[R-SIG-Finance] PortfolioAnalytics: Custom Constraint

[Ross Bennett]

Hi Abhay,

The cardinality constraint is not directly support by the pso solver so we
have to implement that constraint as a penalized objective. Also note that
your box constraint is greater than 0, so the box constraint and position
limit constraint are fighting each other (i.e your problem is
overconstrained).

I recommend using DEoptim or random portfolios as a solver when dealing
with position limit constraints. Position limit constraints are supported
directly by the algorithm in the random portfolios 'sample' method. We use
the mapping function supported by DEoptim to handle more complex
constraints such as position limit when using DEoptim as the solver.

Hope that helps.

Ross


On Mon, Sep 19, 2016 at 10:25 AM, Abhay Bhadani <abhadani at gmail.com> wrote:

> Thanks, Brian!
>
> I implemented the following:
> ------------------------------------------------------------
> ----------------------------------
> data("edhec")
> returns <- edhec[,1:12]
> colnames(returns) <-
> c("CA","CTAG","DS","EM","EN","ED","FIA","GMLS","MA","RV","SS","FF")
> print(head(returns,5))
> fund.names <- colnames(returns)
>
>
> #Giving Portfolio Specifications
> pspec <- portfolio.spec(assets=fund.names)
> print.default(pspec)
>
> #Adding Constraints
> #Full investment constraint: sum of all x_i is 1
> pspec <- add.constraint(portfolio= pspec, type =
> "weight_sum",min=0.99,max=1.01)
>
> #Box constraint: value of x_i varies between 0.2 to 0.8
> pspec <- add.constraint(portfolio= pspec, type="box", min = 0.01, max =
> 0.25)
>
> #Cardinality constraint
> pspec <- add.constraint(portfolio= pspec, type="position_limit",max_pos =
> 6,enabled=TRUE)
>
> #Adding Objective
> pspec <- add.objective(portfolio=pspec, type="risk", name="var")
> pspec <- add.objective(portfolio=pspec, type="return", name="mean")
>
> opt_meanvar <- optimize.portfolio(R=returns,portfolio = pspec,
>                                   optimize_method="pso", trace=TRUE)
>
> ------------------------------------------------------------
> ------------------------------
>
> Results:
>
> Optimal Weights:
>     CA   CTAG     DS     EM     EN     ED    FIA   GMLS     MA     RV
> SS     FF
> 0.1319 0.0551 0.0312 0.1312 0.1127 0.1467 0.0641 0.0218 0.0805 0.1101
> 0.0296 0.0952
>
> _____________________________________________________
>
> I obtained weights for all 12 assets. That's why I was not sure whether
> position_limit constraint is same as cardinality constraint.
>
>
> On Mon, Sep 19, 2016 at 8:32 PM, Brian G. Peterson <brian at braverock.com>
> wrote:
>
> > On Mon, 2016-09-19 at 20:22 +0530, Abhay Bhadani wrote:
> > > I just started exploring PortfolioAnalytics package.
> > >
> > > Similar to setting up custom objective functions, is there a way to set
> > up
> > > custom constraints too?
> > >
> > > I would like to know how to set up cardinality constraint (i.e.,
> limiting
> > > number of assets in a portfolio).
> >
> > cardinality constraints are already supported via the 'position_limit'
> > constraint which is an integer constraint limiting the maximum number of
> > non-zero weight positions in the portfolio.  It may be added like this:
> >
> >
> > pspec <- add.constraint(portfolio=pspec,
> >                         type="position_limit",
> >                         max_pos=3,
> >                         enabled=TRUE)
> >
> > assuming that your portfolio specification object is 'pspec'.
> >
> > As with other constraint types, this may not be efficiently supported by
> > all optimization engines. (This is a limitation of the underlying
> > optimizers/solvers, not of PortfolioAnalytics).
> >
> > On a more general note, any constraint may be expressed as an objective
> > by creating a penalty for violating the constraint.  As noted above,
> > this may lead to very inefficient or non-converging optimization.
> >
> > Regards,
> >
> > Brian
> >
> > --
> > Brian G. Peterson
> > http://braverock.com/brian/
> > Ph: 773-459-4973
> > IM: bgpbraverock
> >
> >
> >
> >
> >
>
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>
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