What is a Portfolio?
In finance, a portfolio is a spread of investment products held by an individual, hedge fund, corporation, or financial institution.
The value of each asset in a portfolio determines its risk/reward ratio – this is known as the asset allocation of the portfolio.
With proper asset allocation the long term goal is to maximize expected returns and minimize risk.
Every individual portfolio is formed according to the investor’s level of risk tolerance, investment objectives, and time frame.
When building your investment portfolio, you must decide whether it is for the long- or short-term, and how much risk you are willing to tolerate.
There are numerous ways of managing an investment portfolio. Notable approaches include: arbitrage pricing theory, price-weighting, risk parity, the capital asset pricing model, the value at risk model, the Jensen Index, equal weighting, capitalization-weighting, the Treynor the Sharpe diagonal model, and more.
Calculating portfolio returns and performance is achieved by using quarterly or monthly money-weighted returns. Another way is by using the true time-weighted method – that compensates for external flows.
A portfolio should have a good spread of investments. When purchasing shares, you should have a mix of defensive stocks and cyclical stocks. Defensive stocks are those issued by companies that are not affected when the national economy goes into recession, such as those of utility companies. Cyclical shares do well when the economy is booming, but suffer during hard times – examples include car companies, vacation providers and producers of luxury goods.
A person in charge of a client’s portfolio is called a portfolio manager, who works alongside researchers and investment analysts.
In order to have portfolios with more successful outcomes, individuals may get together and form investment clubs, where their money is pooled together before purchasing financial products.
Other meanings of Portfolio
Portfolio can also mean the range of products a company has. For example, GlaxoSmithKline, the UK’s largest pharmaceutical company, has a wide portfolio of drugs, covering cardiovascular, diabetes, antibiotics, painkillers and rare diseases.
Many different businesses use the world portfolio with this meaning, which could be seen as a synonym of ‘offering’. E.g. Company A is buying Company B to expand its offering or portfolio (expand its range of products to sell).
Portfolio also means a flat bag for carrying documents – a briefcase.
A minister without portfolio can either mean:
- A government minister with no specific responsibility, or
- a government minister who is not head of any ministry.
A portfolio can also mean a collection of drawings or photographs, typically bound in book form, or in a folder.
Origin: The English word ‘portfolio’ originates from the Italian word portafoglio, which comes from the Latin word portare (to carry). The Latin word foglio means related to a ‘sheet’ or ‘leaf’.
Video – Building a Portfolio