In
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.
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 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, the
capital asset pricing model,
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 of a portfolio's returns when compared to an index or benchmark, partly viewed as
investment strategy.
See also
*
*
Capital asset pricing model
*
Hedge (finance)
*
Infection ratio
*
Investment management
Investment management (sometimes referred to more generally as financial asset management) is the professional asset management of various Security (finance), securities, including shareholdings, Bond (finance), bonds, and other assets, such as r ...
*
Portfolio investment
*
Portfolio optimization
*
References
Bibliography
*
*
*
*
*
*
*
{{Authority control
Financial markets
Investment
Personal finance
Portfolio theories