This is an area where Holderlab excels and it is one of the most important step when building a portfolio or an index.
When aggregating assets, you will need to find the perfect combination. But how do you know which weight you should give to each crypto in your portfolio?
Well, this is where the optimization step comes into play and hopefully, people have thought about it before you do.
This is an area of finance called: Modern Portfolio Theory (MPT).
The Efficient Frontier & Modern Portfolio Theory on Holderlab
This theory, pioneered by Harry Markowitz, an American economist, states that it is possible to build a portfolio to maximize expected returns on a given level of risk.
Each investor will have his own tolerance to risk and should, therefore, have a portfolio reflecting their risk tolerance / aversion while still maximizing their returns.
We will spare you the formulas of Modern Portfolio Theory since this is not the core of our review, besides, Holderlab handles it for you.
What you have to know is that Hodlerlab will launch thousands of simulations of your portfolio. Each with a different weight allocation for your assets and then give you a straightforward answer on the different possibilities.
You will then have to select the most efficient, according to the level of risk you are comfortable with.
How to Optimize your Portfolio on Hodlerlab?
In order to optimize your portfolio, a few steps are required.
- Select a date range for the simulation.
- Build or load an existing portfolio.
- Select the amount of simulations that will be run in order to find the efficient frontier.
- You can select 5000 simulations on any given plan.
- You will need a Holder Pro Subscription to test 50 000 portfolios allocations.
- Let Holderlab do its magic!
- Analyse the results
Portfolio Performance Indicators
The simulation should not take long before you can have the results.
You will be given the following informations:
- 3 different portfolios, each with its own asset allocation.
- Crypto assets and their weight
- Return on the period selected
- Volatility (amount of risk)
- Sharpe Ratio (return of the investment compared to risk)
As you can see, you will get 3 different portfolios, each with its own asset allocation, according to its volatility and risk profile.
If you are a conservative investor, you might want to choose a portfolio with the minimum amount of volatility, the one on the left.
If you are really aggressive, the portfolio allocation on the far right might be your preferred choice. Higher risk, higher reward potential.
Holderlab will give you an optimal allocation. Located in the center, it is the best of both world.
A portfolio with a good return and a healthy level of risk. this will be the portfolio with the highest Sharpe Ratio.
For those that might be unfamiliar with the Sharpe Ratio, it is a portfolio or fund’s risk-adjusted returns.