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Mean-Variance Analysis - Essay Example
Author : ebba77
Finance & Accounting
Pages 6 (1506 words)
Finance and Accounting Mean-Variance Analysis and Portfolio Theory Executive Summary A collection of assets is constitutes a portfolio, which bears elements of risk and return. Therefore, controlling risk in investments is an important undertaking for portfolio managers…
The practical applications of portfolio theory abound in different segments of business and finance. This report seeks to explain the principles of diversification, and discuss some practical applications of portfolio theory in business and finance. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Principles of Diversification 4 Application of Portfolio Theory Mutual Funds 5 Application of Portfolio Theory Capital Allocation 7 Application of Portfolio Theory to Product Portfolio Decisions 8 Recommendations 10 Conclusion 10 References 11 Introduction Diversification is the premise that underlies portfolio theory (Markus, 2008). A portfolio is a combination of assets with a unified risk and return value expectation. Diversified portfolios ensure that loses are minimized if they occur (Hill, 2010). Mean-variance analysis helps determine the viability of an investment portfolio through the analysis of the portfolio risk. The theory relies on the use of portfolio’s variance by comparing how assets in the portfolio vary with regard to each other (Diether, 2010). Mean-variance analysis for a diversified portfolio measures the portfolio’s efficiency. The most efficient portfolio has the highest expected return for a certain standard deviation. Mean-variance analysis application in business and finance helps in making the optimum decisions about the riskiness of a portfolio. ...