Portfolio Management Cheat Sheet

The core ideas of Portfolio Management distilled into a single, scannable reference — perfect for review or quick lookup.

PiqCue — piqcue.com/portfolio-management/cheatsheet

Quick Reference

Asset Allocation

The process of dividing an investment portfolio among different asset categories such as stocks, bonds, cash, and alternatives. Research consistently shows that asset allocation is the primary driver of portfolio returns and risk, accounting for the vast majority of return variability over time.

Modern Portfolio Theory (MPT)

A framework developed by Harry Markowitz in 1952 that demonstrates how investors can construct portfolios to maximize expected return for a given level of risk by carefully choosing the proportions of various assets. MPT introduced the concept of the efficient frontier.

Diversification

The risk management strategy of spreading investments across different asset classes, sectors, geographies, and securities to reduce the impact of any single investment's poor performance on the overall portfolio. Diversification reduces unsystematic (company-specific) risk but cannot eliminate systematic (market) risk.

Risk-Adjusted Return

A measure of how much return an investment generates relative to the amount of risk taken. Common metrics include the Sharpe ratio (excess return per unit of total risk), the Treynor ratio (excess return per unit of systematic risk), and Jensen's alpha (excess return above the CAPM-predicted return).

Rebalancing

The process of periodically buying or selling assets in a portfolio to restore the original or desired level of asset allocation. Market movements cause portfolio weights to drift from targets, potentially increasing risk beyond the investor's tolerance.

Efficient Frontier

A set of optimal portfolios that offer the highest expected return for a defined level of risk, or the lowest risk for a given level of expected return. Portfolios below the efficient frontier are suboptimal because they do not provide enough return for their level of risk.

Beta

A measure of a security's or portfolio's sensitivity to movements in the overall market. A beta of 1.0 indicates the investment moves in line with the market, while a beta greater than 1.0 indicates higher volatility than the market and less than 1.0 indicates lower volatility.

Alpha

The excess return of an investment relative to the return predicted by its benchmark or a pricing model such as the Capital Asset Pricing Model (CAPM). Positive alpha indicates the portfolio manager has added value beyond what the risk level would suggest.

Investment Policy Statement (IPS)

A formal document that defines an investor's return objectives, risk tolerance, time horizon, liquidity needs, tax considerations, legal constraints, and unique circumstances. The IPS serves as a roadmap for all portfolio decisions and helps maintain discipline during volatile markets.

Capital Asset Pricing Model (CAPM)

A financial model that establishes a linear relationship between the expected return of an asset and its systematic risk (beta). The formula is: Expected Return = Risk-Free Rate + Beta x (Market Return - Risk-Free Rate). CAPM is used to estimate the cost of equity and evaluate whether an investment offers adequate compensation for risk.

Key Terms at a Glance

Alpha:The excess return of a portfolio relative to its benchmark or the return predicted by a pricing model such as CAPM.

Asset Allocation:The distribution of investment capital among different asset classes such as equities, fixed income, cash, and alternatives.

Benchmark:A standard or index against which portfolio performance is measured, such as the S&P 500 for US large-cap equities.

Beta:A measure of a security's or portfolio's volatility relative to the overall market. A beta of 1.0 indicates market-level sensitivity.

Capital Asset Pricing Model (CAPM):A model that describes the relationship between systematic risk and expected return, used to estimate the appropriate required rate of return for an asset.

Correlation:A statistical measure between -1.0 and +1.0 describing how two assets move in relation to each other.

Diversification:The practice of spreading investments across various assets to reduce the impact of any single holding's poor performance on the total portfolio.

Dollar-Cost Averaging:An investment strategy of regularly investing a fixed dollar amount regardless of the asset's current price.

Drawdown:The peak-to-trough decline in the value of a portfolio before a new peak is achieved, typically expressed as a percentage.

Efficient Frontier:The set of portfolios that offers the maximum expected return for each level of risk or the minimum risk for each level of expected return.

Efficient Market Hypothesis:The theory that asset prices fully reflect all available information, making it impossible to consistently achieve above-market returns.

Equity Risk Premium:The additional return that investors demand for holding equities over risk-free assets such as government bonds.

Fixed Income:A class of investments, primarily bonds, that pay a fixed or predictable stream of interest income and return principal at maturity.

Information Ratio:A measure of portfolio returns above a benchmark relative to the volatility of those excess returns (tracking error).

Investment Policy Statement (IPS):A document establishing the guidelines, objectives, and constraints for managing an investment portfolio.

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