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Hello to everyone I am writing because I am having a bit of tough time figuring out how to replicate the constraints for a Portfolio Optimization using the set up from Jacobs & Levy 2006 - 'Enanched Active Equity Strategies'-

So i have a couple of question:

  1. first is a merely conceptual one, I am wondering if it would be correct to perform the portfolio optimization in two steps, first a classical min var optimization, and then only after using the inputs from my previous optimization to put in the quadrartic utility function to understand the utility level for my investor.

  2. I was wondering for an 'easy way' to implement the constraints of dollar neutral, market neutral, and active weights constraints of 10% compared to my benchmark (assuming I am using as benchmark 1/N). I would love an analytical explanation of these, I am currently trying to approach this problem by Lagrange and KT conditions, but it is still a bit unclear to me.

I hope I have been specific enough and I am not wasting your time, thanks for your help

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  • $\begingroup$ What do you mean when you say 'an easy way to implement the constraints' ? You mean an easy way without using an optimizer? (with an optimizer it is very easy, the optimizer handles the constraints). $\endgroup$ – noob2 May 10 at 23:40
  • $\begingroup$ Okay thank you i will try use the QP on matlab then :) $\endgroup$ – renato May 11 at 13:45

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