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Portfolio Analytics: Smart Formula for Improved Investment Decisions

Capital Markets CIO Outlook | Wednesday, October 21, 2020

Capturing the essence of asset performance is crucial to optimize investment. Portfolio management solutions help design the best asset portfolios.

FREMONT, CA: An investment portfolio plays an integral role in capital markets. It takes into consideration various aspects of assets that create a comprehensive report on instruments such as stocks, bonds, and mutual funds. Understanding a portfolio inside out is essential for any firm in order to carry out investments tactfully, and with minimum risks. The necessity for comprehending and deciding objectives in investment has led to the development of portfolio analytics. It consists of various tools that aid organizations in analyzing investment portfolios, which subsequently lead to better financial decision-making. Today, there are several service providers that provide portfolio analytics solutions and services to capital market firms.

Each asset behaves in a different manner in the market, owing to several related and unrelated factors. Being able to predict how a particular asset performs on a particular day can be very useful from asset management perspectives. Portfolio analytics equips firms to gain access to deep business insights from structured and unstructured data, thus promoting better allocation. It also alleviates the risks that are very frequently a cause of concern in the very dynamic environment of capital markets.

Portfolio analytics includes risk aversion and returns analysis. Risk aversion relates to the assessment of risks and the proposition of safer trading options. There are two categories of investors in most cases- one that takes higher amounts of risk in expectation of higher returns and another that considers safer options with lower profits. Risk aversion studies the amount of risk through a streamlined process of evaluation, management, measurement, and assessment. It prevents investors from an excess amount of risks.

Returns analysis is concerned with evaluating returns through various analytical methods. Being able to predetermine returns to some extent, lends a lot of security to investment decisions. By using arithmetic and compound methods of calculation, firms are in a position to find out individual returns as well as cumulative returns from investments. Portfolio analytics creates opportunities to optimize returns on investments through the instrument of return analysis.

There are many things portfolio analytics addresses in a capital market ecosystem. One among them is investment diversification. Investment diversification is an essential methodology to balance out risks, subsequently minimizing them. By including multiple assets in a single portfolio, one can be assured that even if half the assets perform poorly, the other half will perform well, thereby compensating for the losses. Although it does not guarantee high returns directly, it still renders the losses powerless. This makes investment diversification crucial. By using portfolio analytics tools, diversification becomes simpler and more efficient. Portfolio analytics tools analyze all the possible combinations of assets so as to create unique sets of diversifications. Each diversification gives a specific risk-return ratio that helps firms to predict performance and minimize the effects of uncertainty.

Diversification acts on risk aversion. Similarly, asset allocation makes for better returns. With the help of portfolio analytics capabilities, capital market firms can understand correlations between assets and come up with options that give better returns. By quantifying the implications of resource allocation, firms can achieve better results. The correlations in asset allocation can either be positive or negative. While positive correlations are not preferable as they contain direct linear relations, negative correlation between assets can reduce risks.

Creation of an efficient portfolio can be of significant interest for firms. Employing the various theories that have been proposed over the years, and the advanced technological applications that enable easy deployment of these theories, capital market companies can develop portfolios that are highly optimized for best returns and equipped to minimize risks as well. Thus, portfolio analytics forms the key to effective asset and risk management.