Portfolio Analysis Using Tidyquant

Definitions

• Portfolio: collection of investments
• Volatility: how much returns fluctuate
• Efficient: best return for level of risk
• Inefficient: lower return for same risk

The problem

How do investors compare risk vs return across portfolios?

• Higher returns come with risk
• Avoid putting all your money in one stock
• So how do we decide using data instead of intuition?

Turning Prices into Returns

• Prices are NOT useful for risk
• Returns are what matters in finance

Example of Daily Stock price behavior: APPL

Building a Portfolio

• Each stock contributes differently
• portfolio = weighted combination of assets

Sharpe Ratio

# A tibble: 4 × 4
  symbol avg_return volatility sharpe
  <chr>       <dbl>      <dbl>  <dbl>
1 AAPL      0.0143      0.0695  0.207
2 KO        0.00992     0.0484  0.205
3 MSFT      0.0134      0.0684  0.196
4 XOM       0.0271      0.0797  0.339

Risk vs Return

By using the Share ratio: - the higher the ration = better risk-adjusted return - The main idea to take away from portfolios

The solution

• individual stocks are volatile, instead diversify
• Risk and return are measurable
• Data-driven beats guessing