Optimizing Optimization: The Next Generation of Optimization Applications and Theory (Quantitative Finance)

(Romina) #1

Novel approaches to portfolio construction 47


interested in portfolios whose expected return is similar to that of P0 and P1,
we added a constraint to the strategy limiting the expected return to be at least
0.27%. Table 2.7 gives the characteristics of the resulting optimal portfolio,
referred to as P2 in the sequel. Clearly, P2 has a lower tax liability than P0


Table 2.5 Constraint elasticities

Constraint Elasticity

Tracking error 0.1687
Turnover 0.1563
Industry bounds 0.0978
Style bounds 0.0784
Sector bounds 0.0323
Active beta 0.0256
Asset bounds 0.0162
Threshold holding 0.0013
Threshold trade 0.0000

2.2
2.18
2.16
2.14
2.12
2.1
2.08
2.06
2.04
2.02

Tracking error

Tu r n o v e r

2
1.98
1.96
1.94
1.92
1.9
1.88
1.86
1.84
1.82
1.8
9
9.19.29.39.49.59.69.79.89.9^10 10.110.210.310.410.510.610.710.810.9^11

Color key

Value

0.27 0.28

Expected return

Figure 2.16 Turnover — tracking error — expected return heatmap.

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