Portfolio Insights: Return Analysis and Its Importance in Digital Asset Investment Decisions with Trac ALPHA

Investing can be a complex and sometimes daunting task, but with the right tools and knowledge, you can make informed decisions that maximise your returns. One of the most fundamental tools in an investor's toolkit is return analysis. In this blog post, we'll explore what return analysis is, why it's essential, how to calculate it, and how it can be applied to real-world investment scenarios.

What is Return Analysis?

Return analysis is a method used to measure the performance of an investment over a specific period. It helps investors understand how much profit or loss an investment has generated relative to its initial cost. This analysis is crucial for evaluating the profitability of investments, comparing the performance of different assets, and making informed decisions to optimise your portfolio.

Why is Return Analysis Important?

Return analysis provides several key benefits:

Evaluates Profitability: By measuring the return on investment (ROI), you can determine whether an investment is profitable and by how much.

Compares Performance: It allows you to compare the performance of different assets, helping you identify which investments are yielding the best returns.

Informs Decision-Making: Understanding your returns helps you make data-driven decisions about buying, holding, or selling assets.

Tracks Performance Over Time: Regular return analysis helps track the performance of your investments over time, ensuring you stay on top of your financial goals.

How to Calculate Returns

Calculating returns is straightforward. The formula for return calculation is:

Return Analysis Formula

Here's a step-by-step breakdown:

Determine the Initial Value: This is the initial amount invested.

Determine the Final Value: This is the value of the investment at the end of the period.

Subtract the Initial Value from the Final Value: This gives you the total gain or loss.

Divide the Total Gain or Loss by the Initial Value: This gives you the return as a decimal.

Convert to Percentage: Multiply the result by 100 to get the return percentage.

Example Calculation from Portfolio Data

Let's illustrate return analysis with an example using hypothetical portfolio data:

Initial Value (2020-09-15): $21,124.45

Final Value (2020-09-16): $21,218.03

Using the return formula:

Return = 21,219.03 - 21,124.45 / 21,124.45 = 93.58 / 21,124.45 ≈ 0.0044 or 0.44%

This indicates a 0.44% growth in the investment over the period.

However, while calculating portfolio return, there is a crucial point that requires careful consideration. If the investor plans his/her investments solely with the existing money, the return analysis is highly accurate. Yet, if there occur injections to and withdrawals from the capital invested, then these actions might cause erroneous return analysis. For example, the return will be calculated higher (lower) than it actually is on the day an injection (withdrawal) takes place. Therefore, an adjustment needs to be made whenever the investor injects or withdraws money. We make this adjustment by assuming the portfolio as an index and calculating a divisor, which is used to adjust the realized daily return on the portfolio.

Insights from Return Analysis

Regular return analysis provides valuable insights:

Performance Tracking: It helps you monitor the performance of your investments and make necessary adjustments.

Trend Identification: By analysing returns over time, you can identify trends and patterns that inform your investment strategy.

Informed Decisions: Understanding your returns allows you to make better decisions about which assets to hold or sell.

Risk Management: It helps you assess the risk of your investments by comparing returns with benchmarks or other investments.

Applying Return Analysis

Return analysis can be applied in various ways to enhance your investment strategy:

Evaluate Investment Strategies: Use return analysis to assess the effectiveness of different strategies and adjust accordingly.

Optimise Portfolio: Identify underperforming assets and replace them with higher-return investments.

Monitor Market Conditions: Track how market changes impact your returns and make proactive adjustments.

Set Financial Goals: Use historical returns to set realistic financial goals and measure progress.

TRAC Alpha Return Analysis is a powerful tool that provides crucial insights into the performance of your investments. By regularly calculating and analysing returns, you can make decisions that enhance your portfolio's profitability and achieve your financial goals. Using daily return analysis, we calculate financial metrics such as standard deviation, variance, alpha, beta, idiosyncratic volatility, value at risk (VaR), expected shortfall (CVaR), and many more that would help you understand your portfolio dynamics and shape your future expectations on portfolio returns.

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