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Literature Review On The Workings Of Portfolio Management Finance Essay

In other words, the most critical question pertaining to product innovations is “How can organizations most efficiently invest their research and development, and new product resources?”And that gives a precise background of what exactly portfolio management is; resource allocation for achieving new corporate product target.

Aligning the accurate information with the correct people for making effective corporate decisions is among the most common challenges encountered by today’s senior management of companies. While addressing capital allocation and investment decision making issues, this challenge turns even more formidable. One of the most significant determinants of a firm’s long-term value is its ability to precisely delegate limited capital to large projects, newer markets and merger acquisition decisions. Furthermore, successful organizations use a robust approach for making capital allocation and large investment decisions, which studies every option’s risk-return trade-off and presents overall impact of each option on the existing portfolio. At the other end of the scale, poor investments may give rise to share price depression, deviation of primary leadership, reduced market share, and negative attention from media.

Incorporating a risk-return strategy in Portfolio Management enables organizations to be better prepared to answer questions such as:

How risks can be integrated into the decision making process in order to consistently evaluate multiple investment choices?

Can the anticipated return on any individual investment warrant the degree of risk needed to consider this option?

Where should one make the next investment/

What is the best set of investment options in order to obtain an organization’s mid- as well as long-term strategic objectives?

By adapting a risk-return viewpoint for supporting these decisions, a firm is enabled to sustain growth and establish long-term value. Moreover, it also becomes capable of applied to a wide array of industry sectors such as:

Technology and media firms which determine a suitable business portfolio despite of technology instability.

Energy sector firms that select an exploration portfolio despite of price and political in uncertainness

Automotive manufacturers and aerospace firms making a choice between business segments amidst prerequisite and project implementation uncertainness

Firms taking outsourcing decisions based on the make vs. buy strategy in their supply chain

Pharmaceutical companies allocate R & D capital on the basis of a portfolio perspective of their pipeline.

Real estate corporations determine the correct combination of geographic against use mixes.

Today’s trend is backed by the notion that newer product projects completely influence tomorrow’s market and product profile of the company. Approximately 50 percent of a company’s sales originate from new products that are developed in the market in the previous five to six years. Similar to the stock market portfolio experts, managers, senior executives, who work to optimize their research & development investments get a much better opportunities of achieving success in the long run.

However, a common question arises in regards to how successful companies are able to accurately manage their R & D investments as well as product innovation portfolios in order to achieve greater returns from their investments.

There exist several approached but with no straightforward and convincing answers. Nonetheless, it is a basic hurdle that all companies these days are addressing issue related to production and maintenance of leading edge products. Moreover, portfolio management for new products has been a dynamic decision making process in which the list of active new products as well as R & D projects is continually being revised for improvisation. Additionally, new projects undergo evaluation, selection and prioritization in this process. Existing projects can be accelerated, terminated, or de-prioritized with resources being allocated or reallocated to the proactive projects.

Portfolio Management

What is Portfolio Management?

Portfolio management is said to be an ongoing process of construction of portfolios aimed at balancing an investor’s rapidly changing goals supported by the portfolio manager’s study of the future. In the framework developed by the investor’s investment policy, several strategies will be employed which ensure the accomplishment of the investor’s long-term objectives. More often, the particular tactics possibly employed by the portfolio manager are also defined. The established portfolio is then carefully monitored so as to enable adjustments of the strategy and tactics in order to accommodate the end results as well as changes in the investor’s objectives.

Portfolio Management is primarily used for selecting a portfolio of new product development projects in order to achieve the following objectives:

Provide balance

Heighten the value and profitability of the portfolio

Support the strategies of the organization

In other words, portfolio management is considered to be the sole responsibility of the senior management team of a company or business unit. This business unit, also termed as the Product Committee holds regular meetings to discuss about the management of the product pipeline and to make appropriate decisions on the product portfolio. Further, this is the same team that carries out the stage-gate reviews for the company.

