Portfolio (finance)

In finance, a portfolio is a collection of investments held by an investment company, hedge fund, financial institution or individual.[1]


The term “portfolio” refers to any combination of financial assets such as stocks, 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.

The portfolio is divided into two types. They are discretionary and non discretionary portfolios.

When determining a proper asset allocation, there is need to consider the one that is aimed at maximizing the expected return and minimizing 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.[2] Newly, an alternative approach to portfolio diversification has been suggested in the literatures that combines risk and return in the optimization problem. [3]


There are many types of portfolios including the market portfolio and the zero-investment portfolio.[4] 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.

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.[5] 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


  1. Staff, Investopedia (2003-11-25). "Portfolio". Investopedia. Archived from the original on 2018-04-20. Retrieved 2018-04-19.
  2. Markowitz, H.M. (March 1952). "Portfolio Selection". The Journal of Finance 7 (1): 77-91
  3. Hatemi-J, A.; El-Khatib, Y. (2015). "Portfolio selection: An alternative approach". Economics Letters. 135 (C): 424–427. Archived from the original on 2016-08-26. Retrieved 2016-08-14.
  4. Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior. Mark Grinblatt, Sheridan Titman, Russ Wermers The American Economic Review, Vol. 85, No. 5 (Dec., 1995), pp. 1088-1105
  5. Investment Performance Measurement Errors, accessed 2008-06-29.
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