What is portfolio?

Portfolio is a collection of investments. An investment could be a stock, a real estate, bond, ... . Each investment carry a certain risk. By owning several investments risk could be reduced. If the price of stock going down it is not likely that the price of the real estate is also going down. Therefore the risk is spread over all investments in the portfolio. That spreading is usually called diversification.

For a portfolio there is usually associated some parameters: expected return, risk, what type of investments to include in the portfolio etc. Managing portfolio means that performance of the portfolio is measured and compared with the expected return. In case of difference between expected return and the current performance of portfolio, portfolio manager can decide to sell some assets and buy some other. For example, if there is decision that there should 10% of portfolio in beverage industry, say, AA Cola, and the price of AA Cola is going down, it might be a good decision to sell AA Cola and BUY BB Cola.

Risk of portfolio is usually defined as standard deviation of the expected return. Greater the deviation, greater the risk. If an investor can choose among several portfolios with the same expected return it best to choose the one with the smallest standard deviation, i.e. risk. These concepts are introduced by Harry Markowitz, in his paper Portfolio Selection (1952).