This is a portfolio simulator where you can put up to 8 stocks to find the most optimal weighting between them and see it on a graph. There are also other terms that will be defined below.
Enter up to 8 stock tickers by adding one and then clicking the add stock button. When you are done, click calculate:
Volatility: Volatility measures how much a financial asset's price changes over time, indicating the level of risk in a portfolio. Higher volatility means greater price fluctuations.
Return: Return is the profit or loss from an investment compared to the initial amount invested. It's usually expressed as a percentage of the initial investment.
Optimal Weights: Optimal weights are the allocation of capital to different assets in a portfolio to achieve a desired risk-return balance. They are the weightings for each asset that maximize the Sharpe Ratio, showing the best trade-off between return and risk.
Sharpe Ratio: The Sharpe Ratio is a measure that evaluates the risk-adjusted return of a portfolio. It indicates how well an investment has performed given its level of risk. A higher Sharpe Ratio suggests a more favorable balance between risk and return, making it a valuable tool for assessing and comparing investment performance.
What is a good Sharpe Ratio? A good Sharpe Ratio typically falls in the range of 0.5 to 1.0 or higher. The higher the ratio, the better, as it indicates a higher return for the level of risk taken. However, the definition of "good" may vary based on individual risk preferences and the specific investment objectives.
Graph Explanation: The graph shows a scatter plot with portfolio return on the y-axis and volatility (risk) on the x-axis. Each point on the graph represents a unique portfolio with different asset weightings. The color of each point indicates the Sharpe Ratio, with darker colors showing a higher ratio.
Red Dot (Most Optimal): The red dot on the graph represents the most optimal portfolio, which has the highest Sharpe Ratio, indicating the best risk-return trade-off. Investors often aim to construct a portfolio that closely resembles this point for optimal performance.
Most Optimal: "Most optimal" refers to the portfolio that offers the best risk-adjusted return, typically determined by the Sharpe Ratio. It represents the ideal balance between risk and return and is the goal for portfolio optimization.