The problem with many performance charts

Performance information conveyed on return charts from many financial sources is misleading. Investors reading these charts will be unfairly biased against income-producing assets.

Learn how total return better represents an asset performance and enables meaningful comparisons. [PDF version]

 


Maximum drawdown and recovery

Previously, we explained how to visualize the maximum drawdown of a portfolio, a volatility measure that is intuitive for most investors.

The latest version of Portfolio Lab is enhanced to also display the recovery from the drawdown. The recovery is the first day after the trough when the portfolio losses are recovered, as shown in green in the chart below:

Portfolio maximum drawdown


Volatility charts

To display a stock, ETF, or mutual fund volatility, bring up the Asset Profile view by clicking on the magnifier icon in the main portfolio table, as show below. The volatility chart is show at the bottom of the Asset Profile view.

 

The volatility is computed as the standard deviation of the last 50 days of returns. Consequently, the volatility chart show the rolling 50 days standard deviation.

Portfolio volatility

You may also chart the volatility of entire portfolios. To display a portfolio volatility, go to the Backtest view, return chart, and select volatility as shown below. The volatility chart appears below the portfolio return chart:

 

In this view, it is also possible to compare the portfolio volatility with a benchmark volatility. Simply use the Backtest compare function to add the benchmark volatility to the chart.

 


Optimization controls

Portfolio optimization is sensitive to the choice of input parameters. Portfolio Lab provides a set of default assumptions based on a simple forward model as a starting point. We recommend that you review these assumptions and adjust them to match your constraints and views.

In the latest release of Portfolio Lab, min/max weights constraints are editable directly on the assumptions table, as shown in red:

 

 

In addition, you may edit the expected returns by either:

  • providing your estimate, directly on the table as shown in green
  • changing the capital market expectations used to calculate expected returns: risk-free rate, equity risk premium

For more information please refer to Portfolio Lab’s user manual.


Portfolio Lab october 2011 release

Changes for Portfolio Lab v2.5, released Oct 20, 2011

  • Portfolio optimization: options to control the optimization process are added: (1) expected returns are adjustable (2) min/max constraints are adjustable (3) capital market expectations (equity risk premium and risk free rate used to calculate expected returns) are adjustable (more)
  • Volatility charts: portfolio volatility chart (rolling 50 days standard deviation of daily returns) is available as an option in the Backtest view. In the new Asset profile view (see below), a volatility chart is available for each portfolio position (more)
  • Asset profile view: for each portfolio position, quickly look up the total return and risk statistics, price chart, periodic return chart and volatility chart. This view is activated through selection in the main portfolio view.
  • Enhanced index/benchmarking: in addition to the current portfolio, two other portfolios, stocks, indexes, ETFs or mutual funds may be compared in the backtest view (previously only portfolios could be compared). The selection of indexes is increased.
  • Backtest statistics: the statistics table previously displayed on the left of the Backtest chart is moved inside the Backtest tab for a more spacious display. A Show best option highlights for each metric, the portfolio with the best performance.
  • Max drawdown: metrics for the recovery are added in both the chart display and the statistics table. The recovery day is the first day after the trough when the initial portfolio value (the peak of the drawdown) is recovered. The drawdown and recovery display in the chart are enhanced to better highlight the duration of the drawdown and recovery.
  • Backtest log: a table is added in the Backtest view to present the list of transactions, as well as dividends distributions and rebalancing events.
  • Rebalancing: options are added to rebalance on trigger 5% or 10%, rather than at fixed calendar dates. For example, a trigger 5% means that rebalancing will be triggered if any position is more than, or less than, 5% of its target. In addition, rebalancing is enhanced to transact only on whole number of shares, and subject to a minimum transaction.
  • Weight Editor: Fractional weights are supported. A Round weights function is added.
  • Max history available: in case some assets have insufficient history and are excluded from Backtest, an option is added to automatically select the length of the maximum history available.
  • ETF correlations: for the correlation of returns between the portfolio and ETFs, it is possible to select between monthly and daily returns correlations (previously only monthly correlations were available).
  • Snapshot: all snapshot windows have a Full dark background option, in addition to the previously available light and partial dark backgrounds.
  • Excel export: Exported file has a .csv format to resolve Microsoft Excel compatibility issued which were encountered with the previous format.
  • Other: rebalancing dates are more visible in the backtest chart; the backtest custom date chooser colors match the other backtest window components; all popup windows are redesigned for better usability; context-sensitive help is available where applicable.