Investment portfolio optimization system, method and computer program product
View Patent ↗The preferred embodiments provide improved systems, methods and products for the optimization of a portfolio and/or multi-portfolios of assets, such as stocks. In some preferred embodiments, new methodology can be employed wherein a confidence region for a mean-varience efficiency set is utilized. In some preferred embodiments, new methodology can be employed for improved computation of a reward-to-variability ratio or Sharpe Ratio. In some preferred embodiments, new methodology can be employed for multiportfolio optimization. In some preferred embodiments, a portfolio optimization engine or module can be adapted to implement one or more of these new methodologies, along with any other desired methodologies.
1. A method for optimizing a portfolio of assets, comprising:
a) inputting portfolio data into an optimization engine, said optimization engine having a confidence region module;
b) having said optimization engine generate optimization results via said confidence region module and outputting said results, wherein said confidence region module defines a confidence region for a mean-variance efficient set for a portfolio P o on an efficient frontier that corresponds to a risk aversion γ; and
c) rebalancing a portfolio based on said optimization results; wherein the region includes all portfolios P, such that: c low *Risk(P 0 )<Risk(P)<c high *Risk(P 0 ) and Ret(P)>c*Ret(P opt ), where P opt is a portfolio on the efficient frontier such that Risk(P opt )=Risk(P) and c low , c high and c are relative average deviations of decrease in risk, increase in risk and expected return of optimal portfolios that correspond to the risk aversion γ and different vectors of returns.
2. The method of claim 1 , further including having a user set a specific confidence level by setting different values for constants c low , c high and c.
3. The method of claim 1 , further including using standard efficient frontier portfolios, wherein the standard efficient frontier portfolios involve portfolios with maximum expected return for a fixed value of risk.
4. The method of claim 1 , wherein when R up is an expected relative increase in risk, R down is an expected relative decrease in risk, t is a tradeoff coefficient and d is a standard deviation, said confidence region module defines a confidence region for a mean-variance efficient set based on the equation:
Ω
(
t
,
d
)
=
{
(
x
,
y
)
x
≤
x
*
(
1
+
R
Up
(
t
,
d
)
)
,
y
≥
Return
(
x
*
(
1
-
R
Down
(
t
,
d
)
)
)
*
(
1
-
δ
(
t
,
d
)
)
,
y
≥
Return
(
x
)
*
(
1
-
δ
(
t
,
d
)
)
.
5. A method for optimizing a portfolio of assets, comprising:
a) inputting portfolio data into an optimization engine, said optimization engine having a compute Sharpe Ratio module that provides an ex-ante optimization of a portfolio of assets based on Sharpe Ratio;
b) having said optimization engine generate optimization results and outputting said results; and
c) rebalancing a portfolio based on said optimization results;
wherein said compute a Sharpe Ratio module computes a Sharpe Ratio using 1) a find bounds algorithm which starts with a maximum value of adiusted return, the adjusted return is decreased by a factor at steps of the algorithm, and the algorithm terminates when a best value of Sharpe Ratio, that corresponds to a current level of the adjusted return, is lower than a Sharpe Ratio at a previous iteration and using 2) a find Sharpe Ratio algorithm in which at iterations a guess of the maximum Sharpe Ratio value S is updated;
wherein to said compute Sharpe Ratio module maximizes the reward-to-return ratio S of a potential investment portfolio h∈Q
S
(
h
)
=
A
(
h
)
Risk
(
h
)
.
6. The method of claim 5 , wherein S 2 is maximized and A 2 is replaced with its piece-wise linear approximation, and further including finding a lower and an upper bounds on A, such that a value of A, that maximizes S, lies between these bounds.
7. A method for multi-portfolio optimization, comprising:
a) inputting multi-portfolio data into an optimization engine, said optimization engine having a multi-portfolio optimization module;
b) having said optimization engine generate optimization results via said multi-portfolio optimization module and outputting said results, wherein said multi-portfolio optimization module performs an algorithm for multi-portfolio optimization that computes an optimal set of portfolios h 1 , . . . , h K , that minimizes a value of a maximum relative or absolute distance of the value of a function Ω k (h k ) from a value Ω k (h k Opt ), where maximum is taken over all portfolios h 1 , . . . , h K , and wherein the set also satisfies a constraint on a total portfolio Σ k=1,K h k ; and
c) rebalancing a portfolio based on said optimization results; wherein said multi-portfolio module performs the steps of: i) finding an optimal portfolio h k Opt ∈Q k for every k, k=1, . . . , K; and ii) distinguishing between two cases:
a) relative measure: maximize value of scalar variable x under the following constraints
Ω
k
(
h
k
)
≥
Ω
k
(
h
k
Opt
)
*
x
,
∀
k
∈
{
1
,
…
,
K
}
,
h
k
∈
Q
k
,
∀
k
∈
{
1
,
…
,
K
}
,
∑
k
=
1
K
h
k
∈
Q
;
b) absolute measure: minimize value of scalar variable y under the following constraints
Ω
k
(
h
k
)
+
y
≥
Ω
k
(
h
k
Opt
)
,
∀
k
∈
{
1
,
…
,
K
}
,
h
k
∈
Q
k
,
∀
k
∈
{
1
,
…
,
K
}
,
∑
k
=
1
K
h
k
∈
Q
.
8. The method of claim 7 , wherein an optimal solution for the first step is the optimal solution for the second step when the constraint on the portfolio is relaxed, and further including first calculating a dual solution for a relaxed problem and then using that solution as initial feasible solution to solve the problem dual to the problem in the second step.