Hypothetical portfolio

Introduction
Creating a Portfolio
Modify an existing Portfolio composition
Changes in allocation
Start date of the Portfolio series
The total value of the portfolio
Show values at the end of each day, week, month or year
Show amounts in percentages or values
Securities contributions to the Portfolio performance
Employ the portfolio module to combine the series of two securities
Create a portfolio whose performance is equal to an index plus a certain percentage
The folder which holds the files of each portfolio

Introduction: The Hypothetical portfolio module allows the user to choose a set of securities, assign weights to each security and the system will create a historical price serie for that portfolio. The portfolio will then become a member of the list of securities in the system. In the example to the side, the user created a portfolio called “Technology Firms”, and since the system then treats this portfolio as any other security in the database, you can then take advantage of all the resources in the system including: graphs, highlights, technical indicators (Price change, volatility, etc), use the portfolio as a benchmak, etc.

The Type of asset assigned to hypothetical portfolios is Hypothetical Portfolio

Any security available in the Economatica database could be included in the hypothetical portfolios.

Creating a Portfolio: To create a portfolio the user must open the Portfolio Holdings module (to learn how to open a new module, consult chapter Basic Structure > Getting started), click the option Hypothetical Portfolio and select Create Hypothetical portfolio from the menu as shown on the side.

In the next screen, the user should enter the portfolio name. The system will automatically create a portfolio code (based on its name), however, if the user wishes  the code can be changed.

The user should then create the list of securities that will comprise the portfolio. The user can generate this list by pressing the <insert> key and picking each security at a time. Aternatively, the user may also create a Stock Guide with all the desired securities (consult chapter Stock Guide > Filter), copy all the rows (ctrl C) in the Stock Guide and then paste (ctrl V) into the portfolio editing screen.

In the side example the user chose the stocks of four technology companies for the portfolio.

After selecting the securities the user must then enter the weight of each in the column indicated on the side image. The weights must be assigned in percentage terms and therefore the total sum must be equal to 100%.

In cases in which the portfolio consists of many securities, it is possible to copy (ctrl C) the weights from an external source (in case there is one) and paste them (ctrl V) into the weight column of the portfolio editing screen.

The user must also inform the date for which the weights correspond. This is necessary because weights valid for a certain date will not be valid for a different date as the prices of the various securities will change across time in an ununiform manner.

By entering the weights at a certain date the user is indirectly informing the number of shares held in each security. In the case on the side, for example, entering the weight as 60% for the shares of Microsoft in the portfolio on 23/08/2010 can be interpreted as if $60 were invested in shares of that company in that date, and, as the share price of Microsoft on 23/08/2010 was $24.28, we can interprete that the portfolio has 2.47 shares of Microsoft ( 2.47 = 60 / 24.28).

This number will remain constant across time. The weights of each security however change since, as previously indicated, the prices of each security change ununiformly.

To inform the reference date of the weights entered the user must click the mouse right button over the weight column header and choose Change Date from the menu.

Once the user selects the Save option in the editing window (where the securities were selected and their weights entered) a window will appear with the values of the portfolio day by day. In the final topics of this chapter alternative options of displaying these values will be described.

Modify an existing portfolio composition: Follow the next steps to modify an existing portfolio composition:

- a portfolio holdings window must be open and must be the active window
- the portfolio being modified must be the Current company (see chapter Basic Structure> Change company)
- click Hypothetical Portfolio and choose Edit hypothetical portfolio from the menú (side image)

Changes in allocation:  As we have seen, by defining the composition on a given date, the user is indirectly defining the number of shares held in each security, which is a number that remains constant. The user, however, can make changes to the number of shares held, in other words, define multiple compositions in different dates so that the number of shares is constant only through the date of the next  composition. Starting from the date of the new composition, new number of shares  become valid until the date of the next composition defined by the user and so on.

Changes in shares held are done without adding or taking out investments from the portfolio, in other words, defining a new composition on date D, occurs as if all of the securities in the old composition were sold (at the closing price of date D) and the proceeds from the sale (neither more nor less) are then used to acquire the new securities defined in the new composition (bought also at the closing price of date D)

The oldest composition defined by the user has a special treatment: in addition to it being valid until the date of the next composition, it is also valid going into the past. In the example to the side, the numbers defined as of 04/04/2006 are valid from the beginning of the portfolio (see topic Start date of the portfolio series below) to the date of the next composition defined on 23/08/2010.

When there is only one composition the numbers defined are valid from the start date of the portolio to the end.

Start date of the portfolio series: The user can choose the start date of the portfolio. After defining the weight for each security click on tab Parameters (as shown to the side).

