The Main table contains the detailed information about your portfolio and its components. It is divided in four parts. Fields available for editing are marked with green.
PORTFOLIO contains symbols and description of portfolio components as well as portfolio structure.
Contains symbols of portfolio components, their descriptions and types (either numeraire, asset or factor).
Type asset type (numeraire (risk-free asset) Other notations are Risk-free asset or Numeraire. It is the asset, in units of which portfolio wealth is measured. As a rule, the investor is nearly indifferent to changes in value of the riskless asset./ asset Meaning of this term depends on the context. As a rule, it denotes any portfolio component. But in the context of Factor-based asset pricing models the term "asset" stands for a dependent variable as opposed to Factor, which stands for an independent variable. In the latter case the more explicit term "ordinary asset" is used sometimes./ factor An asset which plays the role of an independent variable in the context of Factor-based asset pricing models.). The asset/factor gradation is used in the corresponding factor-based asset pricing model A regression model which imposes additional structure on the parameters of the Analytical model. This is achieved by imposing conditions on regression coefficients. The one-factor case corresponds to CAPM. Fama-French 3-factor model is another commonly used asset pricing model..
Symbol asset symbol. The corresponding cell comment contains asset description.
These fields contain information about the analytical portfolio structure.
Weights editable field where you define portfolio weights. Sum of weights for all portfolio components (including the risk-free asset) is always equal to 1.
In the next two fields user sets values that define shape of the inaction region Coherent set in n-dimensional space of portfolio weights, where no transactions take place while portfolio weights belong to it. Immediately after the portfolio vector abandons the inaction region, the investor must transact the minimal amount in appropriate assets to keep portfolio weights from leaving the inaction region.. The latter is used in historical simulations of "inaction region" rebalancing This is the most efficient way to rebalance a portfolio when transaction costs are present. Under this type of rebalancing strategy, portfolio is rebalanced only when vector of portfolio weights abandons the Inaction region. When it happens, the investor must transact the minimal amount in appropriate assets to keep portfolio weights from leaving the inaction region., which is the most appropriate strategy in the presence of proportional transaction costs. Possible shapes of inaction region you can define are limited by cuboids (rectangular parallelepipeds).
Inaction Region Lower Width maximum allowed negative deviation of the asset weight from the weight set in Weights field.
Inaction Region Upper Width maximum allowed positive deviation of the asset weight from the weight set in Weights field.
Portion of Total Budget portion of funds invested in the asset measured in units of the corresponding margin constraint. For example, if the asset weight is equal to 0.5 and margin constraint is set to 5 then its portion in the total budget is equal to 0.5/5 = 0.1.
Portion of the total budget for the entire portfolio is calculated as a sum of the absolute values for all portfolio constituents. Portfolio margin constraint is satisfied if this value is less or equal to 1. This means that you have sufficient funds to satisfy margin requirements in all portfolio components.
Contribution to Portfolio Risk relative contribution of the asset to the entire portfolio variance. See details in Theory Help.
INPUT DATA contains editable parameters of portfolio components. Corresponding values are copied from the database during the portfolio construction process. Changing values in these cells doesn't affect the database.
Dividend Yield see dividend yield Fixed interest rate paid on the asset which is not reflected in its price. For a fixed rate bank account it is equal to the corresponding interest rate. For exchange rates it is equal to the difference between foreign and domestic rates. For futures it reflects the cost of carry. For coupon bonds it is equal to the coupon yield. In SmartFolio it is expressed in the form of continuously compounded rate.
Lower Bound lower weight constraint (used in optimization)
Upper Bound upper weight constraint (used in optimization)
Margin Constraint maximal leverage when buying on margin (used in optimization). For instance, if minimal margin requirement in the asset is equal to 20% of theamount of transaction, then the margin constraint value is equal to 5.
Transaction Cost amount of proportional transaction costs (measured in % of asset price). This value is used in historical simulations.
Analytical MODEL contains fields with characteristics of the portfolio and its components calculated based on the analytical model The financial market model which assumes that all assets collectively follow a random walk in continuous time. This means that distribution of logarithmic returns is normal, returns are serially uncorrelated, and variance of returns grows linearly with a time interval under consideration. assumptions.
These fields contain information about risks and expected returns of the portfolio and its components under the assumptions of the analytical model The financial market model which assumes that all assets collectively follow a random walk in continuous time. This means that distribution of logarithmic returns is normal, returns are serially uncorrelated, and variance of returns grows linearly with a time interval under consideration..
Volatility annualized standard deviation of asset logarithmic returns. This is the most common measure of risk. Values in this field are taken from the Model table.
