[R-SIG-Finance] A question on portfolio value calculation

[Guy Green]

In any realistic portfolio you will have some starting equity, and you would
also have the costs/proceeds of your long & short positions.  The portfolio
value would then be:

Starting equity + $(m1-m2-m3) -cost(pos1) +proceeds(pos2) +proceeds(pos2)

or to put it another way:

Starting equity +/- unrealised gains/losses on your positions.

Your position sizes will be linked to your starting equity, both in the
sense that your starting equity is a real-world constraint on the sizes of
the positions that your broker will allow you to enter into, and also in the
more theoretical (but still real-world) sense that the relative sizes of
your starting equity and your positions contribute to the likelihood of your
strategy exhausting all your equity at some point in the future, even if it
is a winning one over the long term.

Guy


Megh Dal wrote:
> 
> Hi all, can somebody suggest me on what is the correct way to calculate
> value of a portfolio (i.e. mark-to-market value) with having both long and
> short position? For example, suppose I have 3 positions in my portfolio
> pos1, po2, and pos3 and type of transaction is long, short, short
> respectively.
> 
> Say, m2m value of those 3 positions are m1, m2 and m3 in money term. Then
> should m2m value of this portfolio be $(m1-m2-m3)?
> 
> If this is correct I feel there are some practical problem with this
> approach. Let say I calculated the volatility of this portfolio assuming
> some normal distribution of return, let say it is $X. Then if I want to
> answer, what is the volatility for per unit value of my entire portfolio
> the
> answer would be : $X/$(m1-m2-m3). However if it happenes that $(m1-m2-m3)
> =
> 0 then above calculation becomes undefined.
> 
> This approach also may be problametic if I have all short, in this case
> unit
> SD for my portfolio becomes obviously negative.
> 
> Or should I go with $(abs(m1)+abs(m2)+abs(m3)) to avoid above scenario?
> 
> Any explanation would be highly appreciated.
> 
> Thanks
> 

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