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One of the most elegant applications of mathematics to finance has been in the field of portfolio theory. Active portfolio management requires investors to not only select risky securities, but also decide the appropriate weightage to ascribe to each security in the portfolio.

Developed by Markowitz and Sharpe in the early 1960’s, modern portfolio theory defines portfolio risk and return in precise terms: portfolio return is the weighted average of the expected return of individual securities while portfolio risk, is the weighted sum of individual asset covariances. This simple insight allows us to determine the condition for the efficient frontier – a set of portfolios that combine various risky assets in proportions that yield maximum return for a given level of risk.

Applying the fundamental intuition behind the Markowitz / Sharpe framework, PortfolioEdge has been built keeping in mind the practical investment behaviour of traders, investors and portfolio managers. It is a rebalancing tool for equity portfolios, but can be used for any risky asset-class, provided that it is possible to specify the returns on an NAV basis. By risky, it is meant that the asset class should have a positive standard deviation and it should thus be possible to estimate a distinct higher and lower value for its Upside potential and Downside risk, respectively.

The PortfolioEdge algorithm uses an innovative methodology to estimate the model weightage of stocks in your portfolio. The fundamental intuition behind the allocation mechanism is the Reward-to-Risk ratio (R2R), which is analogous to the Sharpe Ratio under modern portfolio theory. However, unlike the Sharpe Ratio, the measure of risk is not volatility (standard deviation), but expected capital loss.

Salient Features:

• Uses an intuitive and practical approach to portfolio rebalancing, based on parameters than can be easily understood and estimated.
• Improves your Portfolio’s reward-to-risk profile by allocating more money to “superior” stocks.
• Dramatically simplifies the investor’s task: focus on ‘what’ to buy, rather than ‘how much’ to buy.
• Retains the flexibility to select between Actual and Model portfolio or to specify your own weightages
• Allows you to perform various kinds of portfolio analytics and generate customized report

Screenshots

You can download a free trial version of PortfolioEdge from www.portfolioedge.net

For further details about the product contact k.v.mehta@gmail.com

This entry was posted on Monday, October 20th, 2008 at 11:00 pm and is filed under Economy, Educational, Fundamentals, Technicals. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.