Portfolio separation theorem

Similar financial terms

Efficient portfolio
A portfolio that provides the superior expected return for a given level of risk

Vega-neutral portfolio
A vega-neutral portfolio has an asset combination which implies a vega of zero.

Zero-beta portfolio
A zero-beta portfolio is constructed to have zero systematic risk, similar to the risk-free asset, that is, having a beta of zero. (i.e. in most cases, we assume the beta of debt to be zero).

Zero-investment portfolio
A zero-investment portfolio consists of zero net value because of a balanced establishment between long and short position, usually in the context of an arbitrage strategy.

Active portfolio strategy
A strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy.

Well diversified portfolio
A portfolio spread out over many securities in such a way that the weight in any security is small. The risk of a well-diversified portfolio closely approximates the systemic risk of the overall market, the unsystematic risk of each security having been diversified out of the portfolio.

Weighted average portfolio yield
The weighted average of the yield of all the bonds in a portfolio.

Tilted portfolio
An indexing strategy that is linked to active management through the emphasis of a particular industry sector, selected performance factors such as earnings momentum, dividend yield, P/E ratio, or selected economic factors such as interest rates and inflation.

Structured portfolio strategy
A strategy in which a portfolio is designed to achieve the performance of some predetermined liabilities that must be paid out in the future.

Replicating portfolio
A portfolio constructed to match an index or benchmark.

Portfolio variance
Weighted sum of the covariance and variances of the assets in a portfolio.

Portfolio turnover rate
For an investment company, an annualized rate found by dividing the lesser of purchases and sales by the average of portfolio assets.

Portfolio opportunity set
The expected return/standard deviation pairs of all portfolios that can be constructed from a given set of assets.

Portfolio internal rate of return
The rate of return computed by first determining the cash flows for all the bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows equal to the market value of the portfolio.

Portfolio insurance
A strategy using a leveraged portfolio in the underlying stock to create a synthetic put option. The strategy's goal is to ensure that the value of the portfolio does not fall below a certain level.

Portfolio
A collection of investments, real and/or financial.

Passive portfolio
A market index portfolio.

Passive portfolio strategy
A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index. A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities, and therefore, does not attempt to find mispriced securities.

Optimal portfolio
An efficient portfolio most preferred by an investor because its risk/reward characteristics approximate the investor's utility function. A portfolio that maximizes an investor's preferences with respect to return and risk.

Normal portfolio
A customized benchmark that includes all the securities from which a manager normally chooses, weighted as the manager would weight them in a portfolio.

Modern portfolio theory
Principles underlying the analysis and evaluation of rational portfolio choices based on risk-return trade-offs and efficient diversification.

Minimum-variance portfolio
The portfolio of risky assets with lowest variance.

Markowitz efficient set of portfolios
The collection of all efficient portfolios, graphically referred to as the Markowitz efficient frontier.

Markowitz efficient portfolio
Also called a mean-variance efficient portfolio, a portfolio that has the highest expected return at a given level of risk.

Market portfolio
A portfolio consisting of all assets available to investors, with each asset held -in proportion to its market value relative to the total market value of all assets.

Leveraged portfolio
A portfolio that includes risky assets purchased with funds borrowed.

Complete portfolio
The entire portfolio, including risky and risk-free assets.

Two-fund separation theorem
The theoretical result that all investors will hold a combination of the risk-free asset and the market portfolio.

Separation theorem
The value of an investment to an individual is not dependent on consumption preferences. All investors will want to accept or reject the same investment projects by using the NPV rule, regardless of personal preference.

Separation property
The property that portfolio choice can be separated into two independent tasks: (a) determination of the optimal risky portfolio, which is a purely technical problem, and (b) the personal choice of the best mix of the risky portfolio and the risk-free asset.

Spot futures parity theorem
Describes the theoretically correct relationship between spot and futures prices. Violation of the parity relationship gives rise to arbitrage opportunities.

Mutual fund theorem
A result associated with the CAPM, asserting that investors will choose to invest their entire risky portfolio in a market-index or mutual fund.