Excess Mu intuitively, this is excess return without compounding. Excess Mu = Mu Vector parameter of the Analytical model. Asset Mu can be viewed as the expected simple annual rate of return in the asset, as opposed to the expected geometric rate of return, measured by the expected growth rate. + dividend yield Fixed interest rate paid on the asset which is not reflected in its price. For a fixed rate bank account it is equal to the corresponding interest rate. For exchange rates it is equal to the difference between foreign and domestic rates. For futures it reflects the cost of carry. For coupon bonds it is equal to the coupon yield. In SmartFolio it is expressed in the form of continuously compounded rate. - risk-free rate Fixed continuously compounded interest rate paid on the Riskless asset. The same as Dividend yield in the riskless asset.. See details in Theory Help.
Expected Excess Growth Rate intuitively, this is excess return with continuous compounding. This value is always less then the corresponding value of excess Mu, the difference being proportional to volatility. See details in Theory Help.
Instantaneous Information Ratio instantaneous performance measure. This value uses target excess rate parameter, which is set in theInvestment Parameters dialog. Use this field to rank assets according to their investment attractiveness. Note that instantaneous information ratio is suited for comparing individual assets only; if you wish to compare portfolios you should use the information ratio instead. For further details see Asset performance ranking and Appendix C of Theory Help.
Implied Excess Mu this field is equal to such values of excess Mu, which make the current portfolio equal to the Merton portfolio The portfolio which maximizes the CRRA utility function corresponding to a given value of Relative risk aversion..
VaR Value-at-Risk Maximum portfolio loss (measured in % of the initial wealth) over a given time interval at a given level of statistical confidence. calculated using delta-normal method. This value uses Horizon and Confidence Level parameters, which are set in theInvestment Parameters dialog. For further details see Risk management tools section of Theory Help.
CVaR Conditional Value-at-Risk Conditional expectation of losses beyond VaR (measured in % of the initial wealth) over a given time interval at a given level of statistical confidence. calculated using delta-normal method. This value uses Horizon and Confidence Level parameters, which are set in theInvestment Parameters dialog. For further details see Risk management tools section of Theory Help.
These fields contain structures of some theoretically important portfolios.
Merton Portfolio weights of the portfolio with the maximal value of CRRA utility function Class of utility functions which is exhausted by Logarithmic and Power utility functions. These utility functions are characterized by risk bearing proportional to wealth. (no imposed constraints are taken into account).
Inaction Region for Merton Portfolio maximum allowed deviation of the asset weight from the corresponding weight of the Merton portfolio in the context of the Davis-Norman model. These values might be considered as a first guess for the inaction region Coherent set in n-dimensional space of portfolio weights, where no transactions take place while portfolio weights belong to it. Immediately after the portfolio vector abandons the inaction region, the investor must transact the minimal amount in appropriate assets to keep portfolio weights from leaving the inaction region.when designing rebalancing strategy in the presence of proportional transaction costs. See details in Theory Help.
Global Minimum Variance Portfolio (GMV portfolio) weights of the portfolio with the minimal variance among all fully-invested portfolios Portfolio that has zero weight in the Riskless asset..
Tangency Portfolio weights of the portfolio with the maximal instantaneous Sharpe ratio Performance measure used to compare individual assets. The special case of Instantaneous information ratio corresponding to Target excess growth rate equal to zero.among all fully-invested portfolios. Under the assumptions of Modern Portfolio Theory any efficient portfolio is a mix of the tangency portfolio and the risk-free asset.
Optimal "Three-Fund" Portfolio weights of the portfolio with the maximal value of CRRA utility function when parameter uncertainty is taken into account. Three-fund portfolio is calculated as a mix of the Merton portfolio and the GMV portfolio.
Historical SIMULATIONS contains fields related to the structure and characteristics of the portfolio based on the historical simulations (backtesting).
These fields contain information about risks and expected returns of the historical portfolio and its components.
Volatility historical volatility calculated as annualized standard deviation of logarithmic returns. Values in this field are calculated based on data from the LOGRETURNS andPORTFOLIO DYNAMICS tables. See details in Theory Help.
Normalized Semi-Volatility doubled value of historical semi-volatility Special case of Downside volatility corresponding to the threshold equal to the average increment size. Under the assumption of independent normally distributed logarithmic returns it is equal to Volatility / 2.. Normalized semi-volatility is more appropriate risk measure then volatility if distribution of returns deviates from normality. Values in this field are calculated based on data from the LOGRETURNS andPORTFOLIO DYNAMICS tables. See details in Theory Help.
Excess Mu intuitively, this is excess return without compounding. Excess Mu = Historical Mu Vector parameter of the Analytical model. Asset Mu can be viewed as the expected simple annual rate of return in the asset, as opposed to the expected geometric rate of return, measured by the expected growth rate. + dividend yield Fixed interest rate paid on the asset which is not reflected in its price. For a fixed rate bank account it is equal to the corresponding interest rate. For exchange rates it is equal to the difference between foreign and domestic rates. For futures it reflects the cost of carry. For coupon bonds it is equal to the coupon yield. In SmartFolio it is expressed in the form of continuously compounded rate. - risk-free rate Fixed continuously compounded interest rate paid on the Riskless asset. The same as Dividend yield in the riskless asset.. Historical Mu in the above expression is extracted directly from historical data. See details in Theory Help.
