[R-SIG-Finance] Optimization Question

[Patrick Burns]

I would think that the two possibilities are:

as you say, adding a penalty to the objective,

looking through the optimization task view to
see if there are any appropriate functions that
handle non-linear constraints.

Pat

ian.mcdonald at malbecpartners.com wrote:
> I wanted to be able to generally include a non-linear constraint on an 
> optimization. I was using maxdrawdown, var, or any risk measure as 
> examples.
>
> Real world example might be when one needs to optimize a portfolio 
> with weight constraints (max size to one or more securities).  We 
> might choose a utility function such as info ratio, calmar ratio, etc, 
> but the resulting solution, while wonderful from utility perpective, 
> has poor real world pnl and isn't simply scalable due to weight 
> constraints. One can modify the utility function, or constrain the 
> risk (or profit) to some minimum. 
> So generally investigating optimization with potentially non-linear 
> constraints. I think a penalty function into utility is best but 
> wondering if there were other approaches.
>
> Ian McDonald
>
>
> ----- Original Message -----
> From: Patrick Burns [patrick at burns-stat.com]
> Sent: 12/30/2008 09:01 PM GMT
> To: Ian McDonald
> Cc: r-sig-finance at stat.math.ethz.ch
> Subject: Re: [R-SIG-Finance] Optimization Question
>
>
>
> I suspect that including Maximum drawdown in an
> optimization is unlikely to be useful.  However, I'm
> anxious to be proven wrong.
>
> It's not clear to me what specifically you are wanting
> to do, but Manfred Gilli has done a fair amount on
> VaR in optimization. (But I don't think you'll get any
> R code off him.)
>
> Patrick Burns
> patrick at burns-stat.com
> +44 (0)20 8525 0696
> http://www.burns-stat.com
> (home of S Poetry and "A Guide for the Unwilling S User")
>
> ian.mcdonald at malbecpartners.com wrote:
>> I am interested in doing a portfolio optimization, but I need to 
>> impose non-linear, functional constraints (i.e Max Drawdown, or VaR, 
>> etc). I've looked into several of the optimization routines (nlminb, 
>> constrOptim and optim with SANN/L-BFGS-B) but it appears that all of 
>> them are geared to linear constraints. Other than using a penalty 
>> function method, is anyone aware of any other approaches available 
>> in  R?
>>
>> Thanks
>> Ian McDonald
>> Malbec Partners
>>
>>     [[alternative HTML version deleted]]
>>
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