Creation of product strategy

Logically, a starting point is considered for creating a product strategy, such as customers, market sectors, products, strategy approaches, competitive stress, and so on. Second step is to accurately study the budget and available resources for balancing the portfolio against. Next, every project is assessed for rewards, resources or investment prerequisites, risks as well as other appropriate factors. The overall statistics of the objectives in making decisions in regards to products varies from organization to organization. However, companies are required to accurately balance these goals, namely

New products vs. improvements

Risk vs. profitability

Strategy vs. rewards

Market vs. product pipeline

Short term vs. long term

Numerous forms of techniques are being employed for supporting the portfolio management process. They are heuristic models, scoring methods, mapping, graphical, or visual methods.


Portfolios are referred to the mix or combination of investments. Investors are mainly institutions or private individuals. Any entity holding a specific value of is capable of retaining its value can be taken as an option by the investors where they could escrow assets. And such assets can be securities including stocks, warrants, bank notes, bonds, mutual funds, contracts, stock options, etc. Furthermore, it could also be private individual assets like real estate and properties, gold certificates, machineries, as well as other production amenities.

In general, institutions may conduct own large-scale investment analysis whereas individual investors could rely on professional financial advisors, needless to say, who have profound similarity to stockbrokers, portfolio managers as well as financial planners. The key objective of investment portfolio managers lies central to addressing particular investment issues and targets for the benefit of the investors. Simply put, these professionals must be highly proficient with respect to diversification or the treatment of degrading different risks and their effects on their organization.

There are several decisions to which investors first acquaint with. But not every investor is well-learnt about which assets to include or must be included within their portfolio, or what steps can be taken to withstand risks at a given level, or how to react to the rapidly-changing stock markets, and so on. In essence, there is a certain drive to enhance the investors’ knowledge about the basics of investment portfolio management and offer them various choices on how to improve the overall process of managing their portfolios.

The earliest portfolio management schemes were aimed at optimizing the financial returns and the project’s profitability through the exhaustive use of mathematical or heuristic models. But this approach hardly paid any significant attention on balancing or alignment of the portfolio of the company’s strategy. Evaluating technique weights as well as score criteria to consider account investment prerequisites, risk, rewards, and strategic alignment. However, the drawback of this approach could be an over-concentration on the financial measures and an uncertainty to optimize the combination of projects. Furthermore, mapping techniques are based on graphical presentation in order to visualize a portfolio’s balance. Such schemes are generally demonstrated in the form of a two spatial dimensional graph which depicts the exact pattern of trade-offs or balance among two factors like profitability vs. risks, market vs. product line coverage, etc.

How it Works

While portfolio techniques differ broadly from organization to organization, the common denominator for the companies is the objective management tries to achieve. Experts of portfolio management have advocated that three primary goals influence the success of a company, by adopting the “best-practise” strategy. These goals are:

Value Maximization

It involves allocation of resources in order to maximize the value of the portfolio through several key objectives, like profitability, Return on Investment, acceptable risk, etc. A vast variety of techniques are being employed for achieving this maximization goal, which ranges from scoring models to financial methods.


This helps an organization to achieve a targeted or desired balance of projects through a number of specific parameters, such as risk vs. return, long-term vs. short-term; throughout several different market sectors, business areas as well as technologies. In general, techniques used for revealing balance involve pie-charts, histograms, and bubble diagrams.

Alignment with Business Strategy

This goal focuses on ensuring that the portfolio of projects perfectly depicts the business strategies and that the division of investing adjusts with the company’s strategic priorities. Furthermore, three key approaches included are:

top-down, also termed as strategic buckets

bottom-up, also termed as effective gating and criteria

top-down & bottom-up, termed as strategic check

Portfolio Management: A drawback

The past few years have seen a increased interest in portfolio management, not just pertaining to the technical community, but also within the CEO’s office. Notwithstanding its increasing popularity, latest benchmarking research have realized portfolio management as the weakest area within the product innovation management. Here, management teams have claimed that there are hardly any serious Go-Kill decision points and particularly, no criteria for making the Go-Kill decisions. As a consequence, organizations tend to encounter too many projects with very limited sources available!

