Maximize Return and Minimize Risk

Portfolio Management

The primary objective of portfolio management is to achieve the highest possible return at the lowest possible risk.

Portfolio Management - Theoretical Background

Any investment has two aspects: risk and return.

  • Return - the percentage increase or decrease in an investment over time
  • Risk - the measure of uncertainty of the investment return

Balancing risk and return is a dilemma that every investor faces. However, armed with the appropriate knowledge, quantitative tools and data, investors can maximize their portfolio's returns at the level of risks that is appropriate for their own circumstances.

Most investors do not hold a single stock. Instead, they try to create a portfolio of diversified stocks to protect against the investment risk. There are two types of investment risks: systematic and unsystematic risk.

It has been empirically proven that the unsystematic company specific risks can be diversified away by holding a truly diversified portfolio, thus leaving investors exposed only to those risks that are inherent to the market as a whole, which can not be diversified away.

To achieve a truly diversified portfolio takes more than intuition and good luck. Investment firms use statistical techniques to determine truly diversified portfolios. At the center of successful diversification lies the concept of correlation. Simply put, correlation is a measure of how often the returns of two investments move together, up or down. When you put assets that have low correlations together in a portfolio, you may be able to get more return while taking on the same level of risk, or the same returns with less risk. Hence, the primary objectives of portfolio management is assembling a portfolio that eliminates the exposure to the unsystematic risk without sacrificing potential returns.

PortfolioSelector Portfolio Management

PortfolioSelector uses a non-parametric correlation called the Spearman Correlation that accounts for the non-linear relationship between stocks. The Spearman Correlation is particularly well suited for financial markets because the financial data distribution tends to be "noisy" - more dense in some areas than others, and the relationship tends to have non-linear qualities.

PortfolioSelector portfolio management is done via an easy-to-use interactive table. All what you need to do is, by using a pull-down list select stocks and add them to your portfolio. PortfolioSelector calculates the expected portfolio return, portfolio risk, and the Correlation Matrix. Additionally, you can change the number of shares, remove stocks from your portfolio, and run instantaneous update. The portfolio expected return, risk, and the Correlation Matrix are immediately recalculated and displayed in the table.

With PortfolioSelector, you can:

  • Determine the expected portfolio return and risk
  • Generate the Portfolio Correlation Matrix
  • Determine stock portfolios that meet your investing risk level
  • Understand risk-reward opportunities offered by different stock combinations
  • use statistical quantitative results to maximize investment returns and minimize investment risks
  • Perform your own analysis and scenarios
  • Manage your investments more effectively

PortfolioSelector makes it straight forward to analyse your stock portfolios as a whole. Utilizing the fundamental statistical data such as covariance, expected portfolio returns, standard deviations, correlation matrix, it can help you manage your own portfolios in order to achieve highest possible return at the lowest possible risk.


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