Long-term investment may mean different thing for different people, but for me and for the purpose of this article, let’s say we are looking at an investment horizon of 8-10 years. If I ask you to make an investment for this long a period, i.e., invest and forget, and then I ask you to pick […]

# Portfolio Management

## Short-fall Risk, Safety-first Ratio, and Optimal Portfolio Selection

Shortfall Risk Shortfall risk refers to the probability that a portfolio will not exceed the minimum return level (target return, benchmark return). Shortfall-risk is more consistent with the investors’ intuitive perception of risk in that it focusses more on the real economic risk of an investor. On the other hand, the standard deviation is rather […]

## What is Tracking Error

Tracking error is a measure of how closely a portfolio follows its benchmark. A tracking error of zero means that the portfolio exactly follows its benchmark. The benchmark could be an index such as S&P 500 index. Let’s say the S&P 500 index provides a return of 6% and your portfolio tracking the S&P 500 […]

## Calculate Risk-adjusted Returns Using Beta

The risk-adjusted return of a portfolio or an asset can be calculated using the Capital Asset Pricing Model. Using this model, we calculate the expected return on the asset commensurate with the risk in the asset. The asset’s beta is used as the measure of risk, which indicates how much more or less volatile the […]

## How to Build Efficient Frontier in Excel

As we know, an efficient frontier represents the set of efficient portfolios that will give the highest return at each level of risk or the lowest risk for each level of return. A portfolio is efficient if there is no alternative with: Higher expected return with same level of risk Same expected return with lower […]

## Jensen’s Alpha Calculator in Excel

The Jensen’s Alpha is a popular risk-adjusted performance measure used by portfolio managers to determine how much excess returns their portfolio has generated over and above the market returns as suggested by the CAPM model. A positive alpha indicates that the portfolio has outperformed the market, and vice versa. The Jensen’s Alpha can be calculated […]

## A Value Investing Approach to Manage an Equity Portfolio

This presentation by Vincenzo Boin makes the case of a value investing approach to manage an equity portfolio. Such an approach is suitable for long term risk-averse investors. “We should remember that there is a large body of research stating that on average value stocks do outperform growth, the result is more pronounced with small […]

## Question: Performance Measurement Using Index Model Regression

This question appeared in one of the university exams for portfolio management. I’ve provided the question along with the detailed answer. Consider the two (excess return) index-model regression results for Portfolio A and B. The risk-free rate over the period was 6%, and the market’s average return was 14%. Performance is measured using an index […]

## How Do Hedge Funds Manage Portfolio Risk?

This video by Gavin Cassar and Joseph Gerako investigates the determinants and outcomes of methods that hedge funds use to manage portfolio risk. The presenters through their reserach found that there is tererogeneity in the methods that hedge funds use to manage portfolio risk. The funds that used formal models of portfolio risk did relative […]

## How to Calculate Portfolio Risk and Return

In this article, we will learn how to compute the risk and return of a portfolio of assets. Let’s start with a two asset portfolio. Portfolio Return Let’s say the returns from the two assets in the portfolio are R1 and R2. Also, assume the weights of the two assets in the portfolio are w1 […]