Sorry in advance if this question is either too basic or really dumb, but I've been researching this and am a bit confused. I'm trying to help my niece with a question she has and the gist of it is she has the following portfolio:
Name Shares Price
a 50 50
b 85 20
c 10 -30
Total Value = $3900
I might be missing something obvious but I tried to take each value and divide it from the total, which gives me:
a 50 * 50 = 0.641%
b 85 * 20 = 0.436%
c 10 * -30 = -0.077%
Which equals 100% but is not correct because of the negative weight(I also tried to make the negative number positive but it didn't seem right). I understand the negative value is causing the weight to be negative but somehow I need to account for the 10 shares(I also want to account for it based on the value and not number of shares). How can I use this information and create a weight that doesn't have a negative value?
I don't really need the answer, just the logic(or what kind of math I need to learn to solve this).
Usually you can abandon an asset that has a negative value, so you can ignore c and just consider a and b. The sense is that the weighting gives you and idea how sensitive your portfolio is to changes in the value of the asset. If you are stuck with c (say it is your house and you won't walk away) you could take the absolute value-in a sense a 5% change in the value of c will be properly reflected that way.
Then you need to normalize. The fractions of the portfolio need to add to 100%, so divide by the sum of the percentages. Then a=25/45, b=17/45, c=3/45.
This is the impact on your portfolio of a change in the value of one asset, but it ignores that the various assets could have much different volatilities. Suppose a is cash, deposited in a bank account, while b is shares in Facebook. The value of your portfolio is much more sensitive to Facebook than cash as the value will change much more.