Portfolio Management analyses the composition of the whole portfolio and thus accounts for the correlation of stocks as well.
Markets are complexly interrelated to each other. Consequently the fall of stocks in one market segment can result in the rise of stocks in another segment. Portfolio Management incorporates these interrelations in order to reduce the risk of the overall portfolio to a minimum. Portfolio Management controls the composition of the portfolio, looking at which stocks are included to what proportion, in order to maximize return and minimize risk of the total portfolio.
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Harry M. Markowitz, who received a Nobel Prize in Economics for his work in 1990, developed the theory of portfolio optimization, on which all modern portfolio theories are based, as early as 1952. The main aim of portfolio optimization is to analyze the risk of every stock and minimize it through diversification. Equity risk is divided into two components: specific and systematic risk. Specific risk is the component of an asset's volatility that is |
uncorrelated with general market moves, while systematic risk is the risk of taking part in the overall market. As the market moves every security is more or less affected. |
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Portfolio Management works with statistical and mathematical methods that calculate the ideal composition of a stock portfolio. It is important that all the stocks within a portfolio form a balanced unity that provides opportunities for high profits and a reduction of risk in the multiple possibilities |
of future market developments. |
