Introduction To Portfolio Theory Finance Essay

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Firstly, we need to define the word of portfolio in order to get more understanding about the portfolio theory and portfolio development. Portfolio is refers to a group of financial assets such as stocks, bonds and cash. The portfolios are mostly hold by investors according to their risk tolerance, time taken and investment objectives and/or will be controlled by financial professionals, banks and other financial institutions to get the better allocation of risk-return portfolio. Besides, there are two types of risk that involved: diversified and undiversified risk. Diversified risk also called as unsystematic risk which the risks cannot be fully predicted and avoided, the examples are interest rates and wars. The undiversified risk is known as systematic risk and this kind of risk can be reduced through suitable diversification and it is more specific to individual stock.

The History of Portfolio Management

Portfolio Theory is also known as Modern Portfolio Theory (MPT). It was first developed and discovered by Harry Max Markowitz. He is an American economist, born on 24th August 1927. He is also a professor of finance at the Rady School of Management at the University of California, San Diego.

Portfolio Theory was introduced in his paper ‘Portfolio Selection’ which was published in the Journal of Finance in 1952. In 1990, he won the Nobel Prize in Economic Sciences for the Theory, shared with Merton Miller and William Sharpe.

Markowitz is not only known for his pioneering work in Portfolio Theory. He is also very known for the study of the effects of asset risk, return, correlation and diversification related to investment portfolio returns.

The Benefits of Portfolio Management

The main advantage of portfolio management is to help companies manage all their processes as well as set objectives. Small businesses may not have a structure for portfolio management, but most companies often employ someone to handle their projects.

A portfolio management benefits the investors in making decisions especially risk matters. It is very important for investors to know how to control risk in their business portfolios. Besides that, it improves business performances. Portfolio management improves business performances by setting the priorities for better project delivery.

Business projects are often achieved by resources which are evenly shared alongside with other projects. Many projects may end up competing for resources. This is where portfolio management is much needed. It helps in planning so that resources are equally distributed in all the business processes. This involves measuring, comparing, and prioritizing the most valuable projects only. The conflicts between the projects for resources are resolved by the high level management. The skill sets required for each project and ideal source of these resources are determined by incorporating formal sourcing strategies.

The performance problems are corrected earlier to their development in major issues. Although, portfolio management cannot completely eliminate performance failures, it helps in identifying the performance issues early. The portfolio management involves steps such as identify,

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