In finance, portfolio analysis evaluates the performance, risk, and returns of a collection of financial assets (stocks, bonds, etc). This involves assessing how investments within a portfolio interact with each other and determining the net effect on overall performance.
The returns from a portfolio, whether it is bonds, stocks, or a mixture of different assets, are commonly based on capital gains (an increase in the price) or income (dividends, interest, rent, alternatives.).
On the other hand, risk represents the chance an investment's actual return will be different than expected. Standard deviation and Beta are commonly used to measure portfolio risk.
- Standard deviation measures the dispersal or uncertainty in a random variable (in this case, portfolio returns). It demonstrates how the portfolio's returns can deviate from the mean (expected) portfolio return. A high standard deviation suggests high volatility.
- Beta measures a portfolio's volatility, or systematic risk, compared to the market as a whole—a beta is Unsystematic risk by investing in various assets. If you invest in a single asset, the risk is much higher than in a diversified portfolio.
In general, a higher risk is associated with a greater probability of higher return and lower risk is associated with a greater likelihood of lower return. This trade-off that an investor faces between risk and return while considering investment decisions is called the risk-return tradeoff.
However, past performance is not an indicator of future results, and all investments carry diverse levels of risk, including the risk of losing the invested principal—investment decisions.