The selection of a best element from some set of available alternatives. Typically consists of maximizing or minimizing a real function by systematically choosing input values from within an allowed set and computing the value of the function.

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1answer
147 views

Parameter estimation using martingale measures - include real world data?

Please note: I posted this in nuclearphynance first, but didn't get any replies. For desks which sell exotics it is common practice (as far as I know it) to calibrate the model (Stochastic ...
5
votes
4answers
601 views

How to optimize a portfolio under *both* maximum diversity ratio and minimum variance

I have a follow-on question to questions that appeared here and was not sure if the right way was to ask in the comments or post a new question. My question is: how can I optimize a portfolio to suit ...
5
votes
1answer
955 views

Optimizing a portfolio of ETFs

I am aware of how to do mean-variance or minimum-variance portfolio optimization with constraints like weights must add to 1.0 no short sells max weight in any ticker using basic quadratic ...
10
votes
3answers
680 views

What is the expected return I should use for the momentum strategy in MV optimization framework?

As all research on the momentum strategies are focused on the indicator, i.e. the entry point, there seems not much discussion on its expected return? Though there are some discussions on the exit ...
2
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3answers
519 views

Can I perform an asset allocation optimization if assets are perfectly uncorrelated?

(Here is a link to the original post) I received this interesting problem from a friend today: Assume that you are a portfolio manager with $10 million to allocate to hedge funds. The due diligence ...
22
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9answers
8k views

Why does the minimum variance portfolio provide good returns?

I've been a researching minimum variance portfolios (from this link) and find that by building MVPs adding constraints on portfolio weights and a few other tweaks to the methods outlined I get ...
10
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5answers
690 views

How can higher co-moments be applied to portfolio optimization in an asset allocation context?

Traditional portfolio optimization involves mean variance optimization, where only the mean and covariance matrix of returns are estimated. What asset allocation and portfolio optimization techniques ...
7
votes
2answers
1k views

How to apply risk-parity portfolio construction to a dollar-neutral portfolio?

Long-only risk-parity portfolios have proliferated in recent years. An optimized long-only risk-parity portfolio requires that the asset weight * marginal contribution to risk of the asset is ...
4
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2answers
385 views

Choice of prior as a shrinkage target in portfolio construction?

There's various research showing how priors such as the minimum variance portfolio turn out to be a surprisingly effective shrinkage target in portfolio construction. The sell point of these priors ...
6
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2answers
735 views

optimal re-balancing strategy with asynchronous alpha signal

You want to construct an optimal portfolio. Let's say you have an alpha signal that arrives with some period (say quarterly). The alpha signal predicts arithmetic returns one-year ahead. You have ...
11
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3answers
2k views

Techniques to optimize the placement of orders in market making strategy?

Market making often requires placing and canceling a lot of orders. You have to buy and sell nearly simultaneously, so you need to move orders pretty often to beat other traders. But I would like to ...
14
votes
1answer
898 views

Portfolio optimization with monte carlo sampling from predictive distribution

Let's say we have a predictive distribution of expected returns for N assets. The distribution is not normal. We can interpret the dispersion in the distribution as reflection of our uncertainty (or ...
7
votes
2answers
2k views

robust portfolio optimization re-balancing with transaction costs

The optimal re-balancing strategy takes account of factors including i) objective function, ii) current portfolio weights, iii) expected return vector containing updated views/alpha forecasts, iv) ...
6
votes
2answers
233 views

How to represent constraints for optimization problems in a data model?

I am at the moment writing a program focusing on asset allocation and I am thinking about how I should represent my constraints in the data model. The first approach that came to mind was to define ...
17
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5answers
9k views

What are some useful approximations to the Black-Scholes formula?

Let the Black-Scholes formula be defined as the function $f(S, X, T, r, v)$. I'm curious about functions that are computationally simpler than the Black-Scholes that yields results that approximate ...
7
votes
4answers
971 views

Library to solve optimization problems

I'm working with C# and I start being bored writing optimization algorithm. Do you know of any free library containing this sort of algorithms. In particular I'm cutrently working with Semidefit ...
11
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3answers
1k views

Role of skewness in portfolio optimization?

What is the role of skewness in portfolio optimization?
14
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5answers
6k views

Python library for Portfolio Optimization

Does anyone know of a python library/source that is able to calculate the traditional mean-variance portfolio? To press my luck, any resources where the library/source also contains functions such as ...
14
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3answers
1k views

Does mean-variance portfolio optimization provide a real edge to those who use it?

Mean-variance optimization (MVO) is a 50+ year concept, and perhaps the first seminal idea of quantitative finance. Still, as far as I know, less than 25% of AUM in the US is quantitatively managed. ...