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Unlocking Financial Data by Justin Pauley

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Chapter 10. Portfolio Reports

Although previous chapters focused on using financial data to make investment decisions, this chapter focuses on measuring the performance and risks of your portfolio. It also demonstrates how to calculate monthly returns, annualized returns, annualized standard deviations, and the Sharpe Ratio for a portfolio of investments. Additionally, this chapter walks you through how to create a two-page tear sheet report that highlights key portfolio metrics and compares the portfolio’s time-weighted and risk-adjusted returns to different benchmarks. And though the techniques shown in this chapter are intended for measuring the performance of your portfolio, you can also use them to measure the performance of other money managers, funds, or portfolios.

This chapter begins by taking two inputs (monthly profit and loss [P&L] and monthly starting balances) and calculates the different types of returns. Calculating and aggregating returns can be more complicated than many assume; simply Googling “how to calculate portfolio returns” will return various confusing methods. When aggregating returns, you must take into consideration compounding by using a time-weighted geometric return. The time-weighted return (also referred to as a cumulative return, compounded return, or geometric return) incorporates gains and losses from prior periods.

Monitoring Performance and Risk

Consider the following example: you invest $1 million and then lose $500,000 (–50 percent return) ...

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