Introduction
Expected portfolio return is a core metric for investors aiming to anticipate potential gains across their investments. Traditional methods calculate expected portfolio return by weighting the expected performance of each asset class by its allocation. However, modern investing often uses a Total Portfolio Approach (TPA) — evaluating each individual investment contribution to the overall portfolio risk and return.
TPA allows dynamic capital allocation across individual assets, maximizing total portfolio efficiency.
Tools like Diversiview simplify this process, helping investors to calculate expected portfolio return across all holdings. One simply enters, loads or imports a portfolio of individual holdings to Diversiview, and the expected portfolio return (together with several other metrics) is calculated in seconds.
Why Expected Portfolio Return Matters
Calculating expected portfolio return helps investors:
- Forecast potential portfolio growth
- Compare investment options across asset classes
- Evaluate risk-adjusted performance
Traditional weighted-average calculations at asset class level can overlook portfolio-level individual correlations. While correlations are not required to calculate portfolio expected return, by integrating TPA one can visualise the combined risk-return performance of the entire portfolio, providing a holistic view and potential improvement options for the expected return as well.
What is the Total Portfolio Approach (TPA)?
The Total Portfolio Approach (TPA) evaluates investments as part of a unified portfolio rather than isolated asset classes. Key benefits include:
- Holistic portfolio evaluation: Measures each investment’s contribution to total return and portfolio risk. For example, the contribution of each listed security rather than the contribution of a basket of listed securities as an asset class.
- Cross-asset optimization: Allocates capital across each equity, bond or alternative investments for optimal risk-adjusted return.
- Dynamic risk management: Focuses on overall portfolio volatility, Sharpe ratio, and other performance metrics.
How Diversiview Supports a Total Portfolio Approach
Diversiview empowers investors implementing TPA by:
- Calculating portfolio-level expected return: Aggregate public and private holdings to see total expected return.
- Running scenario analysis: Test “what-if” reallocations and measure impact on total portfolio risk and return.
- Risk budgeting: Visualize each asset’s contribution to portfolio volatility, Sharpe ratio, and other metrics.
By combining TPA principles with Diversiview analytics, investors can make data-driven portfolio allocation decisions, improving efficiency and maximizing potential returns.
Below example shows the difference in risk-return profile for a normal, user provided portfolio of 5 assets (not optimised) and compared with the risk-return profile of the Optimal Porftolio for the same set of investments. The total portfolio volatility in this example increases slightly in the optimised allocation but so did the portfolio expected return.
Conclusion
Expected portfolio return is essential for informed investing. When paired with a Total Portfolio Approach and supported by Diversiview, investors can:
- View the portfolio as a single, optimized entity
- Identify investments that improve total risk-adjusted return
- Make data-driven allocation decisions across all assets
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Want to calculate the expected return of your portfolio? Analyse your Portfolio today with a free Diversiview account.
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