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What Is Portfolio Weight?

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  • Written By: K.C. Bruning
  • Edited By: John Allen
  • Last Modified Date: 06 September 2016
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Portfolio weight is the percentage of a certain security or type of investment in an investment portfolio. One of the most basic calculations for this kind of analysis is to determine the dollar value of the holding and divide it by the total portfolio value. The same process can be followed using number of shares instead. Determining this balance is one of the key factors of asset allocation.

There are a variety of ways that portfolio weight can be approached. One of the most common methods is to determine the weight of a specific security. An analyst may also perform the calculation to determine how much a portfolio is invested in a certain area. Possible categories include type of business, index exposure, or geographical region. These types of analysis can be combined to provide different perspectives on the total investment.

Portfolio weight is used to assess asset allocation. It is a flexible process which can be molded to suit the analyst’s investment strategy. Determining the weight of various assets weight can help an investor to determine which changes, if any, need to be made in various sectors in order to maximize total portfolio performance.

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While it is possible to determine portfolio weight with a simple calculation, there are several more complex equations that can be used to perform this kind of asset analysis. Some take into consideration the type of portfolio, such as whether it is long-only, fully invested, or zero invested. There are also other conditions, categories, and restrictions which can add to the complexity of the equation and which allow a deeper analysis of the investment blend.

Many analysts will determine portfolio weight as an early step in performing a full analysis of asset allocation. By determining various kinds of portfolio weights and weighing them against each other, an analyst can create an optimum strategy for future investments. The effectiveness of this method depends upon how well the analyst understands the way these different factors work together.

Determining portfolio weight is a part of the process of modern portfolio theory (MPT). This is a method in which a certain amount of risk is accepted in the hopes that the portfolio will achieve maximum return. An analyst can begin to both determine risk and maximize return by understanding how different factors affect portfolio composition. It is essentially a way to acquire a deep understanding of current investments so that their performance can be assessed and measured against future projections.

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