In the window that will appear (side image) the user specifies the start date of the portfolio series by selecting one of the options presented as illustrated on the side.

The total value of the portfolio: Even though the user defines the portfolio composition by entering percentage weight of each security, the system allows the user to enter the value of the portfolio. This is done by clicking on the tab Parameters as depicted on the side image.

In the window that will appear (side image) the user specifies the value of the portfolio by selecting one of the options presented as illustrated on the side. In the adjacent example, the user informed that the total investment value of the portfolio on 26/05/2009 was $5,400,000.

As can be seen in the adjacent image (Stock Prices window), the entire portfolio series will be compatible with the investment value informed by the user.

Show values at the end of each day, week, month or year: Clicking the option Parameters (shown on the side) brings up the parameters window which provides the user the option to show the portfolio composition daily or at the end of each week, month, quarter or year

Show amounts in percentages or values: Clicking the option Parameters (shown on the side) brings up the parameters window which provides the user the option of whether to view each security holding according to its percentage weight or investment value.

The investment value of each security is a result of the definitions made by the user as described in topic The total value of the portfolio above. The side image shows investment values of a portfolio whose value was assigned by the user to be $5,400,00 on 26-May-2009

Securities contribution to the portfolio performance: In addition to viewing the weight percentage or the investment value in each security, it is also possible to see the performance contribution of each security to the overall portfolio performance. The contributions of each security depend on their individual return and weight in the portfolio. To show contributions, the user must click on the option Parameters (shown on the side), and then choose the option Attribution % in the parameters window as shown on the side image.

By clicking on the arrow found in the right hand side of from beginning the user reaches a window that provides the option to choose the period for which to view the contributions.

The image to the side shows a hypothetical portfolio whose start date was defined by the user as 31/12/2009. The user chose to view the contribution of each security since the start date.

In this case, from the start date until 13/04/2010, the portfolio returned 4.71%, that is, for every $100 the portfolio earned $4.71, broken down as follows:

- 0.24 was earned from the return produced by the shares of Microsoft in the portfolio
- 1.76 was earned from the return produced by the shares of Intel in the portfolio
- 1.01 was earned from the return produced by the shares of Cisco in the portfolio
- 1.69 was earned from the return produced by the shares of Apple in the portfolio

Naturally, the contribution of each security does not account for increases or decreases caused by changes in allocation done by the user (see topic Changes in allocation above)

Employ the portfolio module to combine the series of two securities: There are cases in which a certain security is cancelled and holders receive a different security in exchange. In such cases the investor typically wishes to see historical prices which combine the old security prices with the new security prices. The Hypothetical portfolio module can be used for this purpose as explained below.

This combined series would be the value of a portfolio that has 100% in the old security until the date of the exchange and then 100% of the new security from that point forward. Though the steps described earlier in this chapter can be used to construct a portfolio with these specifications, the system offers a simpler and quicker option to achieve this purpose of combining series. Below we describe this alternative.

The user should create a new portfolio following the steps discussed earlier, but after providing the portfolio name the user should not insert any security into the list of items in the portfolio. Rather, the user should click on tab Ammend as shown in the side image.

In the Ammend window (side image), the user should simply specify the name of the old security, the name of the new security and the exchange ratio. In the example to the side, the security Weg PN ceased to exist on 31/05/2007 and its holders received in exchange the security Weg ON.

The investment value of the portfolio constructed with the Ammend tool is not defined the same way described in topic The investment value of the portfolio above. Rather the investment value of ammended series coincide with the value of the new security.

Create a portfolio whose performance is equal to an index plus a certain percentage: The hypothetical portfolio module allows the user to create a portfolio whose performance is equal to an index (selected by the user) plus a certain percentage amount (specified by the user). These types of series are frequently necessary to be used as benchmarks.

To create a portfolio with this characteristic the user should follow the steps described earlier and create a portfolio where the desired index weight represents 100 % the portfolio. In the example to the side, the portfolio is comprised 100% by the inflation index of the US (CPI).

The user should then click the tab Parameters (shown on the side) and in the window that comes up enter the annual percentage amount that the portfolio should return over the annual return of the index.  In the example to the side, the user specified this amount as 6%. This means that in a year in which the CPI returns 5%, the portfolio should return 11.3% (1.113 = 1.05 * 1.06).

The folder which holds the files of each portfolio: As explained earlier, the hypothetical portfolios created by the user become part of the list of securities in the system’s database.

Each hypothetical portfolio created by the user is saved in a file with extensión PTF. The portfolios that are added to the list of securities in the system are those whose files are located in the system’s portfolio folder. This system’s portfolio folder can be viewed or changed by clicking the option Hypothetical portfolio and choosing Folder for hypothetical portfolios from the menu.