# Why optimize.portfolio in R package PortfolioAnalytics is not working?

I used the R-package PortfolioAnalytics for portfolio optimization. In the portfolio optimization part. I used the function optimize.portfolio to set up my optimization. However, here was the error just showed that

Error in optimize.portfolio(R = initial_weights, portfolio = p, optimize_method = "random", : unused arguments (R = initial_weights, portfolio = p, optimize_method = "random", rp = rp, trace = TRUE)

I checked my code and I made sure everything was fine beside this step. So I am wondering this function is not working? Anybody knows how to fix this situation or recommend other package to use?

Thank you so much.

Here is my code:

library(PortfolioAnalytics)
library(quantmod)
library(PerformanceAnalytics)
library(zoo)
library(plotly)

# Get data of the stock

getSymbols(c("SWX","SPY","ICUI","MSFT"), src = 'yahoo', from = '2016-01-01')

Adjusted_price <- merge.zoo(SWX[,6], SPY[,6], ICUI[,6], MSFT[,6])

#Get Returns of portfolio
returns.portfolio <- na.omit(returns.portfolio)

#Set names of each stocks
colnames(returns.portfolio) <- c("Southwest Gas Holdings","S&P 500","ICU Medical","Microsoft")

# Meanreturns

meanReturns <- colMeans(returns.portfolio)
covMat <- cov(returns.portfolio)

#Initial weights
portfolio.spec(assets = c("SWX","SPY","ICUI","MSFT") )
initial_weights <- c("SWX" = 0.25,"SPX" = 0.25,"ICUI"=0.25,"MSFT"=0.25)
port <- intial_weights
portfolio.spec(assets = initial_weights)

#Initialize Portfolio specification
p <- portfolio.spec(assets = initial_weights)

p <- add.constraint(portfolio = p, type = "weight_sum", min_sum = 1, max_sum = 1)

p <- add.objective(portfolio = p, type = "risk", name = "StdDev")
p <- add.objective(portfolio = p, type = "return", name = "mean")

#optimization
opt_single <- optimize.portfolio(R = initial_weights, portfolio = p, optimize_method = "random", rp = rp, trace = TRUE)

Error in optimize.portfolio(R = initial_weights, portfolio = p, optimize_method = "random",  :
unused arguments (R = initial_weights, portfolio = p, optimize_method = "random", rp = rp, trace = TRUE)

• There is a typo in your code: port <- intial_weights does produce an error as you called this variable initial_weights one line before. – muffin1974 Apr 13 '17 at 15:38

There are some issues with your code - you are using wrong variables as inputs/ in case you are not sure what the function arguments mean, search online for a documentation of the PortfolioPerformance functionality! Let me try to make some things clear on how to solve your optimization issue:

Your data input is fine!

library(PortfolioAnalytics)
library(quantmod)
library(PerformanceAnalytics)
library(zoo)

# Get data of the stock

getSymbols(c("SWX","SPY","ICUI","MSFT"), src = 'yahoo', from = '2016-01-01')
Adjusted_price <- merge.zoo(SWX[,6], SPY[,6], ICUI[,6], MSFT[,6])


You don't need to set any initial weights, at least not for your purpose of a static optimization without reflecting any transaction costs! The optimal portfolio in your setting is independent of the initial weights. Your initial portfolio specifications are also redundant in the code.

p <- portfolio.spec(assets = colnames(returns.portfolio))


Now, whenever you refer to the variable p you can change your portfolio specifications. You have correctly specified your objective function, however, I made the experience that referring to standard deviation sometimes leads to to trouble. In case you are into Markowitz Optimization you care for the Variance of the portfolio weights anyway, so I have changed this:

p <- add.objective(portfolio = p, type = "risk", name = "var")
p <- add.constraint(portfolio = p, type = "full_investment")


The full_investment part is equivalent to setting a constraint on the sum of the portfolio weights such that they always sum-up to 1. In your setup the investor currently only cares about the risk of the portfolio. Your optimization therefore returns the portfolio weights which attain the lowest possible portfolio variance. This is the global minimum variance portfolio. If you would like to get the efficient portfolio then you need to add an additional constraint, namely the minimal expected return. Just in case you need this, add the following line

p <- add.constraint(portfolio=p, type = "return",     return_target=0.1/250)


The return_target=0.1/250 can be replaced with any number, I have chosen it to reflect that you have daily data and in this case you would like to have a portfolio which makes 10 per cent per year in expectation.

Last but not least, the optimization part: Here you mixed up the inputs. The input R should be the time-series of returns you have. I also recommend to specify the way, R is optimizing the function. Your specification rp=rp does not make sense as R does not know what you mean with rp.

#Optimize
optimize.portfolio(R=returns.portfolio, portfolio = p,
optimize_method = "ROI", trace = TRUE)


It may be the case that you have to install the package ROI in order to run this code. What I get as output is the following:

***********************************
PortfolioAnalytics Optimization
***********************************

Call:
optimize.portfolio(R = returns.portfolio, portfolio = portf1,
optimize_method = "ROI", trace = TRUE)

Optimal Weights: