Business, Legal & Accounting Glossary
Market portfolio is a hypothetical construct employed in Modern Portfolio Theory. It is a non-existent portfolio that comprises every security available to investors in a specific market. Securities in a market portfolio are in quantities proportional to their market values. The aggregate of stocks nearest to the hypothetical market portfolio are stock indexes like the S&P 500 and FTSE 100.
It is a circumstance when a particular portfolio does not incorporate an adequate amount of a specific security compared to the weight of that security in the underlying benchmark portfolio. This scenario happens in the case of a managed portfolio. The underweighting of a specific security may enable the portfolio manager to achieve greater returns to that of the index benchmark.
Under weighting a security is also done when a portfolio manager believes that the specific security will underperform its peer sector. This is done to concentrate the money on stocks that are expected to perform well-thus maximizing the profit of the portfolio.
It is the risk present in the whole market or a whole segment of a market. Systematic risk is also known as market risk. Examples of systematic risk include wars, fluctuating interest rates, and recession. This type of risk affects a wide range of securities. Systematic risk can be minimized only by hedging.
Window dressing is a strategy employed by portfolio and mutual fund managers to make better the fund performance or portfolio appearance at the end of the financial year or quarter. These cosmetic changes are for the benefit of its shareholders or clients.
It is a type of portfolio risk that comes into fore when an investment goes more than three standard deviations from the mean is greater than exhibited by normal distribution. Tail risk shows that the portfolio is not normal. Hedge funds carry greater tail risk than mutual funds.
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This glossary post was last updated: 2nd April, 2020 | 0 Views.