[R-SIG-Finance] LSPM - Unexpected Results

[Joshua Ulrich]

On Mon, Dec 27, 2010 at 1:10 PM, Noah Silverman <noah at smartmediacorp.com> wrote:
> Josh,
>
> 1)
> R version: 2.11.0
> LSPM Version:  (Don't know where to check)
>
packageDescription("LSPM")  # revision 49 is most recent

> 2)
> I'm fine with it taking many hours - that's to be expected.  There are
> 48 observations for each of the 13 assets.
>
> 3)
> The last output line from the optimizer is:
> 0 0.5908 0.545 0.0954 0.41 0 0.0969 0.0078 0.6066 0.4896 0.0113 0.7568 1
> -0.5036 -1 best value:  -1
>
> The last two values are negative, which I am now assuming are the "z"
> values.  But do not know what "z" values are - don't see any mention of
> them in the Handbook of Portfolio Mathematics.
>
They're discussed in The Leverage Space Trading Model.  They control
the aggressiveness of your position sizing when your equity is above /
below target.

> 4)
> Is there documentation about how to specify the margin and other
> constraints?  The help files in R left me a bit lost.
>
Sorry about the lack of documentation... here's how to specify margin
constraints:
http://blog.fosstrading.com/2010/08/margin-constraints-with-lspm.html

Other constraints can be specified and passed via the
constrFun/constrVal arguments, just like you specified the drawdown
constraint.

> I'm trying this while looking at a portfolio that is a "fund of funds".
> So, they want to invest 100% of their fund and can't short anything.
> Furthermore, they can only re-balance every 90 days, which only adds
> further constraint.
>
>
> I'm using the jpt example function from your blog with n=4 and the
> following call in R:
> DEctrl <- list(NP=100, itermax=1000, trace=1 )
> res <- maxProbProfit(jpt, 1e-6, 6, probDrawdown, 0.1, DD=0.2,
> calc.max=4, snow=cl, control=DEctrl)
>
Why are you setting itermax=1000?

>
> Thanks!!!!
>
> --
> Noah
>
>

--
Joshua Ulrich  |  FOSS Trading: www.fosstrading.com


>
>
> On 12/27/10 10:23 AM, Joshua Ulrich wrote:
>> Noah,
>>
>> On Mon, Dec 27, 2010 at 12:02 PM, Noah Silverman
>> <noah at smartmediacorp.com> wrote:
>>> Hi,
>>>
>>> I've been playing with the LSPM library from optimizing a portfolio of
>>> 13 assets (Using the interesting Leverage Space model developed by Ralph
>>> Vince.)
>>>
>> Which version (and revision) of LSPM are you using?  Which version of R?
>>
>>> Using the function:  maxProbProfit
>>>
>>> res <- maxProbProfit(jpt, 1e-6, 6, probDrawdown, 0.1, DD=0.2,
>>> calc.max=4, snow=cl, control=DEctrl)
>>>
>>> It takes a LONG time for the optmizer to find a solution.
>>>
>> It's always going to take a long time, especially with 13 assets and
>> 100 optimizer iterations (the default).  How many observations are in
>> your lsp object?  A reproducible example, or just some sample data,
>> would really help here.
>>
>>> It has found a solution that has a 100% probability of profit given the
>>> constraints.
>>>
>>> The odd thing is that several of the values (optimal F) are negative.
>>> My understanding is that indicates shorting the asset.  This assets in
>>> this portfolio can't be shorted.
>>>
>> I doubt any f values are negative because they're bound between [0,1]
>> during the optimization.  My guess is that you're referring to the two
>> "z" values, which will always be negative.
>>
>> Here's a quick example from ?maxProbProfit:
>>
>> require(LSPM)
>> data(port)
>> ipop <- cbind(runif(50,0,0.01),runif(50,0,0.01),runif(50,0,0.01),
>>   runif(50,-1,-0.8),runif(50,-1,-0.8))
>> DEctrl <- list(itermax=11, NP=50, initial=ipop)
>> res <- maxProbProfit(port, 1e-6, 4, probDrawdown, 0.1,
>>   DD=0.2, calc.max=4, control=DEctrl)
>>
>>> res
>> $f
>> [1] 0.002308994 0.001884296 0.116972712
>>
>> $z
>>     zminus      zplus
>> -0.9256852 -0.9976883
>>
>> $profitProb
>> [1] 0.9963587
>>
>>
>>> I've never read about shorting with the LSPM model, is this common?
>>> Is there a way to indicate, as a constraint, not to short?
>>> I have a portfolio of X dollars to allocate, so the percentages must sum
>>> to one, how do I do this once I get the F values?
>>>
>> You need to do this during the optimization via the "margin" and
>> "equity" arguments.
>>
>> HTH,
>> --
>> Joshua Ulrich  |  FOSS Trading: www.fosstrading.com
>>
>>
>>
>>> Thanks in advance for any and all suggestions!
>>>
>>> --
>>> Noah
>>>
>>> _______________________________________________
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>
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