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I have no idea how to do this. I can set up the Lagrangian, but I don't know how to translate it into solve.qp() inputs.

The inputs are Dmat, dvec, amat, bvec, meq.

I don't know LaTeX so excuse my notation here. My problem is a global minimum variance portfolio optimization subject to the constraints x1+x2+x3 = 1, as well as 0 < x1 < w1, etc. Essentially, the weights must equal one, and the weights have a min/max condition.

So the matrix notation is (where Sigma is the covariance matrix of 3 assets)

[2*Sigma  [x1  = [0
 2*Sigma   x2  =  0
 2*Sigma   x3  =  0
 1  1  1   L1  =  1
-1  0  0   L2  =  0
 0 -1  0   L3  =  0
 0  0 -1   L4  =  0
 1  0  0   L5  =  w1
 0  1  0   L6  =  w2
 0  0  1]  L7] =  w3]

I know meq=1, as there is only one equality constraint. How do I translate the rest of the matrices into inputs for solve.qp()?

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  • $\begingroup$ So x1,x2,x3 are the primal variables and l1,...,l7 are the dual variables and you wrote out the optimality condition in matrix form, but I think solve.qp() does not require that, it requires the statement of the minimization problem. It will compute the Lagrangian internally. $\endgroup$ – noob2 Sep 29 '16 at 16:21
  • $\begingroup$ Well, I figured out that Dmat is Sigma, dvec is [0,0,0], Amat is the constraints below Sigma, so matrix(rbind(rep(1,NumAsset),-diag(NumAsset), diag(NumAsset)), ncol=NumAsset), and bvec is the vector of targets, so [1, 0, 0, 0, w1, w2, w3]. The problem is now I'm getting "constraints are inconsistent, no solution" $\endgroup$ – milkmotel Sep 29 '16 at 16:24
  • $\begingroup$ The 1st inequality constraint you have is $-x_1\ge0$ and the fourth is $x_1\ge w_1$ which indeed seem inconsistent $\endgroup$ – noob2 Sep 29 '16 at 16:43
  • $\begingroup$ I guess it should be $x_1≥0$ and $-x_1≥-w_1$, so just need to change some signs. $\endgroup$ – noob2 Sep 29 '16 at 16:46
  • $\begingroup$ You're right. I just had to invert my diag matrices and constraints in Amat and bvec such that the constraints were $-x_1 \geq -w_1$ rather than $x_1 \leq w_1$ $\endgroup$ – milkmotel Sep 29 '16 at 16:48
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I figured it out, mostly.

Dmat is your [n x n] covariance matrix.

dvec is your [n] length vector of expected returns, or if you want to find the GMV portfolio, it is a vector of 0s,.

(Can someone explain to me where this fits into the Lagrangian matrices? It doesn't matter since I only calculate the GMV portfolio subject to a target return to find an efficient frontier, then calculate the return using my solution weights, but it'd be nice to know.)

Amat is your transposed matrix of constraints t([m x n]), but you also have to invert the signs on your inequality constraints so that they represent >= constraints.

bvec is your [m] vector of constraints, i.e. the other side of the equation opposite the matrix of constraints.

Hope this helps.

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  • $\begingroup$ I believe in the value returned to you by qp.solve() there is a vector called Lagrangian which contains the Lagrangian at the solution. $\endgroup$ – noob2 Sep 29 '16 at 18:39

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