Importance of portfolio management

Companies which lack efficient new product portfolio management as well as project selection encounter a very slippery road downhill. Majority of the drawbacks that tend to infect innovation initiatives could be directly claimed to be inefficient and ineffective portfolio management. As per the benchmarking studies conducted by practitioners worldwide, specific problems arising whenever a good portfolio management is lacking within a company are:

A powerful unwillingness to terminate Projects

Lack of reproducible standards for Go/Kill decisions

An optimum outcome, projects simple pile up when they are added to the 'active list' of projects without any clear directional focus

No uniform distribution of the resources; lengthy delays to market; weak quality of execution; and unanticipated and higher-than-satisfactory failure rates

Poor project selection and Go/Kill Decisions

Several average-scale projects within the pipeline, such as enhancements, extensions, and absence of high profitability projects

Fewer reasonable projects that do exist amid the lack of resources, consume too much of time to get to market and cannot achieve desired potential

Incorrect selection of Projects:

Decisions are not based on realities and not driven by objective criteria, but depend more on politics, emotions and opinions.

Most of these 'ill-selected' projects tend to fail in bringing profits and reward to the organization

Strategic Criteria are Missing

Lack of strong strategic direction for project selection. Thus, projects lack alignment with the business's strategy

Selected Projects are normally a bad and ugly fit with strategy and the overall expense and investment fails to represent the strategic priorities of the entire business

In this context, Portfolio Management is concerned with doing the right projects. In case the right projects are picked, the outcome is a desirable portfolio of extreme value projects; it witnesses the generation of a portfolio which is in proper alignment and balance and most significantly, supports the business strategy.

Benefits of Portfolio Management

When implemented accurately and carried out on a regular basis, Portfolio Management can be a high impact, high value activity. In other words, portfolio management has the following benefits:

Portfolio management heightens the return on product innovation investments

It sustains the company’s competitive position

It helps companies in achieving efficient allocation of starved resources

It forms a connection between project selection and business strategies

It achieves focus and effectively communicates the business priorities

Portfolio management helps in achieving balance

It allows for objective project selection

Experts and top performers provide more emphasis on the link between the project selection and the company business strategy.

Fundamental Analysis

Definition of Fundamental Analysis

Fundamental analysis is defined as the practise of examining the fundamentals of an organization in order to determine if a business has turned out to be a good investment. Fundamental analysis aims are answering questions related to the business finance and capital investment, such as “what are the probabilities that this business investment is going to fail or become bankrupt” and “how sure can a portfolio manager be that the stock continues to pay dividends?” In other words, fundamental analysis involves detailed study in regards to financial statements like the balance sheet. It is considered as a complete contrast to technical analysis.

Fundamental analysis deals with the analysis of the financial, economic, as well as other quantitative and qualitative elements associated with a security with the sole intention of determining its intrinsic value. Even though this technique is employed for evaluating the value of a firm’s stock, it can additionally be used for any form of security, such as currency and bonds. Also known as quantitative analysis, fundamental analysis involves digging into a corporation’s financial statements, including profit and loss accounts, balance sheet, etc, in order to analyze different types of financial indicators like earnings, revenues, expenses, assets and liabilities. This type of study is typically conducted by analysts, brokers and investors.

Two approaches:

While conducting a fundamental analysis, analysts and investors are most likely to use any of the two schemes described below:

Top-down scheme: This approach deals with the study of both national as well as international economic indicators, such as the GDP growth rates, energy rates, interest rates and inflation. The hunt of the optimal security then reduces to the analysis of total sales, levels of price, and foreign competition within a sector for identifying the best business within the sector.

Bottom-up scheme: This approach allows the investor to start the search with certain business, regardless of their region, sector or industry

How does it work?

Fundamental analysis is driven by the primary intention of predicting the future performance of the organization for which it is carried out. It is solely based on the assumption that the market price of a particular security is likely to shift towards its “real” or intrinsic value”. Therefore, if the intrinsic value of a security becomes greater it’s the market value, then it represents a time to make a purchase. Furthermore, if the value of the security is at lower value relative to its market price, then it’s an indicator to investors for making a sale, i.e. the investors must sell the security.

