A group of assets which are owned or controlled by an investor (individual or institutional) in order to reduce risk by diversification. A portfolio involves the combination of more than one stock, bond, cash equivalent, commodity, real estate, derivative instrument, or any other asset. The construction of a portfolio is usually affected by several factors including the goals of the investor, the risks involved, the taxes on profits, and a comprehension of the available opportunities and alternative investments. The more diversified the assets in a portfolio, the more likely it produce a return comparable to market return.
Portfolios can help investors achieve a variety of objectives (wealth accumulation, income generation, etc) because:
- Portfolios can reduce the overall risk of constituent investments by holding a well-diversified combination of assets.
- Portfolios help stabilize returns over time.
- Portfolios serve as a store of value (they allow investors to transfer purchasing power to the future).
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