Optimal solutions for optimization in practice 87
conjunction with more common sector constraints within the optimization.
Further, a nonlinear transaction cost function with terms dependent upon both
an absolute size factor and the gross value of the portfolio was included. The
result is that absolute beta is used to target the desired level of risk.
3.9 Conclusions
We have presented the detailed methodologies associated with a range of
optimization techniques including not only standard mean – variance but also
Robust to deal with the inherent errors associated with forecast returns, Gain/
Loss to deal with nonnormal return distributions and finally a hybrid approach
that combines both mean – variance and Gain/Loss methodologies.
We have discussed how optimization can be used in light of the perpetual
nature of investments by charities and endowments and offered insights and
adjustments to the standard analytical framework to deal with such investments.
Finally , we discussed two of bespoke applications where BITA Risk has suc-
cessfully implemented some of the more esoteric requirements from clients.