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Modern portfolio theory |
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Definition of Modern portfolio theoryModern portfolio theoryPrinciples underlying the analysis and evaluation of rational portfolio choices
Related Terms:Efficient diversificationThe organizing principle of modern portfolio theory, which maintains that any riskaverse Active portfolio strategyA strategy that uses available information and forecasting techniques to seek a Agency theoryThe analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of Arbitrage Pricing Theory (APT)An alternative model to the capital asset pricing model developed by Bubble theorySecurity prices sometimes move wildly above their true values. Complete portfolioThe entire portfolio, including risky and risk-free assets. Dedicating a portfolioRelated: cash flow matching. Efficient portfolioA portfolio that provides the greatest expected return for a given level of risk (i.e. standard Excess return on the market portfolioThe difference between the return on the market portfolio and the expectations theory of exchange ratestheory that expected spot exchange rate equals the forward rate. Factor portfolioA well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of Feasible portfolioA portfolio that an investor can construct given the assets available. Feasible set of portfoliosThe collection of all feasible portfolios. Hedged portfolioA portfolio consisting of the long position in the stock and the short position in the call Index Portfolio Rebalancing Service (IPRS)Index portfolio Rebalancing Service (IPRS) is a comprehensive investment service that can help increase potential returns while reducing volatility. Several portfolios are available, each with its own strategic balance of Index Funds. IPRS maintains your personal asset allocation by monitoring and rebalancing your portfolio semi-annually. Leveraged portfolioA portfolio that includes risky assets purchased with funds borrowed. Leveraged portfolioA portfolio that includes risky assets purchased with funds borrowed. Liquidity theory of the term structureA biased expectations theory that asserts that the implied forward Local expectations theoryA form of the pure expectations theory which suggests that the returns on bonds Market portfolioA portfolio consisting of all assets available to investors, with each asset held -in market portfolioportfolio of all assets in the economy. In practice a broad stock market index, such as the Standard & Poor's Composite, is used to represent the market. Market PortfolioThe total of all investment opportunities available to the investor. Market segmentation theory or preferred habitat theoryA biased expectations theory that asserts that the Markowitz efficient portfolioAlso called a mean-variance efficient portfolio, a portfolio that has the highest Markowitz efficient set of portfoliosThe collection of all efficient portfolios, graphically referred to as the Mean-variance efficient portfolioRelated: Markowitz efficient portfolio Minimum-variance portfolioThe portfolio of risky assets with lowest variance. Normal backwardation theoryHolds that the futures price will be bid down to a level below the expected Normal portfolioA customized benchmark that includes all the securities from which a manager normally Optimal portfolioAn efficient portfolio most preferred by an investor because its risk/reward characteristics Passive portfolioA market index portfolio. Passive portfolio strategyA strategy that involves minimal expectational input, and instead relies on pecking order theoryFirms prefer to issue debt rather than equity if internal finance is insufficient. PortfolioA collection of investments, real and/or financial. PortfolioA collection of securities and investments held by an investor Portfolio DiversificationSee diversification Portfolio insuranceA strategy using a leveraged portfolio in the underlying stock to create a synthetic put Portfolio internal rate of returnThe rate of return computed by first determining the cash flows for all the Portfolio managementRelated: Investment management Portfolio managerRelated: Investment manager Portfolio opportunity setThe expected return/standard deviation pairs of all portfolios that can be Portfolio separation theoremAn investor's choice of a risky investment portfolio is separate from his Portfolio turnover rateFor an investment company, an annualized rate found by dividing the lesser of Portfolio varianceWeighted sum of the covariance and variances of the assets in a portfolio. Portfolio WeightThe percentage of a total portfolio represented by a single specific Preferred habitat theoryA biased expectations theory that believes the term structure reflects the Pure expectations theoryA theory that asserts that the forward rates exclusively represent the expected Quantity Theory of Moneytheory that velocity is constant, and so a change in money supply will change nominal income by the same percentage. Formalized by the equation Mv = PQ. random walk theorySecurity prices change randomly, with no predictable trends or patterns. Real Business Cycle TheoryBelief that business cycles arise from real shocks to the economy, such as technology advances and natural resource discoveries, and have little to do with monetary policy. Replicating portfolioA portfolio constructed to match an index or benchmark. Static theory of capital structuretheory that the firm's capital structure is determined by a trade-off of the Structured portfolio strategyA strategy in which a portfolio is designed to achieve the performance of some theory of constraints (TOC)a method of analyzing the bottlenecks Tilted portfolioAn indexing strategy that is linked to active management through the emphasis of a trade-off theoryDebt levels are chosen to balance interest tax shields against the costs of financial distress. Weighted average portfolio yieldThe weighted average of the yield of all the bonds in a portfolio. Well diversified portfolioA portfolio spread out over many securities in such a way that the weight in any Zero-beta portfolioA portfolio constructed to represent the risk-free asset, that is, having a beta of zero. Zero-investment portfolioA portfolio of zero net value established by buying and shorting component
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