not take into consideration. For example, businesses that are seasonal.
