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Tracking a Changing Stock Portfolio With a Cash Component

Article Quant Q&A · Author: Wanni
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Summary

The discussion addresses how to keep a portfolio’s normalized value continuous when holdings are added or sold. Simply summing each stock’s normalized value using current portfolio weights can create an artificial jump at a trade, obscuring gains accumulated before the portfolio changed.

The suggested accounting approach includes a cash component that adjusts with portfolio earnings. This can preserve the value history across changes in holdings and also capture dividends. For leveraged portfolios, the cash balance can account for carry costs. The exchange is brief and offers no worked example, formal return-index formula, or comparison of accounting conventions, so implementation details must be developed separately.

Key ideas

  • Changing holdings can create artificial jumps in a portfolio’s normalized value if only current stock weights are used.
  • A cash component can help preserve accumulated portfolio performance as positions change.
  • The cash balance can also track dividends and, when leverage is used, carry costs.
  • The discussion gives a general accounting suggestion but no detailed formula or worked example.

Tags

EquitiesPortfolio constructionRisk management
Full text
# How to calculate the normalized value of a changing stock portfolio?


# How to calculate the normalized value of a changing stock portfolio?












My goal is to compare a portfolio of stocks with a benchmark over time. Calculating the normalized value of a static portfolio is no problem, but I am struggling when stocks are removed or added to the portfolio.

With the current method I am using (sum of normalized value of each stock times the weight of each stock in the portfolio), the normalized value of the portfolio reduces immediately after selling a stock or adding a new one.

What i would like to achieve is that the earnings that the portfolio achieved over time are reflected in the normalized value. My idea is to “remember” the normalized value of the each sold stocks and to add them on top of the normalized value of the portfolio, but I am not sure this is the correct way to do it. Can someone point me in the right direction?

## Answer by JoshK (score 1)

https://quant.stackexchange.com/a/41222

I've seen that done by using a cash component that changes with your portfolio earnings. You can use that to help you track your dividends as well. If you are using leverage then you can accumulate your carry cost in the cash component as well.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.