What is Portfolio How To?

What is Portfolio How To

In simple terms, portfolio refers to the total of financial assets owned by a person, institution or investor. These assets can consist of various financial instruments such as stocks, bonds, commodities, real estate, cash and other investment instruments. In this article, you can find answers to the questions what is a portfolio, how to make it, how to manage a portfolio, what are the basic portfolio analysis methods.

What is Portfolio?


Investment can generally be defined as the whole of activities carried out for the purpose of adding to capital or wealth accumulation. Portfolio is the way wealth is created and, in a broad sense, refers to all the assets owned by a person or organization. In a narrow sense, portfolio can be defined as an asset group consisting of money and capital market instruments and precious metals. The total value of financial instruments held by a person, institution or investor in order to invest and obtain returns represents the portfolio.

The definition of portfolio, which comes from the combination of the Latin words portare (to carry) and foglio (page, bill), can also be defined as a financial asset created by bringing together more than one security. In other words, although any portfolio consists of different financial assets, there is a correlation between the securities that make up the portfolio. Therefore, the portfolio definition can be considered as an asset with its own measurable qualities.
How to Make a Portfolio?

The purpose of any portfolio is to provide maximum efficiency (return) with the aim of diversifying or reducing risk by investing (asset allocation) in more than one financial instrument in line with investment and return planning. In other words, a portfolio is created in order to obtain the determined return with low risk. When creating any portfolio; The purpose of the portfolio, investment objectives, time horizon, risk tolerance, asset preference (allocation) based on risk tolerance, diversification of financial instruments, liquidity preference and other factors should be taken into account.

The purpose of the portfolio, investment objectives and time horizon can be thought of as questions that complement each other and form the basis of the portfolio. On the other hand, each investor's attitude towards risk varies. Depending on this level of difference, some investors prefer to take high risks, while others tend to avoid risk. Investors' attitudes towards risk affect their portfolio preferences. The total risk that a portfolio is exposed to consists of systematic and unsystematic risks. Systematic risk; It can be defined as risks that arise at the macroeconomic level, that is, in the economy as a whole, such as inflation, interest rate, market-based, political and geopolitical, exchange rate risk, and that can affect the majority of securities at the same time (which companies cannot avoid). On the other hand, non-systematic risks can be specified as risks at the microeconomic level, that is, industrial or company-related risks, such as financial, management, industry risks, and unforeseen legal situations.

Diversification means investing in order to reduce the risk level; It refers to the allocation between different financial instruments, industries and other categories. Having different asset classes within the portfolio can enable your portfolio to balance risks and generate returns against different market scenarios. In other words, by creating a portfolio consisting of different financial instruments, each of which will react differently to the same scenario, it is aimed to minimize the risk level and at the same time provide the return at the targeted (optimum) level.
How to Manage a Portfolio?

While investors can create and manage their own portfolios, they can also get support in portfolio management from financial experts, especially portfolio management companies. Portfolio management is divided into two: traditional and modern portfolio management.

Portfolio management, in which investors create and manage their own portfolios, is close to the traditional portfolio management approach, but can also be a mixture of traditional and modern portfolio management styles. Assets allocated in traditional portfolio management; It is based on the investor's knowledge, experience, research and intuition. In this style of management, it is essential to diversify the assets in the portfolio. However, diversification is done in a simple way. In other words, the correlation between the securities to be allocated is not taken into account in order to keep the level of unsystematic risk that may affect the portfolio at a minimum level. In other words, numerical methods are not used much in security selection.

Modern portfolio management aims to diversify portfolio based on statistical calculations. In the modern portfolio management approach, the correlation between securities in the portfolio should be negative. The correlation in question is determined by statistical calculations. In this way, it is aimed to minimize the estimated risk that the portfolio will be exposed to. In other words, if the assets in the portfolio react the same in the relevant scenario, the diversification factor becomes ineffective, that is, the risk cannot be reduced. According to modern portfolio theory, it is possible to determine expected return levels at a lower risk level with different weighted combinations of securities in the portfolio.

How to Perform Portfolio Analysis?

The performance of any portfolio should be measured retrospectively at regular intervals and its consistency with the predetermined return target should be monitored. Portfolio performance can be evaluated by comparing it with any benchmark or measured with statistical methods.

One of the statistical methods commonly used in portfolio performance calculation is Sharpe Ratio. Sharpe Ratio, which is considered a non-complex method because it uses a single parameter in risk-return comparison, shows how much return (excluding risk-free return) the portfolio can provide in return for one unit of risk (standard deviation). This ratio is also used to compare portfolios consisting of similar investment instruments. In addition, there are different statistical methods that measure portfolio performance.