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Portfolio Analysis: Calculating Risk and Returns, Strategies and More

Portfolio Analysis: Calculating Risk and Returns, Strategies and More

Posted April 18, 2023 at 10:50 am
Chainika Thakar


The process of trading with a portfolio of stocks requires a number of steps like stock selection, the formation of strategies while creating a portfolio and so on. In this blog, we will cover all about portfolio analysis, the tools to compute risks over returns and the relationship between the risks and returns.

What is a portfolio?

A portfolio is a collection of financial instruments such as stocks, bonds, cash equivalents, or funds held by an individual, investment company or financial institution. An investment portfolio can be regarded as a pie which is divided into various parts, each representing a financial instrument with the objective of achieving a particular level of risk and return.

Investors should construct a portfolio according to the investment objectives, risk tolerance, and time frame.

Example: Suppose you want to invest $100,000 in the financial market then your portfolio may look like this.

No.Investor’s portfolioInvestmentPercentageSecurityReturns
1.Government Bonds$25,00025%HighLow
2.Banks’ Fixed Deposits$15,00015%HighAverage
4.Mutual Funds$25,00025%AverageAverage

What is a portfolio analysis?

Portfolio analysis is one of the areas of investment management that enables market participants to analyze and assess the performance of a portfolio (equities, bonds, alternative investments, etc.).

Portfolio analysis is intended to measure performance on a relative and absolute basis along with its associated risks.

What are the tools of portfolio analysis?

There are some tools or calculation ratios to be used for conducting the portfolio analysis. These tools are:

1) Holding Period Return

It calculates the overall return during the investment holding period.

Holding Period Return ={(Ending Value–Beginning Value)+Dividends Received}/Beginning Value

2) Arithmetic Mean

It calculates the average returns of the overall portfolio.

ArithmeticMean = (R1+R2+R3+……+Rn)/n

R = Returns of Individual Assets

3) Sharpe Ratio

It calculates the excess returns over and above the risk-free return per unit of portfolio risk.

Sharpe Ratio Formula = (Expected Return – Risk-Free rate of return) / Standard Deviation

4) Alpha

It calculates the difference between the actual portfolio returns and the expected returns.

Alpha of portfolio = Actual rate of return of portfolio – Expected Rate of Return on Portfolio

5) Tracking Error

It calculates the standard deviation of the excess return concerning the benchmark rate of return.



6) Information Ratio

It calculates the success of the active investment manager’s strategy by calculating excess returns and dividing it by the tracking error.



7) Sortino Ratio

It calculates the excess return over and above the risk-free return per unit of negative asset returns.



Originally posted on QuantInsti. Visit the blog read more on this topic.

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