[R-SIG-Finance] Constrained portfolio optimization with DEoptim

[Kristian Lind]

Hi guys,

I’m working on a portfolio optimization problem

The problem I’m trying to solve is of the form Min risk s.t. return = X

For each asset I have simulated 1000 paths for the development in asset
prices over 10 years.

The risk measure I’d like to minimize is YoY shortfall risk, but could be
any risk metric that takes the information from the scenarios into
consideration.

Likewise, the return is the mean annualized return over all the scenarios.

I have tried solving this problem using DEoptim, where deviations from the
required return is penalized. Similar to the approach applied here:
https://cran.r-project.org/web/packages/DEoptim/vignettes/
DEoptimPortfolioOptimization.pdf

I am unable to achieve convergence where the constraint is fulfilled.

My object function is of the form

Obj <- function(Return data, portfolio weights, target return){

Normalize weights to 1

calculate portfolio return

calculate risk metric

calculate deviation from target return

return (risk metric + deviation from target return*1e6)

}

Any pointers on how to formulate and solve this problem would be much
appreciated.

Thank you.



Kristian Lind

	[[alternative HTML version deleted]]