finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

, a portfolio is a collection of

investments Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

Definition

The term "portfolio" refers to any combination of financial

asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

s such as

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

s, bonds and cash. Portfolios may be held by individual investors or managed by financial professionals, hedge funds, banks and other financial institutions. It is a generally accepted principle that a portfolio is designed according to the investor's risk tolerance, time frame and investment objectives. The monetary value of each asset may influence the risk/reward ratio of the portfolio. When determining asset allocation, the aim is to maximise the expected return and minimise the risk. This is an example of a multi-objective optimization problem: many efficient solutions are available and the preferred solution must be selected by considering a tradeoff between risk and return. In particular, a portfolio A is dominated by another portfolio A' if A' has a greater expected gain and a lesser risk than A. If no portfolio dominates A, A is a Pareto-optimal portfolio. The set of Pareto-optimal returns and risks is called the Pareto

efficient frontier In modern portfolio theory, the efficient frontier (or portfolio frontier) is an investment portfolio which occupies the "efficient" parts of the risk–return spectrum. Formally, it is the set of portfolios which satisfy the condition that n ...

for the Markowitz portfolio selection problem. Recently, an alternative approach to portfolio diversification has been suggested in the literatures that combines risk and return in the optimization problem.

Description

There are many types of portfolios including the

market portfolio Market portfolio is an investment portfolio that theoretically consisting of a weighted sum of every asset in the market, with weights in the proportions that they exist in the market, with the necessary assumption that these assets are infinite ...

and the zero-investment portfolio. A portfolio's asset allocation may be managed utilizing any of the following investment approaches and principles: dividend weighting, equal weighting, capitalization-weighting, price-weighting,

risk parity Risk parity (or risk premia parity) is an approach to investment management which focuses on allocation of risk, usually defined as volatility, rather than allocation of capital. The risk parity approach asserts that when asset allocations are ad ...

, the

capital asset pricing model In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a Diversification (finance), well-diversified Portfolio (f ...

arbitrage pricing theory In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross (economist), Stephen Ross i ...

, the Jensen Index, the Treynor ratio, the Sharpe diagonal (or index) model, the value at risk model,

modern portfolio theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of Diversificatio ...

and others. There are several methods for calculating portfolio returns and performance. One traditional method is using quarterly or monthly money-weighted returns; however, the true time-weighted method is a method preferred by many investors in financial markets. There are also several models for measuring the

performance attribution Performance attribution, or investment performance attribution is a set of techniques that performance analysts use to explain why a portfolio's performance differed from the benchmark. This difference between the portfolio return and the benchm ...

of a portfolio's returns when compared to an index or benchmark, partly viewed as

investment strategy In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics ...

References

Bibliography

* * * * * * * {{Authority control Financial markets Investment Personal finance Portfolio theories

Definition

Description

See also

References

Bibliography