Portfolio Management Essentials
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Terms in this set
- Asset Allocation The division of a portfolio across asset classes — the single largest driver of long-run portfolio return variability.
- Diversification Reducing portfolio risk by combining assets whose returns are less than perfectly correlated.
- Rebalancing Adjusting portfolio weights back to their targets after market moves have shifted them away.
- Efficient Frontier The set of portfolios offering the highest expected return for each level of risk.
- Benchmark A reference portfolio against which a manager's performance and risk are measured.
- Sharpe Ratio Excess return per unit of total risk — (portfolio return − risk-free rate) divided by standard deviation.
- Tracking Error The standard deviation of the difference between a portfolio's returns and its benchmark's returns.
- Optimization Solving for the portfolio weights that maximize an objective (e.g., return or utility) subject to constraints (e.g., risk or budget).
- Risk Tolerance An investor's combined willingness and ability to bear investment risk — a core input to the investment policy statement.
- Strategic Allocation The long-run target asset-class weights set in the investment policy statement to meet the investor's objectives and constraints.