Simplicity

• In many ways, portfolio analysis simplifies the complex questions of how resources should be distributed and what investments should be held or sold. However, this simplicity can also be a limitation. Another limitation of portfolio analysis is its tendency to not give much credit to companies that have only modest returns. For example, there were periods when Apple performed moderately at best; it's numbers were not terrible but they were not great either. Then Apple released the iPod, followed by the iPhone and iPad. These were each huge successes that could not have been anticipated in a simple portfolio analysis.
  
  

Assumptions

• Portfolio analysis is limited by its assumptions. To perform a portfolio analysis, an analyst has to make assumptions about the growth of the economy, the forecasted performance of a company, and the future value of the currency in which he is dealing. Even a small variance between his forecasts and reality can result in a large difference to the bottom line. Similarly, portfolio analysis is only as good as the data you use; if the data is incorrect, your analysis will be too.
  
  

Costs

• When you change your portfolio, it incurs costs. Every time you buy or sell stock you have to pay transaction fees. You may also have to pay taxes on any profits from selling your stock. Further, if you try to change your portfolio quickly, you could end up not getting the best price for your stocks or property.
  
  

Hedging

• Portfolio analysis also tends to work against the concept of hedging. Hedging is when you hold investments that have an inverse relationship, meaning when one goes up in value, the other goes down. The benefit of this is to make sure that at least one of your investments is always earning you money. In portfolio analysis, the focus is on what combination of investments will secure the greatest return based on future projections. It does not allow for the holding of a moderate performer to act as a hedge against a competitor. For instance, Apple is the primary competitor against PC products such as Windows. Investing in Apple is effectively hedging against a downturn in Windows; however, for several years Apple was a moderate performer at best. If an investor looked only at the returns of a portfolio analysis, he would have missed the opportunity for hedging the investment.