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Portfolio (finance)
 
 
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In finance, a portfolio is an appropriate mix of or collection of investments held by an institution or a private individual.

Holding a portfolio is part of an investment and risk-limiting strategy called diversification
Diversification (finance)

Diversification in finance is a risk management technique, related to Hedge , that mixes a wide variety of investments within a Portfolio . It is the spreading out investments to reduce risks....
. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include stock
STOCK

Software for fixed assets management and stock control developed in 2004. Stocktaking process is carried using a hand-held mobile terminal equipped with barcode reader or RFID technology....
s, bonds
Bond (finance)

In finance, a bond is a debt security , in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed Maturity ....
, options, warrants
Warrant (finance)

In finance, a warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price, which is usually higher than the stock price at time of issue....
, gold certificates, real estate
Real estate

Real estate is a law term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location., futures contract
Futures contract

In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future, at a price determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders...
s, production facilities, or any other item that is expected to retain its value.

In building up an investment portfolio a financial institution will typically conduct its own investment analysis, whilst a private individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services.

ortfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions.






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In finance, a portfolio is an appropriate mix of or collection of investments held by an institution or a private individual.

Holding a portfolio is part of an investment and risk-limiting strategy called diversification
Diversification (finance)

Diversification in finance is a risk management technique, related to Hedge , that mixes a wide variety of investments within a Portfolio . It is the spreading out investments to reduce risks....
. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include stock
STOCK

Software for fixed assets management and stock control developed in 2004. Stocktaking process is carried using a hand-held mobile terminal equipped with barcode reader or RFID technology....
s, bonds
Bond (finance)

In finance, a bond is a debt security , in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed Maturity ....
, options, warrants
Warrant (finance)

In finance, a warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price, which is usually higher than the stock price at time of issue....
, gold certificates, real estate
Real estate

Real estate is a law term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location., futures contract
Futures contract

In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future, at a price determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders...
s, production facilities, or any other item that is expected to retain its value.

In building up an investment portfolio a financial institution will typically conduct its own investment analysis, whilst a private individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services.

Management

Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions. Selection involves deciding what assets to purchase, how many to purchase, when to purchase them, and what assets to divest. These decisions always involve some sort of performance measurement, most typically expected return
Expected return

The expected return is the weighted-average most likely outcome in gambling, probability theory, economics or finance.What Does Expected Return Mean?...
 on the portfolio, and the risk
Risk

Risk is a concept that denotes the precise probability of specific eventualities. Technically, the notion of risk is independent from the notion of value and, as such, eventualities may have both beneficial and adverse consequences....
 associated with this return (i.e. the standard deviation
Standard deviation

In statistics, standard deviation is a simple measure of the variability or statistical dispersion of a data set. A low standard deviation indicates that all of the data points are very close to the same value , while high standard deviation indicates that the data are ?spread out? over a large range of values....
 of the return). Typically the expected return from portfolios of different asset bundles are compared.

The unique goals and circumstances of the investor must also be considered. Some investors are more risk averse
Risk aversion

Risk aversion is a concept in economics, finance, and psychology related to the behaviour of consumers and investors under uncertainty. Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with a more certain, but possibly lower, expected value....
 than others.

Mutual fund
Mutual fund

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, Bond , short-term money market instruments, and/or other security ....
 have developed particular techniques to optimize their portfolio holdings. See fund management for details.

Portfolio formation

Many strategies have been developed to form a portfolio.
  • equally-weighted portfolio
  • capitalization-weighted portfolio
  • price-weighted portfolio
  • optimal portfolio (for which the Sharpe ratio
    Sharpe ratio

    The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a measure of the excess return per unit of risk in an investment asset or a trading strategy, named after William Forsyth Sharpe....
     is highest)


Models

Some of the financial models used in the process of Valuation
Valuation

Valuation may refer to:*Valuation , the determination of the economic value of an asset or liability*Valuation , the determination of the ethic or philosophic value of an object ...
, stock selection, and management of portfolios include:
  • Maximizing return, given an acceptable level of risk.
  • Modern portfolio theory
    Modern portfolio theory

