Being able to measure and quantify risk/return is a top priority when evaluating investment portfolios. There are many sophisticated tools that help investors assess risk-adjusted portfolio performance. These tools are also useful for comparing investment strategies, indices, or the historical performance of different money managers and hedge funds.

Combining Risk and Return into a Single Comparable Value

There are two main investing goals: (i) achieve the highest annual return, and (ii) minimize the chances of losing money. By combining risk and return into a single value, investors can compare the true performance of different portfolios. This measure is called risk-adjusted portfolio performance. This analysis includes the following risk-adjusted performance ratios:

1️⃣ Sharpe Ratio

2️⃣ Sortino Ratio

3️⃣ Treynor Measure or Treynor Ratio

4️⃣ Jensen Measure or Jensen Alpha

5️⃣ Calmar Ratio

6️⃣ MAR Ratio

7️⃣ Omega Ratio

8️⃣ Information Ratio or Appraisal Ratio

🏁 Key Takeaways from Our Analysis

Read more: Risk-Adjusted Portfolio Performance Ratios

The Essentials of Fundamental Analysis

Fundamental analysis is a common method for evaluating the true value of a traded financial asset by examining economic and other “hard” data. The main goal is to identify securities that are priced below their fair market value.

1. Learn the Basics of Fundamental Analysis

Investment Analysis Framework

Two forces form the overall framework of investment analysis:

(i) Technical Analysis 🔗 The Basics of Technical Analysis

(ii) Fundamental Analysis 🔗 The Basics of Fundamental Analysis

The Goals of Fundamental Analysis

The main goals of fundamental analysis are:

(a) To identify the fair market value of a traded financial security

(b) To identify and assess the risks associated with an investment decision (risk identification is essential for managing your portfolio efficiently)

Fundamental Analysis Framework

A fundamental analysis framework includes all major internal and external factors that can affect the future cash flows of your investment.

(1) Internal fundamental factors

(2) External factors (business, macroeconomic, etc.)

Read more: Fundamental Analysis

〽️ Exploring Economic & Business Cycle Dynamics

What are Economic Cycles?

In general, economic cycles are periods of growth (expansion) followed by recession (contraction). The length of each cycle is influenced by key macroeconomic factors such as GDP growth, national income, inflation, consumption, and employment levels. The debt cycle plays a central role in shaping each economic cycle.

How Central Banks Influence the Length of Economic Cycles

What matters most for a central bank is achieving high employment and sustainable growth while keeping inflation under control.

In developed countries, the central bank manages money flow in the economy, primarily through interest rates. By adjusting rates, it can increase or decrease liquidity, influencing overall economic activity. Central banks also intervene by buying assets from commercial banks to boost their lending capacity, or by slowly devaluing the domestic currency to support exports and growth.

The transition from growth to recession is largely shaped by inflation and employment levels. Adjusting interest rates is the simplest way for central banks to control market liquidity.

(i) Growth Cycle: Managing High Inflation

When the economy grows too fast, inflation rises. The central bank responds by raising interest rates, reducing the money supply. Lower liquidity decreases consumption and helps control inflation, signaling the end of the growth cycle.

Read more: Economic & Business Cycles

🏦 Treasury Bills and Bonds and Their Influence on Global Markets

Investors should pay close attention to the bond market. Big shifts in government or corporate bond prices can signal upcoming changes in the economy. In this context, notable changes in government bond yields or the spread between bonds of different maturities can indicate what may happen in the real economy, equity markets, and Forex markets. One key factor that links all financial markets is the level of interest rates.

🗂 Classification of Marketable Government Securities

Depending on their maturity, marketable securities are referred to as Bills, Notes, and Bonds.

Government securities are generally classified by their maturity into three main categories:

☑️ Treasury Bills – Mature in less than 1 year, paying no coupons, initially sold at a discount and redeemed at face value

☑️ Treasury Notes – Mature in 1 to 10 years, principal at maturity, paying regular coupons (annual/semiannual)

☑️ Treasury Bonds – Mature in 10 to 30 years, principal at maturity, paying regular coupons (annual/semiannual)

Read more: Treasury Bills (T-Bills) and Bonds

🏛️ TIPS (Treasury Inflation-Protected Securities)

The US government issues Treasury Inflation-Protected Securities (TIPS) to provide protection against inflation. The principal value of TIPS increases as the Consumer Price Index (CPI) rises.

📌 Key points

• TIPS are Treasury Bonds designed to protect investors from inflation. 🔗 Learn about Treasury Bonds

• Deflation can reduce the par value of TIPS, but at maturity, investors will never receive less than the original par value.

• TIPS interest rates are lower than traditional non-TIPS bonds, as they adjust for expected inflation.

• In the US, TIPS earnings are taxable. If deflation lowers the par value, this loss can be used to offset other income gains.

• TIPS can be purchased directly through a brokerage account or via a mutual fund or exchange-traded fund (ETF) that invests in TIPS.

Advantages and Disadvantages

First issued by the U.S. Treasury in 1997, TIPS are fixed-income securities that pay interest on the principal. The interest is adjusted for changes in the Consumer Price Index (CPI) and provides a small additional return.

✅ These are some good reasons to buy TIPS:

(1) Easy Protection Against Inflation -TIPS provide a simple way to protect investors from losing purchasing power due to rising inflation.

Read more: TIPS and How to Use them for Predicting Interest Rates

Commitments of Traders (COT) Report

The Commitments of Traders (COT) is a key report published by the CFTC that displays the total long and short positions in the futures market across major asset classes, including Forex currency pairs. The COT is widely used as an indicator to gauge market sentiment and predict future market trends, particularly focusing on the positions of non-commercial traders.

• The COT report provides insights into trend reversals, extreme positions, and potential market exhaustion by tracking historical data.

ℹ️ What is the Commitments of Traders Report?

The Commitments of Traders (COT) is a weekly report that shows the total holdings of commercial and non-commercial participants in the US futures market. The COT was first issued in 1962, covering 13 popular agricultural commodities. Originally released monthly, it has been published weekly since 2000. The report is available for all actively traded futures contracts, including stock indices, interest rates, and currencies.

■ The Commitments of Traders provides a breakdown of total futures positions for three types of market participants:

1️⃣ Non-commercial traders / large speculators (hedge funds, trading firms, and institutional speculators)

2️⃣ Commercial Forex traders/hedgers (users/producers trading primarily to hedge risk)

3️⃣ Small speculators (the extremes of their positions are contrarian signals)

Read more: Commitments of Traders Report (CFTC)