Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. Join them; it only takes a minute:

Sign up
Here's how it works:
  1. Anybody can ask a question
  2. Anybody can answer
  3. The best answers are voted up and rise to the top

Is there an efficient and commonly used optimization method for "more complex" investment strategies. For instance, say you have a function $f(X_1,...,X_n,c,v)$ where the $X_k$'s are your random returns for each month/year $k$ which are determined by historical simulation or some model and $c,v\in[a,b]$ are parameters. (By "more complex" i mean that the function $f$ is messy enough so that optimizing it analytically is not possible.)

Hence I want to determine $\underset{c,v}{\operatorname{argmax}}g\left(f(X_1,...,X_n,c,v)\right)$ for some function $g$. Especially I'm wondering about a pension funds perspective. Then $g$ might be a risk measure such as value-at-risk or expected shortfall.

The most intuitive way would be to just simulate the random variables and determine $g(f)$ for each $c$ and $v$. However, this is very time consuming.

I saw a similar question: Portfolio optimization with monte carlo sampling from predictive distribution where stochastic optimization was suggested, but without any "concrete answer". However, my intuition tells me that this must be a fairly common problem in larger financial institutions, so there must exist optimization methods that are more often used than others.

share|improve this question
2  
This sort of difficult portfolio optimization is handled quite well by the PortfolioAnalytics package. The authors wrote an informal tutorial which explains the what and how. – pteetor Nov 22 '13 at 0:02
    
Thank you for your comment. It looks interesting. I wanted to try it out, but I could get it to install properly, gotta give it another try later. – Good Guy Mike Nov 22 '13 at 18:07
    
Why do you need g? Can you specify some properties of f? Is f continous, differentiable, a polynomial, pathwise linear or such? – user1157 Jan 27 '14 at 22:20

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Browse other questions tagged or ask your own question.