Portfolio Analytics

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What is Portfolio Analysis, and how to master it?

Explaining Portfolio Analysis in Simple Terms

A portfolio, in general, is a term to define a certain number of representations of your work.

In the world of investments, think of a portfolio as a mix of things you own.This mix could include stuff like owning pieces of businesses, borrowing money, online money, and switching cash from other nations. Financial experts, like portfolio managers and investment advisors, offer a service called portfolio analysis to help manage these investments well.

Equity management companies need to perform portfolio analysis periodically as they constantly invest and withdraw from funds depending on their performance. Some formulas are used in the analysis of the portfolios to evaluate their performance.


Holding period return

Holding period return is the value of the returns during the period in which stocks are held. The formula to calculate the holding period is:
Holding period return = (ending value-beginning value) + dividends received / beginning value


Arithmetic mean

The arithmetic mean in portfolio analysis is the average sum of all the returns of the total number of portfolios. The formula for the arithmetic mean is:
Arithmetic mean = (R1+ R2+ R3...+ Rn) / n Here, R is the return on individual investments.


Sharpe ratio

The Sharpe ratio is nothing but a comparison between the return on investment and its risk. The formula for the Sharpe ratio is:
Sharpe ratio = (Expected return - risk-free rate of return) / standard deviation (volatility)



It is the difference between the actual rate of return and the assumed rate of return. The formula for Alpha is the actual rate of return - the assumed rate of return.


Tracking error

A tracking error is a difference between the return of the portfolio and the benchmark rate of return. The formula for tracking error is Rp-Rb.

Key Concepts in Portfolio Analysis

Asset Allocation

Asset allocation is all about allocating funds to different financial instruments for profit. In the process of asset allocation, there are investment options like equity markets, bonds, real estate, and commodities. Things like an individual’s profession, risk tolerance, goals, and ambitions are considered in the process of asset allocation.

Risk and Return

In a portfolio analysis, risk and return are mutually exclusive. The potential risk associated with an investment must always be considered by investors.Risks like volatility, interest rate swings, and economic variables should all be taken into account when making an investment.


Diversification is like having a mix of things in your investment basket.Where you diversify your funds, by investing in multiple cryptos, stocks, properties, and more. This way, if one investment doesn't do well, it won't hurt your whole money pot.Making sure your eggs are not all in one basket and attempting to lower the overall risk are the two main goals.

Performance Measurement

For investors, it's really important to check how well their investments are doing.Common performance metrics include the calculation of returns such as the absolute return, relative return (benchmark comparison), and risk-adjusted return (Sharpe ratio, Treynor ratio).

Techniques for Portfolio Analysis

Modern Portfolio Theory (MPT)

Developed by Harry Markowitz, MPT is a widely adopted framework for portfolio analysis.MPT really cares about spreading your investments out and putting your money in the right places, all while thinking about how risky it is and how much you can make. It's like finding that sweet spot between taking a chance and getting a reward.MPT utilizes mathematical models to optimize portfolios that aim to achieve the maximum return for a given level of risk or minimize risk for a given level of return.

Asset Correlation Analysis

Understanding the correlation between assets is critical for portfolio diversification. While negative correlation suggests assets move in opposing directions, positive correlation suggests assets move in the same direction.Investors can figure out which assets don't move in the same direction or move in opposite ways by looking at past prices. This helps spread out risks and make investments better.

Risk Management

When looking at a portfolio, it's crucial to handle risks effectively. This means assessing and decreasing possible risks using methods like safeguarding against losses, setting limits on the amount of loss you can handle, or using financial tools. The ultimate goal of these techniques is to keep the portfolio safe from negative outcomes and potential market drops.To put it another way, it is similar to encircling your money with a shield to safeguard it from future issues.Just imagine it's a way to look out for your cash in a friendly and easy-to-understand manner.

Frequently Asked Questions

Spreading your investments across different types of investments is what asset allocation entails. 

Portfolio analysis holds significance as it aids in achieving a balance between risk and return. The allocation should be based on the risk tolerance, goals, and time horizon of the investor.

Effectively managing risks is a major aspect of portfolio analysis. This means checking and lowering different kinds of dangers by doing things like spreading out your investments in different places, protecting yourself from losses, setting boundaries on how much you might lose, and using financial tools..

Holding period return, Arithmetic mean, Sharpe ratio, Alpha, and tracking error are some of the performance metrics used in portfolio analysis.

Modern Portfolio Theory (MPT) is a widely adopted framework in portfolio analysis.

 It's important for investors to spread their money and choose investments wisely. This helps them grasp why diversifying and picking the right investments matter. Consider how much risk you're comfortable with and how much profit you want when making your decisions.MPT utilizes mathematical models to optimize portfolios that aim to achieve the maximum return for a given level of risk or minimize risk for a given level of return.

No.While portfolio analysis helps you make smart choices, it can't guarantee you'll strike it rich financially.Financial markets are naturally uncertain, and investing always comes with some level of danger. 

How often you need to check your investment mix relies on a bunch of things, like what you want from your investments, how tricky your mix is, and what's happening in the market.

Generally, it is advisable to conduct portfolio analysis periodically, such as quarterly or annually, or whenever there are significant changes in the investor's circumstances or the market environment. Regular check-ins make sure the investment mix fits what the investor wants, and they let us make changes promptly if necessary.