    Modern portfolio theory proposes how Homo economicuss will use Diversification to optimize their portfolio s, and how a risky asset should be priced....
    —a model proposed by Harry Markowitz
    Harry Markowitz

    Harry Max Markowitz is a professor at the Rady School of Management at the University of California, San Diego. He is best known for his pioneering work in Modern Portfolio Theory, studying the effects of asset risk, correlation and Diversification on expected investment portfolio returns....
     among others.
  • The single-index model of portfolio variance.
  • Capital asset pricing model
    Capital asset pricing model

    In finance, the Capital Asset Pricing Model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified Portfolio , given that asset's non-Diversification risk....
    .
  • Arbitrage pricing theory
    Arbitrage pricing theory

    Arbitrage pricing theory , in finance, is a general theory of asset pricing, that has become influential in the pricing of stock.APT holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represent...
    .
  • The Jensen Index.
  • The Treynor
    Treynor ratio

    The Treynor ratio is a measurement of the returns earned in excess of that which could have been earned on a riskless investment .The Treynor ratio relates excess return over the risk-free rate to the additional risk taken; however systematic risk instead of total risk is used....
     Index.
  • The Sharpe
    William Forsyth Sharpe

    William Forsyth Sharpe is the STANCO 25 Professor of Finance, Emeritus at Stanford University's Graduate School of Business and the winner of the 1990 Nobel Memorial Prize in Economic Sciences....
     Diagonal (or Index) model.
  • Value at risk
    Value at risk

    In financial mathematics and financial risk management, Value at Risk is a widely used measure of the market risk on a specific Portfolio of financial assets....
     model.


Returns

There are many different methods for calculating portfolio returns. A traditional method has been using quarterly or monthly money-weighted returns. A money-weighted return calculated over a period such as a month or a quarter assumes that the rate of return over that period is constant. As portfolio returns actually fluctuate daily, money-weighted returns may only provide an approximation to a portfolio’s actual return. These errors happen because of cashflows during the measurement period. The size of the errors depends on three variables: the size of the cashflows, the timing of the cashflows within the measurement period, and the volatility of the portfolio.

A more accurate method for calculating portfolio returns is to use the true time-weighted method. This entails revaluing the portfolio on every date where a cashflow takes place (perhaps even every day), and then compounding together the daily returns.



Attribution

Performance Attribution
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....
 explains the active performance (i.e. the benchmark-relative performance) of a portfolio. For example, a particular portfolio might be benchmarked against the S&P 500 index. If the benchmark return over some period was 5%, and the portfolio return was 8%, this would leave an active return of 3% to be explained. This 3% active return represents the component of the portfolio's return that was generated by the investment manager (rather than by the benchmark).

There are different models for performance attribution, corresponding to different investment processes. For example, one simple model explains the active return in "bottom-up" terms, as the result of stock selection only. On the other hand, sector attribution explains the active return in terms of both sector bets (for example, an overweight position in Materials, and an underweight position in Financials), and also stock selection within each sector (for example, choosing to hold more of the portfolio in one bank than another).

An altogether different paradigm for performance attribution is based on using factor models, such as the Fama-French three-factor model
Fama-French three-factor model

In the portfolio management field, Eugene Fama and Kenneth French developed the highly successful Fama-French three factor model to describe market behavior....
.

See also

  • Banking
  • Investment management
    Investment management

    References...
  • Market portfolio
    Market portfolio

    A 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 ....
  • Modern portfolio theory
    Modern portfolio theory

    Modern portfolio theory proposes how Homo economicuss will use Diversification to optimize their portfolio s, and how a risky asset should be priced....
  • Performance Attribution
    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....
  • Risk management
    Risk management

    Risk management is activity directed towards the assessing, mitigating and monitoring of risks. In some cases the acceptable risk may be near zero....
  • Styles of investment strategy
    Styles of investment strategy

    Within the context of financial investment, especially investment management, different approaches to selecting investment have differentiated themselves into disting styles....


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