In finance, a portfolio is a collection of
investments.
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
stocks,
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 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,
arbitrage pricing theory, 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 model,
modern portfolio theory 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.
See also
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Capital asset pricing model
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Infection ratio
In finance, the infection ratio describes the relationship between non-performing portfolios and the total loan portfolio. The infection ratio is used to work out the relationship between the non-performing part of the portfolio (i.e., loans not e ...
*
Investment management
References
{{Authority control
Financial markets
Investment
Personal finance