Testing Portfolios


In PORT’s portfolio optimization tool, click on the Add Goal Term button to select goals for your analysis.

How can I minimize the tracking error of my portfolio?

Tracking error is a gauge of how much a portfolio’s returns diverge from those of a benchmark. For many portfolio managers, reducing the risk of major deviations is crucial.

The optimization tool in the Portfolio Analytics (PORT) function lets you analyze various ways to reduce such risk by decreasing your portfolio’s ex-ante, or predicted, tracking error. Type PORT <Go>, click on the arrow to the right of Port and select the portfolio you want to analyze. To access the optimizer, click on the Actions button on the red tool bar and select Launch Optimizer. A window with a menu of optimization tasks will appear. Click on *Reduce Risk: Minimize Risk With 20% Turnover to select it and then on the Continue button.

In essence, the various sections of the Portfolio Optimization screen let you set a goal, define the security universes you want to work within and set constraints at the portfolio and security levels. In this example, the goal, which is displayed in the upper-left corner of the screen, is to minimize active total risk. For a description of the term active total risk, click on the Add Goal Term button and then on the plus sign to the left of Risk to expand the tree, on the plus sign to the left of Risk (Ex Ante) and finally on Active Total Risk. Click on the Close button.

Click on the Run button on the red tool bar. The results page displays a summary of transactions and the resulting change in tracking error. To perform what-if analysis on the optimized portfolio, click on the Analyze In PORT button.

How would my holdings be affected if the euro slid 10 percent?

To quantify the effect of a currency shock on your portfolio’s profit and loss, click on the Scenarios tab in PORT and then on the Main View subtab. Click on the folder icon to the right of Set.

Next, click on the New button on the red tool bar and select New Set. In the SCENARIO SET NAME field, enter a name and click on Save. Then click on New again and select New Scenario. Under Steps on the left side of the screen, click on Stress FX Rates. Click on the arrow to the right of Select under CCY and select EUR–Euro. Tab in to the field under Value, enter -10 and press <Go>. To select the statistical relationship you want to use to analyze how changes in the euro would affect non-euro-denominated stocks, click on Propagation under Steps. If you select No Propagation, then the euro drop would affect only European stocks in your portfolio. Next, click on Scenario Sets, click on the box to the left of your set so that a check mark appears and then click on Next and on Save. Type 1 <Go> and press <Menu> to return to the Main View screen, which will display your profit and loss given the euro currency shock.

MIA LIEB-LAPPEN AND ANDREW PARISI ARE ON THE STAFFOF THE ANALYTICS DEPARTMENT AT BLOOMBERG IN NEW YORK. This email address is being protected from spambots. You need JavaScript enabled to view it. , This email address is being protected from spambots. You need JavaScript enabled to view it. PRESS <HELP> TWICE TO SEND A QUESTION TO THE BLOOMBERG ANALYTICS HELP DESK.


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