After importing historical data in the database you are ready to start designing your portfolio. First thing you have to do now is to run the portfolio construction procedure. As a result, the analytical environment required for analysis and optimization of your portfolio is created in the active smartbook Excel workbook created in SmartFolio. When working in SmartFolio user operates with contents of smartbooks.. To put it more precisely, two different environments are created simultaneously.
The first one is called the analytical environment. It performs portfolio analysis under the assumptions of the analytical model of the financial market 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. (the corresponding portfolio will be further referred to as analytical portfolio A portfolio which is analyzed using the assumptions of the Analytical model.).
The second one, called historical environment, deals with direct simulations of a portfolio on available historical data. In contrast to the analytical environment, in the latter case no theoretical assumptions about assets behaviour are made. A portfolio analyzed by means of the historical environment will be further referred to as historical portfolio As opposed to the Analytical portfolio, which is analyzed based on the assumptions of the Analytical model, historical portfolio is analyzed directly on historical data..
Note.
Weights of analytical and historical portfolios are set independently.
This means that you can simultaneously analyze two different portfolio
structures. This might appear useful if, for instance, you want to compare
two portfolios which are optimal within the limits of the analytical and
historical environments respectively.
After first running the portfolio construction procedure the following tables in the active smartbook are filled with data and become available:
Main – this table contains the detailed information about the portfolio and its components for both analytical and historical environments.
Model – in this table you can view and edit current parameters of the analytical model (vector 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. and the covariance matrix Symmetric matrix containing covariances between portfolio components annual returns. Its diagonal elements are equal to squared volatilities of corresponding assets.). Here you can also find various statistics related to the selected factor-base 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..
PORTFOLIO SUMMARY – in this table you can view the summary statistics for analytical and historical portfolios along with general settings and investment parameters.
LogReturns – this table contains history of portfolio components logarithmic returns Logarithm of the ratio between the final asset price and the initial price..
Portfolio Dynamics – this table contains various backtesting data for the historical portfolio (see also the Historical simulations section).
You also grant access to the following charts:
LogReturns – shows history of portfolio components logarithmic returns. This chart uses data from the LogReturns table.
Portfolio Dynamics – shows various backtesting results for the historical portfolio (wealth dynamics, drawdowns, transaction costs, etc.). This chart uses data from the Portfolio Dynamics table.
Portfolio Statistics – here you can view and compare various statistics for portfolio components. This chart uses data from the Main table.
Correlation Matrix – shows graphical representation of analytical portfolio correlation matrix Symmetric matrix containing correlations between portfolio components returns. Its diagonal elements are equal to 1..
Risk-reward Analysis – X- and Y-axes of this chart correspond to various measures of Risk and Reward respectively. Points on the chart correspond to a selected portfolio (analytical or historical) and its components. This chart is also used for displaying the efficient frontier The set of all Efficient portfolios. (see the efficient frontier construction section).