[R-SIG-Finance] Value of liquidity

[Brian G. Peterson]

Chiquoine, Ben wrote:
> I am trying to come up with a value for liquidity where I define
> liquidity as the ability to rebalance your portfolio.  My thought at how
> to do this is to start with a set of assets.  Given their expected
> returns, volatilities, and correlations I will pick an efficient
> portfolio.  I will then run a Monte-Carlo simulation using the efficient
> weights, expected returns, vols, and correlations to look at the
> expected distribution of returns.  I will compare this to the return
> distribution from a Monte-Carlo simulation in which my I rebalance my
> portfolio to the efficient weights every year.  Eventually I'd like to
> allow or disallow rebalancing to a select subset of the assets in the
> portfolio (say private equity and absolute return) while rebalancing to
> optimal weights (as much as possible) the remaining assets.  I'm really
> new to Monte-Carlo simulation so my question has three parts.  First, is
> this idea completely crazy?  Second, is their a preexisting R package
> that is designed to be used for portfolio asset allocation?  Third, if
> no package exists to do this what is the data generating process I
> should use to model portfolio returns for a portfolio with multiple,
> correlated, underlying assets?   I hope this is the right forum for this
> and that a similar issue had not already been addressed.  Thanks in
> advance for any suggestions you can provide.
>   

There are many packages available in R for performing Monte Carlo 
simulation, and many packages for optimization under various 
constraints.  Someone has already suggested that you check out 
fPortfolio, and there are many more.  I suggest that you start with the 
quantitative finance task view on CRAN.

If you want to maximise the help you receive from this list, you will 
need to be a bit more specific in your questioning.  Preferably, share 
code and data and someone here will almost certainly help you make it 
work the way you want.

Regards,

   - Brian