Fundamental analysis involves the following steps:

Macroeconomic analysis that includes commodities, currencies, and indices

Analysis of the industry sector that is based on the analysis of firms being part of a sector or industry

Situational analysis of an organization

Financial analysis of an organization


Furthermore, the valuation of a security is performed via the discounted cash flow model, i.e. DCF model that takes the following aspects into account:

Dividends obtained by investors

Cash flows or earnings of an organization

Debts that is estimated with the help of debt to equity ratio as well as the current ratio.

Advantages of Fundamental analysis

Fundamental analysis is beneficial for:

Identification of the intrinsic value of a security

Identification of long-term investment opportunities because it includes real time data

Intuitive appeal: Employing fundamental analysis for predicting future prices is based on the principle of “one thing causes another”, and hence tries to recognize the causing factors. Therefore, with this concept, the approach of fundamental analysis is said to be intuitively appealing.

Objectivity: Because relationships are examined by mathematical and statistical techniques, fundamental analysis is objective. Those relationships that fail are removed, whereas those that successfully pass are considered to be credible. Further, there is no room for personal opinion or bias. Many traders greatly depend on objectivity and hold little confidence in their ability to predict prices on pure discretion basis. Furthermore, future traders do not find it difficult to attempt to predict variables through the process of fundamental analysis. Organizations attempt to predict sales, government agencies attempt to predict unemployment and meteorology specialists attempt to predict the weather conditions. With all of these sectors trying to harness the power of fundamental analysis, one advantage of using fundamental analysis is the enhancement and refinement in the pool of techniques available for fundamental analysis. For instance, if an effective technique is developed for predicting the weather, it can be easily applied to future prices and help in obtaining satisfactory outcomes. And this is just how a specific form of fundamental analysis termed as the Chaos Theory, entered the realm of the future traders.

However, fundamental analysis is equipped with the following drawbacks:

Disadvantages of Fundamental Analysis

It can be used only for analyzing long-term investments

Too many economic indicators together with widened macroeconomic data tends to produce confusion for new investors

Similar set of information regarding macroeconomic indicators may impose different effects on the same currencies at varied times.

Labour Intensive: A substantial amount of human labour is needed for fundamental analysis, including time and energy. Additionally, recent techniques have gotten increasingly complex and few individuals have turned towards obtaining help from trained economists who can properly apply the available technology. For example, large banks usually hire teams of economists for devising their in-house prediction models.

Data Intensive: Fundamental analysis entirely counts on a significant quantity of data to analyze the importance of variables. Such data are most often difficult to acquire and, most importantly, are rarely available without extra charge. Data are also contaminated with notable errors that must first be detected and repaired.

It is often not very easy, even though data, time and energy are acquirable, to define a relationship which is very robust and which allows for satisfactory price prediction. In part, this may be due to the fact that numerous variables are connected together, each having a diverse effect on the other, that it becomes difficult to realize causal relationships. A lot of time, energy and money could be spent looking for causal relationships, but never land up finding one.

Technical Analysis

Definition of Technical Analysis:

Technical analysis is the process of utilizing past trading information and stock price trends related to a specific security, and then equating those to how other likewise investments have responded throughout history to similar patterns. Further, when a pattern is identified, the investor can predict that the future pricing of the target investment is likely to respond in a similar manner to patterns observed earlier.

Technical analysis is based on the study if past market data associated with volume and price with the primary purpose of forecasting future price movements. Furthermore, technical analysis is not used for making sheer prediction; instead it assists in projecting the potential price movement across time. Functionally speaking, technical analysis can be applied to commodities, futures, stocks, forex or foreign exchange, indices or any tradable entity, whose price is driven by supply and demand trends of the market. Additionally, it is employed by day traders as well as short-term investors who participate in investment markets, including foreign exchange market and the stock market. Hedgers are also active users of this form of analysis.

How does Technical Analysis work?

