Portfolio

Definition

A portfolio is a collection of financial assets such as stocks, bonds, and cash equivalents held by an investor. It is designed to achieve specific investment goals while managing risk through diversification.

5 Must Know Facts For Your Next Test

1. Diversification in a portfolio can reduce unsystematic risk but not systematic risk.
2. The expected return of a portfolio is the weighted average of the expected returns of its individual assets.
3. The risk (volatility) of a portfolio is not just the weighted average of individual risks; it also depends on the correlations between asset returns.
4. Modern Portfolio Theory (MPT) suggests that an optimal portfolio offers the highest expected return for a given level of risk.
5. A well-balanced portfolio typically includes a mix of asset classes to balance risk and return.

Review Questions

• How does diversification within a portfolio impact unsystematic and systematic risk?
• What factors are considered when calculating the expected return and risk of a portfolio?
• Explain how asset correlation affects the overall risk in a diversified portfolio.

Related terms

Asset Allocation:

The process of dividing investments among different kinds of assets to optimize risk and return.

Risk Tolerance:

An investor's ability or willingness to endure market volatility and potential loss.

Expected Return:

The anticipated amount of profit or loss an investment will generate based on historical data or analytical models.