|
| |
| |
|
 |
Tutorial |
 |
 |
 |
 |
 |
| Portfolio
Optimization |
 | |
 |
|
|
| | |
| |
| What |
Portfolio
Optimization (also referred to as Tactical Asset
Allocation) is the process of analyzing your portfolio
and managing the assets within it, to obtain the highest
return given your level of risk. Through Portfolio Optimization,
FinPortfolio helps to ensure that, given your choice of
portfolio assets, you are holding the appropriate amount
or weighting of each asset to achieve the highest returns,
at your desired level of risk. To give you a
better understanding of the factors that contribute to
the relative optimality of your portfolio, Portfolio Optimization provides
a return/volatility profile of each portfolio asset, and
data on the correlations between portfolio
assets.
|
| When |
It is important to optimize your portfolio on a
regular, periodic basis. FinPortfolio recommends that
you optimize quarterly, though depending upon your
actual portfolio, semi-annually or annually might be
sufficient. Note: Since you are not required to
rebalance your portfolio each time you optimize, you can
optimize as frequently as you like. Also, it is
important you consider the tax and transaction cost
implications of selling some of your assets and buying
more of others as you pursue an optimal portfolio.
|
| Why |
Portfolio Optimization is a "free lunch" in
that you
gain additional expected return without taking on additional
risk. It enables you to allocate
and rebalance portfolio assets based upon the overall
target return/volatility profile you desire for your
portfolio - I.e. enables you to achieve an optimal
portfolio, in which assets are allocated (weighted
relative to the total portfolio) so as to produce the
best possible return given a certain desired level of
volatility or risk.
|
| How |
To use Portfolio Optimization most effectively,
we recommend that you first be sure that you understand
the factors that contribute to a portfolio's relative
optimality - That means taking the time to familiarize
yourself with the concepts of Return & Return
Volatility, Risk-Adjusted Returns, Asset Correlation,
and the Efficient Frontier. (See links
below) Then follow these steps:
- Specify any constraints that you wish to set on
individual portfolio assets. Here, you can
specify both the minimum and the maximum percentage
that any given asset should represent in an optimized
portfolio. Note: Asset constraints are most
often used by institutional money managers, who must
satisfy minimum or maximum holding requirements for
certain assets. For the average investor,
without explicit holding preferences, the pre-set
default constraints for all portfolio assets will
usually yield better results when optimizing. The
wider your constraints (allowing for 0 to 100% is
ideal), the more our Optimizer can help you obtain
the highest return at each level of risk.
- View the return/volatility profile of each of your
portfolio assets - This helps you to frame your return
expectations in a risk-adjusted context, and better
appreciate the potential impact of an asset's
volatility on its return.
- Examine how each of your portfolio assets
correlate to one another - This helps you to
understand the extent to which individual assets lend
to or take away from portfolio diversification.
- Optimize! You push the button, FinPortfolio
will do the rest.
- View your portfolio relative to the Efficient
Frontier - This nifty graph shows all of the optimal
return/volatility combinations that exist for your
portfolio (represented by an arc), and where your
portfolio falls on the graph relative to that
arc. Move along the curve to see a range of
unique optimal portfolios, each of which gives you the best
expected return a given level of risk.
- Select an optimal portfolio - By selecting any given
return/volatility point on the Efficient Frontier, you
can view how your portfolio's individual asset
weightings would need to change to achieve that
optimized return/volatility profile. Comparative
pie charts for your current portfolio and a given
optimized portfolio also help to illustrate this, ,
but you also can use the "Implement"
button to see a table containing the detailed
changes necessary to optimize. For each stock or
mutual fund, a certain number of shares should be
bought or sold.
- Decision time! To rebalance or not to
rebalance? Here, you need to decide if it is
worthwhile to rebalance your portfolio to achieve a
preferred return/volatility profile along the
Efficient Frontier. Only you can make this
decision. Be sure to factor in any transaction costs
and tax costs associated with buying and selling
your securities.
|
|
Once you have determined an optimal
asset allocation, FinPortfolio shows you how to
implemented it.
|
| Relevant Links |
|
|
|
| |
|
