Portfolio theory

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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.

	Follow this link for all the terms related to portfolio.

	Embedded terms in definition
	Basis Distributions Diversifiable risk Efficiency Efficient portfolio Expectations Homogeneous Instruments Investor Nonsystematic risk Offer Portfolio Probability distribution Probability Return Securities Systematic risk

	Related Terms
	Active portfolio strategy Agency theory Arbitrage pricing theory Balanced portfolio Bubble theory Complete portfolio Dedicating a portfolio Dividend irrelevance theory Dividend relevance theory Efficient portfolio Excess return on the market portfolio Expectations theory of forward exchange rates Factor portfolio Feasible portfolio Hedged portfolio Leveraged portfolio Liquidity preference theory Liquidity theory of the term structure Local expectations theory Market portfolio Market segmentation theory or preferred habitat theory Markowitz efficient portfolio Mean variance efficient portfolio Minimum variance portfolio Modern portfolio theory Normal backwardation theory Normal portfolio Odd lot theory Optimal portfolio Passive portfolio Passive portfolio strategy Portfolio Portfolio analysis Portfolio insurance Portfolio internal rate of return Portfolio management Portfolio manager Portfolio opportunity set Portfolio separation theorem Portfolio turnover rate Portfolio variance Preferred habitat theory Pure expectations theory Random walk theory Replicating portfolio Residual theory of dividends Static theory of capital structure Structured portfolio strategy Theory of cross hedging Theory of hedging Tilted portfolio Weighted average portfolio yield Well diversified portfolio Zero beta portfolio Zero investment portfolio

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