Portfolio Analysis

What is the Portfolio Analysis?

Portfolio Analysis is one of the areas of investment management that enables market participants to analyze and assess the performance of a portfolio (equities, bonds, alternative investments etc) with the objective of measuring performance on a relative and absolute basis along with its associated risks.

Tools Used in Portfolio Analysis

Some of the top ratios used are as follows –

1) Holding Period Return

It calculates the overall return during the investment holding period

Holding Period ReturnHolding Period ReturnHolding period return refers to total returns over the period for which an investment was held, usually expressed in percentage of initial investment, and for comparing returns from various investments held for different periods of time.read more ={(Ending Value–Beginning Value)+Dividends Received}/Beginning Value

2) Arithmetic Mean

It calculates the average returns of the overall portfolio

Arithmetic MeanArithmetic MeanArithmetic mean denotes the average of all the observations of a data series. It is the aggregate of all the values in a data set divided by the total count of the observations.read more = (R1 + R2 + R3 +……+ Rn) / n

R – Returns of Individual Assets

3) Sharpe Ratio

It calculates the excess return over and above the risk free return per unit of portfolio risk

Sharpe Ratio FormulaSharpe Ratio FormulaThe Sharpe ratio formula calculates the excess return over the risk-free return per unit of the portfolio's volatility. The risk-free rate of return gets subtracted from the expected portfolio return and is divided by the standard deviation of the portfolio. Sharpe ratio = (Rp – Rf)/ σpread more = (Expected Return – Risk-Free rate of return) / Standard Deviation (Volatility)

4) Alpha

It calculates the difference between the actual portfolio returns and the expected returns

Alpha of portfolioAlpha Of PortfolioThe term alpha refers to an index that is used in a variety of financial models, including the capital asset pricing model, to determine the maximum possible return from a low-risk investment. Alpha of portfolio = Actual rate of return of portfolio – Risk-free rate of return – β * (Market return – Risk-free rate of return)read more = Actual rate of return of portfolio – Expected Rate of Return on Portfolio

5) Tracking Error

It calculates the standard deviation of the excess return with respect to the benchmark rate of return

Tracking Error FormulaTracking Error FormulaTracking Error Formula measures the divergence arising between the price behaviour of the portfolio and the price behaviour of the respective benchmark. Tracking error = Rp-Ri (Rp = return from the portfolio, Ri = return from the index)read more = Rp-Rb

Rp = Return of Portfolio, Rb – Return on Benchmark

6) Information Ratio

It calculates the success of active investment manager strategy by calculating excess returns and dividing it by tracking error

Information ratio FormulaInformation Ratio FormulaInformation ratio” (IR) is measured by comparing the excess returns generated by the investment portfolio to the volatility of those excess returns. Mathematically, the information ratio formula is represented as = (Rp – Rb) / Tracking error read more = (Rp – Rb) / Tracking error

Rp = Return of Portfolio, Rb – Return on Benchmark

7) Sortino Ratio

It calculates the excess return over and above the risk-free return per unit of negative asset returns

Sortino Ratio FormulaSortino Ratio FormulaThe Sortino ratio is a statistical tool used to evaluate the return on investment for a given level of bad risk. It is calculated by subtracting the risk-free rate of return from the expected return and dividing the result by the negative portfolio's standard deviation (downside deviation).read more = (Rp – Rf) / σd

Rp = Return of Portfolio, Rf – Risk-Free Rate, σd = standard deviation of negative asset returns

Portfolio Analysis

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Examples of Portfolio Analysis

Let’s understand this concept in more detail with the help of a few examples by making use of these popular tools as discussed.

You can download this Portfolio Analysis Excel Template here – Portfolio Analysis Excel Template

Example #1

Ryan invested in a portfolio of stocks as discussed below. Based on the information, calculate the holding period return of the portfolio:

Portfolio Analysis Example 1
Holding Period Return={(Ending Value–Beginning Value)+Dividends Received}/Beginning Value

Below is the use holding period return formula.

Portfolio Analysis Example 1-1

Example #2

  • Venus investment is trying to undertake a portfolio analysis of one of its funds namely growth 500 using certain performance measures. The fund has an information ratio of 0.2 and an active risk of 9%. The funds are benchmarked against the S&P 500 and have a Sharpe ratio of 0.4 with a standard deviation of 12%.
  • Venus investment has decided to create a new portfolio by combining growth 500 and the benchmark S&P 500. The criteria are to ensure a Sharpe ratio of 0.35 or more as part of analysis. Venus has decided to undertake the portfolio analysis of the newly created portfolio using the following risk measure:
Portfolio Analysis Example 2

Sharpe Ratio

Optimal Active Risk of the New Portfolio = (Information Ratio/Sharpe Ratio)*Standard Deviation of Benchmark S&P 500

Example 2-1

Accordingly Sharpe Ratio of the New Portfolio = (Information Ratio ^2 + Sharpe Ratio ^2)

Example 2-2

Thus the sharpe ratio is less than 0.35 and venus can not make an investment in the said fund.

Example #3

Raven investments are trying to analyze the portfolio performance of two of its fund managers Mr. A and Mr. B.

Raven investment is undertaking the portfolio analysis using the information ratio of the two fund managers with a higher information ratio act as a measure of superior performance.

The following details enumerated below are used to measure the information ratio for portfolio analysis purpose:

Example 3

With a higher information ratio fund manager B has delivered superior performance.

Steps to Portfolio Analysis

  • #1 – Understanding Investor Expectation and Market Characteristics – The first step before portfolio analysis is to bring in sync the investor expectation and the market in which such Assets will be invested. Proper sync of the expectations of the investor vis-à-vis the risk and return and the market factors helps a long way in meeting the portfolio objective.
  • #2 – Defining an Asset Allocation and Deployment Strategy – This is a scientific process with subjective biases and it is imperative to define what type of assets the portfolio will invest what tools will be used in analyzing the portfolio, which type of benchmark the portfolio will be compared with, the frequency of such performance measurement and so on.
  • #3 – Evaluating Performance and Making Changes if Required – After a stated period as defined in the previous step portfolio performance will be analyzed and evaluated to determine whether the portfolio attained stated objectives and the remedial actions, if any, required. Also, any changes in the investor objectives are also incorporated to ensure portfolio analysis is up to date and keeps the investor expectation in check.
Portfolio Analysis Components

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  • It helps investors to assess the performance periodically and make changes to their Investment strategies if such analysis warrants.
  • This helps in comparing not just portfolio against a benchmark for return perspective but also to understand the risk undertaken to earn such return which enables investors to derive the risk-adjusted return.
  • It helps in realigning the investment strategies with the changing investment objective of the investor.
  • It helps in separating underperformance and outperformance and accordingly, investments can be allocated.


Portfolio analysis is an indispensable part of investment management and should be undertaken periodically to identify and improvise any deviation observed against the investment objective. Another important objective is that it intends to achieve is to identify the total risk undertaken to achieve the desired return and whether the risk is taken commensurate with the return achieved by the investor. In short, it is a complex task and requires professional expertise and guidance to make it impactful.

This has been a guide to What is Portfolio Analysis and its Meaning. Here we discuss its tools along with examples, advantages and steps. You can learn more about portfolio management from the following articles –

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