Portfolio (finance)

In finance, a portfolio is a collection of investments held by an investment company, hedge fund, financial institution or individual.

The term portfolio refers to any combination of financial risk such as , bonds and cash. Portfolios may be held by individual investors and/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 and is referred to as the asset allocation of the portfolio. When determining a proper asset allocation one aims at maximizing the expected return and minimizing the risk. This is an example of a multi-objective optimization problem: more "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 literature that is based on maximizing the risk adjusted return.

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: equal weighting, capitalization-weighting, price-weighting, risk parity, the capital asset pricing model, arbitrage pricing theory, the Jensen Index, the Treynor ratio, the Sharpe diagonal (or index) model, the value at risk model, modern portfolio theory and others.

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