Technical analysis is carried out on the premise that price discounts each individual aspect and data in the market. This type of analysis is also driven by the belief that price movements are not entirely arbitrary and rely on a trend. A technical analyst, through technical analysis, is enabled to detect an ongoing trend, trade on the basis of the trend and produce profits as the trend proceeds.

Following are the methods used for performing technical analysis:

Moving averages: This technique is used for the identification of a variety of support and resistance levels for the short-term and long-term. Moreover, the most widespread moving averages are the 30-day moving averages and 200-day moving averages, commonly known as DMAs.

Patterns and Charts: This method involves extensive charts to be generated from historical data on price movements. Further, these charts are commonly used to identify shapes and patterns, like double top, double bottom, triple bottom, head and shoulders.

Briefly, technical analysis makes extensive use of charts as well as technical indicators for forecasting the price movement of a given currency. Several technicians embrace this approach in order for price prediction whereas fundamentalists will not use it. Almost all traders are aware that technical analysis has its own benefits and drawbacks; however, it also has certain limitations. Many foreign exchange traders utilize only charting methods while other use a mix of approaches.

Advantages of Technical Analysis:

Powerful focus on price movement: The key focus of technical analysis is laid on the movement of prices. In other words, charts are used for depicting how prices move or don’t move, when prices trend, and the strength of those trends. Further, volume, momentum and oscillators show a clearer image in regards to market action. This information can be acquired at a glance. Technicians, unlike fundamentalists, do not employ economic reports which examine the demand for a particular currency.

Patterns are easily found: One of the fundamental aspects of market action is that it re-generates itself in clean, accurate patterns. Charts enables and aids the trader to identify patterns and forecast the price movements on the basis of these patterns. Similar to start constellations, charts and patterns can be composite and complicated. In essence, head-and-shoulder patterns, round tops and bottoms, descending and ascending triangles, as well as double and triple tops are highly effective patterns followed by several currency prices. Therefore, they possess powerful predictive capabilities. Also, they cannot be detected without using a chart.

Trends are easily detected: With just a glance at a moving averages line instantly shows a price that is stuck or trending in a range. A chart can immediately display a currency which exhibits a trend, whether or not it is up, down, or oblique. Trends are vital to technicians since a currency will continue to move in the direction of the trend, and these trends can be clearly and accurately shown by charts.

Charting is fast and cheap: As computer workstations have relieved most individuals from the burden of doing complicated mathematical operations, the Internet holds a pool of various technical indicators which help the trader to make more reliable and more productive trades. Several brokers provide to their clients, such forms of technical indicators as part of their package. Toward that end, technical analysis is inexpensive, less time consuming, as compared to fundamental analysis. It can also be performed within a few countable minutes and the services are most commonly offered for free or at a low price.

Charts offer a wealth of data: Indicators and charts are capable of offering a massive quantity of information. Trends can easily be detected; resistance as well as support levels are instantly found. Volatility, momentum and trading forms are quickly and easily accessible. There exist greater than fifty types of indictors and each offers crucial information on various aspects regarding the exact movement of a currency. This information is said to be vital to technicians for making sound and productive trades.

Additionally, charts depict the representation of the price movement and personality of a currency. This representation can be complicated with several different kinds of ups and downs in terms of the data distribution. Furthermore, charts can provide only the fundamental information on a trend or resistance and support. Nonetheless, they become much more profound in providing information regarding the intensity of a trend, how momentum is heightening, and whether or not formations are being developed that can allow trading.

Disadvantages of Technical Analysis:

As Technical analysis is employed by numerous traders worldwide, for trading stocks, it is attractive as it is driven by mathematics and statistics, thereby giving outputs as the illusion of correctness and predictability. Nevertheless, technical analysis is equipped with several flaws which trader should be aware of. The limitations of technical analysis are as following:

At the core, every technical indicator, irrespective of how its complexity, is based on price, which is a mere reflection of what has already taken place in the market. Therefore, technical analysis is said to be highly reactive and not truly predictive about what will happen.

Currently, markets are much more disorderly and jerky in comparison to earlier decades. This is due to hedge funds as well as automated ultra-short term trading. Consequently, the result is more false signs and non-uniform patterns from technical analysis methods.

