Portfolio Management: Transitioning from Traditional to Modern
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Portfolio Management: Transitioning from Traditional to Modern

By Capital Markets CIO Outlook | Tuesday, August 20, 2019

In the pursuit of intelligent investment decision-making, experts have come up with portfolio analytics tools that aid risk minimization and return maximization.

FREMONT, CA: Portfolio analytics consists of an essential set of tools that are proving to be a critical factor in a company’s performance in the capital markets. Portfolio analysis comes under the purview of portfolio management and plays a very significant part. Optimizing a portfolio is vital if a firm wants to get good returns. Thus, portfolio analytics helps with evaluating portfolios in order to determine the best ones that ensure minimum risks and maximum returns. Through the processes of risk aversion and asset allocation, a portfolio is examined and developed for maximum benefits.

The approach to portfolio analytics has been changing over the years. From simple mathematical and computational tools, analytics has evolved into a much-advanced level with artificial intelligence and data analytics. Every industry has scopes for implementing these advanced technologies and make exceptional growth possible. Thus, businesses have seen the emergence of data-driven processes and operations. With data at hand and the right tools to decipher what lies behind the structured and unstructured data, there is an opportunity to understand the factors impacting returns on investments. The same applies to portfolio management as well. Data is becoming the central point, and it is being used to design the portfolios.

The technologies of machine learning and artificial intelligence have manifestations through solutions from numerous service providers in today’s market. These service providers are successfully tapping into a client-base that looks forward to comprehensive portfolio management solution suites. The software suites consist of technology-enabled tools that incorporate the portfolio theories.

Initially, there used to be a traditional approach that included Dow Jones Theory, Random Walk Theory, and Formula Theory. Later on, the Harry Markowitz theory was formulated, which is considered to be the modern approach. Dow Theory was presented by Charles Dow, in a series of publications in the Wall Street Journal. According to his theory, the stock market did not behave randomly and instead depended on three distinct factors. These were Primary Movement, Secondary Reactions, and Minor Movements. The theory as a history in excess of 100 years and has undergone some modifications. However, the modern technical analysis still has the theory at its core. Tools that firms use today work on the concept of correlations between assets and their characteristics. These aspects are compared with programs and thus analyzed. Formula Plans have to do with risk minimizations to reduce potential losses from occurring.

The modern portfolio management theory or Markowitz theory was developed in 1952. It used the basic mathematical and statistical programming to ensure the best possible asset allocation. The primary consideration in the theory was for the risk-return ratio. This was the essential parameter that was believed to be the main criteria for portfolio design and development as well as analysis. Using this theory, best returns are predetermined, and variance in return is minimized. The allocation of asset is carried out until arriving at the combination with the least amount of variance in returns.

Portfolio analytics bring in an angle of reliability into the world of capital markets that has always been defined by uncertainties. Development of machine learning and artificial intelligence has several implications for portfolio analytics. Systems which are backed by these technologies, when deployed for portfolio analytics, conjure up quantitative data. This data grants significant visibility into the risks and potential performance of investments. Thus, directing assets effectively, regularly, and in a minimum risk atmosphere becomes possible for investors as well as asset managers.

Although the concept of portfolio analytics has not been able to reach a point where one can bring up risk-free assets or well defined predictive analytics, one can still ensure a smoother and relatively risk- negative functioning. With innovative solutions on the fray, capital market firms are headed for better mapping, tracking, and understanding of finances in investment.

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