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Portfolio Management Principles

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Risk-Adjusted Return

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Risk-adjusted return refines an investment's return by measuring how much risk is involved in producing that return. It is often represented using metrics such as Sharpe Ratio or Alpha.

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Diversification

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Diversification is a risk management strategy that involves spreading investments across various financial instruments, industries, and other categories to reduce exposure to any single asset or risk.

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Technical Analysis

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Technical analysis is the study of past market data, primarily through the use of charts, for the purpose of forecasting future price trends in a portfolio.

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Passive Portfolio Management

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Passive portfolio management involves maintaining a well-diversified portfolio designed to mirror the performance of a specific index or benchmark over the long term.

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Liquidity

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Liquidity refers to the ease with which an asset or security can be converted into ready cash without affecting its market price.

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Active Portfolio Management

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Active portfolio management involves making continuous buy and sell decisions based on market research, forecasting, and personal judgment.

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Expected Return

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Expected Return is the mean of the probability distribution of possible returns for a security or portfolio, anticipating the likelihood of various investment outcomes.

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Rebalancing

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Rebalancing involves realigning the weightings of a portfolio of assets by periodically buying or selling assets to maintain an original or desired level of asset allocation or risk.

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Portfolio Optimization

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Portfolio optimization is the process of choosing the best portfolio (out of a set of portfolios) that offers the highest expected return for a defined level of risk.

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Time Horizon

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Time horizon refers to the total length of time that an investor expects to hold a portfolio or investment before taking cash out. It affects investment choices and risk level.

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Tactical Asset Allocation

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Tactical asset allocation is a dynamic investment strategy that actively adjusts a portfolio's asset allocation to take advantage of market inefficiencies or strong market sectors.

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Beta

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Beta is a measure of the volatility, or systematic risk, of a security or a portfolio, in comparison to the market as a whole. It is used as a measure of an asset's risk in relation to the market.

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Sharpe Ratio

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The Sharpe ratio is a measure that indicates the average return minus the risk-free return divided by the standard deviation of the return on an investment.

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Asset Allocation

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Asset allocation involves distributing investments among different asset categories such as stocks, bonds, and cash to balance risk and reward based on an investor's time frame, risk tolerance, and investment goals.

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Efficient Market Hypothesis (EMH)

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The Efficient Market Hypothesis suggests that stocks always trade at their fair value on stock exchanges, making it impossible to either purchase undervalued stocks or sell stocks for inflated prices.

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Risk Tolerance

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Risk tolerance is the degree of variability in investment returns that an individual is willing to withstand in their investment portfolio. It is an essential consideration in portfolio management.

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Modern Portfolio Theory (MPT)

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Modern Portfolio Theory is an investment theory that proposes the concept of optimizing a portfolio to maximize returns for a given level of risk by carefully choosing the proportions of various assets.

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Fundamental Analysis

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Fundamental analysis is the process of examining a company's financial statements, competitive position, and economic conditions to estimate a security's intrinsic value.

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Strategic Asset Allocation

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Strategic asset allocation is a portfolio strategy whereby the investor sets target allocations for various asset classes and periodically rebalances the portfolio to maintain these established allocations.

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Alpha

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Alpha is a measure of an investment's performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or portfolio and compares its risk-adjusted performance to a benchmark index.

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