Econ Grapher

Investment Portfolio

What is a portfolio?
A portfolio is the holding of a collection of investments, and can often form part of a particular investment strategy e.g. long-short spread portfolios, stock and derivatives portfolios. A portfolio can also be part of implementing an asset allocation or diversification process that is designed to optimize the risk and return trade-off. Portfolio design is a key aspect of wealth management and investment planning, because the make up of the portfolio will change depending on the investors' needs e.g. a lower risk income oriented portfolio will be suitable for a conservative or retired investor, while a higher risk growth oriented portfolio will be more suitable for long-term wealth building.

How does it relate to Markets?
Investment portfolios are ways of executing market strategies. In the definition that a portfolio is simply a collection of invesment securities and instruments, portfolios can be used in specific strategies. For example stock option arbitrage might be executed using a portfolio e.g. on one leg, buy a call option, and borrow some money, on the other leg, buy the stock and a put option, which creates an identical payoff profile (where the difference between the two portfolios is the profit). Other portfolios may seek to take advantage of market anomalies or market views, e.g.  one strategy may be to invest in emerging market ETFs, and at the same time invest in ETFs that mimic a short position in developed markets - this way much of the market risk is offset because of the long (buy), and short (sell) match, while the emerging market risk premium is captured as the portfolio return. 

Diversification
Diversification can happen at the portfolio holding level and at the security level, for example at the portfolio holding level diversification would encompass buying a range of different stocks so as to limit the total exposure to individual stocks. While at the security level it might involve buying units of an ETF (exchange traded fund), whereby the fund may hold dozens, or even hundreds of stocks in the case of a large index tracking ETF. The point of diversification is to try and reduce stock specific risk, while at the same time maximising returns - there is a large body of literature on portfolio theory, and risk-return optimisation. 

Sources and further reading:
William F. Sharpe - Macro-Investment Analysis
William N. Goetzmann - An Introduction to Investment Theory
Investopedia - Balanced Investment Strategy
Investor Words - Zero-Investment Portfolio
How to Create an Investment Portfolio
Portfolio Optimization with Modern Portfolio Theory
Yahoo Finance - Create a new portfolio...

Graph Library:
n/a

Original Source: http://www.econgrapher.com/encyclopedia-portfolio.html

 Back to the Econ Grapher Encyclopedia

Bookmark and Share