Portfolio Return is a term that describes gains and losses of the underlying portfolio. When we say “portfolio”, we mean investments that consist of several underlying assets and security types. The main idea behind this instrument is to identify how secure and profitable your portfolio is and if it meets preferred benchmarks. Additionally, with expected portfolio return, you can clarify if the investing strategy meets your core financial goals and objectives.
In this article, you will learn how to calculate portfolio return using a common formula with all of its elements explained in detail.
To get a well-balanced return, investors generally create diversified portfolios with several sets of assets. At the same time, some portfolios can contain a single set of assets depending on its type. It all depends on investors’ preferences, objectives and tactics. Sometimes they choose a blend of shares, bonds, stocks, and other instruments selected with a focus on various factors.
It does not actually matter what type of investment combination you have. There is a common portfolio return formula that will help to decide if it meets your goals or not.
The formula goes like this:
Let’s have a closer look at each of its components:
Here is a simple example: let’s say, an underlying asset account of 24% of your portfolio, which means it has a weight of 0.25. The sum of all assets must be equal to 100%, while the sum of all asset weights must be 1.
To calculate portfolio return, you need to follow several simple steps. However, at first you will need to determine several crucial factors first:
The formula can be very useful, especially if you maintain a diversified portfolio with multiple asset types. Such an approach prevents investors from the risk of losing from a single asset unexpected price change.
Analysing your assets will make it clear if it is a good idea to rely on a single class of securities or opt for a broader asset compilation. The final result will rely on the type of components, the way they are mixed together or allocated. Besides, we also need to consider the correlation degree. The greatest return says that you possess an effective and potentially profitable portfolio with the least risk for a given return.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.