PORTFOLIO ANALYSIS

Portfolio Analysis



Portfolio Analysis

Overview of the topic

The topic is concerned with the principles included in the Portfolio Analysis. The topic begins with a statement that states “The existence of reasonably efficient investment markets in a well-ordered society is a necessary, but not a sufficient, condition for the development of derivative instruments”. The validity of this statement needed an assessment. Basically, this statement meant that in order for the derivative instruments to be developed, it is necessary to have the existence of efficient investment markets, but this is certainly not the only condition that must be met. There are four questions which will be addressed one by one in the topic. Therefore, all the issues and aspects related to the Portfolio Analysis will be discussed in detail.

Question 1: What is meant by efficient investment markets?

The efficient investment market is a necessary condition for the business environment. The efficient market is a one where the market price of any commodity is an unbiased estimate of the true value of the investment. The main element in this derivation is that there are several key concepts. The market efficiency does not have a need for the market price to be equal to the true value of the commodity at any point of time. The main element is that the errors in the market price should be unbiased, which means that the prices can have a high or low value as long these derivations are in random manner. The derivations have a strong relationship with the stocks and they face an impact during the over and under pricing of the commodity. For instance, in an efficient market, stocks that have lower Price Earnings ratios should not be undervalued as compare to the high Price Earnings Ratio. The definition of the efficient market should not be specific to the market but must be considered for the investor group as well. It is not possible that all markets are efficient to all investors but it is possible that a particular market for instance, the London Stock Exchange is useful with respect to the average investor (Bartram, Brown & Fehle, 2009, 206).

Question 2: What derivative instruments are under consideration?

A derivative instrument is a financial instrument which gains value because of some other financial instruments or variables. The main factor is the value of other financial instruments which has its direct impact. For instance, the stock option is a derivative because it gains value from the stock value. The interest rate swap is also a derivative because it gains value from more than one interest rate indices. The value that is gained from a derivative also has a strong relationship with the underliers. The primary instruments are also considered under this option. The term used in this category is known as cash instrument. The usage of the term common instruments is very common in business investment situations. The cash instrument is known as an instrument that value is dependent directly by the ...