Equity Curve To Visualise How You Portfolio Looks Like
An equity curve is a representation of your entire portfolio. You can visualize how your portfolio is performing. This is normalized to a 100 scale. So if suppose you have invested 100 in the market then the equity curve will let you know how that 100 has performed in the given period of time.
To build equity curve you need to have the stock listed ion your portfolio and assigned weights to them. The weight age is basically how much of your capital have you invested in the stock.
You need to normalize your portfolio first to 100 in order to draw the equity curve. So this will let you judge how your investment of 100 has performed. Once you know this it will let you understand how to do portfolio optimization, which is to decide how much you should be investing into one particular stock. This has to be judged in such a way that the risk is low and the return are high.
What do you mean if the portfolio variance is 1.11?
Portfolio variance lets you know the risk associated with your portfolio. So when the portfolio variance is 1.11then this lets you know the risk that gets associated with the portfolio. The 1.11 % is basically the risk of your portfolio on an everyday basis.
Risk, variance, and volatility
When the price moves toa value that is below the price that we brought the stock at then this is the risk. When the price of the stock moves above the price at which we brought the stock then this is returned. The variance is used to understand the range within which you should expect the portfolio to move in a one year time period.
The expected return on your portfolio is the sum of the average return that each stock generates. This is then multiplied by its individual weight and then by the number of trading days. By doing this you are basically scaling your daily return to the annual return and this is then scaled based on the investment made.
The returns of our portfolio are distributed normally
When you plot the portfolio distribution then this will mostly come as a normal distribution. When your portfolio is normally distributed then you will get to know the probable return on your investment in the next 1 year and with some degree of confidence.
To estimate the return with the degree of confidence on your automated trading robot all that you need to do is to add or subtract the variance of the portfolio from what the expected annualized return is.
So using this normal distribution you will be able to judge how the portfolio is likely to fluctuate.