Financial Terms related to Portfolio This document is part of the valuable contents available at www.ftpall.com, a free online glossary with more than five thousand financial and business terms. This document can be copied and distributed freely Find thousands of financial terms at www.ftpall.com respecting its original format. It is forbidden its transcription, translation or change on its format without authorization of its author or editor. 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 www.ftpall.com 2|Page • 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 Find thousands of financial terms at www.ftpall.com • 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 www.ftpall.com 3|Page 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 Find thousands of financial terms at www.ftpall.com • 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 www.ftpall.com 4|Page 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. Find thousands of financial terms at www.ftpall.com • 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 www.ftpall.com 5|Page • 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 Find thousands of financial terms at www.ftpall.com • 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. www.ftpall.com 6|Page 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. Find thousands of financial terms at www.ftpall.com 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 www.ftpall.com 7|Page • 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 Find thousands of financial terms at www.ftpall.com • A portfolio of zero net value established by buying and shorting component securities, usually in the context of an arbitrage strategy.