Portfolio Selection
Portfolio analysis renders the input for the next stage in portfolio management which is portfolio selection. The aim of portfolio construction is to generate a portfolio that at a given level of risk provides the highest returns.
Portfolio Evaluation
The aim of constructing a portfolio and revising it periodically is, with minimum risk, earn maximum returns. Portfolio evaluation is the process implicated with assessing the performance of the portfolio in terms of risk and return during a selected period of time. This requires the risk generated by the portfolio over the period of investment and quantitative evaluation of real return accomplished. These have to be compared with objective norms to evaluate the relative performance of the portfolio. Alternative options of performance evaluation have been acquired for use by capitalist and portfolio managers.
Portfolio evaluation is helpful in yet another way. It renders a mechanism for distinguishing weaknesses in the investment process and for improving them. It provides a feedback mechanism for improving the complete portfolio management process.
Evolution of portfolio management
Portfolio management is basically a systematic method of managing efficiently individual's investments. Many elements have contributed to the growth and development of this approach to investment management. It would be interesting to trace the development of investment management through the years.
In the early years of this century, financial statement data was used by analysts for evaluating the worth of securities companies. This began with the analysis of railroad securities in U.S.A. A booklet was published by Thomas F. Woodlock in 1900, titled the anatomy of a railroad report. It was considered as a classic in railroad analysis.
Although most writers on investment were unclear about the process to be adopted, financial statement analysis became popular in the investment field. They generally recommended the calculation and use of certain financial proportions for the purpose. John Moody in his book, which was published in 1906, "The art of Wall Street investing", supported financial statement analysis for the purpose of investment. Lawrence Chamberlain, in his book "The principles of Bond Investment " which is published in 1911 and proposed an analysis which later came to be know as common-size analysis.
At the beginning of this century another group of analysts focused their attention on the behavior of the stock market. Their investment strategy consisted in analyzing the stock price movement with the help of price charts. This method was referred as technical analysis. It developed during 1900-1902 when the founder of the Dow Jones and Co., Charles H. Dow confronted his views in a series of editorials in the Wall Street journal in U.S.A. The advocated of technical analysis considered that stock price movement was systematic, orderly and that distinct patterns could be identified in these movements. Their investment schemes were built around the recognition of trend and patterns in movements of stock price.
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