Almost all technical traders try their hand at trend-following. Even while trend following method are capable of making big money over time; however, they also have a low rate of accuracy and a high draw down. A good example of this is that most trades are complete losses and are very common to be down by 50 to 60% at a given point. Furthermore, several traders are unable to handle this after-effect psychologically, and end up overriding trading signals and changing between systems.

A major flaw indicates that the bulk of technical traders continue relying on certain indicators that were first created during the 1970's. As a consequence, traders tend to overuse these indicators and, therefore, the markets render them less efficient.

Classical trading chart patterns may be seen in graphs of non-market pertained actions, such as temperature charts. Additionally, chart patterns may appear as well as disappear according to the scaling of the chart. And this strongly advises that chart patterns are nothing but a trick of the human eye and do not have any predictive value.

Fundamental Analysis Vs. Technical Analysis

While analyzing price movement, forex trade uses two primary types of analysis. Those concentrating on price movement and neglect other factors choose to guide their efforts at enhancing their skills at technical analysis, whereas traders preferring to examine the economic events which cause the market action mainly throw light on their efforts in analyzing fundamental analysis.

Most traders wish to mix the information supplied by these two kinds of analysis in order to generate accurate trading signals. Others focus on one aspect of analysis and discard the other type from the computations, and yet it can be said that either of the approaches can be valid with respect to the circumstances. In essence, there are traders who have been acquiring reputation as well as wealth by trading effectively based on fundamental analysis. But as both of these people disagree in several subjects, they would most probably agree with the fact that discipline and emotional control are said to be the most significant aspects of a productive trading career, even prior to analytical prowess.

The technical analysts may view his charts, detect the extreme values assigned with the indicators, and may alert against following a trend that is in danger of being suffered from a sharp reversal as the unavoidable countertrend action takes place. On the other hand, the fundamental analyst will see the euphoria in analyst community as well as news sources, take into account the various declarations of government agencies and personages, and will broadcast the same warning message. As the instruments and indicators employed by these two types of individuals vary, their actions typically coincide with each other.

Technical and fundamental analysis is not exactly the same; the predictive strength of the fundamental studies is substantially greater, at least in the long run. However, these two types of analysis are closely related to two different languages used to describe the same phenomenon, and they present the same direction and come at the same conclusion, at least on the hindsight.

Simply put, technical analysts perform their investments or trades based solely on the volume and price actions of securities. By using charts and several other tools, they trade on momentum, irrespective of the fundamentals. Although it is quite possible to use both the analysis methods in combination, yet one of the basic notions of technical analysis is that, as mentioned previously, the market discounts every entity. Similarly, all news regarding a firm is already prices into a stock, and hence, price actions of a stock can provide more insight relative to the underlying fundamental elements of the overall business itself.

However, followers of the effective market hypothesis commonly disagree with both technical and fundamental analysis. In this context, the efficient market hypothesis argues that it is basically impossible to generate market-beating returns for the longer term, by using either technical or fundamental analysis. In essence, the principle for this debate is that, as the market effectively prices all stocks about an ongoing basis, any valid opportunities for excess returns gained from technical or fundamental analysis would be immediately reduced by the market’s players, thereby making it impossible for any trader to meaningfully outdo the market on a long term.

Functionally, both the analysis techniques are used for selecting investments whose prices are will move in a productive and profitable direction for the trader/ investor; ‘up’ for traders who want to buy an investment and ‘down’ for traders who want to sell or reduce and investment. Fundamental analysis allows the investor to find an investment which is mispriced within the market in comparison to its real value as identified by the investor’s analysis. Technical analysis allows the investor to identify investments whose patterns match patterns that were previously seen, and will result in the price of investment moving in the required direction when followed.

Lastly, fundamental analysis sees the market as a rational sector. It also assumes that a security’s price eventually reflects the true value of the investment. Contrastingly, technical analysis sees the marketplace as a repetition of itself and its past trends, and a security’s price eventually moves in a similar way as other investment prices move.

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