Financial Terms related to Portfolio

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PORTFOLIO
Active portfolio strategy

• A strategy that uses available information and forecasting techniques to seek a

better performance than a portfolio that is simply diversified broadly. Related:passive
portfolio strategy

Balanced portfolio

• A set of investments balanced between riskier and more conservative securities.

Complete portfolio

• The entire portfolio, including risky and risk-free assets.

Dedicating a portfolio

• Related: cash flow matching.

Efficient portfolio
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• A portfolio that provides the greatest expected return for a given level of risk (i.e.
standard deviation), or equivalently, the lowest risk for a given expected return.

• A portfolio that maximizes return for a given level of risk or minimizes risk for a
given level of return.

Excess return on the market portfolio

• The difference between the return on the market portfolio and the risk less rate.

Factor portfolio

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• A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a
beta of zero on any other factors.

Feasible portfolio

• A portfolio that an investor can construct given the assets available.

Feasible set of portfolios

• The collection of all feasible portfolios.

Hedged portfolio

• A portfolio consisting of the long position in the stock and the short position in the
call option, so as to be risk less and produce a return that equals the risk-free
interest rate.

Leveraged portfolio

• A portfolio that includes risky assets purchased with funds borrowed.

Market portfolio

• A portfolio consisting of all assets available to investors, with each asset held -in
proportion to its market value relative to the total market value of all assets.

Markowitz efficient portfolio

• Also called a mean-variance efficient portfolio, a portfolio that has the highest
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expected return at a given level of risk.

Markowitz efficient set of portfolios

• The collection of all efficient portfolios, graphically referred to as the Markowitz

efficient frontier.

Mean variance efficient portfolio

• Related: Markowitz efficient portfolio

Minimum variance portfolio

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• The portfolio of risky assets with lowest variance.

Modern portfolio theory

• Principles underlying the analysis and evaluation of rational portfolio choices based
on risk-return trade-offs and efficient diversification.

Normal portfolio

• A customized benchmark that includes all the securities from which a manager
normally chooses, weighted as the manager would weight them in a portfolio.

Optimal portfolio

• An efficient portfolio most preferred by an investor because its risk/reward

characteristics approximate the investor's utility function. A portfolio that maximizes
an investor's preferences with respect to return and risk.

Passive portfolio

• A market index portfolio.

Passive portfolio strategy

• A strategy that involves minimal expectational input, and instead relies on

diversification to match the performance of some market index. A passive strategy
assumes that the marketplace will reflect all available information in the price paid
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for securities, and therefore, does not attempt to find mispriced securities. Related:
active portfolio strategy

Portfolio

• A collection of investments, real and/or financial.

• Collection of securities held by an investor.

• A collection, or group, of assets.

• Collection of securities held by an investor.

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• A diversified pool of investments typically comprising stocks, bonds, or money-
market instruments.

• Is the holding of a collection of investments. For some individuals and institutions it

is the entire holdings consisting of both assets and liabilities.

Portfolio analysis

• Is the methodology which quantified systematic and nonsystematic risk for

investment holdings. Harry Markowitz is considered the primary influence in this
field.

Portfolio insurance

• A strategy using a leveraged portfolio in the underlying stock to create a synthetic

put option. The strategy's goal is to ensure that the value of the portfolio does not fall
below a certain level.

• Is a form of hedging equity products, although others include credit instruments as

well. Sometimes, this process is called dynamic hedging because it requires quick
adjustments in the hedge. Initially, futures were used at various stop points to serve
as synthetic put options. However, rapid and abrupt price moves can cause serious
imbalances in the hedging mix.

Portfolio internal rate of return

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• The rate of return computed by first determining the cash flows for all the bonds in
the portfolio and then finding the interest rate that will make the present value of the
cash flows equal to the market value of the portfolio.

Portfolio management

• Related: Investment management

Portfolio manager

• Related: Investment manager

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• Also known as Fund Manager. The entity responsible for investing a mutual fund's
assets, implementing its investment strategy and managing day-to-day portfolio
trading.

Portfolio opportunity set

• The expected return/standard deviation pairs of all portfolios that can be

constructed from a given set of assets.

Portfolio separation theorem

• An investor's choice of a risky investment portfolio is separate from his attitude

towards risk. Related: Fisher's separation theorem.

Portfolio theory

• Evaluates the reduction of nonsystematic or diversifiable risks through the selection

of securities or other instruments into a composite holding or efficient portfolio. This
efficiency means that a portfolio would offer lower risks or more stable returns for a
targeted return level. Instruments that have independent returns lower
nonsystematic risks. Also, instruments that are inversely related on a return basis
reduce the diversifiable risks. The basic theory assumes that returns are
independent, investor expectations are homogeneous, and that the normalized
probability distributions are stable.
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Portfolio turnover rate

• For an investment company, an annualized rate found by dividing the lesser of

purchases and sales by the average of portfolio assets.

Portfolio variance

• Weighted sum of the covariance and variances of the assets in a portfolio.

Replicating portfolio

• A portfolio constructed to match an index or benchmark.

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Structured portfolio strategy

• A strategy in which a portfolio is designed to achieve the performance of some

predetermined liabilities that must be paid out in the future.

Tax efficient portfolios

• Are investment holdings which have both trading profits and tax minimization
impact as goals. These portfolios recognize that the subsequent payment of taxes
reduces the investor's after tax returns. When holdings are held by pension plans or
tax deferred accounts, there is no immediate tax liability on realized gains. However,
an investor holding mutual funds which have high rates of security turnover and
significant realized gains are subject to immediate tax year liabilities.

Tilted portfolio

• An indexing strategy that is linked to active management through the emphasis of a

particular industry sector, selected performance factors such as earnings
momentum, dividend yield, price-earnings ratio, or selected economic factors such
as interest rates and inflation.

Weighted average portfolio yield

• The weighted average of the yield of all the bonds in a portfolio.

Well diversified portfolio

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• A portfolio spread out over many securities in such a way that the weight in any
security is small. The risk of a well-diversified portfolio closely approximates the
systemic risk of the overall market, the unsystematic risk of each security having
been diversified out of the portfolio.

Zero beta portfolio

• A portfolio constructed to represent the risk-free asset, that is, having a beta of
zero.

Zero investment portfolio

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• A portfolio of zero net value established by buying and shorting component
securities, usually in the context of an arbitrage strategy.