Investment portfolio management: How can I optimise my financial portfolio?
How can the investment performance portfolio be assessed?
What are the most important components of an investment portfolio decision?
Diversifying an investment means dividing the total amount across several financial assets. So investing in multiple activities can lower your risk.
A financial investment has the following risk components:
The secret to creating a “low risk” portfolio, or rather, mitigating the risk of a portfolio, is therefore to diversify the components of the portfolio by increasing the number of financial assets it contains. These activities are not intended to have any interrelated performance. The essence of this principle, described by the Nobel Laureate in Economics, Markowitz, is that non-correlating assets succeed in eliminating the risk defined as specific, i.e. the risk of the individual instrument. However, there is still a systemic risk that can’t be completely eliminated.
Read more about the concepts expressed here:
A portfolio counts, compared to others, as “optimal” or “optimised” if “a higher return can be achieved with the same risk or, conversely, a lower risk can be achieved with the same return”.
When optimising the investment portfolio, another term is used – the “efficiency frontier” (or “efficiency curve”).
The efficiency frontier is a curve made up of points. Each point expresses the best portfolio with a given specific risk and return profile.
The portfolios at the border are neither all the same nor all equally cheap: they are simply the most efficient. Then, the investor selects the position on the efficiency frontier and thus the corresponding portfolio according to his or her own risk tolerance.
There are several performance indicators for a portfolio. The Sharpe index is the most common. This index measures the ability of a security or a portfolio of securities to outperform a risk-free asset by comparing it to the overall risk of the investment. The Sharpe Index also gives an indication of how much “risk premium” is guaranteed by each unit of risk (volatility) contained in the investment.
When do you evaluate the performance of a portfolio?
The performance of a portfolio must be assessed retrospectively, i.e., as soon as the investment data is available. The quality of an investment is not limited to quantitative performance (how much you have “earned”) but must also be measured in terms of risk (how much did I risk achieving this performance?).
However, an assessment is often made before investing. An assessment that’s required by the industry or managers to choose how to invest the amount available.
When making investment decisions, every investor must firstly define their goals and then break down further decisions. These goals can be divided into three levels:
