Portfolio & Risk: key terms, formulas and examples
A portfolio spreads money across asset classes. Diversification, rebalancing and dollar-cost averaging reduce risk, and higher possible return always comes with higher risk.
Example
Investing 100 every month smooths out price swings.
Takeaway
Match risk to your goal and your timeline.
Key terms
- Portfolio
- The collection of investments someone holds.
- Index fund
- A fund that copies a market index at low cost.
- Volatility
- How sharply a price swings up and down.
- Short selling
- Betting a price will fall by selling borrowed shares first.
- Blue chip
- Shares of large, well-established, reliable companies.
- Diversification
- Spreading money or products across several areas to reduce risk.
- Asset allocation
- How an investor splits money among stocks, bonds and cash.
- Risk tolerance
- How much loss an investor can accept without panicking.
- Asset class
- A group of similar investments, like stocks or bonds.
- Mutual fund
- A pooled fund run by professional managers.
- Rebalancing
- Adjusting a portfolio back to its target mix.
- Long-term investing
- Holding assets for years to ride out ups and downs.
- Dollar-cost averaging
- Investing a fixed sum at regular intervals.
- Risk-return tradeoff
- Higher possible reward comes with higher risk.
- Capital gain
- Profit from selling an asset for more than it cost.
- Defensive stock
- A stock that holds up in downturns.
Formulas
Dividend yieldDPS ÷ Price × 100
Compound growthP × (1 + r)ⁿ
Sharpe ratio(Rp − Rf) ÷ σ
Portfolio returnw × Ra + (1 − w) × Rb
Required return (CAPM)Rf + β × (Rm − Rf)
Expected payoffp × G − (1 − p) × L
Total stock return(End − Start + D) ÷ Start × 100
Simple interestP × r × t
Portfolio weightV ÷ T × 100
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