Posted on October 15, 2010 by Rich Browne

A portfolio is a set of financial assets belonging to natural or legal persons, following an investment. Investment in a portfolio of securities is less risky than an allocation of capital on a single type of security. The allocation must be properly diversified in that among the financial assets there must be a correlation.

An important feature of a financial portfolio is its degree of diversification which attains a balance between risk, volatility and profitability, taking into account the expected length of placement.

With portfolio allocation, various types of assets in individual assets play a crucial role in stock investment. However, the possibility of losing money on the stock market is a constant risk.

Portfolio management entails making a decision on which assets to incorporate in your portfolio, based on your targets for the portfolio and the prevailing economic conditions. It is imperative that you make informed or well calculated moves as regards which assets to purchase, their volume, timing, and which ones to divest from.

As can be expected, such determinations typically entail some degree of performance measurement. This relates to expected returns on the portfolio, and the risk synonymous with such a return, otherwise known as the standard deviation of the return.

The diversification will depend on the degree of risk aversion of the investor. A balanced portfolio takes few risks but can provide a good return to its owner. In contrast, a dynamic portfolio translates to more risk for the holder, but can also lead to significant gains (e.g., companies in changing sectors or restructuring).

A portfolio deemed secure points to a selection of stocks representing companies less exposed to cyclical changes in the economic environment. Numerous techniques and strategies have been formulated in the allocation of a balanced portfolio. And these include equally weighted portfolio, capitalization weighted portfolio, price weighted portfolio and the optimal portfolio (for which the Sharpe ratio is most eminent).

There are various ways of computing portfolio returns, and a traditional formula involves using quarterly or monthly money weighted returns. A money weighted return calculated over a month or a quarter takes that the rate of return during such a period is constant.

Due to persistent fluctuation of portfolio returns, money weighted returns roughly provide an estimate of a portfolio’s actual return. And a more accurate technique for calculating portfolio returns entails utilizing the true time weighted method. It involves revaluing the portfolio on all the dates on which a cash flow occurs, as well as combining the daily returns.

In economics, portfolio is a technical term and means a report, file shares and other securities held by a single investor, sometimes in a narrower meaning: composition of various assets and portfolio is also the name of modern biography.