Portfolio specification, constraints, and objectives

Intermediate Portfolio Analysis in R

Ross Bennett

Instructor

Workflow overview

General portfolio optimization problem workflow in PortfolioAnalytics:

Portfolio specification
Add constraints and objectives
Run optimization
Analyze optimization results

Workflow: portfolio specification

portfolio.spec(assets = NULL, ...)

# Character vector of assets
portfolio.spec(assets = c("SP00", "DJIA", "Nasdaq", "FTSE100", "DAX", "CAC40"))

# Named vector of assets with initial weights
initial_weights <- c("SP500" = 0.5, "FTSE100" = 0.3, "NIKKEI" = 0.2)
portfolio.spec(assets = initial_weights)

# Scalar of number of assets
portfolio.spec(assets = 4)

add.constraint(portfolio,
               type = c("weight_sum", "box", "full_investment",...),
               ...)

# Initialize portfolio specification
p <- portfolio.spec(assets = 4)

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

# Add box constraint
p <- add.constraint(portfolio = p, type = "box", 
                    min = 0.2, max = 0.6)

add.objective(portfolio, 
              type = c("return", "risk", ...), 
              name, 
              arguments = NULL,
              ... )

# Initialize portfolio specification
p <- portfolio.spec(assets = 4)
# Add mean return objective
p <- add.objective(portfolio = p, type = "return",name = "mean")              

# Add expected shortfall risk objective
p <- add.objective(portfolio = p, type = "risk", name = "ES", 
                   arguments = list(p= 0.9, method = "gaussian")

Let's practice!

Intermediate Portfolio Analysis in R