Developing and maintaining a properly diversified portfolio is essential but not easy to do. SmartFolio, a portfolio optimization tool, offers tips on finding an asset allocation mix that suits your investment goals. It details the market’s return history, forecasts future returns, and analyzes the risk of your investment portfolio based on volatility, value-at-risk and the probability of a shortfall.
The program offers a video tutorial which we highly recommend viewing—it’s short and helps you get a better feel for the program. The tutorial was made using Excel 2007, so you may have to adjust to a slightly different layout or search a bit for some of the buttons if you are using an older version of Excel. We used Excel 2002 and had minimal issues finding the correct buttons and tools.
When using SmartFolio, the first step is to create a new Smartbook, add your securities, and download current and historical price data so you can create a portfolio. One portfolio can be created per Smartbook, but you can create numerous Smartbooks. After you have created your portfolio, you will see a Summary Table that includes statistical information for the portfolio under various scenarios. Statistics include return, risk and performance measures.
The program performs analyses based on two models. The first is called the Analytical Model and it performs an analysis of your portfolio under the assumptions of the random walk theory. The second model, the Historical Model, runs an analysis of the portfolio using available historical data. The results are listed in the summary table.
The portfolio optimization tools will give you suggestions for the best asset allocations based on various inputs. You can decide what time interval to use (you can use all available data or specify a date range) and choose an estimation method. The default setting is “maximum-likelihood,” which estimates expected returns and covariance. If you want to use the other methods, you should refer to the Help section for a more detailed analysis of the mathematical models and theory behind each method.
Next, run the simulation. You can choose to use either the Analytical or Historical models mentioned above. The outcome of the analysis will depend on objective factors like budget and trading constraints, and also subjective factors like risk averseness and investment goals. You can also opt to use worst-case scenarios for estimated data points and set any trading constraints such as no short sales and minimum and maximum weights in certain asset groups.
You can also create a graph of the efficient frontier—a line from a risk-reward graph that is comprised of optimal portfolios. The optimal portfolios plotted along the curve have the highest potential returns possible for the given amount of risk. You can also analyze the probability of falling short of your goal based on your investment horizon and your target excess growth rate over the risk-free rate.
SmartFolio is a sophisticated program with a lot of flexibility and power. It is not essential that you be a mathematician to understand the outputs, but it would be wise to read the help manual and watch the tutorial in order to get the most use of it.
System Requirements: Windows XP and Excel 2003/XP/2000/2007; Internet connection.
Price: Free 30-day trial; $199 for one year; $599 for a permanent license.
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