What Does Investment Portfolio Mean?
What is the definition of investment portfolio? What assets should be included in a portfolio and what allocation to follow may be complicated decision, especially for novice investors. However, in general, an investment portfolio is constructed based on the expected return, the risk that the investor is willing to accept, and the level of liquidity.
The expected return represents the yield on an asset. For example, a bank account that yields 2% increases the total amount by 2% annually. Or a stock that is bought at $10 and currently trades at $15 has a yield of 50%. Obviously, any investor seeks the highest possible return, but not all investors are willing to undertake the maximum risk. The risk represents the uncertainty of investment. Usually, a high-risk investment portfolio has a higher probability of generating a higher return than expected. The liquidity of an asset represents how quickly an asset can be converted into cash.
Let’s look at an example.
Kate is a retiree that lives in Florida. Her pension is $3,000 per month, and she has invested $10,000 in government bonds with a maturity of 15 years. Kate doesn’t like investment risk, so she goes the safe road, hoping that the government bonds will give her an extra income at the age of 75. So, Kate is a conservative investor.
On the other hand, Jerry, her son, currently at his 30s, is a sophisticated investor with a highly-diversified portfolio consisting of US stocks, foreign stocks, CDs, options, and mutual funds. Jerry keeps the riskier assets, such as emerging-market stocks, because they are more likely to generate a higher return than the US stocks or the CDs. Unlike his mother, he dislikes bonds because they generate a low return, which doesn’t meet his aggressive investment profile. Also, Jerry is not a long-term investor. He invests in the short-term to gain the maximum return in a period of 3 to 5 months.
In spite of their different risk tolerance, both Kate and Jerry would like to be able to liquidate their assets, if required. Liquidity makes transactions easier and cheaper, providing flexibility for the holder of the portfolio if there is an immediate need for capital.
Define Investment Portfolios: Investment portfolio means a group of investments owned by an investor.