Real world example

Intermediate Portfolio Analysis in R

Ross Bennett

Instructor

Real world example

Solve a portfolio optimization problem similar to the types of problems in the industry
Apply techniques learned throughout the course
- Specify a portfolio with constraints and objectives
- Run the optimization with period rebalancing on historical data
- Analyze the results
- Refine constraints, objectives, and moment estimates
Data
- EDHEC-Risk Alternative Indexes monthly returns {6}
- Jan 1997 - March 2016

data(indexes)
returns <- indexes[,1:4]

# Equal weight benchmark
n <- ncol(returns)
equal_weights <- rep(1 / n, n)

benchmark_returns <- Return.portfolio(R = returns, 
                                      weights = equal_weights,
                                      rebalance_on = "years")
colnames(benchmark_returns) <- "benchmark"

# Benchmark performance
table.AnnualizedReturns(benchmark_returns)

                          benchmark
Annualized Return            0.0775
Annualized Std Dev           0.1032
Annualized Sharpe (Rf=0%)    0.7509

Base portfolio definition

Define a portfolio specification to be used as the base case
The base portfolio specification is meant to be a simple approach with relaxed constraints and basic objectives

# Base portfolio specification
base_port_spec <- portfolio.spec(assets = colnames(returns))
base_port_spec <- add.constraint(portfolio = base_port_spec,
                                 type = "full_investment")
base_port_spec <- add.constraint(portfolio = base_port_spec,
                                 type = "long_only")
base_port_spec <- add.objective(portfolio = base_port_spec, 
                                type = "risk", name = "StdDev")

Let's practice!

Intermediate Portfolio Analysis in R