Paullier Educates

Here you will find concepts that can help you understand how an investment portfolio is made up.

Core concepts:


The investor profile summarizes those personal characteristics that must be taken into account when deciding on investments: the client’s objectives with these investments, their time horizon, their risk aversion, among others.


Refers to the projected duration for the investment portfolio. For how many years do I plan to make these investments? For example, maybe it will be for 30 years, because I want it to be my retirement savings, maybe for 2 or 3 years because by then I will surely want to buy my house. 


Volatility is the dispersion of the returns with respect to the average return or, in other words, the degree of movement of the price of a financial asset. Volatility is normally greater in stocks than in bonds and although volatility is normally associated with risk, this is not exactly the same, since the investment time horizon comes into play there. For a portfolio with a short time horizon, volatility can be a risk, since the investor may need the funds at an inopportune time. However, for a long-term horizon, volatility has a lower associated risk.


The liquidity of a financial product refers to the ease of buying or selling in the market. A liquid product may be traded for relatively large amounts and will typically have a smaller spread. The spread is the difference between the buy and sell price.

On the other hand, an illiquid product may be difficult to trade for relatively large amounts and typically has a higher spread.


Credit risk is understood as the possibility that the company may fail to pay the obligations corresponding to the bond. 


Interest rate risk is understood as the implicit risk that the bonds have as a result of possible fluctuations in interest rates. For example, as benchmark interest rates (US Treasury) rise, bond prices fall as they are discounted at a higher interest rate.

Financial instruments:


Bonds are a financing instrument, in which the investor grants a loan to the company or country issuing the bond, and the latter agrees to make fixed or variable payments throughout the life of the bond, paying interests and returning capital. 

Bonds can be sovereign, corporate or supranational bonds and generally have a maturity and a credit quality rating granted by risk rating agencies. They do not operate at a single price but are listed on the market with a buyer price (bid) and a seller price (offer). 

The return on investment always depends on the purchase price and the form of payment of interest and capital. 


They are zero coupon bonds, issued by the Central Bank of Uruguay (BCU) in Uruguayan pesos. They work at a discount rate: when buying it, we always pay less than what we will receive at maturity, that difference is the interest. 

There is a primary market in which the BCU directly tenders a new LRM offer, and a secondary market in which the different market agents trade these instruments.


Shares represent share ownership of those companies that choose to have their shares open to investors. Instead of having individual owners or a private group, any investor can own a fraction of the company by buying shares in it.  


ETFs are investment funds that trade in the market in a similar way to stocks, hence their acronym in English “exchange-traded-funds”. 

They can have active or passive management. Active management means that the fund’s management team intends to invest in such a way as to generate a difference against its benchmark.  In the case of passive management, the team tries to replicate an index. An example of active management is the Vanguard S&P 500 ETF (VOO) which tracks the recognized American S&P 500 index. 


A mutual fund is an investment vehicle that pools money from multiple investors and invests it for a purpose. They can invest in stocks, bonds, a mixture of both (balanced funds) or in alternative strategies such as real estate, commodities, etc. Money is actively managed by a team specialized in each category.  

There are investment funds that distribute dividends and others that accumulate these dividends and reinvest them automatically.  

Furthermore, there are open and closed funds. Open-end funds can grow or shrink in size as new investors join the fund or current investors withdraw their money.  

They all have a single NAV (Net Asset Value) price based on the closing prices of each of the securities held in the fund’s portfolio. NAV price may be calculated daily, weekly, monthly. 

Open funds are bought and sold at that NAV price.  

Closed-end funds, in addition to the NAV, have a market price, which is at which the units of the fund are bought and sold in the market. Depending on the supply and demand at each moment, the market price can move away from the NAV.


Stocks and bonds are called traditional investments. Alternative investments cover a very heterogeneous group, including both financial assets and real assets: raw materials, real estate. This group is characterized by having little correlation with traditional assets. Precisely for this reason, they provide diversification to portfolios.


They are financial instruments issued by an issuing bank, which undertakes to comply with the personalized conditions of the note. These have a maturity date and can vary in their qualities, for example, they can have the capital guaranteed or they can pay a conditional coupon depending on the evolution of the underlying assets. 


Options are derivatives on their underlying assets, and can be either call or put options on the underlying. The option contract contains an expiration, a price and the underlying to which it is referring.

Options can be used both for speculation on the price of an underlying asset or as hedging.


It is another type of derivative (such as options), in which the parties agree to buy or sell the underlying asset at a future price. In this case, it is not a purchase or sale option since each party must comply with the agreement.    

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