'Portfolio' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
In the world of business and finance, a portfolio stands for an investment collection that a person or institution holds. People and other entities put together portfolios in order to diversify their holdings to reduce risk to a manageable level. A number of different kinds of risk are mitigated through the acquisition of a few varying types of assets. A portfolio’s assets might be comprised of stocks, options, bonds, bank accounts, gold certificates, warrants, futures contracts, real estate, facilities of production, and other assets that tend to hold their value.
Investment portfolios may be constructed in various ways. Financial entities will commonly do their own careful analysis of investments in putting together a portfolio. Individuals might work with the either financial firms or financial advisors that manage portfolios. Alternatively, they could put together a self directed portfolio through working with a self directed online broker such as TD Ameritrade, eTrade, or Scott Trade.
A whole field of portfolio management has arisen to help with the allocation of investment money. This management pertains to determining the types of assets that are appropriate for an individual’s risk tolerance and ultimate goals. Choosing the instruments that will comprise a portfolio has much to do with knowing the kinds of instruments to buy and sell, how many of each to obtain, and the time that is most appropriate to purchase or sell them.
Such decisions are rooted in a measurement for the investments’ performance. This usually pertains to risk versus return on investments and anticipated returns of the entire portfolio. With portfolio returns, various types of assets are understood to commonly return amounts of differing ranges. Portfolio management has to factor in an individual investor’s own precise situation and desired results as well. There are investors who are more fearful of risk than are other investors. These kinds of investors are termed risk averse. Risk averse portfolios are significantly different in their composition than are typical portfolios.
Mutual funds have evolved the act of portfolio management almost to a science. Their fund managers came up with techniques that allow them to prioritize and ideally set their portfolio holdings. This fund management reduces risk and increases returns to maximum levels. Strategies that these managers have created for running portfolios include designing equally weighted portfolios, price weighted portfolios, capitalization weighted portfolios, and optimal portfolios in which the risk adjusted return proves to be the highest possible.
Well diversified portfolios will contain many different asset classes. These will include far more than just stocks, bonds, and mutual funds. They will feature international stocks and bonds to provide diversification away from the U.S. dollar, as well as foreign currencies and hard asset commodities such as real estate investments, and gold and silver holdings.