Interpreting the results generated by Portfolio optimizer, is very simple. Here’s a screenshot of a sample optimised portfolio.
The user input symbols of stocks into the first column, with the heading ‘Symbol’, this is the only mandatory field required for optimization. Next, the user can choose to enter the current number of shares they are holding in the ‘Current Quantity’ column. On clicking the ‘Optimize button a popup comes. In case a user does not want to enter his current quantities and wants to optimize for an investment amount, then he can enter that value in this popup.
There are three types of optimizations the user can perform, as shown in the screenshot above. (1) Optimize for value of current holdings (2) Optimize for a user input investment amount, and (3) Optimize for a user input investment amount and compare it to equally allocating the same amount to all the shares that are selected.
Once the user clicks on ‘Optimize’, the Portfolio Optimiser’s result is shown in the third column, with the header ‘Optimum Quantity’. These values are the number of shares (allocation) the Portfolio Optimiser has identified that the investor should own to receive the best risk-adjusted returns. If the cell value has a green background, this indicates a symbol where the Optimum allocation is greater than the current quantity. If the cell value has a ‘Red’ background, this indicates a symbol where the Optimum allocation is lesser than the current quantity. If there is no change in allocation or the optimum allocation quantity is 0, then the background is grey.
The graph shown below the allocations table shows the performance equity curves of ‘Current Quantity’ allocation and ‘Optimum Quantity’ in comparison to the benchmark S&P-500.
The above example has only 5 symbols for illustration purpose, if you want to add more symbols to your portfolio, click on the ‘+’ button at the bottom right hand corner of the allocations table to add a new row. And, if you want Spotalpha to recommend a new stock for your optimization, then click on the ‘magic wand’ on the bottom right hand corner.
In summary, using the Portfolio Optimiser and understanding it’s results is as easy as using a calculator.