Expected Excess Growth Rate intuitively, this is excess return with continuous compounding. This value is always less then the corresponding value of excess Mu, the difference being proportional to volatility. Unlike the same field for the analytical portfolio this one is extracted directly from historical data. See details in Theory Help.
Instantaneous Information Ratio instantaneous performance measure. This value uses target excess rate parameter, which is set in theInvestment Parameters dialog. Use this field to rank assets according to their investment attractiveness. Note that instantaneous information ratio is suited for comparing individual assets only; if you wish to compare portfolios you should use the information ratio instead. For further details see Asset performance ranking and Appendix C of Theory Help.
Normalized Instantaneous Sortino Ratio instantaneous performance measure. Unlike instantaneous information ratio this measure uses normalized semi-volatility instead of volatility as a measure of risk. This value uses target excess rate parameter, which is set in theInvestment Parameters dialog. Use this field to rank assets according to their investment attractiveness. Note that normalized instantaneous Sortino ratio is suited for comparing individual assets only; if you wish to compare portfolios you should use the normalized Sortino ratio instead. For further details see Asset performance ranking and Appendix C of Theory Help.
VaR Value-at-Risk Maximum portfolio loss (measured in % of the initial wealth) over a given time interval at a given level of statistical confidence. calculated by means of empirical distribution method. This value uses Horizon and Confidence Level parameters, which are set in theInvestment Parameters dialog. For further details see Risk management tools section of Theory Help.
CVaR Conditional Value-at-Risk Conditional expectation of losses beyond VaR (measured in % of the initial wealth) over a given time interval at a given level of statistical confidence. calculated by means of empirical distribution method. This value uses Horizon and Confidence Level parameters, which are set in theInvestment Parameters dialog. For further details see Risk management tools section of Theory Help.
Normalized Instantaneous STARR Ratio instantaneous performance measure. Unlike instantaneous information ratio this measure uses normalized CVaR instead of volatility as a measure of risk. This value uses target excess rate parameter, which is set in theInvestment Parameters dialog. Use this field to rank assets according to their investment attractiveness. Note that normalized instantaneous STARR ratio is suited for comparing individual assets only; if you wish to compare portfolios you should use the normalized STARR ratio instead. For further details see Asset performance ranking and Appendix C of Theory Help.
Skewness this statistics measures the degree of asymmetry in distribution of returns. Positive skewness means that the distribution peak is biased to the right; analogously, negative skewness means that the distribution peak is biased to the left.
Kurtosis Excess this statistics measures the effect of "heavy tails". Positive kurtosis excess means that the corresponding distribution has tails that are heavier then that of the normal distribution. Negative kurtosis excess means that the corresponding distribution has tails that are lighter then that of the normal distribution. As a rule, most financial instruments have positive kurtosis excess. This statistics is important when measuring risks. For instance, use of delta-normal method to calculate VaR and CVaR is justified only if kurtosis excess is close to zero.
To switch between Portfolio Structure, Analytical Model and Historical Simulations subtables you should use the corresponding buttons at the top of the window.
To Save current portfolio structure click the Load/Save Asset Mixes button. You will be presented with the simple dialog, where you can save and load asset mixes. Saved asset mixes are stored in the same smartbook and are cleaned during portfolio construction process.
Note. You can use
saved asset mixes not only to store them for future use, but also to display
several portfolio structures on the Risk-Reward plane.
If running SmartFolio under Excel 2007, then incell databars and icons are used to better visualize data in the table. You can turn on/off this by repeatedly clicking the Data Bars On/Off button. Below are some notes on conditional formatting:
Orange bars correspond to naturally nonnegative statistics such as risk measures. However, in some cases such statistics can become negative, as in the case of Contribution to Portfolio Risk.
Statistics that relate to measures of return and performance are shown with Green for positive values and Red for negative ones.
All other statistics are shown with Blue and Red respectively.
3 symbol icons are used to check values of portfolio Weights, Lower Bounds and Upper Bounds. If one of portfolio weights lies below its lower bound or above its upper bound, then you will see the Red signs in the Weights cell and in the cell that corresponds to the bound violated. Otherwise there will be no sign in the Weights cell and Green signs in the Lower Bound and Upper Bound cells.
Yellow sign is used only in Lower Bound and Upper Bound cells to indicate that the corresponding portfolio weight violates the bound, but for an infinitesimally small value.
3 icon symbols are also used in the cell corresponding to Portion of Total Budget for the entire portfolio. Similarly, if the corresponding value exceeds 100%, then you see the Red sign. Otherwise you see Green or Yellow signs.
You can sort columns in the MAIN table using the corresponding Sort button. After the first click portfolio components are sorted in ascending order; the next click sorts them in descending order. Factors An asset which plays the role of an independent variable in the context of Factor-based asset pricing models., if they are present in the portfolio, are sorted separately.
Note. When sorting,
changes are made not only in the MAIN table,
but in the MODEL
and LOGRETURNS
tables too.
