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A portfolio refers to a collection of investment tools or financial instruments possesses by an individual investor, a company or a financial institution. There are varieties of investments and assets that make up a portfolio, these include cash equivalents, bonds, stocks, currencies, mutual funds, closed funds, exchange-traded funds, and commodities. A portfolio can be held by an investment bank, a hedge fund or an individual investor.
A portfolio can also be used in other contexts, it refers to the compilation of materials that indicates the qualification, skills, and expertise of a professional.
A Little More on What is a Portfolio
An investment portfolio contains offers an investor of an institution the opportunity to invest in diversified assets. A portfolio comprises of different assets with different risks and returns. An investment objective determines the category of assets that an investor will select in a portfolio.
Usually, portfolios are managed by money managers or financial experts, in some cases, individual investors with in-depth knowledge in the market can also manage their portfolios themselves. When an investor, hedge fund or financial institution wants to select the assets or investment instruments in a portfolio, the level of risks and rate of return of the assets must be considered.
Impact of Risk Tolerance on Portfolio Allocations
The kind of objective an investor seeks to achieve with an investment determines what types of assets that will be selected ina portfolio, this includes their levels of risks and returns. However, it is important to know that the risk tolerance of an investor has an effect on the allocation of assets in a portfolio.
This risk tolerance informs the decisions an investor will make and which assets will be more favored. For instance, when an investor is risk-tolerant, the assets in the portfolio might be those with high risks and high returns. Regardless of the risk tolerance level of investors, the main objective is to maximize profit and reducing the volatility of assets in a portfolio.
Impact of Time Horizon on Portfolio Allocations
Time horizon is an important factor that affects portfolio allocations, this is coupled with the investment objective of the holder of the portfolio. For example, an investor investing for retirement may choose assets with longer maturity dates while an investor with a different goal can allocate assets with shorter maturity periods in the portfolio.