Horizon Analysis

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DEFINITION of 'Horizon Analysis'

The analysis of a security or portfolio’s total returns over a period of time, referred to as the investment horizon. Horizon analysis allows an investor to assess performance under different levels of risk, market yields and return expectations. This is referred to as scenario analysis. The horizon date chosen is dependent on the needs of the analyst, and can correspond to a business cycle or maturity date.

BREAKING DOWN 'Horizon Analysis'

Horizon analysis is considered more realistic than simple yield analysis. When combined with statistical analysis, specifically the distribution of returns based on scenarios, horizon analysis allows investors to estimate expected and unexpected losses. This allows a portfolio manager to set aside funds if returns have a higher probability of being low.

Making assumptions about how yields and rates will behave in the future, and how those yields and rates will affect an investment or series of investments, can be daunting for portfolio managers. Because of the complexity in making such assumptions, managers may look to other standard financial measurements, such as yield to maturity. Horizon analysis makes this task simpler by allowing portfolio managers to break down expectations into scenarios. This is made easier by the use of sophisticated technology, which can allow more minute adjustments to be taken into account.

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