The additions cover among other things:
- CVaR
- EVaR
- Gaussian mixture return model
- Risk budgeting
- Robust optimization
- Multiperiod optimization
We are pleased to announce the MOSEK Portfolio Optimization Workshop, a one-day event on the theoretical and practical aspects of portfolio optimization using MOSEK. The workshop takes place at our location in Copenhagen (this is NOT a virtual event(!)) on Thursday, November 18th, 2021. Topics include:
Announcing the workshop is also an opportunity to present the first version of the MOSEK Portfolio Optimization Coookbook, which provides an introduction to the topic of portfolio optimization and discusses several branches of practical interest from this broad subject illustrated with examples using the MOSEK Fusion API. For more information about this topic, including links to the cookbook and accompanying Python notebooks visit our comprehensive Portfolio Optimization Resource Page.
We are being frequently asked about the Sharpe ratio, its formulation in the conic framework, and implementation in Fusion. This involves a class of problems with an objective of the type $$\mathrm{maximize}_x\quad \frac{r^Tx-r_f}{\|Fx\|_2}$$ i.e. an affine function over a 2-norm, where $r^Tx-r_f>0$, $x\in\mathbb{R}^n$. In practical portfolio optimization $r$ would be the vector of expected returns, $r_f$ is the risk-free return rate, $x$ is the vector of asset allocations and $\|Fx\|_2 = \sqrt{x^T\Sigma x}$ is the risk associated with the covariance matrix $\Sigma$ (formulating the risk term as a 2-norm is standard and we don't go into details, see here or here). Typically there will be various constraints on $x$, for example $$\mathbb{1}^Tx=1,\ x\geq 0$$ would correspond to a fully invested portfolio with no short-selling.
Let us explain step by step how one can derive a conic formulation of (1) suitable for a solver like MOSEK. We present it in detail so that the reader can apply it almost verbatim to more complicated models of this kind. First, note that if we could fix $$r^Tx-r_f=\mathrm{const}$$ then the objective would be equivalent to minimizing $\|Fx\|_2$, that is a standard second-order cone problem. However, we don't know in advance what "const" should be. (In fact solving the problem for all values of "const" corresponds to computing the efficient frontier.) Therefore, for reasons which will become clear in a moment, we denote the "const" value by $1/z$, where $z\geq0$ is a new scalar variable, i.e. $$r^Tx-r_f=1/z$$ that is $$zr^Tx-r_fz=1.$$ Denoting $y=zx$ ($y$ is now a new vector variable) the last equation becomes $$r^Ty-r_fz=1.$$ Now $x=y/z$ and the objective function becomes $$\frac{r^Tx-r_f}{\|Fx\|_2} = \frac{1/z}{\|F\frac{y}{z}\|_2} = \frac{1}{\|Fy\|_2}$$ hence we can write the original problem as $$\begin{array}{rl}\mathrm{minimize}&\|Fy\|_2\\ \mathrm{s.t.} & r^Ty-r_fz=1,\\ & z\geq 0.\end{array}$$ Note that the new problem involves variables $y$ and $z$, but $x$ has been eliminated. Any additional constraints must also be reformulated by substituting $x=y/z$, for example $\mathbb{1}^Tx=1,\ x\geq 0$ becomes $$\mathbb{1}^Ty=z,\ y\geq 0$$ and in fact any other linear constraint $Ax=b$ becomes $$Ay=bz.$$ A solution $(y,z)$ to the reformulation gives a solution $x=y/z$ to the original problem (assuming that the problem has a feasible point with $r^Tx-r_f>0$, so that the reformulation has a solution with $z>0$).
Certain other types of constraints can also be carried through the reformulation. For example a cardinality constraint on $x$ (at most $k$ entries in $x$ are nonzero) can be imposed on $y$ using the same mixed-integer model. Another quadratic bound of the form $\|Hx\|_2\leq 1$ will become $\|Hy\|_2\leq z$ using $x=y/z$.
A sample Fusion implementation can be found here: