In finance, a portfolio is a collection of

investments Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...

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 c ...

s such as

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a compan ...

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 no o ...

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 a portfolio 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 infinitely divisible. Richard Roll's cr ...

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 a ...

, 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 well-diversified portfolio. The model takes into ac ...

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 in 1976, it is widely beli ...

, the Jensen Index, the

Treynor ratio The Treynor reward to volatility model (sometimes called the reward-to-volatility ratio or Treynor measure), named after Jack L. Treynor, is a measurement of the returns earned in excess of that which could have been earned on an investment that h ...

, the Sharpe diagonal (or index) model, the

value at risk Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by ...

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 diversificati ...

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 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 a ...

References

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Definition

Description

See also

References